[Federal Register Volume 77, Number 169 (Thursday, August 30, 2012)]
[Proposed Rules]
[Pages 52888-52975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-17010]
[[Page 52887]]
Vol. 77
Thursday,
No. 169
August 30, 2012
Part III
Department of the Treasury
-----------------------------------------------------------------------
Office of the Comptroller of the Currency
12 CFR Part 3
-----------------------------------------------------------------------
Federal Reserve System
12 CFR Part 217
-----------------------------------------------------------------------
Federal Deposit Insurance Corporation
12 CFR Part 324
-----------------------------------------------------------------------
Regulatory Capital Rules: Standardized Approach for Risk-Weighted
Assets; Market Discipline and Disclosure Requirements; Proposed Rule
Federal Register / Vol. 77 , No. 169 / Thursday, August 30, 2012 /
Proposed Rules
[[Page 52888]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID OCC-2012-0009]
RIN 1557-AD46
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Regulations H, Q, and Y; Docket No. R-1442]
RIN 7100 AD 87
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AD96
Regulatory Capital Rules: Standardized Approach for Risk-Weighted
Assets; Market Discipline and Disclosure Requirements
AGENCY: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; and the Federal Deposit
Insurance Corporation.
ACTION: Joint notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
seeking comment on three notices of proposed rulemaking (NPRs) that
would revise and replace the agencies' current capital rules.
This NPR (Standardized Approach NPR) includes proposed changes to
the agencies' general risk-based capital requirements for determining
risk-weighted assets (that is, the calculation of the denominator of a
banking organization's risk-based capital ratios). The proposed changes
would revise and harmonize the agencies' rules for calculating risk-
weighted assets to enhance risk-sensitivity and address weaknesses
identified over recent years, including by incorporating certain
international capital standards of the Basel Committee on Banking
Supervision (BCBS) set forth in the standardized approach of the
``International Convergence of Capital Measurement and Capital
Standards: A Revised Framework'' (Basel II), as revised by the BCBS
between 2006 and 2009, and other proposals addressed in recent
consultative papers of the BCBS.
In this NPR, the agencies also propose alternatives to credit
ratings for calculating risk-weighted assets for certain assets,
consistent with section 939A of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-Frank Act). The revisions include
methodologies for determining risk-weighted assets for residential
mortgages, securitization exposures, and counterparty credit risk. The
changes in the Standardized Approach NPR are proposed to take effect on
January 1, 2015, with an option for early adoption. The Standardized
Approach NPR also would introduce disclosure requirements that would
apply to top-tier banking organizations domiciled in the United States
with $50 billion or more in total assets, including disclosures related
to regulatory capital instruments. In connection with the proposed
changes to the agencies' capital rules in this NPR, the agencies are
also seeking comment on the two related NPRs published elsewhere in
today's Federal Register. The two related NPR's are discussed further
in the SUPPLEMENTARY INFORMATION.
DATES: Comments must be submitted on or before October 22, 2012.
ADDRESSES: Comments should be directed to:
OCC: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
the Federal eRulemaking Portal or email, if possible. Please use the
title ``Regulatory Capital Rules: Standardized Approach for Risk-
weighted Assets; Market Discipline and Disclosure Requirements'' to
facilitate the organization and distribution of the comments. You may
submit comments by any of the following methods:
Federal eRulemaking Portal--``regulations.gov'': Go to
http://www.regulations.gov. Click ``Advanced Search.'' Select
``Document Type'' of ``Proposed Rule,'' and in ``By Keyword or ID''
box, enter Docket ID ``OCC-2012-0009,''and click ``Search.'' If
proposed rules for more than one agency are listed, in the ``Agency''
column, locate the notice of proposed rulemaking for the OCC. Comments
can be filtered by Agency using the filtering tools on the left side of
the screen. In the ``Actions'' column, click on ``Submit a Comment'' or
``Open Docket Folder'' to submit or view public comments and to view
supporting and related materials for this rulemaking action.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting or viewing public comments, viewing other supporting and
related materials, and viewing the docket after the close of the
comment period.
Email: [email protected].
Mail: Office of the Comptroller of the Currency, 250 E
Street SW., Mail Stop 2-3, Washington, DC 20219.
Fax: (202) 874-5274.
Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2012-0009.'' In general, OCC will enter all comments
received into the docket and publish them on the Regulations.gov Web
site without change, including any business or personal information
that you provide such as name and address information, email addresses,
or phone numbers. Comments received, including attachments and other
supporting materials, are part of the public record and subject to
public disclosure. Do not enclose any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
You may review comments and other related materials that pertain to
this notice by any of the following methods:
Viewing Comments Electronically: Go to http://www.regulations.gov. Click ``Advanced search.'' Select ``Document
Type'' of ``Public Submission'' and in ``By Keyword or ID'' box enter
Docket ID ``OCC-2012-0009,'' and click ``Search.'' If comments from
more than one agency are listed, the ``Agency'' column will indicate
which comments were received by the OCC. Comments can be filtered by
Agency using the filtering tools on the left side of the screen.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 250 E Street SW., Washington, DC
20219. For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid
government-issued photo identification and to submit to security
screening in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board: When submitting comments, please consider submitting your
comments by email or fax because paper mail in the Washington, DC area
and at the Board may be subject to delay. You may submit comments,
identified by
[[Page 52889]]
Docket No. R-1442; RIN No. 7100 AD 87, by any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Street NW., Washington, DC 20551) between 9 a.m. and 5 p.m. on
weekdays.
FDIC: You may submit comments by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street NW., Washington, DC 20429.
Hand Delivered/Courier: The guard station at the rear of
the 550 17th Street Building (located on F Street), on business days
between 7:00 a.m. and 5:00 p.m.
Email: [email protected].
Instructions: Comments submitted must include ``FDIC'' and
``RIN 3064-AD 96.'' Comments received will be posted without change to
http://www.FDIC.gov/regulations/laws/federal/propose.html, including
any personal information provided.
FOR FURTHER INFORMATION CONTACT: OCC: Margot Schwadron, Senior Risk
Expert, (202) 874-6022, David Elkes, Risk Expert, (202) 874-3846, or
Mark Ginsberg, Risk Expert, (202) 927-4580, or Ron Shimabukuro, Senior
Counsel, Patrick Tierney, Counsel, or Carl Kaminski, Senior Attorney,
Legislative and Regulatory Activities Division, (202) 874-5090, Office
of the Comptroller of the Currency, 250 E Street SW., Washington, DC
20219.
Board: Anna Lee Hewko, Assistant Director, (202) 530-6260, Thomas
Boemio, Manager, (202) 452-2982, or Constance M. Horsley, Manager,
(202) 452-5239, Capital and Regulatory Policy, Division of Banking
Supervision and Regulation; or Benjamin McDonough, Senior Counsel,
(202) 452-2036, April C. Snyder, Senior Counsel, (202) 452-3099, or
Christine Graham, Senior Attorney, (202) 452-3005, Legal Division,
Board of Governors of the Federal Reserve System, 20th and C Streets
NW., Washington, DC 20551. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: Bobby R. Bean, Associate Director, [email protected]; Ryan
Billingsley, Chief, Capital Policy Section, [email protected]; Karl
Reitz, Chief, Capital Markets Strategies Section, [email protected],
Division of Risk Management Supervision; David Riley, Senior Policy
Analyst, [email protected], Capital Markets Branch, Division of Risk
Management Supervision, (202) 898-6888; or Mark Handzlik, Counsel,
[email protected], Michael Phillips, Counsel, [email protected], Greg
Feder, Counsel, [email protected], or Ryan Clougherty, Senior Attorney,
[email protected]; Supervision Branch, Legal Division, Federal
Deposit Insurance Corporation, 550 17th Street NW., Washington, DC
20429.
SUPPLEMENTARY INFORMATION: The Office of the Comptroller of the
Currency (OCC), the Board of Governors of the Federal Reserve System
(Board), and the Federal Deposit Insurance Corporation (FDIC)
(collectively, the agencies) are seeking comment on three notices of
proposed rulemaking (NPRs) that would revise and replace the agencies'
current capital rules.
This NPR (Standardized Approach NPR) includes proposed changes to
the agencies' general risk-based capital requirements for determining
risk-weighted assets (that is, the calculation of the denominator of a
banking organization's risk-based capital ratios). The proposed changes
would revise and harmonize the agencies' rules for calculating risk-
weighted assets to enhance risk-sensitivity and address weaknesses
identified over recent years, including by incorporating certain
international capital standards of the Basel Committee on Banking
Supervision (BCBS) set forth in the standardized approach of the
``International Convergence of Capital Measurement and Capital
Standards: A Revised Framework'' (Basel II), as revised by the BCBS
between 2006 and 2009, and other proposals addressed in recent
consultative papers of the BCBS.
In this NPR, the agencies also propose alternatives to credit
ratings for calculating risk-weighted assets for certain assets,
consistent with section 939A of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-Frank Act). The revisions include
methodologies for determining risk-weighted assets for residential
mortgages, securitization exposures, and counterparty credit risk. The
changes in this Standardized Approach NPR are proposed to take effect
on January 1, 2015, with an option for early adoption. The Standardized
Approach NPR also would introduce disclosure requirements that would
apply to top-tier banking organizations domiciled in the United States
with $50 billion or more in total assets, including disclosures related
to regulatory capital instruments.
In connection with the proposed changes to the agencies' capital
rules in this NPR, the agencies are also seeking comment on the two
related NPRs published elsewhere in today's Federal Register. In the
notice titled ``Regulatory Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital
Adequacy, Prompt Corrective Action, and Transition Provisions'' (Basel
III NPR), the agencies are proposing to revise their minimum risk-based
capital requirements and criteria for regulatory capital, as well as
establish a capital conservation buffer framework, consistent with
Basel III.
The proposals in this NPR and the Basel III NPR would apply to all
banking organizations that are currently subject to minimum capital
requirements (including national banks, state member banks, state
nonmember banks, state and federal savings associations, and top-tier
bank holding companies domiciled in the United States not subject to
the Board's Small Bank Holding Company Policy Statement), as well as
top-tier savings and loan holding companies domiciled in the United
States (together, banking organizations).
In the notice titled ``Regulatory Capital Rules: Advanced
Approaches Risk-Based Capital Rule; Market Risk Capital Rule,''
(Advanced Approaches and Market Risk NPR) the agencies are proposing to
revise the advanced approaches risk-based capital rules, which are
applicable only to the largest internationally active banking
organizations, consistent with Basel III
[[Page 52890]]
and other changes to the BCBS's capital standards.
Table of Contents \1\
\1\ Sections marked with an asterisk generally would not apply
to less complex banking organizations.
---------------------------------------------------------------------------
I. Introduction and Overview. Overview of the proposed standardized
approach for calculation of risk-weighted assets and summary of
proposals contained in two other NPRs.
II. Standardized Approach for Risk-Weighted Assets
A. Calculation of Standardized Total Risk-weighted Assets. A
discussion of how a banking organization would determine risk-
weighted asset amounts.
B. Risk-weighted Assets for General Credit Risk. A description
of general credit risk exposures and the methodologies for
calculating risk-weighted assets for such exposures.
1. Exposures to Sovereigns. A description of the treatment of
exposures to the U.S. government and other sovereigns.
2. Exposures to Certain Supranational Entities and Multilateral
Development Banks. A description of the treatment of exposures to
Multilateral Development Banks and other supranational entities.
3. Exposures to Government-sponsored Entities. A description of
the treatment of exposures to government-sponsored entities (such as
the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation).
4. Exposures to Depository Institutions, Foreign Banks, and
Credit Unions. A description of the treatment for exposures to U.S.
depository institutions, foreign banks, and credit unions.
5. Exposures to Public Sector Entities. A description of the
treatment for exposures to Public Sector Entities, general
obligation and revenue bonds.
6. Corporate Exposures. A description of the treatment for
corporate exposures.
7. Residential Mortgage Exposures. A description of the more
risk-sensitive treatment for first- and junior-lien residential
mortgage exposures.
8. Pre-sold Construction Loans and Statutory Multifamily
Mortgages. A description of the treatment for pre-sold construction
loans and statutory multifamily mortgages.
9. High Volatility Commercial Real Estate Exposures. A
description of the requirement to assign higher risk weights to
certain commercial real estate exposures.
10. Past Due Exposures. A description of the requirement to
assign higher risk weights to certain past due loans.
11. Other Assets. A description of the treatment for exposures
that are not assigned to specific risk weight categories, including
cash and gold bullion held by a banking organization.
C. Off-balance Sheet Items. A discussion of the requirements for
calculating the exposure amount of an off-balance sheet item.
D. Over-the-Counter Derivative Contracts*. A discussion of the
requirements for calculating risk-weighted asset amounts for
exposures to over-the-counter (OTC) derivative contracts.
E. Cleared Transactions.
1. Overview. A discussion of the requirements for calculating
risk-weighted asset amounts for derivatives and repo-style
transactions that are cleared through central counterparties and for
default fund contributions to central counterparties.
2. Risk-weighted Asset Amount for Clearing Member Clients and
Clearing Members. A description of the calculation of the trade
exposure amount and the appropriate risk weight.
3. Default Fund Contribution*. A description of the risk-based
capital requirement for default fund contributions of clearing
members.
F. Credit Risk Mitigation.
1. Guarantees and Credit Derivatives
a. Eligibility Requirements. A description of the eligibility
requirements for credit risk mitigation, including guarantees and
credit derivatives.
b. Substitution Approach. A description of the substitution
approach for recognizing credit risk mitigation of guarantees and
credit derivatives.
c. Maturity Mismatch Haircut. An explanation of the requirement
for adjusting the exposure amount of a credit risk mitigant to
reflect any maturity mismatch between a hedged exposure and the
credit risk mitigant.
d. Adjustment for Credit Derivatives without Restructuring as a
Credit Event*. A description of requirements to adjust the notional
amount of a credit derivative that does not include restructuring as
a credit event in its governing contracts.
e. Currency Mismatch Adjustment*. A description of the
requirement to adjust the notional amount of an eligible guarantee
or eligible credit derivative that is denominated in a currency
different from that in which the hedged exposure is denominated.
f. Multiple Credit Risk Mitigants*. A description of the
calculation of risk-weighted asset amounts when multiple credit risk
mitigants cover a single exposure.
2. Collateralized Transactions. A discussion of options and
requirements for recognizing collateral credit risk mitigation,
including eligibility criteria, risk management requirements, and
methodologies for calculating exposure amount of eligible
collateral.
a. Eligible Collateral. A description of eligible collateral,
including the definition of financial collateral.
b. Risk Management Guidance for Recognizing Collateral. A
description of the steps a banking organization should take to
ensure the eligibility of collateral prior to recognizing the
collateral for credit risk mitigation purposes.
c. Simple Approach. A description of the approach to assign a
risk weight to the collateralized portion of the exposure.
d. Collateral Haircut Approach*. A description of how a banking
organization would be permitted to use a collateral haircut approach
with supervisory haircuts to recognize the risk mitigating effect of
collateral that secures certain types of transactions.
e. Standard Supervisory Haircuts*. A description of the standard
supervisory market price volatility haircuts based on residual
maturity and exposure type.
f. Own Estimates of Haircuts*. A description of the qualitative
and quantitative standards and requirements for a banking
organization to use internally estimated haircuts.
g. Simple Value-at-risk*. A description of an alternative that
the agencies may consider to permit a banking organization estimate
the exposure amount for transactions subject to certain netting
agreements using a value-at-risk model.
h. Internal Models Methodology*. A description of an alternative
that the agencies may consider to permit a banking organization to
use the internal models methodology to calculate the exposure amount
for the counterparty credit exposure for OTC derivatives, eligible
margin loans, and repo-style transactions.
G. Unsettled Transactions*. A description of the methodology for
calculating the risk-weighted asset amount for unsettled delivery-
versus-payment and payment-versus-payment transactions.
H. Risk-weighted Assets for Securitization Exposures
1. Overview of the Securitization Framework and Definitions. A
description of the securitization framework designed to address the
credit risk of exposures that involve the tranching of the credit
risk of one or more underlying financial exposures under the
proposal.
2. Operational Requirements for Securitization Exposures. A
description of operational and due diligence requirements for
securitization exposures and eligibility of clean-up calls.
a. Due Diligence Requirements. A description of the due
diligence requirements that a banking organization would have to
conduct and document prior to acquisition of exposures and
periodically thereafter.
b. Operational Requirements for Traditional Securitizations*. A
description of the operational requirements for traditional
securitizations.
c. Operational Requirements for Synthetic Securitizations. A
discussion of the operational requirements for synthetic
securitizations.
d. Clean-Up Calls. A discussion of the definition and
eligibility of clean-up calls.
3. Risk-weighted Asset Amounts for Securitization Exposures
a. Exposure Amount of a Securitization Exposure. A description
of the proposed methodology for calculating the exposure amount of a
securitization exposure.
[[Page 52891]]
b. Gains-On-Sale and Credit-enhancing Interest-only Strips. A
description of proposed deduction requirements for gains-on-sale and
credit-enhancing interest-only strips.
c. Exceptions under the Securitization Framework. A description
of exceptions to certain requirements under the proposed
securitization framework.
d. Overlapping Exposures. A description of the provisions to
limit the double counting of risks associated with securitization
exposures.
e. Servicer Cash Advances. A description of the treatment for
servicer cash advances.
f. Implicit Support. A discussion of regulatory consequences
where a banking organization provides implicit (non-contractual)
support to a securitization transaction.
4. Simplified Supervisory Formula Approach*. A discussion of the
simplified supervisory formula methodology for calculating the risk-
weighted asset amounts of securitization exposures.
5. Gross-up Approach. A description of the gross-up approach for
calculating risk-weighted asset amounts for securitization
exposures.
6. Alternative Treatments for Certain Types of Securitization
Exposures*. A description of requirements related to exposures to
asset-backed commercial paper programs.
7. Credit Risk Mitigation for Securitization Exposures. A
discussion of the requirements for recognizing credit risk
mitigation for securitization exposures.
8. Nth-to-default Credit Derivatives*. A description of the
requirements for calculating risk-weighted asset amounts for nth-to-
default credit derivatives.
I. Equity Exposures. A description of the requirements for
calculating risk-weighted asset amounts for equity exposures,
including calculation of exposure amount, recognition of equity
hedges, and methodologies for assigning risk weights to different
categories of equity exposures.
1. Introduction. A description of the treatment for equity
exposures.
2. Exposure Measurement. A description of how a banking
organization would determine the adjusted carrying value for equity
exposures.
3. Equity Exposure Risk Weights. A description of how a banking
organization would determine the risk-weighted asset amount for each
equity exposure.
4. Non-significant Equity Exposures. A description of the
proposed treatment for non-significant equity exposures.
5. Hedged Transactions*. A description of the proposed treatment
for hedged transactions.
6. Measures of Hedge Effectiveness*. A description of the
measures of hedge effectiveness.
7. Equity Exposures to Investment Funds
a. Full Look-through Approach. A description of the proposed
full look-through approach.
b. Simple Modified Look-through Approach. A description of the
simple modified look-through approach.
c. Alternative Modified Look-through Approach. A description of
the alternative modified look-through approach.
III. Insurance-Related Activities*. A discussion of the proposed
treatment for certain instruments and exposures unique to insurance
underwriting activities.
IV. Market Discipline and Disclosure Requirements*.
A. Proposed Disclosure Requirements. A discussion of the
proposed disclosure requirements for top-tier entities with $50
billion or more in total assets that are not subject to the advanced
approaches rule.
B. Frequency of Disclosures. Describes the proposed frequency of
required disclosures.
C. Location of Disclosures and Audit Requirements. A description
of the location of disclosures and audit requirements.
D. Proprietary and Confidential Information. Describes the
treatment of proprietary and confidential information as part of the
proposed disclosure requirements.
E. Specific Public Disclosure Requirements. A description of the
specific public disclosure requirements in tables 14.1-14.10 of the
proposal.
V. List of Acronyms That Appear in the Proposal
VI. Regulatory Flexibility Act Analysis
VII. Paperwork Reduction Act
VIII. Plain Language
IX. OCC Unfunded Mandates Reform Act of 1995 Determination
Addendum 1: Summary of this NPR as it would Generally Apply to
Community Banking Organizations
Addendum 2: Definitions Used in the Proposal
I. Introduction and Overview
The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
proposing comprehensive revisions to their regulatory capital framework
through three concurrent notices of proposed rulemaking (NPRs). In this
NPR (Standardized Approach NPR), the agencies are proposing to revise
certain aspects of the general risk-based capital requirements that
address the calculation of risk-weighted assets. The agencies believe
the proposed changes included in this NPR would both enhance the
overall risk-sensitivity of the calculation of a banking organization's
total risk-weighted assets and be consistent with relevant provisions
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act).\2\ Although many of the proposed changes included in this
NPR are not specifically included in the Basel capital framework, the
agencies believe that these proposed changes are generally consistent
with the goals of the international framework.
---------------------------------------------------------------------------
\2\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------
This NPR contains a standardized approach for determining risk-
weighted assets. This NPR would apply to all banking organizations
currently subject to minimum capital requirements, including national
banks, state member banks, state nonmember banks, state and federal
savings associations, top-tier bank holding companies domiciled in the
United States not subject to the Board's Small Bank Holding Company
Policy Statement (12 CFR part 225, appendix C), as well as top-tier
savings and loan holding companies domiciled in the United States
(together, banking organizations).\3\ The proposed effective date for
the provisions of this NPR is January 1, 2015, with an option for early
adoption.
---------------------------------------------------------------------------
\3\ Small bank holding companies would continue to be subject to
the Small Bank Holding Company Policy Statement. The proposed rule's
application to all savings and loan holding companies (including
small savings and loan holding companies) is consistent with the
transfer of supervisory responsibilities to the Board and the
requirements of section 171 of the Dodd-Frank Act. Section 171 of
the Dodd-Frank Act by its terms does not apply to small bank holding
companies, but there is no exemption from the requirements of
section 171 for small savings and loan holding companies. See 12
U.S.C. 5371.
---------------------------------------------------------------------------
In a separate NPR (Basel III NPR), the agencies are proposing to
revise their capital regulations to incorporate agreements reached by
the Basel Committee on Banking Supervision (BCBS) in ``Basel III: A
Global Regulatory Framework for More Resilient Banks and Banking
Systems'' (Basel III). The Basel III NPR would revise the definition of
regulatory capital and minimum capital ratios, establish capital
buffers, create a supplementary leverage ratio for advanced approach
banking organizations, and revise the agencies' Prompt Corrective
Action (PCA) regulations.
The agencies are proposing in a third NPR (Advanced Approaches and
Market Risk NPR) to incorporate additional aspects of the Basel III
framework into the advanced approaches risk-based capital rule
(advanced approaches rule). Additionally, in the Advanced Approaches
and Market Risk NPR, the Board proposes to apply the advanced
approaches rule to savings and loan holding companies, and the Board,
FDIC, and OCC propose to apply the market risk capital rule (market
risk rule) to savings and loan holding companies and to state and
federal
[[Page 52892]]
savings associations that meet the scope requirements of these rules,
respectively. Thus, the Advanced Approaches and Market Risk NPR is
applicable only to banking organizations that are or would be subject
to the advanced approaches rule (advanced approaches banking
organizations) or the market risk rule, and to savings and loan holding
companies and state and federal savings associations that would be
subject to the advanced approaches rule or market risk rule.
All banking organizations, including organizations subject to the
advanced approaches rule, should review both the Basel III NPR and the
Standardized Approach NPR. The requirements proposed in the Basel III
NPR and the Standardized Approach NPR are proposed to become the
``generally applicable'' capital requirements for purposes of section
171 of the Dodd-Frank Act because they would be the capital
requirements for insured depository institutions under section 38 of
the Federal Deposit Insurance Act, without regard to asset size or
foreign financial exposure.\4\
---------------------------------------------------------------------------
\4\ 12 U.S.C. 1831o; 12 CFR part 6, 12 CFR part 165 (OCC); 12
CFR 208.43 (Board), 12 CFR 325.105, 12 CFR 390.455 (FDIC).
---------------------------------------------------------------------------
The agencies believe that it is important to publish all of the
proposed capital rules at the same time so that banking organizations
can evaluate the overall potential impact of the proposals on their
operations. The proposals are divided into three separate NPRs to
reflect the distinct objectives of each proposal, to allow interested
parties to better understand the various aspects of the overall capital
framework, including which aspects of the proposals would apply to
which banking organizations, and to help interested parties better
focus their comments on areas of particular interest. Additionally, the
agencies believe that separating the proposed requirements into three
NPRs makes it easier for banking organizations of all sizes to more
easily understand which proposed changes are related to the agencies'
objective to improve the quality and increase the quantity of capital
and which are related to the agencies' objective to enhance the overall
risk-sensitivity of the calculation of a banking organization's total
risk-weighted assets. The agencies believe that the proposed changes
contained in the three NPRs will result in capital requirements that
will improve institutions' ability to withstand periods of economic
stress and better reflect their risk profiles. The agencies have
carefully considered the potential impact of the three NPRs on all
banking organizations, including community banking organizations, and
sought to minimize the potential burden of these changes wherever
possible.
This NPR proposes new methodologies for determining risk-weighted
assets in the agencies' general capital rules, incorporating elements
of the Basel II standardized approach \5\ as modified by the 2009
``Enhancements to the Basel II Framework'' (2009 Enhancements) \6\ and
recent consultative papers published by the BCBS. This NPR also
proposes alternative standards of creditworthiness consistent with
section 939A of the Dodd-Frank Act.\7\ The proposed revisions in this
NPR include revisions to recognition of credit risk mitigation,
including a greater recognition of financial collateral and a wider
range of eligible guarantors. They also include risk weighting of
equity exposures and past due loans, operational requirements for
securitization exposures, more favorable capital treatment for
derivatives and repo-style transactions cleared through central
counterparties, and disclosure requirements that would apply to top-
tier banking organizations with $50 billion or more in total assets
that are not subject to the advanced approaches rule. In addition, the
proposed risk weights for residential mortgage exposures in this NPR
enhance risk-sensitivity for capital requirements associated with these
exposures. Similarly, the proposals in this NPR would require a higher
risk weighting for certain commercial real estate exposures that
typically have higher credit risk. The agencies believe these proposals
would more appropriately align capital requirements with these
exposures and contribute to the resilience of both individual banking
organizations and the banking system.
---------------------------------------------------------------------------
\5\ See BCBS, ``International Convergence of Capital Measurement
and Capital Standards: A Revised Framework,'' (June 2006), available
at http://www.bis.org/publ/bcbs128.htm (Basel II).
\6\ See BCBS, ``Enhancements to the Basel II Framework,'' (July
2009), available at http://www.bis.org/publ/bcbs157.htm.
\7\ Dodd-Frank Act, section 939A (15 U.S.C. 78o-7, note).
---------------------------------------------------------------------------
Some of the proposed changes in this NPR are not specifically
included in the Basel capital framework. However, the agencies believe
that these proposed changes are generally consistent with the goals of
that framework. For example, the Basel capital framework seeks to
enhance the risk-sensitivity of the international risk-based capital
requirements by mapping capital requirements for certain exposures to
credit ratings provided by credit rating agencies. Instead of mapping
risk weights to credit ratings, the agencies are proposing alternative
standards of creditworthiness to assign risk weights to certain
exposures, including exposures to sovereigns, companies, and
securitization exposures, in a manner consistent with section 939A of
the Dodd-Frank Act.\8\ These alternative creditworthiness standards and
risk-based capital requirements have been designed to be consistent
with safety and soundness while also exhibiting risk-sensitivity to the
extent possible. Furthermore, these capital requirements are intended
to be similar to those generated under the Basel framework.
---------------------------------------------------------------------------
\8\ Section 939A of the Dodd-Frank Act provides that not later
than 1 year after the date of enactment, each Federal agency shall
review: (1) Any regulation issued by such agency that requires the
use of an assessment of the credit-worthiness of a security or money
market instrument; and (2) any references to or requirements in such
regulations regarding credit ratings. Section 939A further provides
that each such agency ``shall modify any such regulations identified
by the review * * * to remove any reference to or requirement of
reliance on credit ratings and to substitute in such regulations
such standard of credit-worthiness as each respective agency shall
determine as appropriate for such regulations.'' See 15 U.S.C. 78o-7
note.
---------------------------------------------------------------------------
Table 1 summarizes key proposed requirements in this NPR and
illustrates how these changes compare to the agencies' general risk-
based capital rules.\9\ The remaining sections of this notice describe
in detail each element of the proposal, how the proposal would differ
from the current general risk-based capital rules, and examples for how
a banking organization would calculate risk-weighted asset amounts.
---------------------------------------------------------------------------
\9\ Banking organizations should refer to the Basel III NPR to
see a complete table of the key provisions of the proposal.
[[Page 52893]]
Table 1--Key Provisions of the Proposed Requirements as Compared to the
General Risk-Based Capital Rules
------------------------------------------------------------------------
Aspect of proposed requirements Proposed treatment
------------------------------------------------------------------------
Risk-weighted Assets
------------------------------------------------------------------------
Credit exposures to:
U.S. government and its Unchanged.
agencies.
U.S. government-sponsored
entities.
U.S. depository institutions
and credit unions.
U.S. public sector entities,
such as states and
municipalities (section 32 of
subpart D).
Credit exposures to:
Foreign sovereigns............ Introduces a more risk-sensitive
treatment using the Country Risk
Classification measure produced by
the Organization for Economic Co-
operation and Development.
Foreign banks.................
Foreign public sector entities
(section 32 of subpart D).
Corporate exposures (section 32 of Assigns a 100 percent risk weight to
subpart D). corporate exposures, including
exposures to securities firms.
Residential mortgage exposures Introduces a more risk-sensitive
(section 32 of subpart D). treatment based on several
criteria, including certain loan
characteristics and the loan-to-
value-ratio of the exposure.
High volatility commercial real Applies a 150 percent risk weight to
estate exposures (section 32 of certain credit facilities that
subpart D). finance the acquisition,
development or construction of real
property.
Past due exposures (section 32 of Applies a 150 percent risk weight to
subpart D). exposures that are not sovereign
exposures or residential mortgage
exposures and that are more than 90
days past due or on nonaccrual.
Securitization exposures (sections Maintains the gross-up approach for
41-45 of subpart D). securitization exposures.
Replaces the current ratings-based
approach with a formula-based
approach for determining a
securitization exposure's risk
weight based on the underlying
assets and exposure's relative
position in the securitization's
structure.
Equity exposures (sections 51-53 Introduces more risk-sensitive
of subpart D). treatment for equity exposures.
Off-balance Sheet Items (section Revises the measure of the
33 of subpart D). counterparty credit risk of repo-
style transactions.
Raises the credit conversion factor
for most short-term commitments
from zero percent to 20 percent.
Derivative Contracts (section 34 Removes the 50 percent risk weight
of subpart D). cap for derivative contracts.
Cleared Transactions (section 35 Provides preferential capital
of subpart D). requirements for cleared derivative
and repo-style transactions (as
compared to requirements for non-
cleared transactions) with central
counterparties that meet specified
standards. Also requires that a
clearing member of a central
counterparty calculate a capital
requirement for its default fund
contributions to that central
counterparty.
Credit Risk Mitigation (section 36 Provides a more comprehensive
of subpart D). recognition of collateral and
guarantees.
Disclosure Requirements (sections Introduces qualitative and
61-63 of subpart D). quantitative disclosure
requirements, including regarding
regulatory capital instruments, for
banking organizations with total
consolidated assets of $50 billion
or more that are not subject to the
separate advanced approaches
disclosure requirements.
------------------------------------------------------------------------
This NPR proposes that, beginning on January 1, 2015, a banking
organization would be required to calculate risk-weighted assets using
the methodologies described herein. Until then, the banking
organization may calculate risk-weighted assets using the methodologies
in the current general risk-based capital rules.
Some of the proposed requirements in this NPR are not applicable to
smaller, less complex banking organizations. To assist these banking
organizations in rapidly identifying the elements of these proposals
that would apply to them, this NPR and the Basel III NPR provide, as
addenda to the corresponding preambles, a summary of the proposed
changes in those NPRs as they would generally apply to smaller, less
complex banking organizations. This NPR also contains a second addendum
to the preamble, which directs the reader to the definitions proposed
under the Basel III NPR because they are applicable to the Standardized
Approach NPR as well.
Question 1: The agencies seek comment on the advantages and
disadvantages of the proposed standardized approach rule as it would
apply to smaller and less complex banking organizations (community
banking organizations). What specific changes, if any, to the rule
would accomplish the agencies' goals of establishing improved risk-
sensitivity and quality of capital in an appropriate manner? For
example, in which areas might the proposed standardized approach for
calculating risk-weighted assets include simpler approaches for
community banking organizations or longer transition periods? Provide
specific suggestions.
Question 2: The agencies also seek comment on the advantages and
disadvantages of allowing certain community banking organizations to
continue to calculate their risk-weighted assets based on the
methodology in the current general risk-based capital rules, as
modified to meet the new Basel III requirements and any changes
required under U.S. law, and as incorporated into a comprehensive
regulatory framework.
For example, under this type of alternative approach, community
banking organizations would be subject to the proposed new PCA
thresholds, a capital conservation buffer, and other Basel III
revisions to the capital framework including the definition of capital,
as well as any changes related to section 939A of the Dodd-Frank Act.
[[Page 52894]]
As modified with these revisions, community banking organizations would
continue using most of the same risk weights as under the current
general risk-based capital rules, including for commercial and
residential mortgage exposures.
Under this approach, banking organizations other than community
banking organizations would use the proposed standardized approach risk
weights to calculate the denominator of the risk-based capital ratio.
The agencies request comment on the criteria they should consider when
determining which banking organizations, if any, should be permitted to
continue to calculate their risk-weighted assets using the methodology
in the current general risk-based capital rules (revised as described
above). Which banking organizations, consistent with section 171 of the
Dodd-Frank Act, should be required to use the standardized approach?
\10\ What factors should the agencies consider in making this
determination?
---------------------------------------------------------------------------
\10\ Section 171 of the Dodd-Frank Act provides that all banking
organizations must be subject to minimum capital requirements that
cannot be less than the ``generally applicable risk-based capital
rules'' established by the appropriate federal banking agency to
apply to insured depository institutions under section 38 of the
Federal Deposit Insurance Act, regardless of total consolidated
asset size or foreign financial exposure; which shall serve as a
floor for any capital requirements the agency may require.
---------------------------------------------------------------------------
II. Standardized Approach for Risk-weighted Assets
A. Calculation of Standardized Total Risk-weighted Assets
Similar to the current general risk-based capital rules, under the
proposal, a banking organization would calculate its total risk-
weighted assets by adding together its on- and off-balance sheet risk-
weighted asset amounts and making any relevant adjustments to
incorporate required capital deductions.\11\ Banking organizations
subject to the market risk rule would be required to supplement their
total risk-weighted assets as provided by the market risk rule.\12\
Risk-weighted asset amounts generally would be determined by assigning
on-balance sheet assets to broad risk-weight categories according to
the counterparty, or, if relevant, the guarantor or collateral.
Similarly, risk-weighted asset amounts for off-balance sheet items
would be calculated using a two-step process: (1) Multiplying the
amount of the off-balance sheet exposure by a credit conversion factor
(CCF) to determine a credit equivalent amount, and (2) assigning the
credit equivalent amount to a relevant risk-weight category.
---------------------------------------------------------------------------
\11\ See generally 12 CFR part 3, appendix A, section III; 12
CFR 167.6 (OCC); 12 CFR parts 208 and 225, appendix A, section III
(Board); 12 CFR part 325, appendix A, sections II.C and II.D and 12
CFR 390.466 (FDIC).
\12\ The proposed rules would incorporate the market risk rule
into the integrated regulatory framework as subpart F. See the
Advanced Approaches and Market Risk NPR for further discussion.
---------------------------------------------------------------------------
A banking organization would determine its standardized total risk-
weighted assets by calculating the sum of: (1) Its risk-weighted assets
for general credit risk, cleared transactions, default fund
contributions, unsettled transactions, securitization exposures, and
equity exposures, each as defined below, plus (ii) market risk-weighted
assets, if applicable, less (iii) the banking organization's allowance
for loan and lease losses (ALLL) that is not included in tier 2 capital
(as described in section 20 of the proposal). The sections below
describe in more detail how a banking organization would determine the
risk-weighted asset amounts for its exposures.
B. Risk-weighted Assets for General Credit Risk
Under this NPR, total risk-weighted assets for general credit risk
is the sum of the risk-weighted asset amounts as calculated under
section 31(a) of the proposal. As proposed, general credit risk
exposures would include a banking organization's on-balance sheet
exposures, over-the-counter (OTC) derivative contracts, off-balance
sheet commitments, trade and transaction-related contingencies,
guarantees, repo-style transactions, financial standby letters of
credit, forward agreements, or other similar transactions. General
credit risk exposures would generally exclude unsettled transactions,
cleared transactions, default fund contributions, securitization
exposures, and equity exposures, each as the agencies propose to
define. Section 32 describes the proposed risk weights that would apply
to sovereign exposures; exposures to certain supranational entities and
multilateral development banks (MDBs); exposures to government-
sponsored entities (GSEs); exposures to depository institutions,
foreign banks, and credit unions; exposures to public sector entities
(PSEs); corporate exposures; residential mortgage exposures; pre-sold
residential construction loans; statutory multifamily mortgages; high
volatility commercial real estate (HVCRE) exposures; past due
exposures; and other assets (including cash, gold bullion, certain
mortgage servicing assets (MSAs) and deferred tax assets (DTAs)).
Generally, the exposure amount for the on-balance sheet component
of an exposure is the banking organization's carrying value for the
exposure as determined under generally accepted accounting principles
(GAAP). The exposure amount for an off-balance sheet component of an
exposure is typically determined by multiplying the notional amount of
the off-balance sheet component by the appropriate CCF as determined
under section 33. The exposure amount for an OTC derivative contract or
cleared transaction that is a derivative would be determined under
section 34 while exposure amounts for collateralized OTC derivative
contracts, collateralized cleared transactions that are derivatives,
repo-style transactions, and eligible margin loans would be determined
under section 37 of the proposal.
1. Exposures to Sovereigns
The agencies propose to retain the current rules' risk weights for
exposures to and claims directly and unconditionally guaranteed by the
U. S. government or its agencies.\13\ Accordingly, exposures to the U.
S. government, its central bank, or a U.S. government agency and the
portion of an exposure that is directly and unconditionally guaranteed
by the U. S. government, the U.S. central bank, or a U.S. government
agency would receive a zero percent risk weight.\14\ Consistent with
the current risk-based capital rules, the portion of a deposit insured
by the FDIC or the National Credit Union Administration also may be
assigned a zero percent risk weight. An exposure conditionally
guaranteed by the U.S. government, its central bank, or a U.S.
government agency would receive a 20 percent risk weight.\15\
---------------------------------------------------------------------------
\13\ A U.S. government agency would be defined in the proposal
as an instrumentality of the U.S. government whose obligations are
fully and explicitly guaranteed as to the timely payment of
principal and interest by the full faith and credit of the U.S.
government.
\14\ Similar to the current general risk-based capital rules, a
claim would not be considered unconditionally guaranteed by a
central government if the validity of the guarantee is dependent
upon some affirmative action by the holder or a third party. See 12
CFR part 3, appendix A, section 1(c)(11) and 12 CFR 167.6 (OCC); 12
CFR parts 208 and 225, appendix A, section III.C.1 (Board); 12 CFR
part 325, appendix A, section II.C. (footnote 35) and 12 CFR 390.466
(FDIC).
\15\ Loss-sharing agreements entered into by the FDIC with
acquirers of assets from failed institutions are considered
conditional guarantees for risk-based capital purposes due to
contractual conditions that acquirers must meet. The guaranteed
portion of assets subject to a loss-sharing agreement may be
assigned a 20 percent risk weight. Because the structural
arrangements for these agreements vary depending on the specific
terms of each agreement, institutions should consult with their
primary federal supervisor to determine the appropriate risk-based
capital treatment for specific loss-sharing agreements.
---------------------------------------------------------------------------
[[Page 52895]]
The agencies' general risk-based capital rules generally assign
risk weights to direct exposures to sovereigns and exposures directly
guaranteed by sovereigns based on whether the sovereign is a member of
the Organization for Economic Co-operation and Development (OECD) and,
as applicable, whether the exposure is unconditionally or conditionally
guaranteed by the sovereign.\16\
---------------------------------------------------------------------------
\16\ 12 CFR part 3, appendix A, section 3 and 12 CFR 167.6
(OCC); 12 CFR parts 208 and 225, appendix A, section III.C.1
(Board); 12 CFR part 325, appendix A, section II.C and 12 CFR
390.466 (FDIC).
---------------------------------------------------------------------------
Under the proposal, a sovereign would be defined as a central
government (including the U.S. government) or an agency, department,
ministry, or central bank of a central government. The risk weight for
a sovereign exposure would be determined using OECD Country Risk
Classifications (CRCs) (the CRC methodology).\17\ The OECD's CRCs are
an assessment of a country's credit risk, used to set interest rate
charges for transactions covered by the OECD arrangement on export
credits.
---------------------------------------------------------------------------
\17\ For more information on the OECD country risk
classification methodology, see OECD, ``Country Risk
Classification,'' available at http://www.oecd.org/document/49/0,3746,en_2649_34169_1901105_1_1_1_1,00.html.
---------------------------------------------------------------------------
The agencies believe that use of CRCs in the proposal is
permissible under section 939A of the Dodd-Frank Act and that section
939A was not intended to apply to assessments of creditworthiness of
organizations such as the OECD. Section 939A is part of Subtitle C of
Title IX of the Dodd-Frank Act, which, among other things, enhances
regulation by the U.S. Securities and Exchange Commission (SEC) of
credit rating agencies, including Nationally Recognized Statistical
Rating Organizations (NRSROs) registered with the SEC. Section 939, in
Subtitle C of Title IX, removes references to credit ratings and NRSROs
from federal statutes. In the introductory ``findings'' section to
Subtitle C, which is entitled ``Improvements to the Regulation of
Credit Ratings Agencies,'' Congress characterized credit rating
agencies as organizations that play a critical ``gatekeeper'' role in
the debt markets and perform evaluative and analytical services on
behalf of clients, and whose activities are fundamentally commercial in
character.\18\ Furthermore, the legislative history of section 939A
focuses on the conflicts of interest of credit rating agencies in
providing credit ratings to their clients, and the problem of
government ``sanctioning'' of the credit rating agencies' credit
ratings by having them incorporated into federal regulations. The OECD
is not a commercial entity that produces credit assessments for fee-
paying clients, nor does it provide the sort of evaluative and
analytical services as credit rating agencies. Additionally, the
agencies note that the use of the CRCs is limited in the proposal.
---------------------------------------------------------------------------
\18\ See Dodd-Frank Act, section 931 (15 U.S.C. 78o-7 note).
---------------------------------------------------------------------------
The CRC methodology, established in 1999, classifies countries into
categories based on the application of two basic components: the
country risk assessment model (CRAM), which is an econometric model
that produces a quantitative assessment of country credit risk, and the
qualitative assessment of the CRAM results, which integrates political
risk and other risk factors not fully captured by the CRAM. The two
components of the CRC methodology are combined and result in countries
being classified into one of eight risk categories (0-7), with
countries assigned to the zero category having the lowest possible risk
assessment and countries assigned to the 7 category having the highest
possible risk assessment.
The OECD regularly updates CRCs for more than 150 countries and
makes the assessments publicly available on its Web site.\19\
Accordingly, the agencies believe that the CRC approach should not
represent undue burden to banking organizations. The use of the CRC
methodology is consistent with the Basel II standardized approach,
which, as an alternative to credit ratings, provides for risk weights
to be assigned to sovereign exposures according to country risk scores
provided by export credit agencies.
---------------------------------------------------------------------------
\19\ See http://www.oecd.org/document/49/0,2340,en_2649_34171_1901105_1_1_1_1,00.html.
---------------------------------------------------------------------------
The agencies recognize that CRCs have certain limitations. Although
the OECD has published a general description of the methodology for CRC
determinations, the methodology is largely principles-based and does
not provide details regarding the specific information and data
considered to support a CRC. Additionally, while the OECD reviews
qualitative factors for each sovereign on a monthly basis, quantitative
financial and economic information used to assign CRCs is available
only annually in some cases, and payment performance is updated
quarterly. Also, OECD-member sovereigns that are defined to be ``high-
income countries'' by the World Bank are assigned a CRC of zero, the
most favorable classification.\20\ Despite these limitations, the
agencies consider CRCs to be a reasonable alternative to credit ratings
for sovereign exposures and the proposed CRC methodology to be more
granular and risk-sensitive than the current risk-weighting methodology
based on OECD membership.
---------------------------------------------------------------------------
\20\ OECD, ``Premium and Related Conditions: Explanation of the
Premium Rules of the Arrangement on Officially Supported Export
Credits (the Knaepen Package),'' (July 6, 2004), available at http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=TD/PG(2004)10/FINAL&docLanguage=En.
---------------------------------------------------------------------------
The agencies also propose to require a banking organization to
apply a 150 percent risk weight to sovereign exposures immediately upon
determining that an event of sovereign default has occurred or if an
event of sovereign default has occurred during the previous five years.
Sovereign default would be defined as a noncompliance by a sovereign
with its external debt service obligations or the inability or
unwillingness of a sovereign government to service an existing loan
according to its original terms, as evidenced by failure to pay
principal and interest timely and fully, arrearages, or restructuring.
A default would include a voluntary or involuntary restructuring that
results in a sovereign not servicing an existing obligation in
accordance with the obligation's original terms.
The agencies are proposing to map risk weights to CRCs in a manner
consistent with the Basel II standardized approach, which provides risk
weights for foreign sovereigns based on country risk scores. The
proposed risk weights for sovereign exposures are set forth in table 2.
Table 2--Proposed Risk Weights for Sovereign Exposures
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
Sovereign CRC:
0-1................................................. 0
2................................................... 20
3................................................... 50
4-6................................................. 100
7................................................... 150
No CRC.................................................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
If a banking supervisor in a sovereign jurisdiction allows banking
organizations in that jurisdiction to apply a lower risk weight to an
exposure to that sovereign than table 2 provides, a U.S. banking
organization would be able to assign the lower risk weight to an
exposure to that sovereign, provided
[[Page 52896]]
the exposure is denominated in the sovereign's currency and the U.S.
banking organization has at least an equivalent amount of liabilities
in that foreign currency.
Question 3: The agencies solicit comment on the proposed
methodology for risk weighting sovereign exposures. Are there other
alternative methodologies for risk weighting sovereign exposures that
would be more appropriate? Provide specific examples and supporting
data.
2. Exposures to Certain Supranational Entities and Multilateral
Development Banks
Under the general risk-based capital rules, exposures to certain
supranational entities and multilateral development banks (MDB) receive
a 20 percent risk weight. Consistent with the Basel framework's
treatment of exposures to supranational entities, the agencies propose
to apply a zero percent risk weight to exposures to the Bank for
International Settlements, the European Central Bank, the European
Commission, and the International Monetary Fund.
Similarly, the agencies propose to apply a zero percent risk weight
to exposures to an MDB in accordance with the Basel framework. The
proposal would define an MDB to include the International Bank for
Reconstruction and Development, the Multilateral Investment Guarantee
Agency, the International Finance Corporation, the Inter-American
Development Bank, the Asian Development Bank, the African Development
Bank, the European Bank for Reconstruction and Development, the
European Investment Bank, the European Investment Fund, the Nordic
Investment Bank, the Caribbean Development Bank, the Islamic
Development Bank, the Council of Europe Development Bank, and any other
multilateral lending institution or regional development bank in which
the U.S. government is a shareholder or contributing member or which
the primary federal supervisor determines poses comparable credit risk.
The agencies believe this treatment is appropriate in light of the
generally high-credit quality of MDBs, their strong shareholder
support, and a shareholder structure comprised of a significant
proportion of sovereign entities with strong creditworthiness.
Exposures to regional development banks and multilateral lending
institutions that are not covered under the definition of MDB generally
would be treated as corporate exposures.
3. Exposures to Government-Sponsored Entities
The agencies are proposing to assign a 20 percent risk weight to
exposures to GSEs that are not equity exposures and a 100 percent risk
weight to preferred stock issued by a GSE. While this is consistent
with the current treatment under the FDIC and Board's rules, it would
represent a change to the OCC's general risk-based capital rules for
national banks, which currently allow a banking organization to apply a
20 percent risk weight to GSE preferred stock.\21\
---------------------------------------------------------------------------
\21\ 12 CFR part 3, appendix A section 3(a)(2)(vii), and 2 CFR
part 167.6(a)(1)(ii)(F) (OCC); 12 CFR part 208, and 225, appendix A,
section III.C.2.b (Board); 12 CFR part 325, appendix A, section
II.C, and 12 CFR part 390.466(a)(1)(ii)(F) (FDIC). GSEs include the
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National
Mortgage Association (FNMA), the Farm Credit System, and the Federal
Home Loan Bank System.
---------------------------------------------------------------------------
Although the GSEs currently are in the conservatorship of the
Federal Housing Finance Agency and receive capital support from the
U.S. Treasury, they remain privately-owned corporations, and their
obligations do not have the explicit guarantee of the full faith and
credit of the United States. The agencies have long held the view that
obligations of the GSEs should not be accorded the same treatment as
obligations that carry the explicit guarantee of the U.S. government.
Therefore, the agencies propose to continue to apply a 20 percent risk
weight to debt exposures to GSEs.
4. Exposures to Depository Institutions, Foreign Banks, and Credit
Unions
The general risk-based capital rules assign a 20 percent risk
weight to all exposures to U.S. depository institutions and foreign
banks incorporated in an OECD country. Short-term exposures to foreign
banks incorporated in a non-OECD country receive a 20 percent risk
weight and long-term exposures to such entities receive a 100 percent
risk weight. The Basel II standardized approach allows for risk weights
for a claim on a bank to be one risk weight category higher than the
risk weight assigned to the sovereign exposures of a bank's home
country. As described below, the agencies' propose treatment for
depository institutions, foreign banks, and credit unions that is
consistent with this approach.
Under the proposal, exposures to U.S. depository institutions and
credit unions would be assigned a 20 percent risk weight.\22\ For
exposures to foreign banks, the proposal would include risk weights
based on the CRC applicable to the entity's home country, in accordance
with table 3.\23\ Specifically, an exposure to a foreign bank would
receive a risk weight one category higher than the risk weight assigned
to a direct exposure to the entity's home country, as illustrated in
table 3. Exposures to a foreign bank in a country that does not have a
CRC would receive a 100 percent risk weight. A banking organization
would be required to assign a 150 percent risk weight to an exposure to
a foreign bank immediately upon determining that an event of sovereign
default has occurred in the bank's home country, or if an event of
sovereign default has occurred in the foreign bank's home country
during the previous five years.
---------------------------------------------------------------------------
\22\ A depository institution is defined in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813(c)(1)). Under this
proposal, a credit union refers to an insured credit union as
defined under the Federal Credit Union Act (12 U.S.C. 1752(7)).
\23\ Foreign bank means a foreign bank as defined in section
211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2),
that is not a depository institution. For purposes of this proposal,
home country means the country where an entity is incorporated,
chartered, or similarly established.
Table 3--Proposed Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
Sovereign CRC:
0-1................................................. 20
2................................................... 50
3................................................... 100
4-7................................................. 150
No CRC.............................................. 100
Sovereign Default................................... 150
------------------------------------------------------------------------
Exposures to a depository institution or foreign bank that are
includable in the regulatory capital of that entity would receive a
risk weight of 100 percent, unless the exposure is (i) An equity
exposure, (ii) a significant investment in the capital of an
unconsolidated financial institution in the form of common stock under
section 22 of the proposal, (iii) an exposure that is deducted from
regulatory capital under section 22 of the proposal, or (iv) an
exposure that is subject to the 150 percent risk weight under section
32 of the proposal.
In 2011, the BCBS revised certain aspects of the Basel capital
framework to address potential adverse effects of the framework on
trade finance in low income countries.\24\ In particular, the
[[Page 52897]]
framework was revised to remove the sovereign floor for trade finance-
related claims on banking organizations under the Basel II standardized
approach.\25\ The proposed requirements would incorporate this revision
and permit a banking organization to assign a 20 percent risk weight to
self-liquidating, trade-related contingent items that arise from the
movement of goods and that have a maturity of three months or less.
---------------------------------------------------------------------------
\24\ See BCBS, ``Treatment of Trade Finance under the Basel
Capital Framework,'' (October 2011), available at http://www.bis.org/publ/bcbs205.pdf. ``Low income country'' is a
designation used by the World Bank to classify economies (see World
Bank, ``How We Classify Countries,'' available at http://data.worldbank.org/about/country-classifications).
\25\ The BCBS indicated that it removed the sovereign floor for
such exposures to make access to trade finance instruments easier
and less expensive for low income countries. Absent removal of the
floor, the risk weight assigned to these exposures, where the
issuing banking organization is incorporated in a low income
country, typically would be 100 percent.
---------------------------------------------------------------------------
The Basel capital framework treats exposures to securities firms
that meet certain requirements like exposures to depository
institutions. However, the agencies do not believe that the risk
profile of these firms is sufficiently similar to depository
institutions to justify that treatment. Accordingly, the agencies
propose to require banking organizations to treat exposures to
securities firms as corporate exposures, which parallels the treatment
of bank holding companies and savings and loan holding companies, as
described in section II.B.6 of this preamble.
5. Exposures to Public Sector Entities
The agencies' general risk-based capital rules assign a 20 percent
risk weight to general obligations of states and other political
subdivisions of OECD countries.\26\ However, exposures that rely on
repayment from specific projects (for example, revenue bonds) are
assigned a risk weight of 50 percent. Other exposures to state and
political subdivisions of OECD countries (including industrial revenue
bonds) and exposures to political subdivisions of non-OECD countries
receive a risk weight of 100 percent. The risk weights assigned to
revenue obligations are higher than the risk weight assigned to general
obligations because repayment of revenue obligations depends on
specific projects, which present more risk relative to a general
repayment obligation of a state or political subdivision of a
sovereign.
---------------------------------------------------------------------------
\26\ Political subdivisions of the United States would include a
state, county, city, town or other municipal corporation, a public
authority, and generally any publicly owned entity that is an
instrument of a state or municipal corporation.
---------------------------------------------------------------------------
The agencies are proposing to apply the same risk weights to
exposures to U.S. states and municipalities as the general risk-based
capital rules apply. Under the proposal, these political subdivisions
would be included in the definition of public sector entity PSE.
Consistent with both the current rules and the Basel capital framework,
the agencies propose to define a PSE as a state, local authority, or
other governmental subdivision below the level of a sovereign. This
definition would not include government-owned commercial companies that
engage in activities involving trade, commerce, or profit that are
generally conducted or performed in the private sector.
Under the proposal, a banking organization would assign a 20
percent risk weight to a general obligation exposure to a PSE that is
organized under the laws of the United States or any state or political
subdivision thereof and a 50 percent risk weight to a revenue
obligation exposure to such a PSE. A general obligation would be
defined as a bond or similar obligation that is backed by the full
faith and credit of a PSE. A revenue obligation would be defined as a
bond or similar obligation that is an obligation of a PSE, but which
the PSE is committed to repay with revenues from a specific project
financed rather than general tax funds.
Similar to the Basel framework's use of home country risk weights
to assign a risk weight to a PSE exposure, the agencies propose to
require a banking organization to apply a risk weight to an exposure to
a non-U.S. PSE based on (1) the CRC applicable to the PSE's home
country and (2) whether the exposure is a general obligation or a
revenue obligation, in accordance with table 4.
The risk weights assigned to revenue obligations would be higher
than the risk weights assigned to a general obligation issued by the
same PSE, as set forth in table 4. Similar to exposures to a foreign
bank, exposures to a non-U.S. PSE in a country that does not have a CRC
rating would receive a 100 percent risk weight. Exposures to a non-U.S.
PSE in a country that has defaulted on any outstanding sovereign
exposure or that has defaulted on any sovereign exposure during the
previous five years would receive a 150 percent risk weight. Table 4
illustrates the proposed risk weights for exposures to non-U.S. PSEs.
Table 4--Proposed Risk Weights for Exposures to Non-U.S. PSE General
Obligations and Revenue Obligations
[In percent]
------------------------------------------------------------------------
Risk weight for Risk weight for
exposures to non- exposures to non-
U.S. PSE general U.S. PSE revenue
obligations obligations
------------------------------------------------------------------------
Sovereign CRC:
0-1........................... 20 50
2............................. 50 100
3............................. 100 100
4-7........................... 150 150
No CRC............................ 100 100
Sovereign Default................. 150 150
------------------------------------------------------------------------
In certain cases, under the general risk-based capital rules, the
agencies have allowed a banking organization to rely on the risk weight
that a foreign banking supervisor allows to assign to PSEs in that
supervisor's country. Consistent with that approach, the agencies
propose to allow a banking organization to apply a risk weight to an
exposure to a non-U.S. PSE according to the risk weight that the
foreign banking organization supervisor allows to assign to it. In no
event, however, may the risk weight for an exposure to a non-U.S. PSE
be lower than the risk weight assigned to direct exposures to that
PSE's home country.
Question 4: The agencies request comment on the proposed treatment
of exposures to PSEs.
[[Page 52898]]
6. Corporate Exposures
Under the agencies' general risk-based capital rules, credit
exposures to companies that are not depository institutions or
securitization vehicles generally are assigned to the 100 percent risk
weight category. A 20 percent risk weight is assigned to claims on, or
guaranteed by, a securities firm incorporated in an OECD country, that
satisfy certain conditions.
The proposed requirements would be generally consistent with the
general risk-based capital rules and require banking organizations to
assign a 100 percent risk weight to all corporate exposures. The
proposal would define a corporate exposure as an exposure to a company
that is not an exposure to a sovereign, the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, an MDB, a depository institution, a
foreign bank, or a credit union, a PSE, a GSE, a residential mortgage
exposure, a pre-sold construction loan, a statutory multifamily
mortgage, an HVCRE exposure, a cleared transaction, a default fund
contribution, a securitization exposure, an equity exposure, or an
unsettled transaction. In contrast to the agencies' general risk-based
capital rules, securities firms would be subject to the same treatment
as corporate exposures.
The agencies evaluated a number of alternatives to credit ratings
to provide a more granular risk weight treatment for corporate
exposures.\27\ However, each of these alternatives was viewed as either
having significant drawbacks, being too operationally complex, or as
not being sufficiently developed to be proposed in this NPR.
---------------------------------------------------------------------------
\27\ See, for example, 76 FR 73526 (Nov. 29, 2011) and 76 FR
73777 (Nov. 29, 2011).
---------------------------------------------------------------------------
7. Residential Mortgage Exposures
The general risk-based capital rules assign exposures secured by
one-to-four family residential properties to either the 50 percent or
the 100 percent risk-weight category. Exposures secured by a first lien
on a one-to-four family residential property that meet certain
prudential underwriting criteria and that are paying according to their
terms generally receive a 50 percent risk weight.\28\ The Basel II
standardized approach similarly applies a broad treatment to
residential mortgages, assigning a risk weight of 35 percent for most
first-lien residential mortgage exposures that meet certain prudential
criteria, such as the existence of a substantial margin of additional
security over the amount of the loan.
---------------------------------------------------------------------------
\28\ See 12 CFR part 3, appendix A, section 3(c)(iii) and 12 CFR
part 167.6(a)(1)(iii) (OCC); 12 CFR parts 208 and 225, appendix A,
section III.C.3 (Board); 12 CFR part 325, appendix A, section II.C.3
and 12 CFR 390.461 (definition of ``qualifying mortgage loan'')
(FDIC).
---------------------------------------------------------------------------
During the recent market turmoil, the U.S. housing market
experienced significant deterioration and unprecedented levels of
mortgage loan defaults and home foreclosures. The causes for the
significant increase in loan defaults and home foreclosures included
inadequate underwriting standards; the proliferation of high-risk
mortgage products, such as so-called pay-option adjustable rate
mortgages, which provide for negative amortization and significant
payment shock to the borrower; the practice of issuing mortgage loans
to borrowers with unverified or undocumented income; and a precipitous
decline in housing prices coupled with a rise in unemployment. Given
the characteristics of the U.S. residential mortgage market and this
recent experience, the agencies believe that a wider range of risk
weights based on key risk factors is more appropriate for the U.S.
residential mortgage market. Therefore, the agencies are proposing a
risk-weight framework that is different from both the general risk-
based capital rules and the Basel capital framework.
a. Categorization of Residential Mortgage Exposures; Loan-to-Value.
The proposed definition of a residential mortgage exposure would be
an exposure that is primarily secured by a first or subsequent lien on
one-to-four family residential property (and not a securitization
exposure, equity exposure, statutory multifamily mortgage, or presold
construction loan). The definition of residential mortgage exposure
also would include an exposure that is primarily secured by a first or
subsequent lien on residential property that is not one-to-four family
if the original and outstanding amount of the exposure is $1 million or
less. A first-lien residential mortgage exposure would be a residential
mortgage exposure secured by a first lien or by first and junior
lien(s) where no other party holds an intervening lien. A junior-lien
residential mortgage exposure would be a residential mortgage exposure
that is not a first-lien residential mortgage exposure.
The NPR would maintain the current risk-based capital treatment for
residential mortgage exposures that are guaranteed by the U.S.
government or its agency. Accordingly, residential mortgage exposures
that are unconditionally guaranteed by the U.S. government or a U.S.
agency would receive a zero percent risk weight, and residential
mortgage exposures that are conditionally guaranteed by the U.S.
government or a U.S. agency would receive a 20 percent risk weight.
Under the NPR, a banking organization would divide residential
mortgage exposures that are not guaranteed by the U.S. government or
one of its agencies into two categories. The agencies propose to apply
relatively low risk weights for residential mortgage exposures that do
not have product features associated with higher credit risk, and
higher risk weights for nontraditional loans that present greater risk.
As described further below, the risk weight assigned to a residential
mortgage exposure will also depend on the loan's loan-to-value ratio.
The standards for category 1 residential mortgage exposures reflect
those underwriting and product features that have demonstrated a lower
risk of default both through supervisory experience and observations
from the recent foreclosure crisis. Thus, the definition generally
excludes mortgage products that include terms or other characteristics
that the agencies have found to be indicative of higher risk. For
example, the standards include consideration and documentation of a
borrower's ability to repay, and would exclude certain higher risk
product features, such as deferral of principal and balloon loans.
Category 1 residential mortgages also would not include any junior lien
mortgages. All residential mortgages that would not meet the definition
of category 1 residential mortgage would be category 2 residential
mortgages. See section 2 of the proposed rules for the definitions of
``category 1 residential mortgage'' in the related notice titled
``Regulatory Capital Rules: Regulatory Capital, Implementation of Basel
III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition
Provisions, and Prompt Corrective Action.''
The agencies believe that the proposed divergence in risk weights
for category 1 and category 2 residential mortgage exposures
appropriately reflects differences in risk between mortgages in the two
categories. Because category 2 residential mortgage exposures generally
are of higher risk than category 1 residential mortgage exposures, the
minimum proposed risk weight for a category 2 residential mortgage
exposure is 100 percent.
Under the general risk-based capital rules, a banking organization
must assign a minimum 100 percent risk weight to an exposure secured by
a junior lien on residential property, unless the banking organization
also
[[Page 52899]]
holds the first lien and there are no intervening liens. The agencies
also propose to require a banking organization that holds both a first
and junior lien on the same property to combine the exposures into one
first-lien residential mortgage exposure for purposes of determining
the loan-to-value (LTV) and risk weight for the combined exposure.
However, a banking organization could only categorize the combined
exposure as a category 1 residential mortgage exposure if the terms and
characteristics of both mortgages meet all of the criteria for category
1 residential mortgage exposures. This requirement would ensure that no
residential mortgage products associated with higher risk may be
categorized as category 1 residential mortgage exposures.
Except as described in the preceding paragraph, under this NPR, a
banking organization would classify all junior-lien residential
mortgage exposures as category 2 residential mortgage exposures in
light of the increased risk associated with junior liens demonstrated
in the recent foreclosure crisis.
The proposed risk weighting would depend on not only the mortgage
exposure's status as a category 1 or category 2 residential mortgage
exposure, but also on the mortgage exposure's LTV ratio. The amount of
equity a borrower has in a residential property is highly correlated
with default risk, and the agencies believe that it is appropriate that
LTV be an important component in assigning risk weights to residential
mortgage exposures. However, the agencies stress that the use of LTV
ratios to assign risk weights to residential mortgage exposures is not
a substitute for, and does not otherwise release a banking organization
from, its responsibility to have prudent loan underwriting and risk
management practices consistent with the size, type, and risk of its
mortgage business.\29\
---------------------------------------------------------------------------
\29\ See, for example, ``Interagency Guidance on Nontraditional
Mortgage Product Risks,'' 71 FR 58609 (Oct. 4, 2006) and ``Statement
on Subprime Mortgage Lending,'' 72 FR 37569 (July 10, 2007). In
addition, there is ongoing implementation of certain aspects of the
mortgage reform initiatives under various sections of the Dodd-Frank
Act. For example, section 1141 of the Dodd-Frank Act amended the
Truth in Lending Act to prohibit creditors from making mortgage
loans without regard to a consumer's repayment ability. See 15
U.S.C. 1639c.
---------------------------------------------------------------------------
The agencies are proposing in this NPR to require a banking
organization to calculate the LTV ratios of a residential mortgage
exposure as follows. The denominator of the LTV ratio, that is, the
value of the property, would be equal to the lesser of the actual
acquisition cost for the property (for a purchase transaction) or the
estimate of a property's value at the origination of the loan or at the
time of restructuring or modification. The estimate of value would be
based on an appraisal or evaluation of the property in conformance with
the agencies' appraisal regulations \30\ and should conform to the
``Interagency Appraisal and Evaluation Guideline'' and the ``Real
Estate Lending Guidelines.'' \31\ If a banking organization's first-
lien residential mortgage exposure consists of both first and junior
liens on a property, a banking organization would update the estimate
of value at the origination of the junior-lien mortgage.
---------------------------------------------------------------------------
\30\ 12 CFR part 34, subpart C (OCC); 12 CFR part 208, subpart E
and 12 CFR part 225, subpart G (Board); 12 CFR part 323 and 12 CFR
part 390, subpart X (FDIC).
\31\ 12 CFR part 34, subpart D and 12 CFR part 160 (OCC); 12 CFR
part 208, subpart E (Board); 12 CFR part 323 and 12 CFR 390.442
(FDIC).
---------------------------------------------------------------------------
The loan amount for a first-lien residential mortgage exposure is
the unpaid principal balance of the loan unless the first-lien
residential mortgage exposure was a combination of a first and junior
lien. In that case, the loan amount would be the sum of the unpaid
principal balance of the first lien and the maximum contractual
principal amount of the junior lien. The loan amount of a junior-lien
residential mortgage exposure is the maximum contractual principal
amount of the exposure, plus the maximum contractual principal amounts
of all senior exposures secured by the same residential property on the
date of origination of the junior-lien residential mortgage exposure.
As proposed, a banking organization would not calculate a separate
risk-weighted asset amount for the funded and unfunded portions of a
residential mortgage exposure. Instead, the proposal would require only
the calculation of a single LTV ratio representing a combined funded
and unfunded amount when calculating the LTV ratio. Thus, the loan
amount of a first-lien residential mortgage exposure would equal the
funded principal amount (or combined exposures provided there is no
intervening lien) plus the exposure amount of any unfunded commitment
(that is, the unfunded amount of the maximum contractual amount of any
commitment multiplied by the appropriate CCF). The loan amount of a
junior-lien residential mortgage exposure would equal the sum of: (1)
The funded principal amount of the exposure, (2) the exposure amount of
any undrawn commitment associated with the junior-lien exposure, and
(3) the exposure amount of any senior exposure held by a third party on
the date of origination of the junior-lien exposure. If a senior
exposure held by a third party includes an undrawn commitment, such as
a HELOC or a negative amortization feature, the loan amount for a
junior-lien residential mortgage exposure would include the maximum
contractual amount of that commitment.
The agencies believe that the LTV information should be readily
available from the mortgage loan documents and thus should not present
an issue for banking organizations in calculating the risk-based
capital under the proposed requirements.
A banking organization would not be able to recognize private
mortgage insurance (PMI) when calculating the LTV ratio of a
residential mortgage exposure. The agencies believe that, due to the
varying degree of financial strength of mortgage providers, it would
not be prudent to recognize PMI for purposes of the general risk-based
capital rules.
Question 5: The agencies solicit comments on all aspects of this
NPR for determining the risk weights of residential mortgage loans,
including the use of the LTV ratio to determine the risk-based capital
treatment. What alternative criteria or approaches to categorizing
mortgage loans would enable the agencies to appropriately and
consistently differentiate among the levels of risk inherent in
different mortgage exposures? For example, should all residential
mortgages that meet the ``qualified mortgage'' criteria to be
established for the purposes of the Truth in Lending Act pursuant to
section 1412 of the Dodd-Frank Act be included in category 1? For
category 1 residential mortgage exposures with interest rates that
adjust or reset, would a proposed limit based directly on the amount
the mortgage payment increases rather than on a change in interest rate
be more appropriate? Why or why not? Does this proposal appropriately
address loans with balloon payments and the risk of reverse mortgage
loans? Why or why not? Provide detailed explanations and supporting
data wherever possible.
Question 6: The agencies solicit comment on whether to allow
banking organizations to recognize mortgage insurance for purposes of
calculating the LTV ratio of a residential mortgage exposure under the
standardized approach. What criteria could the agencies use to ensure
that only financially sound PMI providers are recognized?
[[Page 52900]]
b. Risk Weights for Residential Mortgage Exposures
As proposed, a banking organization would determine the risk weight
for a residential mortgage exposure using table 5 based on the loan's
LTV ratio and whether it is a category 1 or category 2 residential
mortgage exposure.
Table 5--Proposed Risk Weights for Residential Mortgage Exposures
------------------------------------------------------------------------
Category 1 Category 2
Loan-to-value ratio (in residential residential
percent) mortgage exposure mortgage exposure
(in percent) (in percent)
------------------------------------------------------------------------
Less than or equal to 60...... 35 100
Greater than 60 and less than 50 100
or equal to 80...............
Greater than 80 and less than 75 150
or equal to 90...............
Greater than 90............... 100 200
------------------------------------------------------------------------
As an example risk weight calculation, a category 1 residential
mortgage loan that has a loan amount of $100,000 and a property value
of $125,000 at origination would result in an LTV of 80 percent and
would be assigned a risk weight of 50 percent. If, at the time of
restructuring the loan at a later date, the loan amount is $92,000 and
the value of the property is determined to be $110,000, the LTV would
be 84 percent and the applicable risk weight would be 75 percent.
c. Modified or Restructured Residential Mortgage Exposures
Under the current general risk-based capital rules, a residential
mortgage may be assigned to the 50 percent risk weight category only if
it is performing in accordance with its original terms or not
restructured. The recent crises and ongoing problems in the housing
market have demonstrated the profound negative effect foreclosures have
on homeowners and their communities. Where practicable, modification or
restructuring of a residential mortgage can be an effective means for a
borrower to avoid default and foreclosure and for a banking
organization to reduce risk of loss.
The agencies have recognized the importance of the prudent use of
mortgage restructuring and modification in a banking organization's
risk management and believe that restructuring or modification can
reduce the risk of a residential mortgage exposure. Therefore, in this
NPR, the agencies are not proposing to automatically raise the risk
weight for a residential mortgage exposure if it is restructured or
modified. Instead, under this NPR, a banking organization would
categorize a modified or restructured residential mortgage exposure as
a category 1 or category 2 residential mortgage exposure in accordance
with the terms and characteristics of the exposure after the
modification or restructuring.
Additionally, to ensure that the banking organization applies a
risk weight to a restructured or modified mortgage that most accurately
reflects its risk profile, a banking organization could only apply (1)
a risk weight lower than 100 percent to a category 1 residential
mortgage exposure or (2) a risk weight lower than 200 percent to a
category 2 residential mortgage exposure if the banking organization
updated the LTV ratio of the exposure at the time of the modification
or restructuring.
In further recognition of the importance of residential mortgage
modifications and restructuring, a residential mortgage exposure
modified or restructured on a permanent or trial basis solely pursuant
to the U.S. Treasury's Home Affordable Mortgage Program (HAMP) would
not be restructured or modified under the proposed requirements and
would receive the risk weight provided in table 5.
The agencies believe that treating mortgage loans modified pursuant
to HAMP in this manner is appropriate in light of the special and
unique incentive features of HAMP, and the fact that the program is
offered by the U.S. government to achieve the public policy objective
of promoting sustainable loan modifications for homeowners at risk of
foreclosure in a way that balances the interests of borrowers,
servicers, and lenders. The program includes specific debt-to-income
ratio requirements, which should better ensure the borrower's ability
to repay the modified loan, and it provides for the U.S. Treasury
Department to match reductions in monthly payments dollar-for-dollar to
reduce the borrower's front-end debt-to-income ratio.
Additionally, the program provides financial incentives for
servicers and lenders to take actions to reduce the likelihood of
defaults, as well as for servicers and borrowers designed to help
borrowers remain current on modified loans. The structure and amount of
these cash payments align the financial incentives of servicers,
lenders, and borrowers to encourage and increase the likelihood of
participating borrowers remaining current on their mortgages. Each of
these incentives is important to the agencies' determination with
respect to the appropriate regulatory capital treatment of mortgage
loans modified under HAMP.
Question 7: The agencies request comment on whether loan
modifications made pursuant to federal or state housing programs
warrant specific provisions in the agencies' risk-based capital
regulations at all, and if they do what criteria should be considered
when determining the appropriate risk-based capital treatment for
modified residential mortgages, given the risk characteristics of loans
that require modification.
8. Pre-sold Construction Loans and Statutory Multifamily Mortgages
The general risk-based capital rules assign either a 50 percent or
a 100 percent risk weight to certain one-to-four family residential
pre-sold construction loans and to multifamily residential loans,
consistent with the Resolution Trust Corporation Refinancing,
Restructuring, and Improvement Act of 1991 (RTCRRI Act).\32\ This NPR
would maintain this general treatment while clarifying and
[[Page 52901]]
updating the way the general risk-based capital rules define these
exposures.
---------------------------------------------------------------------------
\32\ The RTCRRI Act mandates that each agency provide in its
capital regulations (i) a 50 percent risk weight for certain one-to-
four-family residential pre-sold construction loans and multifamily
residential loans that meet specific statutory criteria in the
RTCRRI Act and any other underwriting criteria imposed by the
agencies, and (ii) a 100 percent risk weight for one-to-four-family
residential pre-sold construction loans for residences for which the
purchase contract is cancelled. 12 U.S.C. 1831n, note.
---------------------------------------------------------------------------
Under this NPR, a pre-sold construction loan would be subject to a
50 percent risk weight unless the purchase contract is cancelled. This
NPR would define a pre-sold construction loan as any one-to-four family
residential construction loan to a builder that meets the requirements
of section 618(a)(1) or (2) of the RTCRRI Act and the agencies'
existing regulations. A multifamily mortgage that does not meet the
proposed definition of a statutory multifamily mortgage would be
treated as a corporate exposure. The proposed definitions are in
section 2 of the proposed rules in the related notice titled
``Regulatory Capital Rules: Regulatory Capital, Implementation of Basel
III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition
Provisions, and Prompt Corrective Action.''
9. High Volatility Commercial Real Estate Exposures
In this NPR, the agencies are including a new risk-based capital
treatment for certain commercial real estate exposures that currently
receive a 100 percent risk weight under the general risk-based capital
rules. Supervisory experience has demonstrated that certain
acquisition, development, and construction (ADC) loans exposures
present unique risks for which the agencies believe banking
organizations should hold additional capital. Accordingly, the agencies
propose to require banking organizations to assign a 150 percent risk
weight to any High Volatility Commercial Real Estate Exposure (HVCRE).
The proposal would define an HVCRE exposure to include any credit
facility that finances or has financed the acquisition, development, or
construction (ADC) of real property, unless the facility finances one-
to four-family residential mortgage property, or commercial real estate
projects that meet certain prudential criteria, including with respect
to the LTV ratio and capital contributions or expense contributions of
the borrower. See the definition of ``high volatility commercial real
estate exposure'' in section 2 of the proposed rules in the related
notice entitled ``Regulatory Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and Prompt Corrective Action''.
A commercial real estate loan that is not an HVCRE exposure would
be treated as a corporate exposure.
Question 8: The agencies solicit comment on the proposed treatment
for HVCRE exposures.
10. Past Due Exposures
Under the general risk-based capital rules, the risk weight of a
loan does not change if the loan becomes past due, with the exception
of certain residential mortgage loans. The Basel II standardized
approach provides risk weights ranging from 50 to 150 percent for loans
that are more than 90 days past due to reflect the increased risk of
loss. The agencies believe that a higher risk is appropriate for past
due exposures to reflect the increased risk associated with such
exposures
Accordingly, consistent with the Basel capital framework and to
reflect impaired credit quality of such exposures, the agencies propose
that a banking organization assign a risk weight of 150 percent to an
exposure that is not guaranteed or not secured (and that is not a
sovereign exposure or a residential mortgage exposure) if it is 90 days
or more past due or on nonaccrual. A banking organization may assign a
risk weight to the collateralized or guaranteed portion of the past due
exposure if the collateral, guarantee, or credit derivative meets the
proposed requirements for recognition described in sections 36 and 37.
Question 9: The agencies solicit comments on the proposed treatment
of past due exposures.
11. Other Assets
In this NPR, the agencies propose to apply the following risk
weights for exposures not otherwise assigned to a specific risk weight
category, which are generally consistent with the risk weights in the
general risk-based capital rules:
(1) A zero percent risk weight to cash owned and held in all of a
banking organization's offices or in transit; gold bullion held in the
banking organization's own vaults, or held in another depository
institution's vaults on an allocated basis to the extent gold bullion
assets are offset by gold bullion liabilities; and to exposures that
arise from the settlement of cash transactions (such as equities, fixed
income, spot foreign exchange and spot commodities) with a central
counterparty where there is no assumption of ongoing counterparty
credit risk by the central counterparty after settlement of the trade
and associated default fund contributions;
(2) A 20 percent risk weight to cash items in the process of
collection; and
(3) A 100 percent risk weight to all assets not specifically
assigned a different risk weight under this NPR (other than exposures
that would be deducted from tier 1 or tier 2 capital).
In addition, subject to proposed transition arrangements, a banking
organization would assign:
(1) A 100 percent risk weight to DTAs arising from temporary
differences that the banking organization could realize through net
operating loss carrybacks; and
(2) A 250 percent risk weight to MSAs and DTAs arising from
temporary differences that the banking organization could not realize
through net operating loss carrybacks that are not deducted from common
equity tier 1 capital pursuant to section 22(d) of the proposal.
The proposed requirements would provide limited flexibility to
address situations where exposures of a depository institution holding
company or nonbank financial company supervised by the Board, that are
not exposures typically held by depository institutions, do not fit
wholly within the terms of another risk-weight category. Under the
proposal, such exposures could be assigned to the risk weight category
applicable under the capital rules for bank holding companies, provided
that (1) the depository institution holding company or nonbank
financial company is not authorized to hold the asset under applicable
law other than debt previously contracted or similar authority; and (2)
the risks associated with the asset are substantially similar to the
risks of assets that are otherwise assigned to a risk weight category
of less than 100 percent under subpart D of the proposal.
C. Off-balance Sheet Items
Under this NPR, as under the general risk-based capital rules, a
banking organization would calculate the exposure amount of an off-
balance sheet item by multiplying the off-balance sheet component,
which is usually the notional amount, by the applicable credit
conversion factor (CCF). This treatment would be applied to off-balance
sheet items, such as commitments, contingent items, guarantees, certain
repo-style transactions, financial standby letters of credit, and
forward agreements.
Also similar to the general risk-based capital rules, a banking
organization would apply a zero percent CCF to the unused portion of
commitments that are unconditionally cancelable by the banking
organization. For purposes of this NPR, a commitment would mean any
legally binding arrangement that obligates a banking organization to
extend credit or to purchase assets.
[[Page 52902]]
Unconditionally cancelable would mean a commitment that a banking
organization may, at any time, with or without cause, refuse to extend
credit under the commitment (to the extent permitted under applicable
law). In the case of a residential mortgage exposure that is a line of
credit, a banking organization would be deemed able to unconditionally
cancel the commitment if it can, at its option, prohibit additional
extensions of credit, reduce the credit line, and terminate the
commitment to the full extent permitted by applicable law. If a banking
organization provides a commitment that is structured as a syndication,
it would only be required to calculate the exposure amount for its pro
rata share of the commitment.
The agencies propose to increase a CCF from zero percent to 20
percent for commitments with an original maturity of one year or less
that are not unconditionally cancelable by a banking organization, as
consistent with the Basel II standardized approach. The proposed
requirements would maintain the 20 percent CCF for self-liquidating,
trade-related contingent items that arise from the movement of goods
with an original maturity of one year or less.
As under the general risk-based capital rules, a banking
organization would apply a 50 percent CCF to commitments with an
original maturity of more than one year that are not unconditionally
cancelable by the banking organization; and to transaction-related
contingent items, including performance bonds, bid bonds, warranties,
and performance standby letters of credit.
Under this NPR, a banking organization would be required to apply a
100 percent CCF to off-balance sheet guarantees, repurchase agreements,
securities lending or borrowing transactions, financial standby letters
of credit; forward agreements, and other similar exposures. The off-
balance sheet component of a repurchase agreement would equal the sum
of the current market values of all positions the banking organization
has sold subject to repurchase. The off-balance sheet component of a
securities lending transaction would be the sum of the current market
values of all positions the banking organization has lent under the
transaction. For securities borrowing transactions, the off-balance
sheet component would be the sum of the current market values of all
non-cash positions the banking organization has posted as collateral
under the transaction. In certain circumstances, a banking organization
may instead determine the exposure amount of the transaction as
described in section II.F.2 of this preamble and section 37 of the
proposal.
The calculation of the off-balance sheet component for repurchase
agreements, and securities lending and borrowing transactions described
above represents a change to the general risk-based capital treatment
for such transactions. Under the general risk-based capital rules,
capital is required for any on-balance sheet exposure that arises from
a repo-style transaction (that is, a repurchase agreement, reverse
repurchase agreement, securities lending transaction, and securities
borrowing transaction). For example, capital is required against the
cash receivable that a banking organization generates when it borrows a
security and posts cash collateral to obtain the security. However, a
banking organization faces counterparty credit risk on a repo-style
transaction, regardless of whether the transaction generates an on-
balance sheet exposure. Therefore, in contrast to the general risk-
based capital rules, this NPR would require a banking organization to
hold risk-based capital against all repo-style transactions, regardless
of whether they generate on-balance sheet exposures, as described in
section 37 of the proposal.
Under the general risk-based capital rules, a banking organization
is subject to a risk-based capital requirement when it provides credit-
enhancing representations and warranties on assets sold or otherwise
transferred to third parties as such positions are considered recourse
arrangements.\33\ However, the general risk-based capital rules do not
impose a risk-based capital requirement on assets sold or transferred
with representations and warranties that contain (1) Certain early
default clauses, (2) certain premium refund clauses that cover assets
guaranteed, in whole or in part, by the U.S. government, a U.S.
government agency, or a U.S. GSE; or (3) warranties that permit the
return of assets in instances of fraud, misrepresentation, or
incomplete documentation.\34\
---------------------------------------------------------------------------
\33\ 12 CFR 3, appendix A, section 4(a)(11) and 12 CFR 167.6(b)
(OCC); 12 CFR parts 208 and 225 appendix A, section III.B.3.a.xii
(Board); 12 CFR part 325, appendix A, section II.B.5(a) and 12 CFR
390.466(b) (FDIC).
\34\ 12 CFR part 3, appendix A, section 4(a)(8) and 12 CFR
167.6(b) (OCC); 12 CFR part 208, appendix A, section II.B.3.a.ii.1
and 12 CFR part 225, appendix A, section III.B.3.a.ii.(1) (Board);
and 12 CFR part 325, appendix A, section II.B.5(a) and 12 CFR part
390.466(b) (FDIC).
---------------------------------------------------------------------------
Under this NPR, if a banking organization provides a credit-
enhancing representation or warranty on assets it sold or otherwise
transferred to third parties, including in cases of early default
clauses or premium-refund clauses, the banking organization would treat
such an arrangement as an off-balance sheet guarantee and apply a 100
percent credit conversion factor (CCF) to the exposure amount. The
agencies are proposing a different treatment than the one under the
general risk-based capital rules because the agencies believe that a
banking organization should hold capital for such exposures while
credit-enhancing representations and warranties are in place.
Question 10: The agencies solicit comment on the proposed treatment
of credit-enhancing representations and warranties.
The proposed risk-based capital treatment for off-balance sheet
items is consistent with section 165(k) of the Dodd-Frank Act which
provides that, in the case of a bank holding company with $50 billion
or more in total consolidated assets the computation of capital for
purposes of meeting capital requirements shall take into account any
off-balance-sheet activities of the company.\35\ The proposal complies
with the requirements of section 165(k) of the Dodd-Frank Act by
requiring a bank holding company to hold risk-based capital for its
off-balance sheet exposures, as described in sections 31, 33, 34 and 35
of the proposal.
---------------------------------------------------------------------------
\35\ Section 165(k) of the Dodd-Frank Act (12 U.S.C. 5365(k)).
This section defines an off-balance sheet activity as an existing
liability of a company that is not currently a balance sheet
liability, but may become one upon the happening of some future
event. Such transactions may include direct credit substitutes in
which a banking organization substitutes its own credit for a third
party; irrevocable letters of credit; risk participations in
bankers' acceptances; sale and repurchase agreements; asset sales
with recourse against the seller; interest rate swaps; credit swaps;
commodities contracts; forward contracts; securities contracts; and
such other activities or transactions as the Board may define
through a rulemaking.
---------------------------------------------------------------------------
D. Over-the-counter Derivative Contracts
In this NPR, the agencies propose generally to retain the treatment
of over-the-counter (OTC) derivatives provided under the general risk-
based capital rules, which is similar to the current exposure method
for determining the exposure amount for OTC derivative contracts
contained in the Basel II standardized approach.\36\ The proposed
[[Page 52903]]
revisions to the treatment of the OTC derivative contracts include an
updated definition of an OTC derivative contract, a revised conversion
factor matrix for calculating the potential future exposure (PFE), a
revision of the criteria for recognizing the netting benefits of
qualifying master netting agreements and of financial collateral, and
the removal of the 50 percent risk weight limit for OTC derivative
contracts.
---------------------------------------------------------------------------
\36\ The general risk-based capital rules for savings
associations regarding the calculation of credit equivalent amounts
for derivative contracts differ from the rules for other banking
organizations. (See 12 CFR 167(a)(2) (federal savings associations)
and 12 CFR 390.466(a)(2) (state savings associations)). The savings
association rules address only interest rate and foreign exchange
rate contracts and include certain other differences. Accordingly,
the description of the general risk-based capital rules in this
preamble primarily reflects the rules applicable to state and
national banks and bank holding companies.
---------------------------------------------------------------------------
Under the proposed requirements, as under the general risk-based
capital rules, a banking organization would be required to hold risk-
based capital for counterparty credit risk for OTC derivative
contracts. As defined in this NPR, a derivative contract is a financial
contract whose value is derived from the values of one or more
underlying assets, reference rates, or indices of asset values or
reference rates. A derivative contract would include an interest rate,
exchange rate, equity, or a commodity derivative contract, a credit
derivative, and any other instrument that poses similar counterparty
credit risks. Under the proposal, derivative contracts also would
include unsettled securities, commodities, and foreign exchange
transactions with a contractual settlement or delivery lag that is
longer than the lesser of the market standard for the particular
instrument or five business days. This applies, for example, to
mortgage-backed securities transactions that the GSEs conduct in the
To-Be-Announced market.
An OTC derivative contract would not include a derivative contract
that is a cleared transaction, which would be subject to a specific
treatment as described in section II.E of this preamble. OTC derivative
contracts would, however, include an exposure of a banking organization
that is a clearing member to its clearing member client where the
banking organization is either acting as a financial intermediary and
enters into an offsetting transaction with a central counterparty (CCP)
or where the banking organization provides a guarantee to the CCP on
the performance of the client. These transactions may not be treated as
cleared transactions because the banking organization remains exposed
directly to the risk of the individual counterparty.
To determine the risk-weighted asset amount for an OTC derivative
contract under the proposal, a banking organization would first
determine its exposure amount for the contract and then apply to that
amount a risk weight based on the counterparty, eligible guarantor, or
recognized collateral.
For a single OTC derivative contract that is not subject to a
qualifying master netting agreement (as defined further below in this
section), the exposure amount would be the sum of (1) the banking
organization's current credit exposure, which would be the greater of
the mark-to-market value or zero, and (2) PFE, which would be
calculated by multiplying the notional principal amount of the OTC
derivative contract by the appropriate conversion factor, in accordance
with table 6 below.
Under this NPR, the conversion factor matrix would be revised to
include the additional categories of OTC derivative contracts as
illustrated in table 6. For an OTC derivative contract that does not
fall within one of the specified categories in table 6, the PFE would
be calculated using the appropriate ``other'' conversion factor.
---------------------------------------------------------------------------
\37\ For a derivative contract with multiple exchanges of
principal, the conversion factor is multiplied by the number of
remaining payments in the derivative contract.
\38\ For a derivative contract that is structured such that on
specified dates any outstanding exposure is settled and the terms
are reset so that the market value of the contract is zero, the
remaining maturity equals the time until the next reset date. For an
interest rate derivative contract with a remaining maturity of
greater than one year that meets these criteria, the minimum
conversion factor is 0.005.
\39\ A banking organization would use the column labeled
``Credit (investment-grade reference asset)'' for a credit
derivative whose reference asset is an outstanding unsecured long-
term debt security without credit enhancement that is investment
grade. A banking organization would use the column labeled ``Credit
(non-investment-grade reference asset)'' for all other credit
derivatives.
Table 6--Conversion Factor Matrix for OTC Derivative Contracts \37\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit
Interest Foreign exchange (investment-grade Credit (non- Precious metals
Remaining maturity \38\ rate rate and gold reference asset) investment-grade Equity (except gold) Other
\39\ reference asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less..................... 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Greater than one year and less than 0.005 0.05 0.05 0.10 0.08 0.07 0.12
or equal to five years..............
Greater than five years.............. 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
For multiple OTC derivative contracts subject to a qualifying
master netting agreement, the exposure amount would be calculated by
adding the net current credit exposure and the adjusted sum of the PFE
amounts for all OTC derivative contracts subject to the qualifying
master netting agreement. The net current credit exposure would be the
greater of zero and the net sum of all positive and negative mark-to-
market values of the individual OTC derivative contracts subject to the
qualifying master netting agreement. The adjusted sum of the PFE
amounts would be calculated as described in section 34(a)(2)(ii) of the
proposal.
Under the general risk-based capital rules, a banking organization
must enter into a bilateral master netting agreement with its
counterparty and obtain a written and well-reasoned legal opinion of
the enforceability of the netting agreement for each of its netting
agreements that cover OTC derivative contracts to recognize the netting
benefit. Similarly, under this NPR, to recognize netting of multiple
OTC derivative contracts, the contracts would be required to be subject
to a qualifying master netting agreement; however, for most
transactions, a banking organization may rely on sufficient legal
review instead of an opinion on the enforceability of the netting
agreement as described below. Under this NPR, a qualifying master
netting agreement would be defined as any written, legally enforceable
netting agreement, that creates a single legal obligation for all
individual transactions covered by the agreement upon an event
[[Page 52904]]
of default (including receivership, insolvency, liquidation, or similar
proceeding) provided that certain conditions are met. These conditions
include requirements with respect to the banking organization's right
to terminate the contract and lien date collateral and meeting certain
standards with respect to legal review of the agreement to ensure it
meets the criteria in the definition.
The legal review must be sufficient so that the banking
organization may conclude with a well-founded basis that, among other
things the contract would be found legal, binding, and enforceable
under the law of the relevant jurisdiction and that the contract meets
the other requirements of the definition. In some cases, the legal
review requirement could be met by reasoned reliance on a commissioned
legal opinion or an in-house counsel analysis. In other cases, for
example, those involving certain new derivative transactions or
derivative counterparties in jurisdictions where a banking organization
has little experience, the banking organization would be expected to
obtain an explicit, written legal opinion from external or internal
legal counsel addressing the particular situation. See the definition
of ``qualifying master netting agreement'' in section 2 of the proposed
rules in the related notice titled ``Regulatory Capital Rules:
Regulatory Capital, Implementation of Basel III, Minimum Regulatory
Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt
Corrective Action.''
If an OTC derivative contract is collateralized by financial
collateral, a banking organization would first determine the exposure
amount of the OTC derivative contract as described in this section.
Next, to recognize the credit risk mitigation benefits of the financial
collateral, a banking organization could use the simple approach for
collateralized transactions as described in section 37(b) of the
proposal. Alternatively, if the financial collateral is marked-to-
market on a daily basis and subject to a daily margin maintenance
requirement, a banking organization could adjust the exposure amount of
the contract using the collateral haircut approach described in section
37(c) of the proposal.
Under this NPR, a banking organization would be required to treat
an equity derivative contract as an equity exposure and compute its
risk-weighted asset amount according to the proposed calculation
requirements described in section 52 (unless the contract is a covered
position under subpart F of the proposal). If the banking organization
risk weights a contract under the Simple Risk-Weight Approach described
in section 52, it may choose not to hold risk-based capital against the
counterparty risk of the equity contract, so long as it does so for all
such contracts. Where the OTC equity contracts are subject to a
qualified master netting agreement, a banking organization would either
include or exclude all of the contracts from any measure used to
determine counterparty credit risk exposures. If the banking
organization is treating an OTC equity derivative contract as a covered
position under subpart F, it would calculate a risk-based capital
requirement for counterparty credit risk of the contract under section
34.
Similarly, if a banking organization purchases a credit derivative
that is recognized under section 36 of the proposal as a credit risk
mitigant for an exposure that is not a covered position under subpart F
of the proposal, it would not be required to compute a separate
counterparty credit risk capital requirement for the credit derivative,
provided it does so consistently for all such credit derivative
contracts. Further, where these credit derivative contracts are subject
to a qualifying master netting agreement, the banking organization
would either include them all or exclude them all from any measure used
to determine the counterparty credit risk exposure to all relevant
counterparties for risk-based capital purposes.
In addition, if a banking organization provides protection through
a credit derivative that is not a covered position under subpart F of
the proposal, it would treat the credit derivative as an exposure to
the underlying reference asset and compute a risk-weighted asset amount
for the credit derivative under section 32 of the proposal. The banking
organization would not be required to compute a counterparty credit
risk capital requirement for the credit derivative, as long as it does
so consistently and either includes all or excludes all such credit
derivatives that are subject to a qualifying master netting contract
from any measure used to determine counterparty credit risk exposure to
all relevant counterparties for risk-based capital purposes.
Where the banking organization provides protection through a credit
derivative treated as a covered position under subpart F of the
proposal, it would compute a supplemental counterparty credit risk
capital requirement using an amount determined under section 34 for OTC
credit derivatives or section 35 for credit derivatives that are
cleared transactions. In either case, the PFE of the protection
provider would be capped at the net present value of the amount of
unpaid premiums.
Under the general risk-based capital rules, the risk weight applied
to an OTC derivative contract is limited to 50 percent even if the
counterparty or guarantor would otherwise receive a higher risk weight.
Under this NPR, the risk weight for OTC derivative transactions would
not be subject to any specific ceiling, consistent with the Basel
capital framework. The agencies believe that as the market for
derivatives has developed, the types of counterparties acceptable to
participants have expanded to include counterparties that merit a risk
weight greater than 50 percent.
Question 11: The agencies solicit comment on the proposed risk-
based capital treatment for OTC derivatives, including the definition
of an OTC derivative and the removal of the 50 percent cap on risk
weighting for OTC derivative contracts.
E. Cleared Transactions
1. Overview
The BCBS and the agencies support clearing derivative and repo-
style transactions \40\ through a central counterparty (CCP) wherever
possible in order to promote transparency, multilateral netting, and
robust risk management practices.\41\
---------------------------------------------------------------------------
\40\ See section II.F.2d of this preamble for a discussion of
the proposed definition of a repo-style transaction.
\41\ See, ``Capitalisation of Banking Organization Exposures to
Central Counterparties'' (November 2011) (CCP consultative release),
available at http://www.bis.org/publ/bcbs206.pdf. Once the CCP
consultative release is finalized, the agencies expect to take into
account the BCBS revisions and incorporate them into the agencies'
capital rules through the regular rulemaking process, as
appropriate.
---------------------------------------------------------------------------
In general, CCPs help improve the safety and soundness of the
derivatives market through the multilateral netting of exposures,
establishment and enforcement of collateral requirements, and promoting
market transparency. Under Basel II, exposures to a CCP arising from
cleared transactions, posted collateral, clearing deposits or guaranty
funds could be assigned an exposure amount of zero. However, when
developing Basel III, the BCBS recognized that as more transactions
move to central clearing, the potential for risk concentration and
systemic risk increases. To address these concerns, the BCBS has sought
comment on a more risk-sensitive approach for determining a capital
requirement for a banking organization's exposures to a
[[Page 52905]]
CCP. In addition, to encourage CCPs to maintain strong risk management
procedures, the BCBS sought comment on lower risk-based capital
requirements for derivative and repo-style transaction exposures to
CCPs that meet the standards established by the Committee on Payment
and Settlement Systems (CPSS) and International Organization of
Securities Commissions (IOSCO).\42\
---------------------------------------------------------------------------
\42\ See CPSS, ``Recommendations for Central Counterparties''
(November 2004), available at http://www.bis.org/publ/cpss64.pdf?noframes=1.
---------------------------------------------------------------------------
Consistent with the proposals the Basel Committee has made on these
issues and the IOSCO standards, the agencies are seeking comment on
specific risk-based capital requirements for derivative and repo-style
transactions that are cleared on CCPs designed to incentivize the use
of CCPs, help reduce counterparty credit risk, and promote strong risk
management of CCPs to mitigate their potential for systemic risk. In
contrast to the general risk-based capital rules, which permit a
banking organization to exclude certain derivative contracts traded on
an exchange from the risk-based capital calculation, the agencies would
require a banking organization to hold risk-based capital for an
outstanding derivative contract or a repo-style transaction that has
been entered into with all CCPs, including exchanges. Specifically, the
proposal would define a cleared transaction as an outstanding
derivative contract or repo-style transaction that a banking
organization or clearing member has entered into with a central
counterparty (that is, a transaction that a central counterparty has
accepted).\43\ Under the proposal, a banking organization would be
required to hold risk-based capital for all of its cleared
transactions, whether the banking organization acts as a clearing
member (defined as a member of, or direct participant in, a CCP that is
entitled to enter into transactions with the CCP) or a clearing member
client (defined as a party to a cleared transaction associated with a
CCP in which a clearing member acts either as a financial intermediary
with respect to the party or guarantees the performance of the party to
the CCP).
---------------------------------------------------------------------------
\43\ For example, the agencies expect that a transaction with a
derivatives clearing organization (DCO) would meet the proposed
criteria for a cleared transaction. A DCO is a clearinghouse,
clearing association, clearing corporation, or similar entity that
enables each party to an agreement, contract, or transaction to
substitute, through novation or otherwise, the credit of the DCO for
the credit of the parties; arranges or provides, on a multilateral
basis, for the settlement or netting of obligations; or otherwise
provides clearing services or arrangements that mutualize or
transfer credit risk among participants. To qualify as a DCO, an
entity must be registered with the U.S. Commodity Futures Trading
Commission and comply with all relevant laws and procedures.
---------------------------------------------------------------------------
Derivative transactions that are not cleared transactions would be
OTC derivative transactions. In addition, if a transaction submitted to
a CCP is not accepted by a CCP because the terms of the transaction do
not match or other operational issues were identified by the CCP, the
transaction would not meet the definition of a cleared transaction and
would be an OTC derivative transaction. If the counterparties to the
transaction resolved the issues and resubmit the transaction, and if it
is accepted, the transaction could then be a cleared transaction if it
satisfies all the criteria described above.
Under the proposal, a cleared transaction would include a
transaction between a CCP and a clearing member banking organization
for the banking organization's own account. In addition, it would
include a transaction between a CCP and a clearing member banking
organization acting on behalf of its client, and a transaction between
a client banking organization and a clearing member where the clearing
member acts on behalf of the banking organization and enters into an
offsetting transaction with a CCP. A cleared transaction also includes
one between a clearing member client and a CCP where a clearing member
banking organization guarantees the performance of the clearing member
client to the CCP. Transactions must also satisfy additional criteria
provided in the definition of CCP in the proposed rule text.
Under the proposal, a cleared transaction would not include an
exposure of a banking organization that is a clearing member to its
clearing member client where the banking organization is either acting
as a financial intermediary and enters into an offsetting transaction
with a CCP or where the banking organization provides a guarantee to
the CCP on the performance of the client. Such a transaction would be
treated as an OTC derivative transaction with the exposure amount
calculated according to section 34 of the proposal. However, the
agencies recognize that this treatment may create a disincentive for
banking organizations to act as intermediaries and provide access to
CCPs for clients. As a result, the agencies are considering approaches
that could address this disincentive while at the same time
appropriately reflect the risks of these transactions. For example, one
approach would allow banking organizations that are clearing members to
adjust the exposure amount calculated under section 34 downward by a
certain percentage or, for advanced approaches banking organizations
using the internal models method, to adjust the margin period of risk.
The international discussions are ongoing on this issue and the
agencies expect to revisit this issue once the Basel capital framework
is revised. See also the definition of ``cleared transaction'' in
section 2 of the proposed rules in the related notice titled
``Regulatory Capital Rules: Regulatory Capital, Implementation of Basel
III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition
Provisions, and Prompt Corrective Action.''
Question 12: The agencies request comment on whether the proposal
provides an appropriately risk-sensitive treatment of (1) a transaction
between a banking organization that is a clearing member and its client
and (2) a clearing member's guarantee of its client's transaction with
a CCP by treating these exposures as OTC derivative contracts. The
agencies also request comment on whether the adjustment of the exposure
amount would address possible disincentives for banking organizations
that are clearing members to facilitate the clearing of their clients'
transactions. What other approaches should the agencies consider?
2. Risk-weighted Asset Amount for Clearing Member Clients and Clearing
Members
As proposed in this NPR, to determine the risk-weighted asset
amount for a cleared transaction, a clearing member client or a
clearing member would multiply the trade exposure amount for the
cleared transaction by the appropriate risk weight, determined as
described below. The trade exposure amount would be calculated as
follows:
(1) For a derivative contract that is a cleared transaction, the
trade exposure amount would equal the exposure amount for the
derivative contract, calculated using the current exposure methodology
for OTC derivative contracts under section 34 of the proposal, plus the
fair value of the collateral posted by the clearing member banking
organization that is held by the CCP in a manner that is not bankruptcy
remote;\44\ and
---------------------------------------------------------------------------
\44\ Under this proposal, bankruptcy remote, with respect to
entity or asset, would mean that the entity or asset would be
excluded from an insolvent entity's estate in a receivership,
insolvency, liquidation, or similar proceeding.
---------------------------------------------------------------------------
(2) For a repo-style transaction that is a cleared transaction, the
trade exposure amount would equal the exposure amount calculated under
the collateral
[[Page 52906]]
haircut approach (described in section 37(c) of the proposal) plus the
fair value of the collateral posted by the clearing member client
banking organization that is held by the CCP in a manner that is not
bankruptcy remote.
The trade exposure amount would not include any collateral posted
by a clearing member banking organization that is held by a custodian
in a manner that is bankruptcy remote from the CCP or any collateral
posted by a clearing member client that is held by a custodian in a
manner that is bankruptcy remote from the CCP, clearing members and
other counterparties of the clearing member. In addition to the capital
requirement for the cleared transaction, the banking organization would
remain subject to a capital requirement for any collateral provided to
a CCP, a clearing member, or a custodian in connection with a cleared
transaction in accordance with section 32.
Consistent with the Basel capital framework, the agencies propose
that the risk weight for a cleared transaction depends on whether the
CCP is a qualifying CCP (QCCP). As proposed, central counterparties
that are designated financial market utilities (FMUs) and foreign
entities regulated and supervised in a manner equivalent to designated
FMUs would be QCCPs. In addition, a central counterparty could be a
QCCP under the proposal if it was in sound financial condition and met
certain standards that are consistent with BCBS expectations for QCCPs,
as set forth in the proposed definition. See the definition of
``qualified central counterparty'' in section 2 of the proposed rules
in the related notice titled ``Regulatory Capital Rules: Regulatory
Capital, Implementation of Basel III, Minimum Regulatory Capital
Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective
Action''.
Under the proposal, a clearing member banking organization would
apply a 2 percent risk weight to its trade exposure amount with a QCCP.
A banking organization that is a clearing member client would apply a 2
percent risk weight to the trade exposure amount only if:
(1) The collateral posted by the banking organization to the QCCP
or clearing member is subject to an arrangement that prevents any
losses to the clearing member due to the joint default or a concurrent
insolvency, liquidation, or receivership proceeding of the clearing
member and any other clearing member clients of the clearing member,
and
(2) The clearing member client banking organization has conducted
sufficient legal review to conclude with a well-founded basis (and
maintains sufficient written documentation of that legal review) that
in the event of a legal challenge (including one resulting from default
or a liquidation, insolvency, or receivership proceeding) the relevant
court and administrative authorities would find the arrangements to be
legal, valid, binding, and enforceable under the law of the relevant
jurisdiction.
The agencies believe that omnibus accounts (that is, accounts that
are generally set up by clearing entities for non-clearing members) in
the United States would satisfy these requirements because of the
protections afforded client accounts under certain regulations of the
SEC \45\ and CFTC.\46\ If the criteria above are not met, a banking
organization that is clearing member client would apply a risk weight
of 4 percent to the trade exposure amount.
---------------------------------------------------------------------------
\45\ See 15 U.S.C 78aaa-78lll and 17 CFR part 300.
\46\ See 17 CFR part 190.
---------------------------------------------------------------------------
For a cleared transaction with a CCP that is not a QCCP, a clearing
member and a banking organization that is a clearing member client
would risk weight the trade exposure amount to the CCP according to the
treatment for the CCP under section 32 of the proposal. In addition,
collateral posted by a clearing member banking organization that is
held by a custodian in a manner that is bankruptcy remote from the CCP
would not be subject to a capital requirement for counterparty credit
risk. Collateral posted by a clearing member client that is held by a
custodian in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member would
not be subject to a capital requirement for counterparty credit risk.
3. Default Fund Contribution
One of the benefits of clearing a transaction through a CCP is the
protection provided to the CCP clearing members by the margin
requirements imposed by the CCP, as well as by the CCP members' default
fund contributions, and the CCP's own capital and contribution to the
default fund. Default funds make CCPs safer and are an important source
of collateral in case of counterparty default. However, CCPs
independently determine default fund contributions from members. The
BCBS therefore has proposed to establish a risk-sensitive approach for
risk weighting a banking organization's exposure to a default fund.
Consistent with the CCP consultative release, the agencies are
proposing to require a banking organization that is a clearing member
of a CCP to calculate the risk-weighted asset amount for its default
fund contributions at least quarterly or more frequently if there is a
material change, in the opinion of the banking organization or the
primary federal supervisor, in the financial condition of the CCP. A
default fund contribution would mean the funds contributed or
commitments made by a clearing member to a CCP's mutualized loss-
sharing arrangement.\47\ Under this proposal, a banking organization
would assign a 1,250 percent risk weight to its default fund
contribution to a CCP that is not a QCCP.
---------------------------------------------------------------------------
\47\ Default funds are also known as clearing deposits or
guaranty funds.
---------------------------------------------------------------------------
As under the CCP consultative release, a banking organization would
calculate a risk-weighted asset amount for its default fund
contribution to a QCCP by using a three-step process. The first step is
to calculate the QCCP's hypothetical capital requirement
(KCCP), unless the QCCP has already disclosed it.
KCCP is the capital that a QCCP would be required to hold if
it were a banking organization, and it is calculated using the current
exposure methodology for OTC derivatives and recognizing the risk-
mitigating effects of collateral posted by and default fund
contributions received from the QCCP clearing members.
As a first step, for purposes of calculating KCCP, the
agencies are proposing several modifications to the current exposure
methodology to adjust for certain features that are unique to QCCPs.
First, a clearing member would be permitted to offset its exposure to a
QCCP with actual default fund contributions. Second, greater
recognition of netting would be allowed when calculating
KCCP. Specifically, the formula used to calculate the
adjusted sum of the PFE amounts in section 34 (the Anet formula) would
be changed from Anet = (0.4 x Agross) + (0.6 x NGR x Agross) to Anet =
(0.3 x Agross) + (0.7 x NGR x Agross).\48\ Third, the risk weight of
all clearing members would be set at 20 percent, except when a banking
organization's primary federal supervisor has determined that a higher
risk weight is appropriate based on the specific characteristics of the
QCCP and
[[Page 52907]]
its clearing members. Finally, for derivative contracts that are
options, the PFE amount calculation would be adjusted by multiplying
the notional principal amount of the derivative contract by the
appropriate conversion factor and the absolute value of the option's
delta (that is, the ratio of the change in the value of the derivative
contract to the corresponding change in the price of the underlying
asset).
---------------------------------------------------------------------------
\48\ NGR is defined as the net to gross ratio (that is, the
ratio of the net current credit exposure to the gross current credit
exposure). If a banking organization cannot calculate the NGR, the
banking organization may use a value of 0.30 until March 31, 2013.
If the CCP does not provide the NGR to the banking organization or
data needed to calculate the NGR after that date, the CCP no longer
meets the criteria for a QCCP.
---------------------------------------------------------------------------
In the second step, KCCP is compared to the funded
portion of the default fund of a QCCP and the total of all the clearing
members' capital requirements (Kcm*) is calculated. If the
total funded default fund of a QCCP is less than KCCP,
additional capital would be assessed against the shortfall because of
the small size of the funded portion of the default fund relative to
KCCP. If the total funded default fund of a QCCP is greater
than KCCP, but the QCCP's own funded contributions to the
default fund are less than KCCP (so that the clearing
members' default fund contributions are required to achieve
KCCP), the clearing members' default fund contributions up
to KCCP would be risk-weighted at 100 percent and a
decreasing capital factor, between 0.16 percent and 1.6 percent, would
be applied to the clearing members' funded default fund contributions
above KCCP. If the QCCP's own contribution to the default
fund is greater than KCCP, then only the decreasing capital
factor would be applied to the clearing members' default fund
contributions.
In the third step, the total of all the clearing members' capital
requirements (Kcm*) is allocated back to each individual
clearing member. This allocation is proportional to each clearing
member's contribution to the default fund but adjusted to reflect the
impact of two average-size clearing members defaulting as well as to
account for the concentration of exposure among clearing members.
Question 13: The agencies are seeking comment on the proposed
calculation of the risk-based capital for cleared transactions,
including the proposed risk-based capital requirements for exposures to
a QCCP. Are there specific types of exposures to certain QCCPs that
would warrant an alternative risk-based capital approach? Please
provide a detailed description of such transactions or exposures, the
mechanics of the alternative risk-based approach, and the supporting
rationale.
F. Credit Risk Mitigation
Banking organizations use a number of techniques to mitigate credit
risks. For example, a banking organization may collateralize exposures
with first-priority claims, cash or securities; a third party may
guarantee a loan exposure; a banking organization may buy a credit
derivative to offset an exposure's credit risk; or a banking
organization may net exposures with a counterparty under a netting
agreement. The general risk-based capital rules recognize these
techniques to some extent. This section describes how a banking
organization would recognize the risk-mitigation effects of guarantees,
credit derivatives, and collateral for risk-based capital purposes
under the proposal. Similar to the general risk-based capital rules, a
banking organization that is not engaged in complex financial
activities generally would be able to use a substitution approach to
recognize the credit risk-mitigation effect of an eligible guarantee
from an eligible guarantor and the simple approach to recognize the
effect of collateral.
To recognize credit risk mitigants, all banking organizations
should have operational procedures and risk management processes that
ensure that all documentation used in collateralizing or guaranteeing a
transaction is legal, valid, binding, and enforceable under applicable
law in the relevant jurisdictions. A banking organization should
conduct sufficient legal review to reach a well-founded conclusion that
the documentation meets this standard as well as conduct additional
reviews as necessary to ensure continuing enforceability.
Although the use of credit risk mitigants may reduce or transfer
credit risk, it simultaneously may increase other risks, including
operational, liquidity, or market risk. Accordingly, a banking
organization should employ robust procedures and processes to control
risks, including roll-off and concentration risks, and monitor the
implications of using credit risk mitigants for the banking
organization's overall credit risk profile.
1. Guarantees and Credit Derivatives
a. Eligibility Requirements
The general risk-based capital rules generally recognize third-
party guarantees provided by central governments, GSEs, PSEs in the
OECD countries, multilateral lending institutions and regional
development banking organizations, U.S. depository institutions,
foreign banks, and qualifying securities firms in OECD countries.\49\
Consistent with the Basel capital framework, the agencies propose to
recognize a wider range of eligible guarantors, including sovereigns,
the Bank for International Settlements, the International Monetary
Fund, the European Central Bank, the European Commission, Federal Home
Loan Banks, Federal Agricultural Mortgage Corporation (Farmer Mac),
MDBs, depository institutions, bank holding companies, savings and loan
holding companies, credit unions, and foreign banks. Eligible
guarantors would also include entities that are not special purpose
entities that have issued and outstanding unsecured debt securities
without credit enhancement that are investment grade and that meet
certain other requirements.\50\ See the definition of ``eligible
guarantor'' in section 2 of the proposed rules in the related notice
titled ``Regulatory Capital Rules: Regulatory Capital, Implementation
of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy,
Transition Provisions, and Prompt Corrective Action.''
---------------------------------------------------------------------------
\49\ 12 CFR part 3, appendix A and 12 CFR 167.6 (OCC); 12 CFR
parts 208 and 225, appendix A, section III.B.2 (Board); 12 CFR part
325, appendix A, section II.B.3 and 12 CFR 390.466 (FDIC).
\50\ Under the proposal, an exposure would be, ``investment
grade'' if the entity to which the banking organization is exposed
through a loan or security, or the reference entity with respect to
a credit derivative, has adequate capacity to meet financial
commitments for the projected life of the asset or exposure. Such an
entity or reference entity has adequate capacity to meet financial
commitments if the risk of its default is low and the full and
timely repayment of principal and interest is expected.
---------------------------------------------------------------------------
Under this NPR, guarantees and credit derivatives would be required
to meet specific eligibility requirements to be recognized for credit
risk mitigation purposes. Under the proposal an eligible guarantee
would be defined as a guarantee from an eligible guarantor that is
written and meets certain standards and conditions, including with
respect to its enforceability. For example, an eligible guarantee must
either be unconditional or a contingent obligation of the U.S.
government or its agencies (the enforceability of which is dependent on
some affirmative action on the part of the beneficiary of the guarantee
or a third party, such as servicing requirements). See the definition
of ``eligible guarantee'' in section 2 of the proposed rules in the
related notice titled ``Regulatory Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and Prompt Corrective Action.''
An eligible credit derivative would be defined as a credit
derivative in the form of a credit default swap, nth-to-default swap,
total return swap, or any other form of credit derivative approved by
the primary federal supervisor,
[[Page 52908]]
provided that the instrument meets the standards and conditions set
forth in the proposed definition. See the definition of ``eligible
credit derivative'' in section 2 of the proposed rules in the related
notice titled ``Regulatory Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and Prompt Corrective Action.''
Under this NPR, a banking organization would be permitted to
recognize the credit risk mitigation benefits of an eligible credit
derivative that hedges an exposure that is different from the credit
derivative's reference exposure used for determining the derivative's
cash settlement value, deliverable obligation, or occurrence of a
credit event if (1) the reference exposure ranks pari passu with or is
subordinated to the hedged exposure; and (2) the reference exposure and
the hedged exposure are to the same legal entity, and legally
enforceable cross-default or cross-acceleration clauses are in place to
assure payments under the credit derivative are triggered when the
issuer fails to pay under the terms of the hedged exposure.
When a banking organization has a group of hedged exposures with
different residual maturities that are covered by a single eligible
guarantee or eligible credit derivative, a banking organization would
treat each hedged exposure as if it were fully covered by a separate
eligible guarantee or eligible credit derivative.
b. Substitution Approach
Under the proposed substitution approach, if the protection amount
(as defined below) of an eligible guarantee or eligible credit
derivative is greater than or equal to the exposure amount of the
hedged exposure, a banking organization would substitute the risk
weight applicable to the guarantor or credit derivative protection
provider for the risk weight assigned to the hedged exposure.
If the protection amount of the eligible guarantee or eligible
credit derivative is less than the exposure amount of the hedged
exposure, a banking organization would treat the hedged exposure as two
separate exposures (protected and unprotected) to recognize the credit
risk mitigation benefit of the guarantee or credit derivative. In such
cases, a banking organization would calculate the risk-weighted asset
amount for the protected exposure under section 36 (using a risk weight
applicable to the guarantor or credit derivative protection provider
and an exposure amount equal to the protection amount of the guarantee
or credit derivative). The banking organization would calculate its
risk-weighted asset amount for the unprotected exposure under section
36 of the proposal (using the risk weight assigned to the exposure and
an exposure amount equal to the exposure amount of the original hedged
exposure minus the protection amount of the guarantee or credit
derivative).
The protection amount of an eligible guarantee or eligible credit
derivative would mean the effective notional amount of the guarantee or
credit derivative (reduced to reflect any currency mismatch, maturity
mismatch, or lack of restructuring coverage, as described in this
section below). The effective notional amount for an eligible guarantee
or eligible credit derivative would be the lesser of the contractual
notional amount of the credit risk mitigant and the exposure amount of
the hedged exposure, multiplied by the percentage coverage of the
credit risk mitigant. For example, the effective notional amount of a
guarantee that covers, on a pro rata basis, 40 percent of any losses on
a $100 bond would be $40.
The following sections addresses credit risk mitigants with
maturity mismatches, lack of restructuring coverage, currency
mismatches, and multiple credit risk mitigants. A banking organization
that is not engaged in complex financial transactions is unlikely to
have credit risk mitigant with a currency mismatch, maturity mismatch,
or lack of restructuring coverage, or multiple credit risk mitigants.
In such a case, a banking organization should refer to section II.F.2
below which describes the treatment of collateralized transactions.
c. Maturity Mismatch Haircut
Under the proposed requirements, a banking organization that
recognizes an eligible guarantee or eligible credit derivative to
adjust the effective notional amount of the credit risk mitigant to
reflect any maturity mismatch between the hedged exposure and the
credit risk mitigant. A maturity mismatch occurs when the residual
maturity of a credit risk mitigant is less than that of the hedged
exposure(s).\51\
---------------------------------------------------------------------------
\51\ As noted above, when a banking organization has a group of
hedged exposures with different residual maturities that are covered
by a single eligible guarantee or eligible credit derivative, a
banking organization would treat each hedged exposure as if it were
fully covered by a separate eligible guarantee or eligible credit
derivative. To determine whether any of the hedged exposures has a
maturity mismatch with the eligible guarantee or credit derivative,
the banking organization would assess whether the residual maturity
of the eligible guarantee or eligible credit derivative is less than
that of the hedged exposure.
---------------------------------------------------------------------------
The residual maturity of a hedged exposure would be the longest
possible remaining time before the obligated party of the hedged
exposure is scheduled to fulfil its obligation on the hedged exposure.
A banking organization would be required to take into account any
embedded options that may reduce the term of the credit risk mitigant
so that the shortest possible residual maturity for the credit risk
mitigant would be used to determine the potential maturity mismatch. If
a call is at the discretion of the protection provider, the residual
maturity of the credit risk mitigant would be at the first call date.
If the call is at the discretion of the banking organization purchasing
the protection, but the terms of the arrangement at origination of the
credit risk mitigant contain a positive incentive for the banking
organization to call the transaction before contractual maturity, the
remaining time to the first call date would be the residual maturity of
the credit risk mitigant. For example, if there is a step-up in the
cost of credit protection in conjunction with a call feature or if the
effective cost of protection increases over time even if credit quality
remains the same or improves, the residual maturity of the credit risk
mitigant would be the remaining time to the first call date. Under this
NPR, a banking organization would be permitted to recognize a credit
risk mitigant with a maturity mismatch only if its original maturity is
greater than or equal to one year and the residual maturity is greater
than three months.
Assuming that the credit risk mitigant may be recognized, a banking
organization would be required to apply the following adjustment to
reduce the effective notional amount of the credit risk mitigant: Pm =
E x [(t-0.25)/(T-0.25)], where:
(1) Pm = effective notional amount of the credit risk mitigant,
adjusted for maturity mismatch;
(2) E = effective notional amount of the credit risk mitigant;
(3) t = the lesser of T or residual maturity of the credit risk
mitigant, expressed in years; and
(4) T = the lesser of five or the residual maturity of the hedged
exposure, expressed in years.
d. Adjustment for Credit Derivatives Without Restructuring as a Credit
Event
Under the proposal, a banking organization that seeks to recognize
an eligible credit derivative that does not include a restructuring of
the hedged exposure as a credit event under the
[[Page 52909]]
derivative would have to reduce the effective notional amount of the
credit derivative recognized for credit risk mitigation purposes by 40
percent. For purposes of the proposed credit risk mitigation framework,
a restructuring would involve forgiveness or postponement of principal,
interest, or fees that result in a credit loss event (that is, a
charge-off, specific provision, or other similar debit to the profit
and loss account). In these instances, the banking organization would
be required to apply the following adjustment to reduce the effective
notional amount of the credit derivative: Pr = Pm x 0.60, where:
(1) Pr = effective notional amount of the credit risk mitigant,
adjusted for lack of a restructuring event (and maturity mismatch,
if applicable); and
(2) Pm = effective notional amount of the credit risk mitigant
(adjusted for maturity mismatch, if applicable).
e. Currency Mismatch Adjustment
Under this proposal, if a banking organization recognizes an
eligible guarantee or eligible credit derivative that is denominated in
a currency different from that in which the hedged exposure is
denominated, the banking organization would apply the following formula
to the effective notional amount of the guarantee or credit derivative:
PC = Pr x (1-HFX), where:
(1) Pc = effective notional amount of the credit risk mitigant,
adjusted for currency mismatch (and maturity mismatch and lack of
restructuring event, if applicable);
(2) Pr = effective notional amount of the credit risk mitigant
(adjusted for maturity mismatch and lack of restructuring event, if
applicable); and
(3) HFX = haircut appropriate for the currency mismatch
between the credit risk mitigant and the hedged exposure.
A banking organization would be required to use a standard
supervisory haircut of 8 percent for HFX (based on a ten-
business-day holding period and daily marking-to-market and
remargining). Alternatively, a banking organization would be able to
use internally estimated haircuts of HFX based on a ten-
business-day holding period and daily marking-to-market if the banking
organization qualifies to use the own-estimates of haircuts in section
37(c)(4) of the proposal. In either case, the banking organization is
required to scale the haircuts up using the square root of time formula
if the banking organization revalues the guarantee or credit derivative
less frequently than once every 10 business days. The applicable
haircut (HM) is calculated using the following square root
of time formula:
[GRAPHIC] [TIFF OMITTED] TP30AU12.006
where TM = equals the greater of 10 or the number of days
between revaluation.
f. Multiple Credit Risk Mitigants
If multiple credit risk mitigants (for example, two eligible
guarantees) cover a single exposure, the agencies propose to permit a
banking organization disaggregate the exposure into portions covered by
each credit risk mitigant (for example, the portion covered by each
guarantee) and calculate separately a risk-based capital requirement
for each portion, consistent with the Basel capital framework. In
addition, when credit risk mitigants provided by a single protection
provider have differing maturities, the mitigants should be subdivided
into separate layers of protection.
2. Collateralized Transactions
a. Eligible Collateral
The general risk-based capital rules recognize limited types of
collateral, such as cash on deposit; securities issued or guaranteed by
central governments of the OECD countries; securities issued or
guaranteed by the U.S. government or its agencies; and securities
issued by certain multilateral development banks.\52\ Given the fact
that the general risk-based capital rules for collateral are
restrictive and, in some cases, do not take into account market
practices, the agencies propose to recognize the credit risk mitigating
impact of an expanded range of financial collateral, consistent with
the Basel capital framework.
---------------------------------------------------------------------------
\52\ The agencies' rules for collateral transactions differ
somewhat as described in the agencies' joint report to Congress. See
``Joint Report: Differences in Accounting and Capital Standards
among the Federal Banking Agencies; Report to Congressional
Committees,'' 75 FR 47900 (August 9, 2010).
---------------------------------------------------------------------------
As proposed, financial collateral would mean collateral in the form
of: (1) Cash on deposit with the banking organization (including cash
held for the banking organization by a third-party custodian or
trustee); (2) gold bullion; (3) short- and long-term debt securities
that are not resecuritization exposures and that are investment grade;
(4) equity securities that are publicly-traded; (5) convertible bonds
that are publicly-traded; or (6) money market fund shares and other
mutual fund shares if a price for the shares is publicly quoted daily.
With the exception of cash on deposit, the banking organization would
also be required to have a perfected, first-priority security interest
or, outside of the United States, the legal equivalent thereof,
notwithstanding the prior security interest of any custodial agent. A
banking organization would be permitted to recognize partial
collateralization of an exposure.
Under this NPR, a banking organization would be able to recognize
the risk-mitigating effects of financial collateral using the simple
approach, described in section II.F.2(c) below, for any exposure where
the collateral is subject to a collateral agreement for at least the
life of the exposure; the collateral must be revalued at least every
six months; and the collateral (other than gold) and the exposure must
be denominated in the same currency. For repo-style transactions,
eligible margin loans, collateralized derivative contracts, and single-
product netting sets of such transactions, a banking organization could
alternatively use the collateral haircut approach described in section
II.F.2(d) below. A banking organization would be required to use the
same approach for similar exposures or transactions.
b. Risk Management Guidance for Recognizing Collateral
Before a banking organization recognizes collateral for credit risk
mitigation purposes, it should: (1) CONDUCt sufficient legal review to
ensure, at the inception of the collateralized transaction and on an
ongoing basis, that all documentation used in the transaction is
binding on all parties and legally enforceable in all relevant
jurisdictions; (2) consider the correlation between risk of the
underlying direct exposure and collateral risk in the transaction; and
(3) fully take into account the time and cost needed to realize the
liquidation proceeds and the potential for a decline in collateral
value over this time period.
A banking organization also should ensure that the legal mechanism
under which the collateral is pledged or transferred ensures that the
banking organization has the right to liquidate or take legal
possession of the collateral in a timely manner in the event of the
default, insolvency, or bankruptcy (or other defined credit event) of
the counterparty and, where applicable, the custodian holding the
collateral.
In addition, a banking organization should ensure that it (1) Has
taken all steps necessary to fulfill any legal requirements to secure
its interest in the collateral so that it has and maintains an
enforceable security interest; (2) has set up clear and robust
procedures to ensure observation of any legal conditions required for
declaring the default of the borrower and prompt
[[Page 52910]]
liquidation of the collateral in the event of default; (3) has
established procedures and practices for conservatively estimating, on
a regular ongoing basis, the fair value of the collateral, taking into
account factors that could affect that value (for example, the
liquidity of the market for the collateral and obsolescence or
deterioration of the collateral); and (4) has in place systems for
promptly requesting and receiving additional collateral for
transactions whose terms require maintenance of collateral values at
specified thresholds.
c. Simple Approach
Under the proposed simple approach, which is similar to the general
risk-based capital rules, the collateralized portion of the exposure
would receive the risk weight applicable to the collateral. The
collateral would be required to meet the definition of financial
collateral, provided that a banking organization could recognize any
collateral for a repo-style transaction that is included in the banking
organization's Value-at-Risk (VaR)-based measure under the market risk
capital rule. For repurchase agreements, reverse repurchase agreements,
and securities lending and borrowing transactions, the collateral would
be the instruments, gold, and cash that a banking organization has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty under the transaction. As noted above, in all cases, (1)
The terms of the collateral agreement would be required to be equal to
or greater than the life of the exposure; (2) the banking organization
would be required to revalue the collateral at least every six months;
and (3) the collateral (other than gold) and the exposure would be
required to be denominated in the same currency.
Generally, the risk weight assigned to the collateralized portion
of the exposure would be no less than 20 percent. However, the
collateralized portion of an exposure could be assigned a risk weight
of less than 20 percent for the following exposures. OTC derivative
contracts that are marked-to-market on a daily basis and subject to a
daily margin maintenance agreement, which would receive (1) a zero
percent risk weight to the extent that they are collateralized by cash
on deposit, or (2) a 10 percent risk weight to the extent that the
contracts are collateralized by an exposure to a sovereign or a PSE
that qualifies for a zero percent risk weight under section 32 of the
proposal. In addition, a banking organization may assign a zero percent
risk weight to the collateralized portion of an exposure where the
financial collateral is cash on deposit; or the financial collateral is
an exposure to a sovereign that qualifies for a zero percent risk
weight under section 32 of the proposal, and the banking organization
has discounted the market value of the collateral by 20 percent.
d. Collateral Haircut Approach
The agencies would permit a banking organization to use a
collateral haircut approach with supervisory haircuts or, with prior
written approval of the primary federal supervisor, its own estimates
of haircuts to recognize the risk-mitigating effect of financial
collateral that secures an eligible margin loan, a repo-style
transaction, collateralized derivative contract, or single-product
netting set of such transactions, as well as any collateral that
secures a repo-style transaction that is included in the banking
organization's VaR-based measure under the market risk capital rule. A
netting set would refer to a group of transactions with a single
counterparty that are subject to a qualifying master netting agreement
or a qualifying cross-product master netting agreement.
The proposal would define a repo-style transaction as a repurchase
or reverse repurchase transaction, or a securities borrowing or
securities lending transaction (including a transaction in which a
banking organization acts as agent for a customer and indemnifies the
customer against loss), provided that the transaction meets certain
standards and conditions, including with respect to its legal status
and the assets backing the transaction. For example, the transaction
must be a ``securities contract,'' ``repurchase agreement'' under the
Bankruptcy Code or a qualified financial contract under certain
provisions of U.S. banking laws, as specified in the definition. In
addition, the contract must meet certain enforceability standards and a
legal review of the contract must be conducted. See the definition of
``repo-style transaction'' in section 2 of the proposed rules in the
related notice titled ``Regulatory Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and Prompt Corrective Action.'':
Under the proposal, an eligible margin loan would be defined as an
extension of credit where certain standards and conditions are met,
including with respect to collateral securing the loan and events of
default in the agreements governing the loan. See the definition of
``eligible margin loan'' in section 2 of the proposed rules in the
related notice titled ``Regulatory Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and Prompt Corrective Action.''
Under the collateral haircut approach, a banking organization would
determine the exposure amount using standard supervisory haircuts or
its own estimates of haircuts and risk weight the exposure amount
according to the counterparty or guarantor if applicable. A banking
organization would set the exposure amount for an eligible margin loan,
repo-style transaction, collateralized derivative contract, or a
netting set of such transactions equal to the greater of zero and the
sum of the following three quantities:
(1) The value of the exposure less the value of the collateral. For
eligible margin loans, repo-style transactions and netting sets
thereof, the value of the exposure is the sum of the current market
values of all instruments, gold, and cash the banking organization has
lent, sold subject to repurchase, or posted as collateral to the
counterparty under the transaction or netting set. For collateralized
OTC derivative contracts and netting sets thereof, the value of the
exposure is the exposure amount that is calculated under section 34 of
the proposal. The value of the collateral would equal the sum of the
current market values of all instruments, gold and cash the banking
organization has borrowed, purchased subject to resale, or taken as
collateral from the counterparty under the transaction or netting set;
(2) The absolute value of the net position in a given instrument or
in gold (where the net position in a given instrument or in gold equals
the sum of the current market values of the instrument or gold the
banking organization has lent, sold subject to repurchase, or posted as
collateral to the counterparty minus the sum of the current market
values of that same instrument or gold that the banking organization
has borrowed, purchased subject to resale, or taken as collateral from
the counterparty) multiplied by the market price volatility haircut
appropriate to the instrument or gold; and
(3) The absolute values of the net position of instruments and cash
in a currency that is different from the settlement currency (where the
net position in a given currency equals the sum of the current market
values of any instruments or cash in the currency the banking
organization has lent, sold
[[Page 52911]]
subject to repurchase, or posted as collateral to the counterparty
minus the sum of the current market values of any instruments or cash
in the currency the banking organization has borrowed, purchased
subject to resale, or taken as collateral from the counterparty)
multiplied by the haircut appropriate to the currency mismatch.
For purposes of the collateral haircut approach, a given instrument
would include, for example, all securities with a single Committee on
Uniform Securities Identification Procedures (CUSIP) number and would
not include securities with different CUSIP numbers, even if issued by
the same issuer with the same maturity date.
e. Standard Supervisory Haircuts
Under this NPR, a banking organization would use an 8 percent
haircut for each currency mismatch and would use the market price
volatility haircut appropriate to each security as provided in table 7.
The market price volatility haircuts are based on the ten-business-day
holding period for eligible margin loans and derivative contracts and
may be multiplied by the square root of \1/2\ (which equals 0.707107)
to convert the standard supervisory haircuts to the five-business-day
minimum holding period for repo-style transactions.
Table 7--Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Haircut (in percents) assigned based on:
------------------------------------------------------------------------------ Investment
Sovereign issuers risk weight under Non-sovereign issuers risk weight grade
Residual maturity Sec. ----.32 \2\ under Sec. ----.32 securitization
------------------------------------------------------------------------------ exposures (in
Zero % 20% or 50% 100% 20% 50% 100% percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year.............................. 0.5 1.0 15.0 1.0 2.0 25.0 4.0
Greater than 1 year and less than or equal to 5 years..... 2.0 3.0 15.0 4.0 6.0 25.0 12.0
Greater than 5 years...................................... 4.0 6.0 15.0 8.0 12.0 25.0 24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold 15.0
Other publicly-traded equities (including convertible bonds) 25.0
Mutual funds Highest haircut applicable to any security in
which the fund can invest.
Cash collateral held Zero.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 2 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.
For example, if a banking organization has extended an eligible
margin loan of $100 that is collateralized by five-year U.S. Treasury
notes with a market value of $100, the value of the exposure less the
value of the collateral would be zero, and the net position in the
security ($100) times the supervisory haircut (.02) would be $2. There
is no currency mismatch. Therefore, the exposure amount would be $0 +
$2 = $2.
During the financial crisis, many financial institutions
experienced significant delays in settling or closing out
collateralized transactions, such as repo-style transactions and
collateralized OTC derivatives. The assumed holding period for
collateral in the collateral haircut approach under Basel II proved to
be inadequate for certain transactions and netting sets and did not
reflect the difficulties and delays that institutions had when settling
or liquidating collateral during a period of financial stress.
Accordingly, consistent with the revised Basel capital framework,
for netting sets where: (1) The number of trades exceeds 5,000 at any
time during the quarter; (2) one or more trades involves illiquid
collateral posted by the counterparty; or (3) the netting set includes
any OTC derivatives that cannot be easily replaced, this NPR would
require a banking organization to assume a holding period of 20
business days for the collateral under the collateral haircut approach.
When determining whether collateral is illiquid or an OTC derivative
cannot be easily replaced for these purposes, a banking organization
should assess whether, during a period of stressed market conditions,
it could obtain multiple price quotes within two days or less for the
collateral or OTC derivative that would not move the market or
represent a market discount (in the case of collateral) or a premium
(in the case of an OTC derivative).
If over the two previous quarters more than two margin disputes on
a netting set have occurred that lasted longer than the holding period,
then the banking organization would use a holding period for that
netting set that is at least two times the minimum holding period that
would otherwise be used for that netting set. Margin disputes may occur
when the banking organization and its counterparty do not agree on the
value of collateral or on the eligibility of the collateral provided.
Margin disputes also can occur when the banking organization and its
counterparty disagree on the amount of margin that is required, which
could result from differences in the valuation of a transaction, or
from errors in the calculation of the net exposure of a portfolio, for
instance, if a transaction is incorrectly included or excluded from the
portfolio. In this NPR, the agencies propose to incorporate these
adjustments to the holding period in the collateral haircut approach.
However, consistent with the Basel capital framework, a banking
organization would not be required to adjust the holding period upward
for cleared transactions.
f. Own Estimates of Haircuts
In this NPR, the agencies are proposing to allow banking
organizations to calculate market price volatility and foreign exchange
volatility using own internal estimates with prior written approval of
the banking organization's primary federal supervisor. The banking
organization's primary federal supervisor would base approval to use
internally estimated haircuts on the satisfaction of certain minimum
qualitative and quantitative standards, including the requirements that
a banking organization would: (1) Use a 99th percentile one-tailed
confidence interval and a minimum five-business-day holding period for
repo-style transactions and a minimum ten-business-day holding period
for all other transactions; (2) adjust holding periods upward where and
as appropriate to take into account the
[[Page 52912]]
illiquidity of an instrument; (3) select a historical observation
period that reflects a continuous 12-month period of significant
financial stress appropriate to the banking organization's current
portfolio; and (4) update its data sets and compute haircuts no less
frequently than quarterly, as well as any time market prices change
materially. A banking organization would estimate the volatilities of
each exposure, the collateral, and foreign exchange rates and not take
into account the correlations between them.
Under the proposed requirements, a banking organization would be
required to have policies and procedures that describe how it
determines the period of significant financial stress used to calculate
the bank's own internal estimates, and to be able to provide empirical
support for the period used. These policies and procedures would
address (1) how the banking organization links the period of
significant financial stress used to calculate the own internal
estimates to the composition and directional bias of the banking
organization's current portfolio; and (2) the banking organization's
process for selecting, reviewing, and updating the period of
significant financial stress used to calculate the own internal
estimates and for monitoring the appropriateness of the 12-month period
in light of the bank's current portfolio. The banking organization
would be required to obtain the prior approval of its primary federal
supervisor for these policies and procedures and notify its primary
federal supervisor if the banking organization makes any material
changes to them. A banking organization's primary federal supervisor
may require it to use a different period of significant financial
stress in the calculation of the banking organization's own internal
estimates.
Under the proposal, a banking organization would be allowed to use
internally estimated haircuts for categories of debt securities under
certain conditions. The banking organization would be allowed to
calculate internally estimated haircuts for categories of debt
securities that are investment grade exposures. The haircut for a
category of securities would have to be representative of the internal
volatility estimates for securities in that category that the banking
organization has lent, sold subject to repurchase, posted as
collateral, borrowed, purchased subject to resale, or taken as
collateral.
In determining relevant categories, the banking organization would,
at a minimum, take into account (1) The type of issuer of the security;
(2) the investment grade of the security; (3) the maturity of the
security; and (4) the interest rate sensitivity of the security. A
banking organization would calculate a separate internally estimated
haircut for each individual non-investment grade debt security and for
each individual equity security. In addition, a banking organization
would estimate a separate currency mismatch haircut for its net
position in each mismatched currency based on estimated volatilities
for foreign exchange rates between the mismatched currency and the
settlement currency where an exposure or collateral (whether in the
form of cash or securities) is denominated in a currency that differs
from the settlement currency.
g. Simple Value-at-risk
Under this NPR, a banking organization would not be permitted to
use the simple value-at-risk (VaR) to calculate exposure amounts for
eligible margin loans and repo-style transactions. However, the Basel
standardized approach does incorporate the simple VaR approach for
credit risk mitigants. Therefore, the agencies are considering whether
to implement the simple VaR approach consistent with the requirements
described below.
Under the simple VaR approach (which is not included in the NPR),
with the prior written approval of its primary federal supervisor, a
banking organization could be allowed to estimate the exposure amount
for repo-style transactions and eligible margin loans subject to a
single-product qualifying master netting agreement using a VaR model
(simple VaR approach). Under the simple VaR approach, a banking
organization's exposure amount for transactions subject to such a
netting agreement would be equal to the value of the exposures minus
the value of the collateral plus a VaR-based estimate of the PFE. The
value of the exposures would be the sum of the current market values of
all instruments, gold, and cash the banking organization has lent, sold
subject to repurchase, or posted as collateral to a counterparty under
the netting set. The value of the collateral would be the sum of the
current market values of all instruments, gold, and cash the banking
organization has borrowed, purchased subject to resale, or taken as
collateral from a counterparty under the netting set. The VaR-based
estimate of the PFE would be an estimate of the banking organization's
maximum exposure on the netting set over a fixed time horizon with a
high level of confidence.
To qualify for the simple VaR approach, a banking organization's
VaR model would have to estimate the banking organization's 99th
percentile, one-tailed confidence interval for an increase in the value
of the exposures minus the value of the collateral ([sum]E-[sum]C) over
a five-business-day holding period for repo-style transactions or over
a ten-business-day holding period for eligible margin loans using a
minimum one-year historical observation period of price data
representing the instruments that the banking organization has lent,
sold subject to repurchase, posted as collateral, borrowed, purchased
subject to resale, or taken as collateral. The main ongoing
qualification requirement for using a VaR model is that the banking
organization would have to validate its VaR model by establishing and
maintaining a rigorous and regular backtesting regime.
Question 14: The agencies solicit comments on whether banking
organizations should be permitted to use the simple VaR to calculate
exposure amounts for margin lending, and repo-style transactions.
h. Internal Models Methodology
The advanced approaches rule include an internal models methodology
for the calculation of the exposure amount for the counterparty credit
exposure for OTC derivatives, eligible margin loans, and repo-style
transactions.\53\ This methodology requires a risk model that captures
counterparty credit risk and estimates the exposure amount at the level
of a netting set. A banking organization may use the internal models
methodology for OTC derivatives, eligible margin loans, and repo-style
transactions. In the companion NPR, the agencies are proposing to
permit a banking organization subject to the advanced approaches risk-
based capital rules to use the internal models methodology to calculate
the trade exposure amount for cleared transactions.\54\
---------------------------------------------------------------------------
\53\ See 72 FR 69288, 69346 (December 7, 2007).
\54\ The internal models methodology is fully discussed in the
2007 Federal Register notice of the advanced approaches rule, with
specific references at: (1) 72 FR 69346-69349 and 69302-69321); (2)
section 22(c) and other paragraphs in section 22 of the common rule
text (at 72 FR 69413-69416; sections 22 (a)(2) and (3), (i), (j),
and (k) (these sections establish the qualification requirements for
the advanced systems in general and therefore would apply to the
expected positive exposure modeling approach as part of the internal
models methodology); (3) sections 32(c) and (d) of the common rule
text (at 72 FR 69413-69416); (4) applicable definitions in section 2
of the common rule text (at 72 FR 69397-69405); and (5) applicable
disclosure requirements in Tables 11.6 and 11.7 of the common rule
text (at 72 FR 69443). In addition, the Advanced Approaches and
Market Risk NPR proposes modifications to the internal models
methodology.
---------------------------------------------------------------------------
[[Page 52913]]
Although the internal models methodology is not part of this
proposal, the Basel standardized approach does incorporate an internal
models methodology for credit risk mitigants. Therefore, the agencies
are considering whether to implement the internal models methodology in
a final rule consistent with the requirements in the advanced
approaches rule as modified by the companion NPR.
Question 15: The agencies request comment on the appropriateness of
including the internal models methodology for calculating exposure
amounts for OTC derivatives, eligible margin loans, repo-style
transactions and cleared transactions for all banking organizations.
For purposes of reviewing the internal models methodology in the
advanced approaches rule, commenters should substitute the term
``exposure amount'' for the term ``exposure at default'' and ``EAD''
each time these terms appear in the advanced approaches rule.)
G. Unsettled Transactions
In this NPR, the agencies propose to provide for a separate risk-
based capital requirement for transactions involving securities,
foreign exchange instruments, and commodities that have a risk of
delayed settlement or delivery. The proposed capital requirement would
not, however, apply to certain types of transactions, including: (1)
Cleared transactions that are marked-to-market daily and subject to
daily receipt and payment of variation margin; (2) repo-style
transactions, including unsettled repo-style transactions; (3) one-way
cash payments on OTC derivative contracts; or (4) transactions with a
contractual settlement period that is longer than the normal settlement
period (which the proposal defines as the lesser of the market standard
for the particular instrument or five business days).\55\ Under the
proposal, in the case of a system-wide failure of a settlement,
clearing system, or central counterparty, the banking organization's
primary federal supervisor may waive risk-based capital requirements
for unsettled and failed transactions until the situation is rectified.
---------------------------------------------------------------------------
\55\ Such transactions would be treated as derivative contracts
as provided in section 34 or section 35 of the proposal.
---------------------------------------------------------------------------
This NPR proposes separate treatments for delivery-versus-payment
(DvP) and payment-versus-payment (PvP) transactions with a normal
settlement period, and non-DvP/non-PvP transactions with a normal
settlement period. A DvP transaction would refer to a securities or
commodities transaction in which the buyer is obligated to make payment
only if the seller has made delivery of the securities or commodities
and the seller is obligated to deliver the securities or commodities
only if the buyer has made payment. A PvP transaction would mean a
foreign exchange transaction in which each counterparty is obligated to
make a final transfer of one or more currencies only if the other
counterparty has made a final transfer of one or more currencies. A
transaction would be considered to have a normal settlement period if
the contractual settlement period for the transaction is equal to or
less than the market standard for the instrument underlying the
transaction and equal to or less than five business days.
A banking organization would be required to hold risk-based capital
against a DvP or PvP transaction with a normal settlement period if the
banking organization's counterparty has not made delivery or payment
within five business days after the settlement date. The banking
organization would determine its risk-weighted asset amount for such a
transaction by multiplying the positive current exposure of the
transaction for the banking organization by the appropriate risk weight
in table 8. The positive current exposure from an unsettled transaction
of a banking organization would be the difference between the
transaction value at the agreed settlement price and the current market
price of the transaction, if the difference results in a credit
exposure of the banking organization to the counterparty.
Table 8--Proposed Risk Weights for Unsettled DvP and PvP Transactions
------------------------------------------------------------------------
Risk weight to be
applied to
Number of business days after contractual settlement positive current
date exposure (in
percent)
------------------------------------------------------------------------
From 5 to 15......................................... 100.0
From 16 to 30........................................ 625.0
From 31 to 45........................................ 937.5
46 or more........................................... 1,250.0
------------------------------------------------------------------------
A banking organization would hold risk-based capital against any
non-DvP/non-PvP transaction with a normal settlement period if the
banking organization delivered cash, securities, commodities, or
currencies to its counterparty but has not received its corresponding
deliverables by the end of the same business day. The banking
organization would continue to hold risk-based capital against the
transaction until it has received the corresponding deliverables. From
the business day after the banking organization has made its delivery
until five business days after the counterparty delivery is due, the
banking organization would calculate the risk-weighted asset amount for
the transaction by risk weighting the current market value of the
deliverables owed to the banking organization, using the risk weight
appropriate for an exposure to the counterparty in accordance with
section 32. If a banking organization has not received its deliverables
by the fifth business day after the counterparty delivery due date, the
banking organization would assign a 1,250 percent risk weight to the
current market value of the deliverables owed.
Question 16: Are there other transactions with a CCP that the
agencies should consider excluding from the treatment for unsettled
transactions? If so, what are the specific transaction types that
should be excluded and why would exclusion be appropriate?
H. Risk-weighted Assets for Securitization Exposures
Under the general risk-based capital rules, a banking organization
may use external ratings issued by NRSROs to assign risk weights to
certain recourse obligations, residual interests, direct credit
substitutes, and asset- and mortgage-backed securities. Such exposures
to securitization transactions may also be subject to capital
requirements that can result in effective risk weights of 1,250
percent, or a dollar-for-dollar capital requirement. A banking
organization must deduct certain credit-enhancing interest-only strips
(CEIOs) from tier 1 capital.\56\ In this NPR, the agencies are updating
the terminology of the securitization framework and proposing a broader
definition of a securitization exposure to encompass a wider range of
exposures with similar risk characteristics.
---------------------------------------------------------------------------
\56\ See 12 CFR part 3, appendix A, section 4 and 12 CFR 167.12
(OCC); 12 CFR parts 208 and 225 appendix A, section III.B.3 (Board);
12 CFR part 325, appendix A section II.B.1 and 12 CFR 390.471
(FDIC). The agencies also have published a significant amount of
supervisory guidance to assist banking organizations with the
capital treatment of securitization exposures. In general, the
agencies expect banking organizations to continue to use this
guidance, most of which would remain applicable to the
securitization framework proposed in this NPR.
---------------------------------------------------------------------------
As noted in the introduction section of this preamble, the Basel
capital framework has maintained the use and reliance on credit ratings
in the
[[Page 52914]]
securitization framework. In accordance with the Dodd-Frank Act
requirement to remove references to and reliance on credit ratings, the
agencies have developed alternative standards of creditworthiness for
use in the securitization framework that, where possible and to the
extent appropriate, have been designed to be similar to the
requirements prescribed by the BCBS. These proposed alternative
standards are also consistent with those incorporated into the market
risk capital rules, under the agencies' final rule.\57\
---------------------------------------------------------------------------
\57\ See ``Risk-Based Capital Guidelines: Market Risk,'' June 7,
2012 (Federal Register publication forthcoming).
---------------------------------------------------------------------------
1. Overview of the Securitization Framework and Definitions
The proposed securitization framework is designed to address the
credit risk of exposures that involve the tranching of the credit risk
of one or more underlying financial exposures. The agencies believe
that requiring all or substantially all of the underlying exposures of
a securitization be financial exposures creates an important boundary
between the general credit risk framework and the securitization
framework. Examples of financial exposures include loans, commitments,
credit derivatives, guarantees, receivables, asset-backed securities,
mortgage-backed securities, other debt securities, or equity
securities. Based on their cash flow characteristics, for purposes of
this proposal, the agencies also would consider asset classes such as
lease residuals and entertainment royalties to be financial assets.
The securitization framework is designed to address the tranching
of the credit risk of financial exposures and is not designed, for
example, to apply to tranched credit exposures to commercial or
industrial companies or nonfinancial assets. Accordingly, under this
NPR, a specialized loan to finance the construction or acquisition of
large-scale projects (for example, airports or power plants), objects
(for example, ships, aircraft, or satellites), or commodities (for
example, reserves, inventories, precious metals, oil, or natural gas)
generally would not be a securitization exposure because the assets
backing the loan typically are nonfinancial assets (the facility,
object, or commodity being financed).
Proposed definition of securitization exposure would include on- or
off-balance sheet credit exposure (including credit-enhancing
representations and warranties) that arises from a traditional or
synthetic securitization (including a resecuritization), or an exposure
that directly or indirectly references a securitization exposure. A
traditional securitization means a transaction in which credit risk has
been transferred to one or more third parties, the credit risk
associated with the underlying exposures has been separated into at
least two tranches reflecting different levels of seniority, and
certain other conditions are met, such as a measurement that all or
substantially all of the underlying exposures are financial exposures.
See the definition of ``traditional securitization'' in section 2 of
the proposed rules in the related notice titled ``Regulatory Capital
Rules: Regulatory Capital, Implementation of Basel III, Minimum
Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and
Prompt Corrective Action.''
Paragraph (10) of the proposed definition would specifically
exclude from the definition exposures to investment funds (as defined
in the proposal) and collective investment and pension funds (as
defined in relevant regulations and set forth in the proposed
definition of ``traditional securitization''). These specific
exemptions provided in paragraph (10) serve to narrow the potential
scope of the securitization framework. Investment funds, collective
investment funds, pension funds regulated under ERISA and their foreign
equivalents, and transactions regulated under the Investment Company
Act of 1940 and their foreign equivalents are exempted from the
definition because these entities and transactions are tightly
regulated and subject to strict leverage requirements. For purposes of
this proposal, an investment fund is a company (1) where all or
substantially all of the assets of the fund are financial assets; and
(2) that has no material liabilities. In addition, the agencies believe
that the capital requirements for an extension of credit to, or an
equity holding in these transactions are more appropriately calculated
under the rules for corporate and equity exposures, and that the
securitization framework was not intended to apply to such
transactions.
Under the proposal, an operating company would not fall under the
definition of a traditional securitization (even if substantially all
of its assets are financial exposures). For purposes of the proposed
definition of a traditional securitization, operating companies
generally would refer to companies that are set up to conduct business
with clients with the intention of earning a profit in their own right
and generally produce goods or provide services beyond the business of
investing, reinvesting, holding, or trading in financial assets.
Accordingly, an equity investment in an operating company, such as a
banking organization, generally would be an equity exposure under the
proposal. In addition, investment firms that generally do not produce
goods or provide services beyond the business of investing,
reinvesting, holding, or trading in financial assets, would not be
operating companies for purposes of this proposal and would not qualify
for this general exclusion from the definition of traditional
securitization.
To address the treatment of investment firms, the primary federal
supervisor of a banking organization, under paragraph (8) of the
definition of traditional securitization, would have discretion to
exclude from the definition of a traditional securitization those
transactions in which the underlying exposures are owned by an
investment firm that exercise substantially unfettered control over the
size and composition of its assets, liabilities, and off-balance sheet
exposures. The agencies would consider a number of factors in the
exercise of this discretion, including the assessment of the
transaction's leverage, risk profile, and economic substance. This
supervisory exclusion would give the primary federal supervisor
discretion to distinguish structured finance transactions, to which the
securitization framework was designed to apply, from those of flexible
investment firms such as certain hedge funds and private equity funds.
Only investment firms that can easily change the size and composition
of their capital structure, as well as the size and composition of
their assets and off-balance sheet exposures, would be eligible for the
exclusion from the definition of traditional securitization under this
provision. The agencies do not consider managed collateralized debt
obligation vehicles, structured investment vehicles, and similar
structures, which allow considerable management discretion regarding
asset composition but are subject to substantial restrictions regarding
capital structure, to have substantially unfettered control. Thus, such
transactions would meet the definition of traditional securitization.
The agencies are concerned that the line between securitization
exposures and non-securitization exposures may be difficult to draw in
some circumstances. In addition to the supervisory exclusion from the
definition of traditional securitization described above, the primary
federal supervisor may scope certain transactions into the
securitization
[[Page 52915]]
framework if justified by the economics of the transaction. Similar to
the analysis for excluding an investment firm from treatment as a
traditional securitization, the agencies would consider the economic
substance, leverage, and risk profile of transactions to ensure that
the appropriate risk-based capital treatment. The agencies would
consider a number of factors when assessing the economic substance of a
transaction including, for example, the amount of equity in the
structure, overall leverage (whether on- or off-balance sheet), whether
redemption rights attach to the equity investor, and the ability of the
junior tranches to absorb losses without interrupting contractual
payments to more senior tranches.
Both the designation of exposures as securitization (or
resecuritization) exposures and the calculation of risk-based capital
requirements for securitization exposures would be guided by the
economic substance of a transaction rather than its legal form.
Provided there is a tranching of credit risk, securitization exposures
could include, among other things, asset-backed and mortgage-backed
securities, loans, lines of credit, liquidity facilities, financial
standby letters of credit, credit derivatives and guarantees, loan
servicing assets, servicer cash advance facilities, reserve accounts,
credit-enhancing representations and warranties, and CEIOs.
Securitization exposures also could include assets sold with retained
tranches. Mortgage-backed pass-through securities (for example, those
guaranteed by FHLMC or FNMA) do not meet the proposed definition of a
securitization exposure because they do not involve a tranching of
credit risk. Only those mortgage-backed securities that involve
tranching of credit risk would be securitization exposures.
Under the proposal, a synthetic securitization would mean a
transaction in which: (1) All or a portion of the credit risk of one or
more underlying exposures is transferred to one or more third parties
through the use of one or more credit derivatives or guarantees (other
than a guarantee that transfers only the credit risk of an individual
retail exposure); (2) the credit risk associated with the underlying
exposures has been separated into at least two tranches reflecting
different levels of seniority; (3) performance of the securitization
exposures depends upon the performance of the underlying exposures; and
(4) all or substantially all of the underlying exposures are financial
exposures (such as loans, commitments, credit derivatives, guarantees,
receivables, asset-backed securities, mortgage-backed securities, other
debt securities, or equity securities).
Consistent with 2009 Enhancements, this NPR would define a
resecuritization exposure as an on- or off-balance sheet exposure to a
resecuritization; or an exposure that directly or indirectly references
a resecuritization exposure. An exposure to an asset-backed commercial
paper program (ABCP) would not be a resecuritization exposure if
either: (1) The program-wide credit enhancement does not meet the
definition of a resecuritization exposure; or (2) the entity sponsoring
the program fully supports the commercial paper through the provision
of liquidity so that the commercial paper holders effectively are
exposed to the default risk of the sponsor instead of the underlying
exposures. A resecuritization would mean a securitization in which one
or more of the underlying exposures is a securitization exposure. If a
transaction involves a traditional multi-seller ABCP, also discussed in
more detail below, a banking organization would need to determine
whether the transaction should be considered a resecuritization
exposure. For example, assume that an ABCP conduit acquires
securitization exposures where the underlying assets consist of
wholesale loans and no securitization exposures. As is typically the
case in multi-seller ABCP conduits, each seller provides first-loss
protection by over-collateralizing the conduit to which it sells its
loans. To ensure that the commercial paper issued by each conduit is
highly-rated, a banking organization sponsor provides either a pool-
specific liquidity facility or a program-wide credit enhancement such
as a guarantee to cover a portion of the losses above the seller-
provided protection.
The pool-specific liquidity facility generally would not be treated
as a resecuritization exposure under this proposal because the pool-
specific liquidity facility represents a tranche of a single asset pool
(that is, the applicable pool of wholesale exposures), which contains
no securitization exposures. However, a sponsor's program-wide credit
enhancement that does not cover all losses above the seller-provided
credit enhancement across the various pools generally would constitute
tranching of risk of a pool of multiple assets containing at least one
securitization exposure, and therefore would be treated as a
resecuritization exposure.
In addition, if the conduit in this example funds itself entirely
with a single class of commercial paper, then the commercial paper
generally would not be considered a resecuritization exposure if either
(1) the program-wide credit enhancement did not meet the proposed
definition of a resecuritization exposure or (2) the commercial paper
was fully supported by the sponsoring banking organization. When the
sponsoring banking organization fully supports the commercial paper,
the commercial paper holders effectively would be exposed to default
risk of the sponsor instead of the underlying exposures, and the
external rating of the commercial paper would be expected to be based
primarily on the credit quality of the banking organization sponsor,
thus ensuring that the commercial paper does not represent a tranched
risk position.
2. Operational Requirements
a. Due Diligence Requirements
During the recent financial crisis, it became apparent that many
banking organizations relied exclusively on NRSRO ratings and did not
perform their own credit analysis of the securitization exposures.
Accordingly, and consistent with the Basel capital framework, banking
organizations would be required under the proposal to satisfy specific
due diligence requirements for securitization exposures. Specifically,
a banking organization would be required to demonstrate, to the
satisfaction of its primary federal supervisor, a comprehensive
understanding of the features of a securitization exposure that would
materially affect the performance of the exposure. The banking
organization's analysis would be required to be commensurate with the
complexity of the exposure and the materiality of the exposure in
relation to capital. If the banking organization is not able to
demonstrate a comprehensive understanding of a securitization exposure
to the satisfaction of its primary federal supervisor, the banking
organization would be required to assign a risk weight of 1,250 percent
to the exposure.
Under the proposal, to demonstrate a comprehensive understanding of
a securitization exposure a banking organization would have to conduct
and document an analysis of the risk characteristics of the exposure
prior to acquisition and periodically thereafter. This analysis would
consider:
(1) Structural features of the securitization that would materially
impact the performance of the exposure, for example, the contractual
cash flow waterfall, waterfall-related triggers, credit enhancements,
liquidity
[[Page 52916]]
enhancements, market value triggers, the performance of organizations
that service the position, and deal-specific definitions of default;
(2) Relevant information regarding the performance of the
underlying credit exposure(s), for example, the percentage of loans 30,
60, and 90 days past due; default rates; prepayment rates; loans in
foreclosure; property types; occupancy; average credit score or other
measures of creditworthiness; average LTV ratio; and industry and
geographic diversification data on the underlying exposure(s);
(3) Relevant market data of the securitization, for example, bid-
ask spread, most recent sales price and historical price volatility,
trading volume, implied market rating, and size, depth and
concentration level of the market for the securitization; and
(4) For resecuritization exposures, performance information on the
underlying securitization exposures, for example, the issuer name and
credit quality, and the characteristics and performance of the
exposures underlying the securitization exposures.
On an ongoing basis (no less frequently than quarterly), a banking
organization would be required to evaluate, review, and update as
appropriate the analysis required under section 41(c)(1) for each
securitization exposure.
Question 17: What, if any, are specific challenges that are
involved with meeting the proposed due diligence requirements and for
what types of securitization exposures? How might the agencies address
these challenges while ensuring that a banking organization conducts an
appropriate level of due diligence commensurate with the risks of its
exposures?
b. Operational Requirements for Traditional Securitizations
In a traditional securitization, an originating banking
organization typically transfers a portion of the credit risk of
exposures to third parties by selling them to a securitization special
purpose entity (SPE) (as defined in the proposal).\58\ Under this NPR,
a banking organization would be an originating banking organization if
it: (1) Directly or indirectly originated or securitized the underlying
exposures included in the securitization; or (2) serves as an ABCP
program sponsor to the securitization.
---------------------------------------------------------------------------
\58\ The proposal would define a securitization SPE as a
corporation, trust, or other entity organized for the specific
purpose of holding underlying exposures of a securitization, the
activities of which are limited to those appropriate to accomplish
this purpose, and the structure of which is intended to isolate the
underlying exposures held by the entity from the credit risk of the
seller of the underlying exposures to the entity.
---------------------------------------------------------------------------
Under the proposal, a banking organization that transfers exposures
it has originated or purchased to a securitization SPE or other third
party in connection with a traditional securitization may exclude the
underlying exposures from the calculation of risk-weighted assets only
if each of the following conditions are met: (1) The exposures are not
reported on the banking organization's consolidated balance sheet under
GAAP; (2) the banking organization has transferred to one or more third
parties credit risk associated with the underlying exposures; and (3)
any clean-up calls relating to the securitization are eligible clean-up
calls (as discussed below). An originating banking organization that
meets these conditions would hold risk-based capital against any
securitization exposures it retains in connection with the
securitization. An originating banking organization that fails to meet
these conditions would be required to hold risk-based capital against
the transferred exposures as if they had not been securitized and would
deduct from common equity tier 1 capital any after-tax gain-on-sale
resulting from the transaction.
In addition, if a securitization includes one or more underlying
exposures in which (1) the borrower is permitted to vary the drawn
amount within an agreed limit under a line of credit, and (2) contains
an early amortization provision, the originating banking organization
would be required to hold risk-based capital against the transferred
exposures as if they had not been securitized and deduct from common
equity tier 1 capital any after-tax gain-on-sale resulting from the
transaction.\59\ The agencies believe that this treatment is
appropriate given the lack of risk transference in securitizations that
contain early amortization provisions.
---------------------------------------------------------------------------
\59\ Many securitizations of revolving credit facilities (for
example, credit card receivables) contain provisions that require
the securitization to be wound down and investors to be repaid if
the excess spread falls below a certain threshold. This decrease in
excess spread may, in some cases, be caused by deterioration in the
credit quality of the underlying exposures. An early amortization
event can increase a banking organization's capital needs if new
draws on the revolving credit facilities need to be financed by the
banking organization using on-balance sheet sources of funding. The
payment allocations used to distribute principal and finance charge
collections during the amortization phase of these transactions also
can expose a banking organization to a greater risk of loss than in
other securitization transactions. The proposed rule would define
early amortization as a provision in a securitization's governing
documentation that, when triggered, causes investors in the
securitization exposures to be repaid before the original stated
maturity of the securitization exposure, unless the provision is
solely triggered by events not related to the performance of the
underlying exposures or the originating banking organization (such
as material changes in tax laws or regulations).
---------------------------------------------------------------------------
c. Operational Requirements for Synthetic Securitizations
In general, the proposal's treatment of synthetic securitizations
is similar to that of traditional securitizations. The operational
requirements for synthetic securitizations, however, are more rigorous
to ensure that the originating banking organization has truly
transferred credit risk of the underlying exposures to one or more
third parties.
For synthetic securitizations, an originating banking organization
would recognize for risk-based capital purposes the use of a credit
risk mitigant to hedge underlying exposures only if each of the
conditions in the proposed definition of ``synthetic securitization''
is satisfied. These conditions include requirements with respect to the
type and contractual governance of the credit risk mitigant used in the
transaction. For example, the credit risk associated with the
underlying exposures must be separated into at least two tranches
reflecting different levels of seniority and all or substantially all
of the underlying exposures are financial exposures. See the definition
of ``synthetic securitization'' in section 2 of the proposed rules in
the related notice titled ``Regulatory Capital Rules: Regulatory
Capital, Implementation of Basel III, Minimum Regulatory Capital
Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective
Action.''
Failure to meet these operational requirements for a synthetic
securitization would prevent a banking organization from using the
proposed securitization framework and would require the banking
organization to hold risk-based capital against the underlying
exposures as if they had not been synthetically securitized. A banking
organization that provides credit protection to a synthetic
securitization would use the securitization framework to compute risk-
based capital requirements for its exposures to the synthetic
securitization even if the originating banking organization failed to
meet one or more of the operational requirements for a synthetic
securitization.
[[Page 52917]]
d. Clean-Up Calls
To satisfy the operational requirements for securitizations and
enable an originating banking organization to exclude the underlying
exposures from the calculation of its risk-based capital requirements,
any clean-up call associated with a securitization would need to be an
eligible clean-up call. The proposal would define a clean-up call as a
contractual provision that permits an originating banking organization
or servicer to call securitization exposures before their stated
maturity or call date. In the case of a traditional securitization, a
clean-up call generally is accomplished by repurchasing the remaining
securitization exposures once the amount of underlying exposures or
outstanding securitization exposures falls below a specified level. In
the case of a synthetic securitization, the clean-up call may take the
form of a clause that extinguishes the credit protection once the
amount of underlying exposures has fallen below a specified level.
Under the proposal, an eligible clean-up call would be a clean-up
call that (1) Is exercisable solely at the discretion of the
originating banking organization or servicer; (2) is not structured to
avoid allocating losses to securitization exposures held by investors
or otherwise structured to provide credit enhancement to the
securitization (for example, to purchase non-performing underlying
exposures); and (3) for a traditional securitization, is only
exercisable when 10 percent or less of the principal amount of the
underlying exposures or securitization exposures (determined as of the
inception of the securitization) is outstanding; or, for a synthetic
securitization, is only exercisable when 10 percent or less of the
principal amount of the reference portfolio of underlying exposures
(determined as of the inception of the securitization) is outstanding.
Where a securitization SPE is structured as a master trust, a clean-up
call with respect to a particular series or tranche issued by the
master trust would meet criteria (3) of the definition of ``eligible
clean-up call'' as long as the outstanding principal amount in that
series was 10 percent or less of its original amount at the inception
of the series.
3. Risk-weighted Asset Amounts for Securitization Exposures
Under the proposed securitization framework, a banking organization
generally would calculate a risk-weighted asset amount for a
securitization exposure by applying either (1) the simplified
supervisory formula approach (SSFA), described in section II.H.4 of
this preamble, or (2) for banking organizations that are not subject to
the market risk rule, a gross-up approach similar to an approach
provided under the general risk-based capital rules. A banking
organization would be required to apply either the gross-up approach or
the SSFA consistently across all of its securitization exposures.
Alternatively, a banking organization may choose to apply a 1,250
percent risk weight to any of its securitization exposures. In
addition, the proposal provides for alternative treatment of
securitization exposures to ABCP liquidity facilities and certain
gains-on-sales and CEIO exposures. The proposed requirements, similar
to the general risk-based capital rules, would include exceptions for
interest-only mortgage-backed securities, certain statutorily exempted
assets, and certain derivatives as described below. In all cases, the
minimum risk weight for securitization exposures would be 20 percent.
For synthetic securitizations, which typically employ credit
derivatives, a banking organization would apply the securitization
framework when calculating risk-based capital requirements. Under this
NPR, a banking organization may use the securitization CRM rules to
adjust the capital requirement under the securitization framework for
an exposure to reflect the CRM technique used in the transaction.
a. Exposure Amount of a Securitization Exposure
Under this proposal, the exposure amount of an on-balance sheet
securitization exposure that is not a repo-style transaction, eligible
margin loan, OTC derivative contract or derivative that is a cleared
transaction (other than a credit derivative) would be the banking
organization's carrying value of the exposure. The exposure amount of
an off-balance sheet securitization exposure that is not an eligible
ABCP liquidity facility, a repo-style transaction, eligible margin
loan, an OTC derivative contract, or a derivative that is a cleared
transaction (other than a credit derivative) would be the notional
amount of the exposure.
For purposes of calculating the exposure amount of off-balance
sheet exposure to an ABCP securitization exposure, such as a liquidity
facility, the notional amount may be reduced to the maximum potential
amount that the banking organization could be required to fund given
the ABCP program's current underlying assets (calculated without regard
to the current credit quality of those assets). Thus, if $100 is the
maximum amount that could be drawn given the current volume and current
credit quality of the program's assets, but the maximum potential draw
against these same assets could increase to as much as $200 under some
scenarios if their credit quality were to deteriorate, then the
exposure amount is $200. This NPR would define an ABCP program as a
program established primarily for the purpose of issuing commercial
paper that is investment grade and backed by underlying exposures held
in a securitization SPE. An eligible ABCP liquidity facility would be
defined as a liquidity facility supporting ABCP, in form or in
substance, that is subject to an asset quality test at the time of draw
that precludes funding against assets that are 90 days or more past due
or in default. Notwithstanding these eligibility requirements, a
liquidity facility would be an eligible ABCP liquidity facility if the
assets or exposures funded under the liquidity facility that do not
meet the eligibility requirements are guaranteed by a sovereign entity
that qualifies for a 20 percent risk weight or lower.
The exposure amount of an eligible ABCP liquidity facility that is
subject to the SSFA would be the notional amount of the exposure
multiplied by a 100 percent CCF. The exposure amount of an eligible
ABCP liquidity facility that is not subject to the SSFA would be the
notional amount of the exposure multiplied by a 50 percent CCF. The
proposed CCF for eligible ABCP liquidity facilities with an original
maturity of less than one year is greater than the 10 percent CCF
prescribed under the general risk-based capital rules.
The exposure amount of a securitization exposure that is a repo-
style transaction, eligible margin loan, an OTC derivative or
derivative that is a cleared transaction (other than a credit
derivative) would be the exposure amount of the transaction as
calculated in section 34 or section 37 as applicable.
b. Gains-On-Sale and Credit-Enhancing Interest-Only Strips
Under this NPR and the Basel III NPR, a banking organization would
deduct from common equity tier 1 capital any after-tax gain-on-sale
resulting from a securitization and would apply a 1,250 percent risk
weight to the portion of a credit-enhancing interest-only strip (CEIO)
that does not constitute an after-tax gain-on-sale. The agencies
believe this treatment is appropriate given historical supervisory
concerns with the
[[Page 52918]]
subjectivity involved in valuations of gains-on-sale and CEIOs.
Furthermore, although the treatments for gains-on-sale and CEIOs can
increase an originating banking organization's risk-based capital
requirement following a securitization, the agencies believe that such
anomalies would be rare where a securitization transfers significant
credit risk from the originating banking organization to third parties.
c. Exceptions Under the Securitization Framework
There are several exceptions to the general provisions in the
securitization framework that parallel the general risk-based capital
rules. First, a banking organization would be required to assign a risk
weight of at least 100 percent to an interest-only mortgage-backed
security. The agencies believe that a minimum risk weight of 100
percent is prudent in light of the uncertainty implied by the
substantial price volatility of these securities. Second, as required
by federal statute, a special set of rules would continue to apply to
securitizations of small-business loans and leases on personal property
transferred with retained contractual exposure by well-capitalized
depository institutions.\60\ Finally, under this NPR, if a
securitization exposure is an OTC derivative contract or derivative
contract that is a cleared transaction (other than a credit derivative)
that has a first priority claim on the cash flows from the underlying
exposures (notwithstanding amounts due under interest rate or currency
derivative contracts, fees due, or other similar payments), a banking
organization may choose to set the risk-weighted asset amount of the
exposure equal to the amount of the exposure. This treatment would be
subject to supervisory approval.
---------------------------------------------------------------------------
\60\ See 12 U.S.C. 1835. This provision places a cap on the
risk-based capital requirement applicable to a well-capitalized
depository institution that transfers small-business loans with
recourse. This NPR does not expressly provide that the agencies may
permit adequately capitalized banking organizations to use the small
business recourse rule on a case-by-case basis because the agencies
may make such a determination under the general reservation of
authority in section 1 of the proposal.
---------------------------------------------------------------------------
d. Overlapping Exposures
This NPR includes provisions to limit the double counting of risks
in situations involving overlapping securitization exposures. If a
banking organization has multiple securitization exposures that provide
duplicative coverage to the underlying exposures of a securitization
(such as when a banking organization provides a program-wide credit
enhancement and multiple pool-specific liquidity facilities to an ABCP
program), the banking organization would not be required to hold
duplicative risk-based capital against the overlapping position.
Instead, the banking organization would apply to the overlapping
position the applicable risk-based capital treatment under the
securitization framework that results in the highest risk-based capital
requirement.
e. Servicer Cash Advances
A traditional securitization typically employs a servicing banking
organization that, on a day-to-day basis, collects principal, interest,
and other payments from the underlying exposures of the securitization
and forwards such payments to the securitization SPE or to investors in
the securitization. Servicing banking organizations often provide a
facility to the securitization under which the servicing banking
organization may advance cash to ensure an uninterrupted flow of
payments to investors in the securitization, including advances made to
cover foreclosure costs or other expenses to facilitate the timely
collection of the underlying exposures. These servicer cash advance
facilities are securitization exposures.
A banking organization would either apply the SSFA or the gross-up
approach, as described below, or a 1,250 percent risk weight to its
exposure under the facility. The treatment of the undrawn portion of
the facility would depend on whether the facility is an eligible
servicer cash advance facility. An eligible servicer cash advance
facility would be defined as a servicer cash advance facility in which:
(1) The servicer is entitled to full reimbursement of advances, except
that a servicer may be obligated to make non-reimbursable advances for
a particular underlying exposure if any such advance is contractually
limited to an insignificant amount of the outstanding principal balance
of that exposure; (2) the servicer's right to reimbursement is senior
in right of payment to all other claims on the cash flows from the
underlying exposures of the securitization; and (3) the servicer has no
legal obligation to, and does not make, advances to the securitization
if the servicer concludes the advances are unlikely to be repaid.
Consistent with the general risk-based capital rules with respect
to the treatment of residential mortgage servicer cash advances, a
servicing banking organization would not be required to hold risk-based
capital against the undrawn portion of an eligible servicer cash
advance facility. A banking organization that provides a non-eligible
servicer cash advance facility would determine its risk-based capital
requirement for the notional amount of the undrawn portion of the
facility in the same manner as the banking organization would determine
its risk-based capital requirement for any other off-balance sheet
securitization exposure.
f. Implicit Support
This NPR specifies consequence for a banking organization's risk-
based capital requirements if the banking organization provides support
to a securitization in excess of the banking organization's
predetermined contractual obligation (implicit support). First, similar
to the general risk-based capital rules, a banking organization that
provides such implicit support would include in risk-weighted assets
all of the underlying exposures associated with the securitization as
if the exposures had not been securitized, and deduct from common
equity tier 1 capital any after-tax gain-on-sale resulting from the
securitization.\61\ Second, the banking organization would disclose
publicly (i) that it has provided implicit support to the
securitization, and (ii) the risk-based capital impact to the banking
organization of providing such implicit support. Under the proposed
reservations of authority, the banking organization's primary federal
supervisor also could require the banking organization to hold risk-
based capital against all the underlying exposures associated with some
or all the banking organization's other securitizations as if the
exposures had not been securitized, and to deduct from common equity
tier 1 capital any after-tax gain-on-sale resulting from such
securitizations.
---------------------------------------------------------------------------
\61\ ``Interagency Guidance on Implicit Recourse in Asset
Securitizations,'' (May 23, 2002). OCC Bulletin 2002-20; CEO Memo
No. 162 (OCC); SR letter 02-15 (Board); and FIL-52-2002 (FDIC).
---------------------------------------------------------------------------
4. Simplified Supervisory Formula Approach
For purposes of this proposal, and consistent with the approach
provided for assigning specific risk-weighting factors to
securitization exposures under subpart F, the agencies have developed a
simplified version of the advanced approaches supervisory formula
approach (SFA to assign risk weights to securitization exposures.\62\
This
[[Page 52919]]
approach is referred to as the simplified supervisory formula approach
(SSFA. Banking organizations may choose to use the alternative gross-up
approach described in section II.5 below, provided that it applies the
gross-up approach to all of its securitization exposures.
---------------------------------------------------------------------------
\62\ When using the SFA, a banking organization must meet
minimum requirements under the Basel internal ratings-based approach
to estimate probability of default and loss given default for the
underlying exposures. Under the agencies' current risk-based capital
rules, the SFA is available only to banking organizations that have
been approved to use the advanced approaches.
---------------------------------------------------------------------------
Similar to the SFA under the advanced approaches rule, the proposed
SSFA is a formula that starts with a baseline derived from the capital
requirements that apply to all exposures underlying a securitization
and then assigns risk weights based on the subordination level of an
exposure. The proposed SSFA was designed to apply relatively higher
capital requirements to the more risky junior tranches of a
securitization that are the first to absorb losses, and relatively
lower requirements to the most senior exposures.
The SSFA methodology begins with ``KG'' the weighted-
average risk weight of the underlying exposures, calculated using the
risk-weighted asset amounts in the standardized approach of subpart D,
as proposed in this NPR. In addition, the SSFA also uses the attachment
and detachment points of the particular securitization positions, and
the current amount of delinquencies within the underlying exposures of
the securitization. In terms of enhancements, the agencies note that
the relative seniority of the exposure, as well as all cash funded
enhancements, are recognized as part of the SSFA calculation.
The SSFA as proposed would apply a 1,250 percent risk weight to
securitization exposures that absorb losses up to the amount of capital
that would be required for the underlying exposures under subpart D had
those exposures been held directly by a banking organization. In
addition, agencies are proposing a supervisory risk-weight floor or
minimum risk-weight for a given securitization of 20 percent. The
agencies believe that a 20 percent floor is reasonably prudent given
recent performance of securitization structures during times of stress,
and will maintain this floor in the final rule.
At the inception of a securitization, the SSFA as proposed would
require more capital on a transaction-wide basis than would be required
if the pool of assets had not been securitized. That is, if the banking
organization held every tranche of a securitization, its overall
capital charge would be greater than if the banking organization held
the underlying assets in portfolio. The agencies believe this overall
outcome is important in reducing the likelihood of regulatory capital
arbitrage through securitizations.
To make the SSFA risk-sensitive and forward-looking, the agencies
are proposing to adjust KG based on delinquencies among the
underlying assets of the securitization structure. Specifically, the
parameter KG is modified and the resulting adjusted
parameter is labeled KA. KA is set equal to the
weighted average of the KG value and a fixed parameter equal
to 0.5.
[GRAPHIC] [TIFF OMITTED] TP30AU12.007
KG would be the weighted-average total capital
requirement of the underlying exposures, calculated using the
standardized risk weighting methodologies in subpart D, as proposed in
this NPR. The agencies believe it is important to calibrate risk
weights for securitization exposures around the risk associated with
the underlying assets of the securitization in this proposal, in order
to reduce complexity and promote consistency between the different
frameworks for calculating risk-weighted asset amounts in the
standardized approach.
[GRAPHIC] [TIFF OMITTED] TP30AU12.008
The agencies believe that, with the delinquent exposure calibration
parameter set equal to 0.5, the overall capital requirement would be
sufficiently responsive and prudent to ensure sufficient capital for
pools that demonstrate credit weakness. The entire specification of the
SSFA in the final rule is as follows:
[GRAPHIC] [TIFF OMITTED] TP30AU12.009
[[Page 52920]]
[GRAPHIC] [TIFF OMITTED] TP30AU12.010
[[Page 52921]]
[GRAPHIC] [TIFF OMITTED] TP30AU12.011
[[Page 52922]]
[GRAPHIC] [TIFF OMITTED] TP30AU12.036
Substituting this value into the equation yields:
[GRAPHIC] [TIFF OMITTED] TP30AU12.037
5. Gross-up Approach
As an alternative to the SSFA, banking organizations that are not
subject to subpart F may assign risk-based capital requirements to
securitization exposures by implementing a gross-up approach described
in section 43 of the proposal, which is similar to an approach provided
under the general risk-based capital rules. If the banking organization
chooses to apply the gross-up approach, it would be required to apply
this approach to all of its securitization exposures, except as
otherwise provided for certain securitization exposures under sections
44 and 45 of the proposal.
The gross-up approach assigns risk-based capital requirements based
on the full amount of the credit-enhanced assets for which the banking
organization directly or indirectly assumes credit risk. To calculate
risk-weighted assets under the gross-up approach, a banking
organization would determine four inputs: the pro rata share, the
exposure amount, the enhanced amount, and the applicable risk weight.
The pro rata share is the par value of the banking organization's
exposure as a percentage of the par value of the tranche in which the
securitization exposure resides. The enhanced amount is the value of
all the tranches that are more senior to the tranche in which the
exposure resides. The applicable risk weight is the weighted-average
risk weight of the underlying exposures in the securitization pool as
calculated under subpart D.
Under the gross-up approach, a banking organization would be
required to calculate the credit equivalent amount, which equals the
sum of the exposure of the banking organization's securitization
exposure and the pro rata share multiplied by the enhanced amount. To
calculate risk-weighted assets for a securitization exposure under the
gross-up approach, a banking organization would be required to assign
the applicable risk weight to the gross-up credit equivalent amount. As
noted above, in all cases, the minimum risk weight for securitization
exposures would be 20 percent.
Question 18: The agencies solicit commenters' views on the proposed
gross-up approach.
6. Alternative Treatments for Certain Types of Securitization Exposures
Under the NPR, a banking organization generally would assign a
1,250 percent risk weight to all securitization exposures to which the
banking organization does not apply the SSFA or the gross-up approach.
However, the NPR provides alternative treatments for certain types of
securitization exposures described below, provided that the banking
[[Page 52923]]
organization knows the composition of the underlying exposures at all
times:
a. Eligible ABCP Liquidity Facilities
In this NPR, consistent with the Basel capital framework, a banking
organization would be permitted to determine the exposure amount of an
eligible asset-backed commercial paper (ABCP) liquidity facility by
multiplying the exposure amount by the highest risk weight applicable
to any of the individual underlying exposures covered by the facility.
The proposal would define an eligible ABCP liquidity facility to mean a
liquidity facility supporting ABCP, in form or in substance, that is
subject to an asset quality test at the time of draw that precludes
funding against assets that are 90 days or more past due or in default.
Notwithstanding the preceding sentence, a liquidity facility is an
eligible ABCP liquidity facility if the assets or exposures funded
under the liquidity facility that do not meet the eligibility
requirements are guaranteed by a sovereign that qualifies for a 20
percent risk weight or lower.
b. A Securitization Exposures in a Second Loss Position or Better to an
ABCP Program
Under the proposal, a banking organization may determine the risk-
weighted asset amount of a securitization exposure that is in a second
loss position or better to an ABCP program by multiplying the exposure
amount by the higher of 100 percent and the highest risk weight
applicable to any of the individual underlying exposures of the ABCP
program,\63\ provided the exposure meets the following criteria:
---------------------------------------------------------------------------
\63\ The proposal would define an ABCP program as a program that
primarily issues commercial paper that is investment grade and
backed by underlying exposures held in a bankruptcy-remote manner.
---------------------------------------------------------------------------
(1) The exposure is not a first priority securitization exposure or
an eligible ABCP liquidity facility;
(2) The exposure is economically in a second loss position or
better, and the first loss position provides significant credit
protection to the second loss position;
(3) The exposure qualifies as investment grade; and
(4) The banking organization holding the exposure does not retain
or provide protection for the first-loss position.
The agencies believe that this approach, which is consistent with
the Basel capital framework, appropriately and conservatively assesses
the credit risk of non-first-loss exposures to ABCP programs.
7. Credit Risk Mitigation for Securitization Exposures
As proposed, the treatment of credit risk mitigation for
securitization exposures would differ slightly from the treatment for
other exposures. In general, to recognize the risk mitigating effects
of financial collateral or an eligible guarantee or an eligible credit
derivative from an eligible guarantor, a banking organization would use
the approaches for collateralized transactions under section 37 of the
proposal, the substitution treatment for guarantees and credit
derivatives described in section 36 of the proposal.
Under section 45 of the proposal, a banking organization would be
permitted to recognize an eligible guarantee or eligible credit
derivative only from an eligible guarantor. In addition, when an
eligible guarantee or eligible credit derivative covers multiple hedged
exposures that have different residual maturities, the banking
organization would be required to use the longest residual maturity of
any of the hedged exposures as the residual maturity of all the hedged
exposures.
8. Nth-to-default Credit Derivatives
The agencies propose that the capital requirement for protection
provided through an nth-to-default derivative be determined either by
using the SSFA, or applying a 1,250 percent risk weight. A banking
organization would determine its exposure in the nth-to-default credit
derivative as the largest notional amount of all the underlying
exposures.
When applying the SSFA, the attachment point (parameter A) is the
ratio of the sum of the notional amounts of all underlying exposures
that are subordinated to the banking organization's exposure to the
total notional amount of all underlying exposures. In the case of a
first-to-default credit derivative, there are no underlying exposures
that are subordinated to the banking organization's exposure. In the
case of a second-or-subsequent-to default credit derivative, the
smallest (n-1) underlying exposure(s) are subordinated to the banking
organization`s exposure.
Under the SSFA, the detachment point (parameter D) is the sum of
the attachment point and the ratio of the notional amount of the
banking organization's exposure to the total notional amount of the
underlying exposures. A banking organization that does not use the SSFA
to calculate a risk weight for an nth-to-default credit derivative
would assign a risk weight of 1,250 percent to the exposure.
For protection purchased through a first-to-default derivative, a
banking organization that obtains credit protection on a group of
underlying exposures through a first-to-default credit derivative that
meets the rules of recognition for guarantees and credit derivatives
under section 36(b) would determine its risk-based capital requirement
for the underlying exposures as if the banking organization
synthetically securitized the underlying exposure with the smallest
risk-weighted asset amount and had obtained no credit risk mitigant on
the other underlying exposures. A banking organization must calculate a
risk-based capital requirement for counterparty credit risk according
to section 34 for a first-to-default credit derivative that does not
meet the rules of recognition of section 36(b).
For second-or-subsequent-to default credit derivatives, a banking
organization that obtains credit protection on a group of underlying
exposures through a nth-to-default credit derivative that meets the
rules of recognition of section 36(b) (other than a first-to-default
credit derivative) may recognize the credit risk mitigation benefits of
the derivative only if the banking organization also has obtained
credit protection on the same underlying exposures in the form of
first-through-(n-1)-to-default credit derivatives; or if n-1 of the
underlying exposures have already defaulted. If a banking organization
satisfies these requirements, the banking organization would determine
its risk-based capital requirement for the underlying exposures as if
the banking organization had only synthetically securitized the
underlying exposure with the smallest risk-weighted asset amount. For a
nth-to-default credit derivative that does not meet the rules of
recognition of section 36(b), a banking organization would calculate a
risk-based capital requirement for counterparty credit risk according
to the treatment of OTC derivatives under section 34.
I. Equity Exposures
1. Introduction
Under the general risk-based capital rules, a banking organization
must deduct a portion of non-financial equity investments from tier 1
capital, based on the aggregate adjusted carrying value of all non-
financial equity investments held directly or indirectly by the banking
organization as a percentage of its tier 1 capital.\64\ For those
equity
[[Page 52924]]
exposures that are not deducted, a banking organization generally must
assign a 100 percent risk weight.
---------------------------------------------------------------------------
\64\ In contrast, the current rules for state and federal
savings associations require the deduction of most equity securities
from total capital. See 12 CFR part 167.5(c)(2)(ii) (federal savings
associations) and 12 CFR 390.465(c)(2)(ii) (state savings
associations).
---------------------------------------------------------------------------
Consistent with the Basel capital framework, in this NPR, the
agencies are proposing to require a banking organization to apply the
simple risk-weight approach (SRWA) for equity exposures that are not
exposures to an investment fund and apply certain look-through
approaches to assign risk-weighted asset amounts to equity exposures to
an investment fund. In some cases, such as equity exposures to the
Federal Home Loan Bank, the treatment under the proposal would remain
unchanged from the general risk-based capital rules. However, this NPR
introduces changes to the treatment of equity exposures, which are
consistent with the treatment for equity exposures under the advanced
approaches rule, to improve risk sensitivity of the general risk-based
capital requirements. For example, the proposal would differentiate
between publicly-traded and non-publicly-traded equity exposures, while
the general risk-based capital rules do not make such a distinction.
Under this NPR, the definition of equity exposure would include
ownership interests that are residual claims on the assets and income
of a company, unless the company is consolidated by the banking
organization under GAAP, and options and warrants for securities or
instruments that would be equity exposures. The definition would
exclude securitization exposures. Additionally. certain other criteria
would need to be met for an exposure to be an ``equity exposure,'' as
set forth in the proposed definition. See the definition of ``equity
exposure'' in section 2 of the proposed rules in the related notice
titled ``Regulatory Capital Rules: Regulatory Capital, Implementation
of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy,
Transition Provisions, and Prompt Corrective Action.''
2. Exposure Measurement
Under the proposal, a banking organization would be required to
determine the adjusted carrying value for each equity exposure based on
the approaches described below. For the on-balance sheet component of
an equity exposure, the adjusted carrying value would be a banking
organization's carrying value of the exposure. For a commitment to
acquire an equity exposure that is unconditional, the adjusted carrying
value would be the effective notional principal amount of the exposure
multiplied by a 100 percent conversion factor. For a commitment to
acquire an equity exposure that is conditional, the adjusted carrying
value would be the effective notional principal amount of the
commitment multiplied by (1) a 20 percent conversion factor, for a
commitment with an original maturity of one year or less or (2) a 50
percent conversion factor, for a commitment with an original maturity
of over one year. For the off-balance sheet component of an equity
exposure that is not an equity commitment, the adjusted carrying value
would be the effective notional principal amount of the exposure, the
size of which is equivalent to a hypothetical on-balance sheet position
in the underlying equity instrument that would evidence the same change
in fair value (measured in dollars) for a given small change in the
price of the underlying equity instrument, minus the adjusted carrying
value of the on-balance sheet component of the exposure.
As described in the hedged transactions section below, exposure
amounts may have different treatments in the case of hedged equity
exposures. The agencies created the concept of the effective notional
principal amount of the off-balance sheet portion of an equity exposure
to provide a uniform method for banking organizations to measure the
on-balance sheet equivalent of an off-balance sheet exposure. For
example, if the value of a derivative contract referencing the common
stock of company X changes the same amount as the value of 150 shares
of common stock of company X, for a small change (for example, 1.0
percent) in the value of the common stock of company X, the effective
notional principal amount of the derivative contract is the current
value of 150 shares of common stock of company X, regardless of the
number of shares the derivative contract references. The adjusted
carrying value of the off-balance sheet component of the derivative is
the current value of 150 shares of common stock of company X minus the
adjusted carrying value of any on-balance sheet amount associated with
the derivative.
3. Equity Exposure Risk Weights
Under the proposed SRWA, set forth in section 52 of the proposal, a
banking organization would determine the risk-weighted asset amount for
each equity exposure, other than an equity exposure to an investment
fund, by multiplying the adjusted carrying value of the equity
exposure, or the effective portion and ineffective portion of a hedge
pair as described below, by the lowest applicable risk weight in table
9. A banking organization would determine the risk-weighted asset
amount for an equity exposure to an investment fund under section 53 of
the proposal. A banking organization would sum risk-weighted asset
amounts for all of its equity exposures to calculate its aggregate
risk-weighted asset amount for its equity exposures. The proposed SRWA
is summarized in table 9 and described in more detail below:
Table 9--Simple Risk-Weight Approach (SRWA)
------------------------------------------------------------------------
Risk weight (in percent) Equity exposure
------------------------------------------------------------------------
0.................................... An equity exposure to a
sovereign, the Bank for
International Settlements, the
European Central Bank, the
European Commission, the
International Monetary Fund, an
MDB, and any other entity whose
credit exposures receive a zero
percent risk weight under
section 32 of the proposal.
20................................... An equity exposure to a PSE,
Federal Home Loan Bank or the
Federal Agricultural Mortgage
Corporation (Farmer Mac).
100.................................. Community development
equity exposures \65\
The effective portion of
a hedge pair
Non-significant equity
exposures to the extent that the
aggregate adjusted carrying
value of the exposures does not
exceed 10 percent of tier 1
capital plus tier 2 capital
250.................................. A significant investment in the
capital of an unconsolidated
financial institution that is
not deducted under section 22 of
the proposal.
[[Page 52925]]
300.................................. A publicly-traded equity exposure
(other than an equity exposure
that receives a 600 percent risk
weight and including the
ineffective portion of a hedge
pair).
400.................................. An equity exposure that is not
publicly-traded (other than an
equity exposure that receives a
600 percent risk weight).
600.................................. An equity exposure to an
investment firm that (i) would
meet the definition of a
traditional securitization were
it not for the primary federal
supervisor's application of
paragraph (8) of that definition
and (ii) has greater than
immaterial leverage.
------------------------------------------------------------------------
Under the proposal, equity exposures to sovereign, supranational
entities, MDBs, and PSEs would receive a risk weight of zero percent,
20 percent, or 100 percent, as described in section 52 of the proposal.
Certain community development equity exposures, the effective portion
of hedged pairs, and, up to certain limits, non-significant equity
exposures would receive a 100 percent risk weight. In addition, a
banking organization generally would assign a 250 percent risk weight
to an equity exposure related to a significant investment in the
capital of unconsolidated financial institutions that is not deducted
under section 22; a 300 percent risk weight to a publicly-traded equity
exposure; and a 400 percent risk weight to a non-publicly-traded equity
exposure.
---------------------------------------------------------------------------
\65\ The proposed rule generally defines these exposures as
exposures that would qualify as community development investments
under 12 U.S.C. 24 (Eleventh), excluding equity exposures to an
unconsolidated small business investment company and equity
exposures held through a consolidated small business investment
company described in section 302 of the Small Business Investment
Act of 1958 (15 U.S.C. 682). For savings associations, community
development investments would be defined to mean equity investments
that are designed primarily to promote community welfare, including
the welfare of low- and moderate-income communities or families,
such as by providing services or jobs, and excluding equity
exposures to an unconsolidated small business investment company and
equity exposures held through a consolidated small business
investment company described in section 302 of the Small Business
Investment Act of 1958 (15 U.S.C. 682).
---------------------------------------------------------------------------
This proposal defines publicly-traded as traded on: (1) any
exchange registered with the SEC as a national securities exchange
under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f);
or (2) any non-U.S.-based securities exchange that is registered with,
or approved by, a national securities regulatory authority and that
provides a liquid, two-way market for the instrument in question. A
two-way market would refer to a market where there are independent bona
fide offers to buy and sell so that a price reasonably related to the
last sales price or current bona fide competitive bid and offer
quotations can be determined within one day and settled at that price
within a relatively short time frame conforming to trade custom.
The proposal would require banking organizations to assign a 600
percent risk weight to an equity exposure to an investment firm,
provided that the investment firm (1) would meet the definition of a
traditional securitization were it not for the primary federal
supervisor's application of paragraph (8) of that definition and (2)
has greater than immaterial leverage. As discussed in the
securitizations section, the agencies would have discretion under this
proposal to exclude from the definition of a traditional securitization
those investment firms that exercise substantially unfettered control
over the size and composition of their assets, liabilities, and off-
balance sheet exposures. Equity exposures to investment firms that
would otherwise be traditional securitizations were it not for the
specific primary federal supervisor's exclusion are leveraged exposures
to the underlying financial assets of the investment firm. The agencies
believe that equity exposure to such firms with greater than immaterial
leverage warrant a 600 percent risk weight under the SRWA, due to their
particularly high risk. Moreover, the agencies believe that the 100
percent risk weight assigned to non-significant equity exposures is
inappropriate for equity exposures to investment firms with greater
than immaterial leverage.
4. Non-significant Equity Exposures
Under this NPR, a banking organization would be permitted to apply
a 100 percent risk weight to certain equity exposures deemed non-
significant. Non-significant equity exposures would mean an equity
exposure to the extent that the aggregate adjusted carrying value of
the exposures does not exceed 10 percent of the banking organization's
total capital.\66\
---------------------------------------------------------------------------
\66\ The definition would exclude exposures to an investment
firm that (1) would meet the definition of traditional
securitization were it not for the primary federal supervisor's
application of paragraph (8) of the definition of a traditional
securitization and (2) has greater than immaterial leverage.
---------------------------------------------------------------------------
To compute the aggregate adjusted carrying value of a banking
organization's equity exposures for determining their non-significance,
this proposal provides that the banking organization may exclude (1)
Equity exposures that receive less than a 300 percent risk weight under
the SRWA (other than equity exposures determined to be non-
significant); (2) the equity exposure in a hedge pair with the smaller
adjusted carrying value; and (3) a proportion of each equity exposure
to an investment fund equal to the proportion of the assets of the
investment fund that are not equity exposures or (4) exposures that
qualify as community development equity exposures. If a banking
organization does not know the actual holdings of the investment fund,
the banking organization may calculate the proportion of the assets of
the fund that are not equity exposures based on the terms of the
prospectus, partnership agreement, or similar contract that defines the
fund's permissible investments. If the sum of the investment limits for
all exposure classes within the fund exceeds 100 percent, the banking
organization would assume that the investment fund invests to the
maximum extent possible in equity exposures.
To determine which of a banking organization's equity exposures
qualify for a 100 percent risk weight based on non-significance, the
banking organization first would include equity exposures to
unconsolidated small business investment companies, or those held
through consolidated small business investment companies described in
section 302 of the Small Business Investment Act of 1958. Next, it
would include publicly-traded equity exposures (including those held
indirectly through investment funds), and then it would include non-
publicly-traded equity exposures (including
[[Page 52926]]
those held indirectly through investment funds).\67\
---------------------------------------------------------------------------
\67\ See 15 U.S.C. 682.
---------------------------------------------------------------------------
The treatment of non-significant equity exposures in this proposal
is consistent with the advanced approaches rule. However, in light of
significant volatility in equity values since publication of the
advanced approaches rule in 2007, and the BCBS revisions to the Basel
capital framework, the agencies are considering whether a more simple
treatment of banking organizations' non-significant equity exposures is
appropriate.
One alternative would assign a 100 percent risk weight to a banking
organization's equity exposures to small business investment companies
and to stock that a banking organization acquires in satisfaction of
debts previously contracted (DPC), consistent with the proposed
treatment of community development investments and the effective
portion of hedge pairs. The full amount of a banking organization's
equity exposure to a small business investment company and the full
amount of its DPC equity exposures (together with community development
investments and the effective portion of hedge pairs) would receive a
100 percent risk weight, not just the ``non-significant'' portion of
such equity exposures.
If the agencies assign a 100 percent risk weight to equity
exposures to a small business investment company and to DPC equity
exposures, the agencies would consider what other types of equity
exposures, if any, would continue to be exempt from the calculation of
the ``non-significant'' amount of equity exposures for risk-based
capital purposes and what capital treatment would be appropriate for
such exposures. For example, the agencies could reduce the threshold
for non-significant equity exposure calculation from 10 percent of tier
1 capital and tier 2 capital to 5 percent of tier 1 and tier 2 capital.
Question 19: The agencies solicit comment on an alternative
proposal to simplify the risk-based capital treatment of banking
organizations' non-significant equity exposures by assigning a 100
percent risk weight to equity exposures to small business investment
companies and to DPC equity exposures, consistent with the treatment of
community development investments and the effective portion of hedged
pairs. What other types of equity exposures (excluding exposures to
small business investment companies and equities taken for DPC) should
be excluded from the non-significant equity exposure calculation under
the alternative approach and what is the approximate amount of these
exposures in relation to banking organizations' total capital? What
would be an appropriate measure or level for determining whether equity
exposures in the aggregate are ``non-significant'' for a banking
organization?
5. Hedged Transactions
In this NPR, the agencies are proposing the following treatment for
recognizing hedged equity exposures. For purposes of determining risk-
weighted assets under the SRWA, a banking organization could identify
hedge pairs. Hedge pairs would be defined as two equity exposures that
form an effective hedge, as long as each equity exposure is publicly-
traded or has a return that is primarily based on a publicly-traded
equity exposure. Under the NPR, a banking organization may risk weight
only the effective and ineffective portions of a hedge pair rather than
the entire adjusted carrying value of each exposure that makes up the
pair.
Two equity exposures form an effective hedge if the exposures
either have the same remaining maturity or each has a remaining
maturity of at least three months; the hedge relationship is formally
documented in a prospective manner (that is, before the banking
organization acquires at least one of the equity exposures); the
documentation specifies the measure of effectiveness (E) the banking
organization would use for the hedge relationship throughout the life
of the transaction; and the hedge relationship has an E greater than or
equal to 0.8. A banking organization would measure E at least quarterly
and would use one of three measures of E described in the next section:
the dollar-offset method, the variability-reduction method, or the
regression method.
It is possible that only part of a banking organization's exposure
to a particular equity instrument is part of a hedge pair. For example,
assume a banking organization has equity exposure A with a $300
adjusted carrying value and chooses to hedge a portion of that exposure
with equity exposure B with an adjusted carrying value of $100. Also
assume that the combination of equity exposure B and $100 of the
adjusted carrying value of equity exposure A form an effective hedge
with an E of 0.8. In this situation, the banking organization would
treat $100 of equity exposure A and $100 of equity exposure B as a
hedge pair, and the remaining $200 of its equity exposure A as a
separate, stand-alone equity position. The effective portion of a hedge
pair would be calculated as E multiplied by the greater of the adjusted
carrying values of the equity exposures forming the hedge pair. The
ineffective portion of a hedge pair would be calculated as (1-E)
multiplied by the greater of the adjusted carrying values of the equity
exposures forming the hedge pair. In the above example, the effective
portion of the hedge pair would be 0.8 x $100 = $80, and the
ineffective portion of the hedge pair would be (1-0.8) x $100 = $20.
6. Measures of Hedge Effectiveness
As stated above, a banking organization could determine
effectiveness using any one of three methods: the dollar-offset method,
the variability-reduction method, or the regression method. Under the
dollar-offset method, a banking organization would determine the ratio
of the cumulative sum of the changes in value of one equity exposure to
the cumulative sum of the changes in value of the other equity
exposure, termed the ratio of value change (RVC). If the changes in the
values of the two exposures perfectly offset each other, the RVC would
be -1. If RVC is positive, implying that the values of the two equity
exposures move in the same direction, the hedge is not effective and E
equals 0. If RVC is negative and greater than or equal to -1 (that is,
between zero and -1), then E would equal the absolute value of RVC. If
RVC is negative and less than -1, then E would equal 2 plus RVC.
The variability-reduction method of measuring effectiveness
compares changes in the value of the combined position of the two
equity exposures in the hedge pair (labeled X in the equation below) to
changes in the value of one exposure as though that one exposure were
not hedged (labeled A). This measure of E expresses the time-series
variability in X as a proportion of the variability of A. As the
variability described by the numerator becomes small relative to the
variability described by the denominator, the measure of effectiveness
improves, but is bounded from above by a value of one. E would be
computed as:
[[Page 52927]]
[GRAPHIC] [TIFF OMITTED] TP30AU12.012
The value of t would range from zero to T, where T is the length of
the observation period for the values of A and B, and is comprised of
shorter values each labeled t.
The regression method of measuring effectiveness is based on a
regression in which the change in value of one exposure in a hedge pair
is the dependent variable and the change in value of the other exposure
in the hedge pair is the independent variable. E would equal the
coefficient of determination of this regression, which is the
proportion of the variation in the dependent variable explained by
variation in the independent variable. However, if the estimated
regression coefficient is positive, then the value of E is zero. The
closer the relationship between the values of the two exposures, the
higher E would be.
7. Equity Exposures to Investment Funds
Under the general risk-based capital rules, exposures to
investments funds are captured through one of two methods. These
methods are similar to the alternative modified look-through approach
and the simple modified look-through approach described below. The
agencies propose an additional option in this NPR, the full look-
through approach.
The agencies propose a separate treatment for equity exposures to
an investment fund to ensure that banking organizations do not receive
a punitive risk-based capital requirement for equity exposures to
investment funds that hold only low-risk assets, and to prevent banking
organizations from arbitraging the proposed risk-based capital
requirements for certain high-risk exposures.
As proposed, a banking organization would determine the risk-
weighted asset amount for equity exposures to investment funds using
one of three approaches: the full look-through approach, the simple
modified look-through approach, or the alternative modified look-
through approach, unless the equity exposure to an investment fund is a
community development equity exposure. Such community development
equity exposures would be subject to a 100 percent risk weight. If an
equity exposure to an investment fund is part of a hedge pair, a
banking organization would use the ineffective portion of the hedge
pair as the adjusted carrying value for the equity exposure to the
investment fund. The risk-weighted asset amount of the effective
portion of the hedge pair would be equal to its adjusted carrying
value. A banking organization could choose which approach to apply for
each equity exposure to an investment fund.
a. Full Look-through Approach
A banking organization may use the full look-through approach only
if the banking organization is able to calculate a risk-weighted asset
amount for each of the exposures held by the investment fund. Under the
proposal, a banking organization would be required to calculate the
risk-weighted asset amount for each of the exposures held by the
investment fund (as calculated under subpart D of the proposal) as if
the exposures were held directly by the banking organization. The
banking organization's risk-weighted asset amount for the fund would be
equal to the aggregate risk-weighted asset amount of the exposures held
by the fund as if they were held directly by the banking organization
multiplied by the banking organization's proportional ownership share
of the fund.
b. Simple Modified Look-through Approach
Under the proposed simple modified look-through approach, a banking
organization would set the risk-weighted asset amount for its equity
exposure to an investment fund equal to the adjusted carrying value of
the equity exposure multiplied by the highest risk weight assigned
according to subpart D of the proposal that applies to any exposure the
fund is permitted to hold under the prospectus, partnership agreement,
or similar agreement that defines the fund's permissible investments.
The banking organization may exclude derivative contracts held by the
fund that are used for hedging, rather than for speculative purposes,
and do not constitute a material portion of the fund's exposures.
c. Alternative Modified Look-through Approach
Under the proposed alternative modified look-through approach, a
banking organization may assign the adjusted carrying value of an
equity exposure to an investment fund on a pro rata basis to different
risk weight categories under subpart D of the proposal based on the
investment limits in the fund's prospectus, partnership agreement, or
similar contract that defines the fund's permissible investments.
The risk-weighted asset amount for the banking organization's
equity exposure to the investment fund would be equal to the sum of
each portion of the adjusted carrying value assigned to an exposure
type multiplied by the applicable risk weight. If the sum of the
investment limits for all exposures within the fund exceeds 100
percent, the banking organization would assume that the fund invests to
the maximum extent permitted under its investment limits in the
exposure type with the highest applicable risk weight under the
proposed requirements and continues to make investments in the order of
the exposure category with the next highest risk weight until the
maximum total investment level is reached. If more than one exposure
category applies to an exposure, the banking organization would use the
highest applicable risk
[[Page 52928]]
weight. A banking organization may exclude derivative contracts held by
the fund that are used for hedging, rather than for speculative
purposes, and do not constitute a material portion of the fund's
exposures.
III. Insurance-related Activities
The agencies propose to apply consolidated capital requirements to
savings and loan holding companies, consistent with the transfer of
supervisory responsibilities to the Board under Title III of the Dodd-
Frank Act, as well as the requirements in section 171 of the Dodd-Frank
Act. Savings and loan holding companies have not been subject to
consolidated quantitative capital requirements prior to this proposal.
In the Notice of Intent published in April 2011 (2011 notice of
intent), the Board discussed the possibility of applying to savings and
loan holding companies the same consolidated risk-based and leverage
capital requirements as those proposed for bank holding companies.\68\
The Board requested comment on unique characteristics, risks, or
specific activities of savings and loan holding companies that should
be taken into consideration when developing consolidated capital
requirements for these entities. The Board also sought specific comment
on instruments that are currently included in savings and loan holding
companies' regulatory capital that would be excluded or strictly
limited under Basel III, as well as the appropriate transition
provisions.
---------------------------------------------------------------------------
\68\ See 76 FR 22662 (April 22, 2011).
---------------------------------------------------------------------------
The Board received comment letters on the 2011 notice of intent as
well as on other notices issued in 2011 pertaining to savings and loan
companies.\69\ In addition, Board staff met with a number of industry
participants, regulators, and trade groups to further the discussion of
relevant considerations. The main themes raised by commenters relevant
to this proposal were the appropriateness of requiring savings and loan
holding companies to apply ``bank-centric'' consolidated capital
standards; the need to appropriately address certain instruments and
assets unique to savings and loan holding companies; the need for
appropriate transition periods; and the degree of regulatory burden
(particularly for those savings and loan holding companies that are
insurance companies that only prepare financial statements according to
Statutory Accounting Principles).
---------------------------------------------------------------------------
\69\ See, for example, ``Agency Information Collection
Activities Regarding Savings and Loan Holding Companies,'' available
at http://www.gpo.gov/fdsys/pkg/FR-2011-12-29/pdf/2011-33432.pdf;
``Proposed Agency Information Collection Activities; Comment
Request,'' available at http://www.gpo.gov/fdsys/pkg/FR-2011-08-25/pdf/2011-21736.pdf.
---------------------------------------------------------------------------
A number of commenters suggested that the Board defer its oversight
of savings and loan holding companies, in part or in whole, to
functional regulators or impose the same capital standards required by
insurance regulators. Other commenters suggested that certain savings
and loan holding companies should be exempt from the Board's regulatory
capital requirements in cases where depository institution activity
constitutes only a small part of the consolidated organization's assets
and revenues. The Board believes both of these approaches would be
inconsistent with the requirements set out in section 171 of the Dodd-
Frank Act. Further, the Board believes it is important to apply
consolidated risk-based and leverage capital requirements to insurance-
based holding companies because the insurance risk-based capital
requirements are not imposed on a consolidated basis and are based on
different considerations, such as solvency concerns, rather than broad
categories of credit risk.
The Board considered all the comments received and believes that
the proposed requirements for savings and loan holding companies
appropriately take into consideration their unique characteristics,
risks, and activities while ensuring compliance with the requirements
of the Dodd-Frank Act. Further, a uniform approach for all holding
companies would mitigate potential competitive equity issues, limit
opportunities for regulatory arbitrage, and facilitate comparable
treatment of similar risks.
In 2011, the agencies amended the general risk-based capital rules
to provide that low-risk assets not held by depository institutions may
receive the capital treatment applicable under the capital guidelines
for bank holding companies under limited circumstances.\70\ This
provision provides appropriate capital requirements for certain low-
risk exposures that generally are not held by depository institutions
and brings the regulations applicable to bank holding companies into
compliance with section 171 of the Dodd-Frank Act, which requires that
bank holding companies be subject to capital requirements that are no
less stringent than those applied to insured depository institutions.
The agencies propose to continue this approach for purposes of this
NPR.
---------------------------------------------------------------------------
\70\ See 76 FR 37620 (June 28, 2011).
---------------------------------------------------------------------------
The proposed requirements that are unique to savings and loan
holding companies or bank holding companies are discussed below,
including provisions pertaining to the determination of risk-weighted
assets for nonbanking exposures unique to insurance underwriting
activities (whether conducted by a bank holding company or savings and
loan holding company).
Policy Loans
A policy loan would be defined as a loan to policyholders under the
provisions of an insurance contract that are secured by the cash
surrender value or collateral assignment of the related policy or
contract. A policy loan would include: (1) A cash loan, including a
loan resulting from early payment or accelerated payment benefits, on
an insurance contract when the terms of contract specify that the
payment is a policy loan secured by the policy; and (2) an automatic
premium loan, which is a loan made in accordance with policy provisions
which provide that delinquent premium payments are automatically paid
from the cash value at the end of the established grace period for
premium payments.
Under the proposal, a policy loan would be assigned a 20 percent
risk. Such treatment is similar to the treatment of a cash-secured
loan. The Board believes this treatment is appropriate in light of the
fact that should a borrower default, the resulting loss to the
insurance company is mitigated by the right to access the cash
surrender value or collateral assignment of the related policy.
Separate Accounts
A separate account is a legally segregated pool of assets owned and
held by an insurance company and maintained separately from its general
account assets for the benefit of an individual contract holder,
subject to certain conditions. To qualify as a separate account, the
following conditions generally must be met: (1) The account must be
legally recognized under applicable law; (2) the assets in the account
must be insulated from general liabilities of the insurance company
under applicable law and protected from the insurance company's general
creditors in the event of the insurer's insolvency; (3) the insurance
company must invest the funds within the account as directed by the
contract holder in designated investment alternatives or in accordance
with specific investment objectives or
[[Page 52929]]
policies; and (4) all investment performance, net of contract fees and
assessments, must be passed through to the contract holder, provided
that contracts may specify conditions under which there may be a
minimum guarantee, but not a ceiling.
Under the general risk-based capital rules, assets held in separate
accounts are assigned to risk-weight categories based on the risk
weight of the underlying assets. However, the agencies propose to
assign a zero percent risk weight to assets held in non-guaranteed
separate accounts where all the losses are passed on to the contract
holders. To qualify as a non-guaranteed separate account, the insurance
company could not contractually guarantee a minimum return or account
value to the contract holder, and the insurance company would not be
required to hold reserves for these separate account assets pursuant to
its contractual obligations on an associated policy. The proposal would
maintain the current risk-weighting treatment for assets held in a
separate account that does not qualify as a non-guaranteed separate
account.
The agencies believe the proposed treatment for non-guaranteed
separate account assets is appropriate, even though the proposed
definition of non-guaranteed separate accounts is more restrictive than
the one used by insurance regulators. The proposed criteria for non-
guaranteed separate accounts are designed to ensure that a zero percent
risk weight is applied only to the assets for which contract holders,
and not an insurance company, would bear all the losses.
Question 20: The agencies request comment on how the proposed
definition of a separate account interacts with state law. What are the
significant differences and what is the nature of the implications of
these differences?
Deferred Acquisition Costs and Value of Business Acquired
Deferred acquisition costs (DAC) represent certain costs incurred
in the acquisition of a new contract or renewal insurance contract that
are capitalized pursuant to GAAP. Value of business acquired (VOBA)
refers to assets that reflect revenue streams from insurance policies
purchased by an insurance company. The Board proposes to risk weight
these assets at 100 percent, similar to other assets not specifically
assigned a different risk weight under this NPR.
Surplus Notes
A surplus note is a financial instrument issued by an insurance
company that is included in surplus for statutory accounting purposes
as prescribed or permitted by state laws and regulations. A surplus
note generally has the following features: (1) The applicable state
insurance regulator approves in advance the form and content of the
note; (2) the instrument is subordinated to policyholders, to claimant
and beneficiary claims, and to all other classes of creditors other
than surplus note holders; and (3) the applicable state insurance
regulator is required to approve in advance any interest payments and
principal repayments on the instrument.
The Board believes that surplus notes do not meet the proposal's
eligibility criteria for tier 1 capital. In particular, surplus notes
are not perpetual instruments but represent debt instruments that are
treated as equity for insurance regulatory capital purposes. Surplus
notes are long-term, unsecured obligations, subordinated to all senior
debt holders and policy claims. The main equity characteristics of
surplus notes are the loss absorbency feature and the need to obtain
prior approval from insurance regulators before issuance.
Some commenters on the Board's savings and loan holding company-
related proposals issued in 2011 recommended that all outstanding
surplus note issuances should be grandfathered and considered eligible
as additional tier 1 capital instruments. Other commenters believed the
Basel III framework provided sufficient flexibility to include surplus
notes in tier 1 capital given the BCBS's recognition that Basel III
should accommodate the specific needs of non-joint stock companies,
such as mutual and cooperatives, which are unable to issue common
stock. The Board believes generally that including surplus notes in
tier 1 capital would be inconsistent with the proposed eligibility
criteria for regulatory capital instruments and with overall safety and
soundness concerns because surplus notes generally do not reflect the
required loss absorbency characteristics of tier 1 instruments under
the proposal. A surplus note could be eligible for inclusion in tier 2
capital provided the note meets the proposed tier 2 capital eligibility
criteria. The Board has sought to incorporate reasonable transition
provisions in the first NPR for instruments that would no longer meet
the eligibility criteria for tier 2 capital.
Additional Deductions--Insurance Underwriting Subsidiaries
Consistent with the current treatment under the advanced approaches
rule, the Basel III NPR would require bank holding companies and
savings and loan holding companies to consolidate and deduct the
minimum regulatory capital requirement of insurance underwriting
subsidiaries (generally 200 percent of the subsidiary's authorized
control level as established by the appropriate state insurance
regulator) from total capital to reflect the capital needed to cover
insurance risks. The proposed deduction treatment recognizes that
capital requirements imposed by the functional regulator to cover the
various risks that insurance risk-based capital captures reflect
capital needs at the particular subsidiary and that this capital is
therefore not generally available to absorb losses in other parts of
the organization. The deduction would be 50 percent from tier 1 capital
and 50 percent from tier 2 capital.
Question 21: The agencies solicit comment on all aspects of the
proposed treatment of insurance underwriting activities.
Question 22: What are the specific terms and features of capital
instruments (including surplus notes) unique to insurance companies
that diverge from current eligibility requirements under the proposal?
Are there ways in which such terms and features might be modified in
order to bring the instruments into compliance with the proposal?
Question 23: The agencies seek data on the amount and issuers of
surplus notes currently outstanding. What proportion of insurance
company capital is comprised of surplus notes?
IV. Market Discipline and Disclosure Requirements
A. Proposed Disclosure Requirements
The agencies have long supported meaningful public disclosure by
banking organizations with the objective of improving market discipline
and encouraging sound risk-management practices. As noted above, the
BCBS introduced public disclosure requirements under Pillar 3 of Basel
II, which is designed to complement the minimum capital requirements
and the supervisory review process by encouraging market discipline
through enhanced and meaningful public disclosure.\71\ The BCBS
introduced additional disclosure requirements in Basel III, which the
agencies are
[[Page 52930]]
proposing to apply to banking organizations as discussed herein.\72\
---------------------------------------------------------------------------
\71\ The agencies incorporated the BCBS disclosure requirements
into the advanced approaches rule in 2007. See 72 FR 69288, 69432
(December 7, 2007).
\72\ In December 2011, the BCBS proposed additional Pillar 3
disclosure requirements in a consultative paper titled ``Definition
of Capital Disclosure Requirements,'' available at http://www.bis.org/publ/bcbs212.pdf. The agencies anticipate incorporating
these disclosure requirements for banking organizations with more
than $50 billion in total assets through a separate rulemaking once
the BCBS finalizes these disclosure requirements.
---------------------------------------------------------------------------
The public disclosure requirements under this NPR would apply only
to banking organizations representing the top consolidated level of the
banking group with $50 billion or more in total consolidated assets
that are not advanced approaches banking organizations making public
disclosures pursuant to section 172 of the proposal.\73\ The agencies
note that the asset threshold of $50 billion is consistent with the
threshold established by section 165 of the Dodd-Frank Act relating to
enhanced supervision and prudential standards for certain banking
organizations.\74\ In addition, the agencies are trying to strike an
appropriate balance between the market benefits of disclosure and the
additional burden to a banking organization that provides disclosures.
A banking organization may be able to fulfill some of the proposed
disclosure requirements by relying on similar disclosures made in
accordance with accounting standards or SEC mandates. In addition, a
banking organization could use information provided in regulatory
reports to fulfill the disclosure requirements. In these situations, a
banking organization would be required to explain any material
differences between the accounting or other disclosures and the
disclosures required under this proposal.
---------------------------------------------------------------------------
\73\ Advanced approaches banking organizations would be subject
to the disclosure requirements described in the Advanced Approaches
and Market Risk NPR.
\74\ See section 165(a) of the Dodd-Frank Act (12 U.S.C.
5365(a)). The Dodd-Frank Act provides that the Board may, upon the
recommendation of the Financial Stability Oversight Council,
increase the $50 billion asset threshold for the application of the
resolution plan, concentration limit, and credit exposure report
requirements. See 12 U.S.C. 5365(a)(2)(B).
---------------------------------------------------------------------------
A banking organization's exposure to risks and the techniques that
it uses to identify, measure, monitor, and control those risks are
important factors that market participants consider in their assessment
of the banking organization. Accordingly, as proposed, a banking
organization would have a formal disclosure policy approved by its
board of directors that addresses the banking organization's approach
for determining the disclosures it should make. The policy should
address the associated internal controls, disclosure controls, and
procedures. The board of directors and senior management would ensure
the appropriate review of the disclosures and that effective internal
controls, disclosure controls, and procedures are maintained. One or
more senior officers of the banking organization must attest that the
disclosures meet the requirements of this proposal.
A banking organization would decide the relevant disclosures based
on a materiality concept. Information would be regarded as material if
its omission or misstatement could change or influence the assessment
or decision of a user relying on that information for the purpose of
making investment decisions.
B. Frequency of Disclosures
Consistent with the agencies' longstanding requirements for robust
quarterly disclosures in regulatory reports, and considering the
potential for rapid changes in risk profiles, this NPR would require
that quantitative disclosures are made quarterly. However, qualitative
disclosures that provide a general summary of a banking organization's
risk-management objectives and policies, reporting system, and
definitions may be disclosed annually, provided any significant changes
are disclosed in the interim.
The proposal would require that the disclosures are timely. The
agencies acknowledge that the timing of disclosures under the federal
banking laws may not always coincide with the timing of disclosures
required under other federal laws, including disclosures required under
the federal securities laws and their implementing regulations by the
SEC. For calendar quarters that do not correspond to fiscal year-end,
the agencies would consider those disclosures that are made within 45
days as timely. In general, where a banking organization's fiscal year
end coincides with the end of a calendar quarter, the agencies would
consider disclosures to be timely if they are made no later than the
applicable SEC disclosure deadline for the corresponding Form 10-K
annual report. In cases where an institution's fiscal year-end does not
coincide with the end of a calendar quarter, the primary federal
supervisor would consider the timeliness of disclosures on a case-by-
case basis. In some cases, management may determine that a significant
change has occurred, such that the most recent reported amounts do not
reflect the banking organization's capital adequacy and risk profile.
In those cases, a banking organization would need to disclose the
general nature of these changes and briefly describe how they are
likely to affect public disclosures going forward. A banking
organization would make these interim disclosures as soon as
practicable after the determination that a significant change has
occurred.
C. Location of Disclosures and Audit Requirements
The disclosures required by the proposal would have to be publicly
available (for example, included on a public Web site) for each of the
last three years or such shorter time period beginning when the
proposal comes into effect. Except as discussed below, management would
have some discretion to determine the appropriate medium and location
of the disclosure. Furthermore, a banking organization would have
flexibility in formatting its public disclosures.
The agencies encourage management to provide all of the required
disclosures in one place on the entity's public Web site and the
agencies anticipate that the public Web site address would be reported
in a banking organization's regulatory report. Alternatively, banking
organizations would be permitted to provide the disclosures in more
than one place, as some of them may be included in public financial
reports (for example, in Management's Discussion and Analysis included
in SEC filings) or other regulatory reports. The agencies would
encourage such banking organizations to provide a summary table on
their public Web site that specifically indicates where all the
disclosures may be found (for example, regulatory report schedules,
page numbers in annual reports).
Disclosures of common equity tier 1, tier 1, and total capital
ratios would be tested by external auditors as part of the financial
statement audit. Disclosures that are not included in the footnotes to
the audited financial statements are not subject to external audit
reports for financial statements or internal control reports from
management and the external auditor.
D. Proprietary and Confidential Information
The agencies believe that the proposed requirements strike an
appropriate balance between the need for meaningful disclosure and the
protection of proprietary and confidential information.\75\
Accordingly,
[[Page 52931]]
the agencies believe that banking organizations would be able to
provide all of these disclosures without revealing proprietary and
confidential information. Only in rare circumstances might disclosure
of certain items of information required by the proposal compel a
banking organization to reveal confidential and proprietary
information. In these unusual situations, the agencies propose that if
a banking organization believes that disclosure of specific commercial
or financial information would compromise its position by making public
information that is either proprietary or confidential in nature, the
banking organization need not disclose those specific items. Instead,
the banking organization must disclose more general information about
the subject matter of the requirement, together with the fact that, and
the reason why, the specific items of information have not been
disclosed. This provision would apply only to those disclosures
included in this NPR and does not apply to disclosure requirements
imposed by accounting standards or other regulatory agencies.
---------------------------------------------------------------------------
\75\ Proprietary information encompasses information that, if
shared with competitors, would render a banking organization's
investment in these products/systems less valuable, and, hence,
could undermine its competitive position. Information about
customers is often confidential, in that it is provided under the
terms of a legal agreement or counterparty relationship.
---------------------------------------------------------------------------
Question 24: The agencies seek commenters' views on all of the
elements of the proposed public disclosure requirements. In particular,
the agencies seek views on specific disclosure requirements that are
problematic, and why.
E. Specific Public Disclosure Requirements
The public disclosure requirements are designed to provide
important information to market participants on the scope of
application, capital, risk exposures, risk assessment processes, and,
thus, the capital adequacy of the institution. The agencies note that
the substantive content of the tables is the focus of the disclosure
requirements, not the tables themselves. The table numbers below refer
to the table numbers in the proposal.
A banking organization would make the disclosures described in
tables 14.1 through 14.10. The banking organization would make these
disclosures publicly available for each of the last three years or such
shorter time period beginning when the proposed requirements come into
effect.\76\
---------------------------------------------------------------------------
\76\ Other public disclosure requirements would continue to
apply, such as federal securities law, and regulatory reporting
requirements for banking organizations.
---------------------------------------------------------------------------
Table 14.1 disclosures, ``Scope of Application,'' would name the
top corporate entity in the group to which subpart D of the proposal
would apply; include a brief description of the differences in the
basis for consolidating entities for accounting and regulatory
purposes, as well as a description of any restrictions, or other major
impediments, on transfer of funds or total capital within the group.
These disclosures provide the basic context underlying regulatory
capital calculations.
Table 14.2 disclosures, ``Capital Structure,'' would provide
summary information on the terms and conditions of the main features of
regulatory capital instruments, which would allow for an evaluation of
the quality of the capital available to absorb losses within a banking
organization. A banking organization also would disclose the total
amount of common equity tier 1, tier 1 and total capital, with separate
disclosures for deductions and adjustments to capital. The agencies
expect that many of these disclosure requirements would be captured in
revised regulatory reports.
Table 14.3 disclosures, ``Capital Adequacy,'' would provide
information on a banking organization's approach for categorizing and
risk-weighting its exposures, as well as the amount of total risk-
weighted assets. The table would also include common equity tier 1, and
tier 1 and total risk-based capital ratios for the top consolidated
group; and for each depository institution subsidiary.
Table 14.4 disclosures, ``Capital Conservation Buffer,'' would
require a banking organization to disclose the capital conservation
buffer, the eligible retained income and any limitations on capital
distributions and certain discretionary bonus payments, as applicable.
Tables 14.5, 14.6 and 14.7 disclosures, related to credit risk,
counterparty credit risk and credit risk mitigation, respectively,
would provide market participants with insight into different types and
concentrations of credit risk to which a banking organization is
exposed and the techniques it uses to measure, monitor, and mitigate
those risks. These disclosures are intended to enable market
participants to assess the credit risk exposures of the banking
organization without revealing proprietary information.
Table 14.8 disclosures, ``Securitization,'' would provide
information to market participants on the amount of credit risk
transferred and retained by a banking organization through
securitization transactions, the types of products securitized by the
organization, the risks inherent in the organization's securitized
assets, the organization's policies regarding credit risk mitigation,
and the names of any entities that provide external credit assessments
of a securitization. These disclosures would provide a better
understanding of how securitization transactions impact the credit risk
of a bank. For purposes of these disclosures, ``exposures securitized''
include underlying exposures originated by a banking organization,
whether generated by the banking organization or purchased from third
parties, and third-party exposures included in sponsored programs.
Securitization transactions in which the originating banking
organization does not retain any securitization exposure would be shown
separately and would only be reported for the year of inception.
Table 14.9 disclosures, ``Equities Not Subject to Subpart F of the
[proposal],'' would provide market participants with an understanding
of the types of equity securities held by the banking organization and
how they are valued. The table would also provide information on the
capital allocated to different equity products and the amount of
unrealized gains and losses.
Table 14.10 disclosures, ``Interest Rate Risk for Non-trading
Activities,'' would require banking organization to provide certain
quantitative and qualitative disclosures regarding the banking
organization's management of interest rate risks.
V. List of Acronyms That Appear in the Proposal
ABCP Asset-Backed Commercial Paper
ABS Asset Backed Security
ADC Acquisition, Development, or Construction
AFS Available For Sale
ALLL Allowance for Loan and Lease Losses
AOCI Accumulated Other Comprehensive Income
BCBS Basel Committee on Banking Supervision
BHC Bank Holding Company
BIS Bank for International Settlements
CAMELS Capital adequacy, Asset quality, Management, Earnings,
Liquidity, and Sensitivity to market risk
CCF Credit Conversion Factor
CCP Central Counterparty
CDC Community Development Corporation
CDFI Community Development Financial Institution
CDO Collateralized Debt Obligation
CDS Credit Default Swap
CDSind Index Credit Default Swap
CEIO Credit-Enhancing Interest-Only Strip
CF Conversion Factor
CFR Code of Federal Regulations
CFTC Commodity Futures Trading Commission
CMBS Commercial Mortgage Backed Security
[[Page 52932]]
CPSS Committee on Payment and Settlement Systems
CRC Country Risk Classifications
CRAM Country Risk Assessment Model
CRM Credit Risk Mitigation
CUSIP Committee on Uniform Securities Identification Procedures
DAC Deferred Acquisition Costs
DCO Derivatives Clearing Organizations
DFA Dodd-Frank Act
DI Depository Institution
DPC Debts Previously Contracted
DTA Deferred Tax Asset
DTL Deferred Tax Liability
DVA Debit Valuation Adjustment
DvP Delivery-versus-Payment
E Measure of Effectiveness
EAD Exposure at Default
ECL Expected Credit Loss
EE Expected Exposure
E.O. Executive Order
EPE Expected Positive Exposure
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FFIEC Federal Financial Institutions Examination Council
FHLMC Federal Home Loan Mortgage Corporation
FMU Financial Market Utility
FNMA Federal National Mortgage Association
FR Federal Register
GAAP Generally Accepted Accounting Principles
GDP Gross Domestic Product
GLBA Gramm-Leach-Bliley Act
GSE Government-Sponsored Entity
HAMP Home Affordable Mortgage Program
HELOC Home Equity Line of Credit
HOLA Home Owners' Loan Act
HVCRE High-Volatility Commercial Real Estate
IAA Internal Assessment Approach
IFRS International Reporting Standards
IMM Internal Models Methodology
I/O Interest-Only
IOSCO International Organization of Securities Commissions
LTV Loan-to-Value Ratio
M Effective Maturity
MDB Multilateral Development Banks
MSA Mortgage Servicing Assets
NGR Net-to-Gross Ratio
NPR Notice of Proposed Rulemaking
NRSRO Nationally Recognized Statistical Rating Organization
OCC Office of the Comptroller of the Currency
OECD Organization for Economic Co-operation and Development
OIRA Office of Information and Regulatory Affairs
OMB Office of Management and Budget
OTC Over-the-Counter
OTTI Other Than Temporary Impairment
PCA Prompt Corrective Action
PCCR Purchased Credit Card Relationships
PFE Potential Future Exposure
PMI Private Mortgage Insurance
PSE Public Sector Entities
PvP Payment-versus-payment
QCCP Qualifying Central Counterparty
REIT Real Estate Investment Trust
RFA Regulatory Flexibility Act
RMBS Residential Mortgage Backed Security
RTCRRI Act Resolution Trust Corporation Refinancing, Restructuring,
and Improvement Act of 1991
RVC Ratio of Value Change
RWA Risk-Weighted Asset
SEC Securities and Exchange Commission
SFA Supervisory Formula Approach
SFT Securities Financing Transactions
SLHC Savings and Loan Holding Company
SPE Special Purpose Entity
SPV Special Purpose Vehicle
SR Supervision and Regulation Letter
SRWA Simple Risk-Weight Approach
SSFA Simplified Supervisory Formula Approach
UMRA Unfunded Mandates Reform Act of 1995
U.S. United States
U.S.C. United States Code
VaR Value-at-Risk
VOBA Value of Business Acquired
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA) requires
an agency to provide an initial regulatory flexibility analysis with a
proposed rule or to certify that the rule will not have a significant
economic impact on a substantial number of small entities (defined for
purposes of the RFA to include banking entities with assets less than
or equal to $175 million) and publish its certification and a short,
explanatory statement in the Federal Register along with the proposed
rule.
The agencies are separately publishing initial regulatory
flexibility analyses for the proposals as set forth in this NPR.
Board
A. Statement of the Objectives of the Proposal; Legal Basis
As discussed in the Supplementary Information above, the Board is
proposing to revise its capital requirements to promote safe and sound
banking practices, implement Basel III and other aspects of the Basel
capital framework, and codify its capital requirements.
The proposals in this NPR and the Basel III NPR would implement
provisions consistent with certain requirements of the Dodd-Frank Act
because they would (1) revise regulatory capital requirements to remove
all references to, and requirements of reliance on, credit ratings,\77\
and (2) impose new or revised minimum capital requirements on certain
depository institution holding companies.\78\
---------------------------------------------------------------------------
\77\ See 15 U.S.C. 78o-7, note.
\78\ See 12 U.S.C. 5371.
---------------------------------------------------------------------------
Additionally, under section 38(c)(1) of the Federal Deposit
Insurance Act, the agencies may prescribe capital standards for
depository institutions that they regulate.\79\ In addition, among
other authorities, the Board may establish capital requirements for
state member banks under the Federal Reserve Act,\80\ for state member
banks and bank holding companies under the International Lending
Supervision Act and Bank Holding Company Act,\81\ and for savings and
loan holding companies under the Home Owners Loan Act.\82\
---------------------------------------------------------------------------
\79\ See 12 U.S.C. 1831o(c).
\80\ See 12 U.S.C. 321-338.
\81\ See 12 U.S.C. 3907; 12 U.S.C. 1844.
\82\ See 12 U.S.C. 1467a(g)(1).
---------------------------------------------------------------------------
B. Small Entities Potentially Affected by the Proposal
Under regulations issued by the Small Business Administration,\83\
a small entity includes a depository institution, bank holding company,
or savings and loan holding company with total assets of $175 million
or less (a small banking organization). As of March 31, 2012 there were
373 small state member banks. As of December 31, 2011, there were
approximately 128 small savings and loan holding companies and 2,385
small bank holding companies.\84\
---------------------------------------------------------------------------
\83\ See 13 CFR 121.201.
\84\ The December 31, 2011 data are the most recent available
data on small savings and loan holding companies and small bank
holding companies.
---------------------------------------------------------------------------
The proposed requirements would not apply to small bank holding
companies that are not engaged in significant nonbanking activities, do
not conduct significant off-balance sheet activities, and do not have a
material amount of debt or equity securities outstanding that are
registered with the SEC. These small bank holding companies remain
subject to the Board's Small Bank Holding Company Policy Statement
(Policy Statement).\85\
---------------------------------------------------------------------------
\85\ See 12 CFR part 225, appendix C. Section 171 of the Dodd-
Frank provides an exemption from its requirements for bank holding
companies subject to the Policy Statement (as in effect on May 19,
2010). Section 171 does not provide a similar exemption for small
savings and loan holding companies and they are therefore subject to
the proposed rules. 12 U.S.C. 5371(b)(5)(C).
---------------------------------------------------------------------------
Small state member banks and small savings and loan holding
companies (covered small banking organizations) would be subject to the
proposals in this NPR.
C. Impact on Covered Small Banking Organizations
The proposed requirements in the Basel III NPR and this NPR may
impact covered small banking organizations in several ways, including
both recordkeeping and compliance requirements. As explained in the
Basel III NPR, the proposals therein would change the minimum capital
ratios and
[[Page 52933]]
qualifying criteria for regulatory capital, including required
deductions and adjustments. The proposals in this NPR would modify the
risk weight treatment for some exposures.
Most small state member banks already hold capital in excess of the
proposed minimum risk-based regulatory ratios. Therefore, the proposed
requirements are not expected to significantly impact the capital
structure of most covered small state member banks. Comparing the
capital requirements proposed in this NPR and the Basel III NPR on a
fully phased-in basis to minimum requirements of the current rules, the
capital ratios of approximately 1-2 percent of small state member banks
would fall below at least one of the proposed minimum risk-based
capital requirements. Thus, the Board believes that the proposals in
this NPR and the Basel III NPR would affect an insubstantial number of
small state member banks.
Because the Board has not fully implemented reporting requirements
for savings and loan holding companies, it is unable to determine the
impact of the proposed requirements on small savings and loan holding
companies. The Board seeks comment on the potential impact of the
proposed requirements on small savings and loan holding companies.
Covered small banking organizations that would have to raise
additional capital to comply with the requirements of the proposal may
incur certain costs, including costs associated with issuance of
regulatory capital instruments. The Board has sought to minimize the
burden of raising additional capital by providing for transitional
arrangements that phase-in the new capital requirements over several
years, allowing banking organizations time to accumulate additional
capital through retained earnings as well as raising capital in the
market.
As discussed above, the proposed requirements would modify risk
weights for exposures, as well as calculation of the leverage ratio.
Accordingly, covered small banking organizations would be required to
change their internal reporting processes to comply with these changes.
These changes may require some additional personnel training and
expenses related to new systems (or modification of existing systems)
for calculating regulatory capital ratios.
Additionally, covered small banking organizations that hold certain
exposures would be required to obtain additional information under the
proposed rules in order to determine the applicable risk weights.
Covered small banking organizations that hold exposures to sovereign
entities other than the United States, foreign depository institutions,
or foreign public sector entities would have to acquire Country Risk
Classification ratings produced by the OECD to determine the applicable
risk weights. Covered small banking organizations that hold residential
mortgage exposures would need to have and maintain information about
certain underwriting features of the mortgage as well as the LTV ratio
in order to determine the applicable risk weight. Generally, covered
small banking organizations that hold securitization exposures would
need to obtain sufficient information about the underlying exposures to
satisfy due diligence requirements and apply the simplified supervisory
formula described above to calculate the appropriate risk weight, or be
required to assign a 1,250 percent risk weight to the exposure.
Covered small banking organizations typically do not hold
significant exposures to foreign entities or securitization exposures,
and the Board expects any additional burden related to calculating risk
weights for these exposures, or holding capital against these
exposures, would be modest. Some covered small banking organizations
may hold significant residential mortgage exposures. However, if the
small banking organization originated the exposure, it should have
sufficient information to determine the applicable risk weight under
the proposal. If the small banking organization acquired the exposure
from another institution, the information it would need to determine
the applicable risk weight is consistent with information that it
should normally collect for portfolio monitoring purposes and internal
risk management.
Covered small banking organizations would not be subject to the
disclosure requirements in subpart D of the proposal. However, the
Board expects to modify regulatory reporting requirements that apply to
covered small banking organizations to reflect the changes made to the
Board's capital requirements in the proposal. The Board expects to
propose these changes to the relevant reporting forms in a separate
notice.
For small savings and loan holding companies, the compliance
burdens described above may be greater than for those of other covered
small banking organizations. Small savings and loan holding companies
previously were not subject to regulatory capital requirements and
reporting requirements tied regulatory capital requirements. Small
savings and loan holding companies may therefore need to invest
additional resources in establishing internal systems (including
purchasing software or hiring personnel) or raising capital to come
into compliance with the proposed rules.
D. Transitional Arrangements To Ease Compliance Burden
For those covered small banking organizations that would not
immediately meet the proposed minimum requirements, the NPR provides
transitional arrangements for banking organizations to make adjustments
and to come into compliance. Small covered banking organizations would
be required to meet the proposed minimum capital ratio requirements
beginning on January 1, 2013 thorough to December 31, 2014. On January
1, 2015, small covered banking organizations would be required to
comply with the new Prompt Corrective Action capital ratio requirements
proposed in the Basel III NPR. January 1, 2015 is also the proposed
effective date for small covered companies to begin calculating risk-
weighted assets according to the methodologies in this NPR.
E. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
The Board is unaware of any duplicative, overlapping, or
conflicting federal rules. As noted above, the Board anticipates
issuing a separate proposal to implement reporting requirements that
are tied to (but do not overlap or duplicate) the requirements of the
proposed rules. The Board seeks comments and information regarding any
such rules that are duplicative, overlapping, or otherwise in conflict
with the proposed rules.
F. Discussion of Significant Alternatives
The Board has sought to incorporate flexibility into the proposals
in this NPR and provide alternative treatments to lessen burden and
complexity for smaller banking organizations wherever possible,
consistent with safety and soundness and applicable law, including the
Dodd-Frank Act. These alternatives and flexibility features include the
following:
Covered small banking organizations would not be subject
to the enhanced disclosure requirements of the proposed rules.
Covered small banking organizations could choose to apply
the gross-up approach for securitization exposures rather than the
SSFA.
[[Page 52934]]
The proposal also offers covered small banking organizations a
choice between a simpler and more complex methods of risk weighting
equity exposures to investment funds.
The Board welcomes comment on any significant alternatives to the
proposed rules applicable to covered small banking organizations that
would minimize their impact on those entities, as well as on all other
aspects of its analysis. A final regulatory flexibility analysis will
be conducted after consideration of comments received during the public
comment period.
OCC
In accordance with section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.) (RFA), the OCC is publishing this summary of its
Initial Regulatory Flexibility Analysis (IRFA) for this NPR. The RFA
requires an agency to publish in the Federal Register its IRFA or a
summary of its IRFA at the time of the publication of its general
notice of proposed rulemaking \86\ or to certify that the proposed rule
will not have a significant economic impact on a substantial number of
small entities.\87\ For its IRFA, the OCC analyzed the potential
economic impact of this NPR on the small entities that it regulates.
---------------------------------------------------------------------------
\86\ 5 U.S.C. 603(a).
\87\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
The OCC welcomes comment on all aspects of the summary of its IRFA.
A final regulatory flexibility analysis will be conducted after
consideration of comments received during the public comment period.
A. Reasons Why the Proposed Rule is Being Considered by the Agencies;
Statement of the Objectives of the Proposed Rule; and Legal Basis
As discussed in the Supplementary Information section above, the
agencies are proposing to revise their capital requirements to promote
safe and sound banking practices, implement Basel III, and harmonize
capital requirements across charter type. This NPR also satisfies
certain requirements under the Dodd-Frank Act by revising regulatory
capital requirements to remove all references to, and requirements of
reliance on, credit ratings. Federal law authorizes each of the
agencies to prescribe capital standards for the banking organizations
it regulates.\88\
---------------------------------------------------------------------------
\88\ See, e.g., 12 U.S.C. 1467a(g)(1); 12 U.S.C. 1831o(c)(1); 12
U.S.C. 1844; 12 U.S.C. 3907; and 12 U.S.C. 5371.
---------------------------------------------------------------------------
B. Small Entities Affected by the Proposal
Under regulations issued by the Small Business Administration,\89\
a small entity includes a depository institution or bank holding
company with total assets of $175 million or less (a small banking
organization). As of March 31, 2012, there were approximately 599 small
national banks and 284 small federally chartered savings associations.
---------------------------------------------------------------------------
\89\ See 13 CFR 121.201.
---------------------------------------------------------------------------
C. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
This NPR includes changes to the general risk-based capital
requirements that address the calculation of risk-weighted assets and
affect small banking organizations. The proposed rules in this NPR that
would affect small banking organizations include:
1. Changing the denominator of the risk-based capital ratios by
revising the asset risk weights;
2. Revising the treatment of counterparty credit risk;
3. Replacing references to credit ratings with alternative measures
of creditworthiness;
4. Providing more comprehensive recognition of collateral and
guarantees; and
5. Providing a more favorable capital treatment for transactions
cleared through qualifying central counterparties.
These changes are designed to enhance the risk-sensitivity of the
calculation of risk-weighted assets. Therefore, capital requirements
may go down for some assets and up for others. For those assets with a
higher risk weight under this NPR, however, that increase may be large
in some instances, e.g., requiring the equivalent of a dollar-for-
dollar capital charge for some securitization exposures.
The Basel Committee on Banking Supervision has been conducting
periodic reviews of the potential quantitative impact of the Basel III
framework.\90\ Although these reviews monitor the impact of
implementing the Basel III framework rather than the proposed rule, the
OCC is using estimates consistent with the Basel Committee's analysis,
including a conservative estimate of a 20 percent increase in risk-
weighted assets, to gauge the impact of this NPR on risk-weighted
assets. Using this assumption, the OCC estimates that a total of 56
small national banks and federally chartered savings associations will
need to raise additional capital to meet their regulatory minimums. The
OCC estimates that this total projected shortfall will be $143 million
and that the cost of lost tax benefits associated with increasing total
capital by $143 million will be approximately $0.8 million per year.
Averaged across the 56 affected institutions, the cost is approximately
$14,000 per institution per year.
---------------------------------------------------------------------------
\90\ See, ``Update on Basel III Implementation Monitoring,''
Quantitative Impact Study Working Group, January 28, 2012.
---------------------------------------------------------------------------
To comply with the proposed rules in this NPR, covered small
banking organizations would be required to change their internal
reporting processes. These changes would require some additional
personnel training and expenses related to new systems (or modification
of existing systems) for calculating regulatory capital ratios.
Additionally, covered small banking organizations that hold certain
exposures would be required to obtain additional information under the
proposed rules in order to determine the applicable risk weights.
Covered small banking organizations that hold exposures to sovereign
entities other than the United States, foreign depository institutions,
or foreign public sector entities would have to acquire Country Risk
Classification ratings produced by the OECD to determine the applicable
risk weights. Covered small banking organizations that hold residential
mortgage exposures would need to have and maintain information about
certain underwriting features of the mortgage as well as the LTV ratio
in order to determine the applicable risk weight. Generally, covered
small banking organizations that hold securitization exposures would
need to obtain sufficient information about the underlying exposures to
satisfy due diligence requirements and apply either the simplified
supervisory formula or the gross-up approach described in section ----
--.43 of this NPR to calculate the appropriate risk weight, or be
required to assign a 1,250 percent risk weight to the exposure.
Covered small banking organizations typically do not hold
significant exposures to foreign entities or securitization exposures,
and the agencies expect any additional burden related to calculating
risk weights for these exposures, or holding capital against these
exposures, would be relatively modest. The OCC estimates that, for
small national banks and federal savings associations, the cost of
implementing the alternative measures of creditworthiness will be
approximately $36,125 per institution.
Some covered small banking organizations may hold significant
residential mortgage exposures.
[[Page 52935]]
However, if the small banking organization originated the exposure, it
should have sufficient information to determine the applicable risk
weight under the proposed rule. If the small banking organization
acquired the exposure from another institution, the information it
would need to determine the applicable risk weight is consistent with
information that it should normally collect for portfolio monitoring
purposes and internal risk management.
Covered small banking organizations would not be subject to the
disclosure requirements in subpart D of the proposed rule. However, the
agencies expect to modify regulatory reporting requirements that apply
to covered small banking organizations to reflect the changes made to
the agencies' capital requirements in the proposed rules. The agencies
expect to propose these changes to the relevant reporting forms in a
separate notice.
To determine if a proposed rule has a significant economic impact
on small entities we compared the estimated annual cost with annual
noninterest expense and annual salaries and employee benefits for each
small entity. If the estimated annual cost was greater than or equal to
2.5 percent of total noninterest expense or 5 percent of annual
salaries and employee benefits we classified the impact as significant.
The OCC has concluded that the proposals included in this NPR would
exceed this threshold for 500 small national banks and 253 small
federally chartered private savings institutions. Accordingly, for the
purposes of this IRFA, the OCC has concluded that the changes proposed
in this NPR, when considered without regard to other changes to the
capital requirements that the agencies simultaneously are proposing,
would have a significant economic impact on a substantial number of
small entities.
Additionally, as discussed in the Supplementary Information section
above, the changes proposed in this NPR should be considered together
with changes proposed in the separate Basel III NPR also published in
today's Federal Register. The changes described in the Basel III NPR
include changes to minimum capital requirements that would impact small
national banks and federal savings associations. These include a more
conservative definition of regulatory capital, a new common equity tier
1 capital ratio, a higher minimum tier 1 capital ratio, new thresholds
for prompt corrective action purposes, and a new capital conservation
buffer. To estimate the impact of the Basel III NPR on national banks'
and federal savings' association capital needs, the OCC estimated the
amount of capital the banks will need to raise to meet the new minimum
standards relative to the amount of capital they currently hold. To
estimate new capital ratios and requirements, the OCC used currently
available data from banks' quarterly Consolidated Report of Condition
and Income (Call Reports) to approximate capital under the proposed
rule, which shows that most banks have raised their capital levels well
above the existing minimum requirements. After comparing existing
levels with the proposed new requirements, the OCC determined that 28
small institutions that it regulates would fall short of the proposed
increased capital requirements. Together, those institutions would need
to raise approximately $82 million in regulatory capital to meet the
proposed minimum requirements set forth in the Basel III NPR. The OCC
estimates that the cost of lost tax benefits associated with increasing
total capital by $82 million will be approximately $0.5 million per
year. Averaged across the 28 affected institutions, the cost attributed
to the Basel III NPR is approximately $18,000 per institution per year.
The OCC concluded for purposes of its IRFA for the Basel III NPR that
the changes described in the Basel III NPR, when considered without
regard to changes in this NPR, would not result in a significant
economic impact on a substantial number of small entities. However, the
OCC has concluded that the proposed changes in this NPR would result in
a significant economic impact on a substantial number of small
entities. Therefore, considered together, this NPR and the Basel III
NPR would have a significant economic impact on a substantial number of
small entities.
D. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
The OCC is unaware of any duplicative, overlapping, or conflicting
federal rules. As noted previously, the OCC anticipates issuing a
separate proposal to implement reporting requirements that are tied to
(but do not overlap or duplicate) the requirements of the proposed
rules. The OCC seeks comments and information regarding any such
federal rules that are duplicative, overlapping, or otherwise in
conflict with the proposed rule.
E. Discussion of Significant Alternatives to the Proposed Rule
The agencies have sought to incorporate flexibility into the
proposed rule and lessen burden and complexity for smaller banking
organizations wherever possible, consistent with safety and soundness
and applicable law, including the Dodd-Frank Act. The agencies are
requesting comment on potential options for simplifying the rule and
reducing burden, including whether to permit certain small banking
organizations to continue using portions of the current general risk-
based capital rules to calculate risk-weighted assets. Additionally,
the agencies proposed the following alternatives and flexibility
features:
Covered small banking organizations are not subject to the
enhanced disclosure requirements of the proposed rules.
Covered small banking organizations would continue to
apply a 100 percent risk weight to corporate exposures (as described in
section ----.32 of this NPR).
Covered small banking organizations may choose to apply
the simpler gross-up method for securitization exposures rather than
the Simplified Supervisory Formula Approach (SSFA) (as described in
section ----.43 of this NPR).
The proposed rule offers covered small banking
organizations a choice between a simpler and more complex methods of
risk weighting equity exposures to investment funds (as described in
section ----.53 of this NPR).
The agencies welcome comment on any significant alternatives to the
proposed rules applicable to covered small banking organizations that
would minimize their impact on those entities.
VII. Paperwork Reduction Act
A. Request for Comment on Proposed Information Collection
In accordance with the requirements of the Paperwork Reduction Act
(PRA) of 1995, the Agencies may not conduct or sponsor, and the
respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(OMB) control number. The Agencies are requesting comment on a proposed
information collection.
The information collection requirements contained in this joint
notice of proposed rulemaking (NPRs) have been submitted by the OCC and
FDIC to OMB for review under the PRA, under OMB Control Nos. 1557-0234
and 3064-0153. In accordance with the PRA (44 U.S.C. 3506; 5 CFR part
1320, Appendix A.1), the Board has reviewed the NPR under the authority
delegated by OMB. The Board's OMB Control No. is 7100-0313. The
requirements are
[[Page 52936]]
found in Sec. Sec. ----.35, ----.37, ----.41, ----.42, ----.62, and --
--.63.
The Agencies have published two other NPRs in this issue of the
Federal Register. Please see the NPRs entitled ``Regulatory Capital
Rules: Regulatory Capital, Minimum Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions'' and ``Regulatory Capital Rules:
Advanced Approaches Risk-based Capital Rules; Market Risk Capital
Rule.'' While the three NPRs together comprise an integrated capital
framework, the PRA burden has been divided among the three NPRs and a
PRA statement has been provided in each.
Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the Agencies' functions, including whether the
information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record.
Comments should be addressed to:
OCC: Communications Division, Office of the Comptroller of the
Currency, Public Information Room, Mail stop 1-5, Attention: 1557-0234,
250 E Street SW., Washington, DC 20219. In addition, comments may be
sent by fax to 202-874-4448, or by electronic mail to
[email protected]. You can inspect and photocopy the comments
at the OCC's Public Information Room, 250 E Street SW., Washington, DC
20219. You can make an appointment to inspect the comments by calling
202-874-5043.
Board: You may submit comments, identified by R-14441255, by any of
the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments on the http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include docket
number in the subject line of the message.
Fax: 202-452-3819 or 202-452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper in Room MP-500 of the Board's Martin Building (20th and C Streets
NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit written comments, which should refer to RIN
3064-AD96 Standardized Approach for Risk-weighted Assets; Market
Discipline and Disclosure Requirements 0153, by any of the following
methods:
Agency Web Site: http://www.fdic.gov/regulations/laws/
federal/propose.html. Follow the instructions for submitting comments
on the FDIC Web site.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected].
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, FDIC, 550 17th Street NW., Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m.
Public Inspection: All comments received will be posted without
change to http://www.fdic.gov/regulations/laws/federal/propose/html
including any personal information provided. Comments may be inspected
at the FDIC Public Information Center, Room 100, 801 17th Street NW.,
Washington, DC, between 9 a.m. and 4:30 p.m. on business days.
B. Proposed Information Collection
Title of Information Collection: Basel III, Part II.
Frequency of Response: On occasion and quarterly.
Affected Public:
OCC: National banks and federally chartered savings associations.
Board: State member banks, bank holding companies, and savings and
loan holding companies.
FDIC: Insured state nonmember banks, state savings associations,
and certain subsidiaries of these entities.
Estimated Burden: The burden estimates below exclude any regulatory
reporting burden associated with changes to the Consolidated Reports of
Income and Condition for banks (FFIEC 031 and FFIEC 0431; OMB Nos.
7100- 0036, 3064-0052, 1557-0081), and the Financial Statements for
Bank Holding Companies (FR Y-9; OMB No. 7100-0128), and the Capital
Assessments and Stress Testing information collection (FR Y-14A/Q/M;
OMB No. 7100-0341).
The agencies are still considering whether to revise these
information collections or to implement a new information collection
for the regulatory reporting requirements. In either case, a separate
notice would be published for comment on the regulatory reporting
requirements.
OCC
Estimated Number of Respondents: Independent national banks, 172;
federally chartered savings banks, 603.
Estimated Burden per Respondent: One-time recordkeeping, 122 hours;
ongoing recordkeeping, 20 hours; one-time disclosures, 226.25 hours;
ongoing disclosures, 131.25 hours.
Total Estimated Annual Burden: 112,303.75 hours.
Board
Estimated Number of Respondents: SMBs, 831; BHCs, 933; SLHCs, 438.
Estimated Burden per Respondent: One-time recordkeeping, 122 hours;
ongoing recordkeeping, 20 hours; one-time disclosures, 226.25 hours;
ongoing disclosures, 131.25 hours.
Total Estimated Annual Burden: One-time recordkeeping and
disclosures, 279,277.75 hours; ongoing recordkeeping and disclosures
68,715.
FDIC
Estimated Number of Respondents: 4,571.
Estimated Burden per Respondent: One-time recordkeeping, 122 hours;
ongoing recordkeeping, 20 hours; one-time disclosures, 226.25 hours;
ongoing disclosures, 131.25 hours.
Total Estimated Annual Burden: 652,087 hours (558,567 one-time
recordkeeping and disclosures; 93,520 ongoing recordkeeping and
disclosures).
Abstract:
The recordkeeping requirements are found in sections --.35, --.37,
-- and .41. The disclosure requirements are found in sections --.42,
--.62, and --.63. These recordkeeping and disclosure requirements are
necessary for the agencies' assessment and monitoring of
[[Page 52937]]
the risk-sensitivity of the calculation of a banking organization's
total risk-weighted assets and for general safety and soundness
purposes.
Section-by-section Analysis
Recordkeeping
Section --.35 sets forth requirements for cleared transactions.
Section --.35(b)(3)(i)(A) would require for a cleared transaction with
a qualified central counterparty (QCCP) that a client bank apply a risk
weight of 2 percent, provided that the collateral posted by the bank to
the QCCP is subject to certain arrangements and the client bank has
conducted a sufficient legal review (and maintains sufficient written
documentation of the legal review) to conclude with a well-founded
basis that the arrangements, in the event of a legal challenge, would
be found to be legal, valid, binding and enforceable under the law of
the relevant jurisdictions. The agencies estimate that respondents
would take on average 2 hours to reprogram and update systems with the
requirements outlined in this section. In addition, the agencies
estimate that, on a continuing basis, respondents would take on average
2 hours annually to maintain their internal systems.
Section --.37 addresses requirements for collateralized
transactions. Section --.37(c)(4)(i)(E) would require that a bank have
policies and procedures describing how it determines the period of
significant financial stress used to calculate its own internal
estimates for haircuts and be able to provide empirical support for the
period used. The agencies estimate that respondents would take on
average 80 hours (two business weeks) to reprogram and update systems
with the requirements outlined in this section. In addition, the
agencies estimate that, on a continuing basis, respondents would take
on average 16 hours annually to maintain their internal systems.
Section --.41 addresses operational requirements for securitization
exposures. Section --.41(b)(3) would allow for synthetic
securitizations a bank's recognition, for risk-based capital purposes,
of a credit risk mitigant to hedge underlying exposures if certain
conditions are met, including the bank's having obtained a well-
reasoned opinion from legal counsel that confirms the enforceability of
the credit risk mitigant in all relevant jurisdictions. Section
--.41(c)(2)(i) would require that a bank support a demonstration of its
comprehensive understanding of a securitization exposure by conducting
and documenting an analysis of the risk characteristics of each
securitization exposure prior to its acquisition, taking into account a
number of specified considerations. The agencies estimate that
respondents would take on average 40 hours (one business week) to
reprogram and update systems with the requirements outlined in this
section. In addition, the agencies estimate that, on a continuing
basis, respondents would take on average 2 hours annually to maintain
their internal systems.
Disclosures
Section --.42 addresses risk-weighted assets for securitization
exposures. Section --.42(e)(2) would require that a bank publicly
disclose that is has provided implicit support to the securitization
and the risk-based capital impact to the bank of providing such
implicit support.
Section --.62 sets forth disclosure requirements related to a
bank's capital requirements. Section --.62(a) specifies a quarterly
frequency for the disclosure of information in the applicable tables
set out in section 63 and, if a significant change occurs, such that
the most recent reported amounts are no longer reflective of the bank's
capital adequacy and risk profile, section --.62(a) also would require
the bank to disclose as soon as practicable thereafter, a brief
discussion of the change and its likely impact. Section 62(a) would
allow for annual disclosure of qualitative information that typically
does not change each quarter, provided that any significant changes are
disclosed in the interim. Section --.62(b) would require that a bank
have a formal disclosure policy approved by the board of directors that
addresses its approach for determining the disclosures it makes. The
policy would be required to address the associated internal controls
and disclosure controls and procedures. Section 62(c) would require a
bank with total consolidated assets of $50 billion or more that is not
an advanced approaches bank, if it concludes that specific commercial
or financial information required to be disclosed under section --.62
would be exempt from disclosure by the agency under the Freedom of
Information Act (5 U.S.C. 552), to disclose more general information
about the subject matter of the requirement and the reason the specific
items of information have not been disclosed.
Section --.63 sets forth disclosure requirements for banks with
total consolidated assets of $50 billion or more that are not advanced
approaches banks. Section --.63(a) would require a bank to make the
disclosures in Tables 14.1 through 14.10 and in section --.63(b) for
each of the last three years beginning on the effective date of the
rule. Section --.63(b) would require quarterly disclosure of a bank's
common equity tier 1 capital, additional tier 1 capital, tier 2
capital, tier 1 and total capital ratios, including the regulatory
capital elements and all the regulatory adjustments and deductions
needed to calculate the numerator of such ratios; total risk-weighted
assets, including the different regulatory adjustments and deductions
needed to calculate total risk-weighted assets; regulatory capital
ratios during any transition periods, including a description of all
the regulatory capital elements and all regulatory adjustments and
deductions needed to calculate the numerator and denominator of each
capital ratio during any transition period; and a reconciliation of
regulatory capital elements as they relate to its balance sheet in any
audited consolidated financial statements. Table 14.1 sets forth scope
of application qualitative and quantitative disclosure requirements;
Table 14.2 sets forth capital structure qualitative and quantitative
disclosure requirements; Table 14.3 sets forth capital adequacy
qualitative and quantitative disclosure requirements; Table 14.4 sets
forth capital conservation buffer qualitative and quantitative
disclosure requirements; Table 14.5 sets forth general qualitative and
quantitative disclosure requirements for credit risk; Table 14.6 sets
forth general qualitative and quantitative disclosure requirements for
counterparty credit risk-related exposures; Table 14.7 sets forth
qualitative and quantitative disclosure requirements for credit risk
mitigation; Table 14.8 sets forth qualitative and quantitative
disclosure requirements for securitizations; Table 14.9 sets forth
qualitative and quantitative disclosure requirements for equities not
subject to Subpart F of the rule; and Table 14.10 sets forth
qualitative and quantitative disclosure requirements for interest rate
risk for non-trading activities.
The agencies estimate that respondents would take on average 226.25
hours to reprogram and update systems with the requirements outlined in
these sections. In addition, the agencies estimate that, on a
continuing basis, respondents would take on average 131.25 hours
annually to maintain their internal systems.
VIII. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Federal
banking agencies to use plain language in all
[[Page 52938]]
proposed and final rules published after January 1, 2000. The agencies
invited comment on whether the proposed rule was written plainly and
clearly or whether there were ways the agencies could make the rule
easier to understand. The agencies received no comments on these
matters and believe that the final rule is written plainly and clearly
in conjunction with the agencies' risk-based capital rules.
IX. OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) (2
U.S.C. 1532 et seq.) requires that an agency prepare a written
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 written
statement is required, the UMRA (2 U.S.C. 1535) also requires an agency
to identify and consider a reasonable number of regulatory alternatives
before promulgating a rule and from those alternatives, either select
the least costly, most cost-effective or least burdensome alternative
that achieves the objectives of the rule, or provide a statement with
the rule explaining why such an option was not chosen.
Under this NPR, the OCC is proposing changes to their minimum
capital requirements that address the calculation of risk-weighted
assets. The proposed rule would:
1. Change denominator of the risk-based capital ratios by revising
the methodologies for calculating risk weights;
2. Revise the treatment of counterparty credit risk;
3. Replace references to credit ratings with alternative measures
of creditworthiness;
4. Provide more comprehensive recognition of collateral and
guarantees;
5. Provide a more favorable capital treatment for transactions
cleared through qualifying central counterparties; and
6. Introduce disclosure requirements for banking organizations with
assets of $50 billion or more.
To estimate the impact of this NPR on national banks and federal
savings associations, the OCC estimated the amount of capital banks
will need to raise to meet the new minimum standards relative to the
amount of capital they currently hold, as well as the compliance costs
associated with establishing the infrastructure to determine correct
risk weights using the new alternative measures of creditworthiness and
the compliance costs associated with new disclosure requirements. The
OCC has determined that its NPR will not result in expenditures by
State, local, and Tribal governments, or by the private sector, of $100
million or more (adjusted annually for inflation). Accordingly, the
UMRA does not require that a written statement accompany this NPR.
Addendum 1: Summary of this NPR for Community Banking Organizations
Overview
The agencies are issuing a notice of proposed rulemaking (NPR,
proposal, or proposed rule) to harmonize and address shortcomings in
the measurement of risk-weighted assets that became apparent during
the recent financial crisis, in part by implementing in the United
States changes made by the Basel Committee on Banking Supervision
(BCBS) to international regulatory capital standards and by
implementing aspects of the Dodd-Frank Act. Among other things, the
proposed rule would:
Revise risk weights for residential mortgages based on
loan-to-value ratios and certain product and underwriting features;
Increase capital requirements for past-due loans, high
volatility commercial real estate exposures, and certain short-term
loan commitments;
Expand the recognition of collateral and guarantors in
determining risk-weighted assets;
Remove references to credit ratings; and
Establish due diligence requirements for securitization
exposures.
This addendum presents a summary of the proposal in this NPR
that is most relevant for smaller, less complex banking
organizations that are not subject to the market risk capital rule
or the advanced approaches capital rule, and that have under $50
billion in total assets. The agencies intend for this addendum to
act as a guide for these banking organizations, helping them to
navigate the proposed rule and identify the changes most relevant to
them. The addendum does not, however, by itself provide a complete
understanding of the proposed rules and the agencies expect and
encourage all institutions to review the proposed rule in its
entirety.
A. Zero Percent Risk-weighted Items
The following exposures would receive a zero percent risk weight
under the proposal:
Cash;
Certain gold bullion;
Direct and unconditional claims on the U.S. government,
its central bank, or a U.S. government agency;
Exposures unconditionally guaranteed by the U.S.
government, its central bank, or a U.S. government agency;
Claims on certain supranational entities (such as the
International Monetary Fund) and certain multilateral development
banking organizations; and
Claims on and exposures unconditionally guaranteed by
sovereign entities that meet certain criteria (as discussed below).
For more information, please refer to sections 32(a) and
37(b)(3)(iii) of the proposal. For exposures to foreign governments
and their central banks, see section L below.
B. 20 Percent Risk Weighted Items
The following exposures would receive a twenty percent risk
weight under the proposal:
Cash items in the process of collection;
Exposures conditionally guaranteed by the U.S.
government, its central bank, or a U.S. government agency;
Claims on government-sponsored entities (GSEs);
Claims on U.S. depository institutions and National
Credit Union Administration (NCUA)-insured credit unions;
General obligation claims on, and claims guaranteed by
the full faith and credit of state and local governments (and any
other public sector entity, as defined in the proposal) in the
United States; and
Claims on and exposures guaranteed by foreign banks and
public sector entities if the sovereign of incorporation of the
foreign bank or public sector entity meets certain criteria (as
described below).
A conditional guarantee is one that requires the satisfaction of
certain conditions, for example servicing requirements.
For more information, please refer to sections 32(a) through
32(e), and section 32(l) of the proposal. For exposures to foreign
banks and public sector entities, see section L below.
C. 50 Percent Risk-weighted Exposures
The following exposures would receive a 50 percent risk weight
under the proposal:
``Statutory'' multifamily mortgage loans meeting
certain criteria;
Presold residential construction loans meeting certain
criteria;
Revenue bonds issued by state and local governments in
the United States; and
Claims on and exposures guaranteed by sovereign
entities, foreign banks, and foreign public sector entities that
meet certain criteria (as described below).
The criteria for multifamily loans and presold residential
construction loans are generally the same as in the existing general
risk-based capital rules. These criteria are required under federal
law.\91\ Consistent with the general risk-based capital rules and
requirements of the statute, the proposal would assign a 100 percent
risk weight to pre-sold construction loans where the contract is
cancelled.
---------------------------------------------------------------------------
\91\ See sections 618(a)(1) or (2) and 618(b)(1) of the
Resolution Trust Corporation Refinancing, Restructuring, and
Improvement Act of 1991.
---------------------------------------------------------------------------
For more information, please refer to sections 32(e), 32(h), and
32(i) of the proposal. Also refer to section 2 of the proposal for
relevant definitions:
--Pre-sold construction loan.
--Revenue obligation.
--Statutory multifamily mortgage.
[[Page 52939]]
D. 1-4 Family Residential Mortgage Loans
Under the proposed rule, 1-4 family residential mortgages would
be separated into two risk categories (``category 1 residential
mortgage exposures'' and ``category 2 residential mortgage
exposures'') based on certain product and underwriting
characteristics. The proposed definition of category 1 residential
mortgage exposures would generally include traditional, first-lien,
prudently underwritten mortgage loans. The proposed definition of
category 2 residential mortgage exposures would generally include
junior-liens and non-traditional mortgage products.
The proposal would not recognize private mortgage insurance
(PMI) for purposes of calculating the loan to value (LTV) ratio.
Therefore, the LTV levels in the table below represent only the
borrower's equity in the mortgaged property.
The table below shows the proposed risk weights for 1-4 family
residential mortgage loans, based on the LTV ratio and risk category
of the exposure:
----------------------------------------------------------------------------------------------------------------
Risk weight for Risk weight for
category 1 residential category 2 residential
LTV ratio (in percent) mortgage exposures mortgage exposures
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
Less than or equal to 60...................................... 35 100
Greater than 60 and less than or equal to 80.................. 50 100
Greater than 80 and less than or equal to 90.................. 75 150
Greater than 90............................................... 100 200
----------------------------------------------------------------------------------------------------------------
Definitions:
Category 1 residential mortgage exposure would mean a
residential mortgage exposure with the following characteristics:
--The term of the mortgage loan does not exceed 30 years;
--The terms of the mortgage loan provide for regular periodic
payments that do not:
[cir] Result in an increase of the principal balance;
[cir] Allow the borrower to defer repayment of principal of the
residential mortgage exposure; or,
[cir] Result in a balloon payment;
--The standards used to underwrite the residential mortgage loan:
[cir] Took into account all of the borrower's obligations, including
for mortgage obligations, principal, interest, taxes, insurance, and
assessments; and
[cir] Resulted in a conclusion that the borrower is able to repay
the loan using:
[squf] The maximum interest rate that may apply during the first
five years after the date of the closing of the residential mortgage
loan; and
[squf] The amount of the residential mortgage loan as of the date of
the closing of the transaction;
--The terms of the residential mortgage loan allow the annual rate
of interest to increase no more than two percentage points in any
twelve-month period and no more than six percentage points over the
life of the loan;
--For a first-lien home equity line of credit (HELOC), the borrower
must be qualified using the principal and interest payments based on
the maximum contractual exposure under the terms of the HELOC;
--The determination of the borrower's ability to repay is based on
documented, verified income;
--The residential mortgage loan is not 90 days or more past due or
on non-accrual status; and
--The residential mortgage loan is not a junior-lien residential
mortgage exposure.
Category 2 residential mortgage exposure would mean a
residential mortgage exposure that is not a Category 1 residential
mortgage exposure and is not guaranteed by the U.S. government.
LTV ratio would equal the loan amount divided by the value of
the property.
Loan Amount:
--For a first-lien residential mortgage, the loan amount would be
the maximum contractual principal amount of the loan. For a
traditional mortgage loan where the loan balance will not increase
under the terms of the mortgage, the loan amount is the current loan
balance. However, for a loan whose balance may increase under the
terms of the mortgage, such as pay-option adjustable loan that can
negatively amortize or for a HELOC, the loan amount is the maximum
contractual principal amount of the loan.
--For a junior-lien mortgage, the loan amount would be the maximum
contractual principal amount of the loan plus the maximum
contractual principal amounts of all more senior loans secured by
the same residential property on the date of origination of the
junior-lien residential mortgage.
The value of the property is the lesser of the acquisition cost
(for a purchase transaction) or the estimate of the property's value
at the origination of the loan or the time of restructuring. The
banking organization must base all estimates of a property's value
on an appraisal or evaluation of the property that meets the
requirements of the primary federal supervisor's appraisal
regulations.\92\
---------------------------------------------------------------------------
\92\ The appraisal or evaluation must satisfy the requirements
of 12 CFR part 34, subpart C, 12 CFR part 164 (OCC); 12 CFR part
208, subpart E (Board); 12 CFR part 323, 12 CFR 390.442 (FDIC).
---------------------------------------------------------------------------
If a banking organization holds a first mortgage and junior-lien
mortgage on the same residential property and there is no
intervening lien, the proposal treats the combined exposure as a
single first-lien mortgage exposure.
If a banking organization holds two or more mortgage loans on
the same residential property, and one of the loans is category 2,
then the banking organization would be required to treat all of the
loans on the property as category 2.
Additional Notes:
--1-4 family mortgage loans sold with recourse are converted to an
on-balance sheet credit equivalent amount using a 100 percent
conversion factor. There is no grace period, such as the 120-day
exception under the current general risk-based capital rules.
--Restructured and modified mortgages would be assigned risk weights
based on their LTVs and classification as category 1 or category 2
residential mortgage exposures based on the modified contractual
terms. If the LTV is not updated at the time of modification or
restructuring, a category 1 residential mortgage would receive a
risk weight of 100 percent and a category 2 residential mortgage
would receive a risk weight of 200 percent.
--Similar to the current capital rules, loans modified or
restructured under the Treasury's Home Affordable Mortgage Program
(HAMP) would not be considered modified or restructured for the
purposes of the proposal.
For more information, please refer to section 32(g) of the
proposal. Also refer to section 2 for relevant definitions:
--Category 1 residential mortgage exposure
--Category 2 residential mortgage exposure
--First lien residential mortgage exposure
--Junior-lien residential mortgage
--Residential mortgage exposure
E. Past Due Exposures
The proposal would assign a 150 percent risk weight to loans and
other exposures that are 90 days or more past due. This applies to
all exposure categories except for the following:
--1-4 family residential exposures (1-4 family loans over 90 days
past due and are in Category 2 and would be risk weighted as
described in section D).
--A sovereign exposure where the sovereign has experienced a
sovereign default.
For more information, please refer to section 32(k) of the
proposal.
F. High-Volatility Commercial Real Estate Loans (HVCRE)
The proposal would assign a 150 percent risk weight to HVCRE
exposures. The
[[Page 52940]]
proposal defines an HVCRE exposure as a credit facility that
finances or has financed the acquisition, development, or
construction (ADC) of real property, unless the facility finances:
--One- to four-family residential properties; or
--Commercial real estate projects in which:
[cir] The LTV ratio is less than or equal to the applicable maximum
supervisory LTV ratio;
[cir] The borrower has contributed capital to the project in the
form of cash or unencumbered readily marketable assets (or has paid
development expenses out-of-pocket) of at least 15 percent of the
real estate's appraised ``as completed'' value; and
[cir] The borrower contributed the amount of capital required by
this definition before the banking organization advances funds under
the credit facility, and the capital contributed by the borrower, or
internally generated by the project, is contractually required to
remain in the project throughout the life of the project. The life
of a project concludes only when the credit facility is converted to
permanent financing or is sold or paid in full. Permanent financing
may be provided by the banking organization that provided the ADC
facility as long as the permanent financing conforms with the
banking organization's underwriting criteria for long-term mortgage
loans.
For more information please refer to section 32 of the proposal.
Also refer to section 2 for relevant definitions:
--High-volatility commercial real estate exposure (HVCRE)
G. Commercial Loans/Corporate Exposures
The proposal would assign a 100 percent risk weight to all
corporate exposures. The definition of a corporate exposure would
exclude exposures that are specifically covered elsewhere in the
proposal, such as HVCRE, pre-sold residential construction loans,
and statutory multifamily mortgages.
For more information please refer to section 32(f) of the
proposal, and section 33 for off-balance sheet exposures.
H. Consumer Loans and Credit Cards
Under the proposed rule, consumer loans and credit cards would
continue to receive a 100 percent risk weight. The proposal does not
specifically list these assets, but they fall into the ``other
assets'' category that would receive a 100 percent risk weight.
For more information, please refer to section 32(l) of the
proposal.
I. Basel III Risk Weight Items
As described in the Basel III NPR, the amounts of the threshold
deduction items (mortgage servicing assets, certain deferred tax
assets, and investments in the common equity of financial
institutions) that are not deducted would be assigned a risk weight
of 250 percent. In addition, certain high-risk exposures such as
credit-enhancing interest-only (CEIO) strips would receive 1,250
percent risk weight.
J. Other Assets and Exposures
Where the proposal does not assign a specific risk weight to an
asset or exposure type, the applicable risk weight would be 100
percent. For example, premises, fixed assets, and other real estate
owned receive a risk weight of 100 percent. Section 32(m) of the
proposal for bank holding companies and savings and loan holding
companies provides specific risk weights for certain insurance-
related assets.
For more information, please refer to section 32(l) of the
proposal.
K. Conversion Factors for Off-balance Sheet Items
Similar to the current rules, under the proposal, a banking
organization would be required to calculate the exposure amount of
an off-balance sheet exposure using the credit conversion factors
(CCFs) below. The proposal increases the CCR for commitments with an
original maturity of one year or less from zero percent to 20
percent.
--Zero percent CCF. A banking organization would apply a zero
percent CCF to the unused portion of commitments that are
unconditionally cancelable by the banking organization.
--20 percent CCF. A banking organization would apply a 20 percent
CCF to:
[cir] Commitments with an original maturity of one year or less that
are not unconditionally cancelable by the banking organization.
[cir] Self-liquidating, trade-related contingent items that arise
from the movement of goods, with an original maturity of one year or
less.
--50 percent CCF. A banking organization would apply a 50 percent
CCF to:
[cir] Commitments with an original maturity of more than one year
that are not unconditionally cancelable by the banking organization.
[cir] Transaction-related contingent items, including performance
bonds, bid bonds, warranties, and performance standby letters of
credit.
--100 percent CCF. A banking organization would apply a 100 percent
CCF to the following off-balance-sheet items and other similar
transactions:
[cir] Guarantees;
[cir] Repurchase agreements (the off-balance sheet component of
which equals the sum of the current market values of all positions
the banking organization has sold subject to repurchase);
[cir] Off-balance sheet securities lending transactions (the off-
balance sheet component of which equals the sum of the current
market values of all positions the banking organization has lent
under the transaction);
[cir] Off-balance sheet securities borrowing transactions (the off-
balance sheet component of which equals the sum of the current
market values of all non-cash positions the banking organization has
posted as collateral under the transaction);
[cir] Financial standby letters of credit; and
[cir] Forward agreements.
For more information please refer to section 33 of the proposal.
Also refer to section 2 for the definition of unconditionally
cancelable.
L. Over-the-Counter (OTC) Derivative Contracts
The proposal provides a method for determining the risk-based
capital requirement for a derivative contract that is similar to the
general risk-based capital rules. Under the proposed rule, the
banking organization would determine the exposure amount and then
assign a risk weight based on the counterparty or collateral. The
exposure amount is the sum of current exposures plus potential
future credit exposures (PFEs). In contrast to the general risk-
based capital rules, which place a 50 percent risk weight cap on
derivatives, the proposal does not include a risk weight cap and
introduces specific credit conversion factors for credit
derivatives.
The current credit exposure is the greater of zero or the mark-
to-market value of the derivative contract.
The PFE is generally the notional amount of the derivative
contract multiplied by a credit conversion factor for the type of
derivative contract. The table below shows the credit conversion
factors for derivative contracts:
Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit
Interest Foreign exchange (investment-grade Credit (non- Precious metals
Remaining maturity \2\ rate rate and gold \3\ reference investment-grade Equity (except gold) Other
(percent) (percent) asset) \4\ reference asset) (percent) (percent) (percent)
(percent) (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less..................... 0.0 1.0 5.0 10.0 6.0 7.0 10.0
Greater than one year and less than 0.5 5.0 5.0 10.0 8.0 7.0 12.0
or equal to five years..............
[[Page 52941]]
Greater than five years.............. 1.5 7.5 5.0 10.0 10.0 8.0 15.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ As proposed, ``investment grade'' would mean that the entity to which the banking organization is exposed through a loan or security, or the
reference entity with respect to a credit derivative, has adequate capacity to meet financial commitments for the projected life of the asset or
exposure. Such an entity or reference entity has adequate capacity to meet financial commitments if the risk of its default is low and the full and
timely repayment of principal and interest is expected.
\4\ A [BANK] must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative whose reference asset is an outstanding
unsecured long-term debt security without credit enhancement that is investment grade. A [BANK] must use the column labeled ``Credit (non-investment-
grade reference asset)'' for all other credit derivatives.
For more information please refer to section 34 of the proposal.
Also refer to section 2 for relevant definitions:
--Effective notional amount
--Eligible credit derivative
--Eligible derivative contract
--Exposure amount
--Interest rate derivative contract
M. Securitization Exposures
Section 42 of the proposal introduces due diligence requirements
for banking organizations that own, originate or purchase
securitization exposures and introduces a new definition of
securitization exposure. If a banking organization is unable to
demonstrate to the satisfaction of its primary federal supervisor a
comprehensive understanding of the features of a securitization
exposure that would materially affect the performance of the
exposure, the banking organization would be required to assign the
securitization exposure a risk weight of 1,250 percent. The banking
organization's analysis would be required to be commensurate with
the complexity of the securitization exposure and the materiality of
the exposure in relation to capital.
Note that mortgage-backed pass-through securities (for example,
those guaranteed by Federal Home Loan Mortgage Corporation (FHLMC)
or Federal National Mortgage Association (FNMA) do not meet the
proposed definition of a securitization exposure because they do not
involve a tranching of credit risk. Rather, only those mortgage-
backed securities that involve tranching of credit risk would be
securitization exposures. For securitization exposures guaranteed by
the U.S. Government or GSEs, there are no changes relative to the
existing treatment:
--The Government National Mortgage Association (Ginnie Mae)
securities receive a zero percent risk weight to the extent they are
unconditionally guaranteed.
--The Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac) guaranteed
securities receive a 20 percent risk weight.
--Fannie Mae and Freddie Mac non-credit enhancing interest-only (IO)
securities receive a 100 percent risk weight.
The risk-based capital requirements for securitizations under
the proposed rule would be as follows:
--A banking organization would deduct any after-tax gain-on-sale of
a securitization. (This requirement would usually pertain to banking
organizations that are securitizers rather than purchasers of
securitization exposures);
--A banking organization would assign a 1,250 percent risk weight to
a CEIO.
--A banking organization would assign a 100 percent risk weight to
non-credit enhancing IO mortgage-backed securities.
For privately-issued mortgage securities and all other
securitization exposures, a banking organization would be able
choose among the following approaches, provided that the banking
organization consistently applies such approach to all
securitization exposures: \93\
---------------------------------------------------------------------------
\93\ The ratings-based approach for externally-rated positions
would no longer be available.
--A banking organization may use the existing gross-up approach to
risk weight all of its securitizations. Under the existing gross-up
approach, senior securitization tranches are assigned the risk
weight associated with the underlying exposures. A banking
organization must hold capital for the senior tranche based on the
risk weight of the underlying exposures. For subordinate
securitization tranches, a banking organization must hold capital
for the subordinate tranche, as well as all more senior tranches for
which the subordinate tranche provides credit support.
--A banking organization may determine the risk weight for the
securitization exposure using the simplified supervisory formula
approach (SSFA) described in section 43 of the proposal. The SSFA
formula would require a banking organization to apply a supervisory
formula that requires various data inputs including the risk weight
applicable to the underlying exposures; the attachment and
detachment points of the securitization tranche, which is the
relative position of the securitization position in the structure
(subordination); and the current percentage of the underlying
exposures that are 90 days or more past due, in default, or in
foreclosure. Banking organizations considering the SSFA approach
should carefully read and consider section 43 of the proposal.
Alternatively, a banking organization may apply a 1,250 percent
risk weight to any of its securitization exposures.
For more information, please refer to sections 42-45 of the
proposal. Also refer to section 2 for the following definitions:
--Credit-enhancing interest-only strip
--Gain-on-sale
--Resecuritization
--Resecuritization exposure
--Securitization exposure
--Securitization special purpose entity (securitization SPE)
--Synthetic securitization
--Traditional securitization
--Underlying exposure
N. Equity Exposures
Under section 52 of the proposal, a banking organization would
apply a simple risk-weight approach (SRWA) to determine the risk
weight for equity exposures that are not exposures to an investment
fund. The following table indicates the risk weights that would
apply to equity exposures under the SRWA:
[[Page 52942]]
------------------------------------------------------------------------
Risk weight (in percent) Equity exposure
------------------------------------------------------------------------
0................................. An equity exposure to a sovereign
entity, the Bank for International
Settlements, the European Central
Bank, the European Commission, the
International Monetary Fund, a MDB,
and any other entity whose credit
exposures receive a zero percent
risk weight under section 32 of
this proposed rule.
20................................ An equity exposure to a public
sector entity, Federal Home Loan
Bank or the Federal Agricultural
Mortgage Corporation (Farmer Mac).
100............................... Community development
equity exposures.\94\
The effective portion of a
hedge pair.
Non-significant equity
exposures to the extent that the
aggregate adjusted carrying value
of the exposures does not exceed 10
percent of tier 1 capital plus tier
2 capital.
250............................... A significant investment in the
capital of an unconsolidated
financial institution that is not
deducted under section 22.
300............................... A publicly-traded equity exposure
(other than an equity exposure that
receives a 600 percent risk weight
and including the ineffective
portion of a hedge pair).
400............................... An equity exposure that is not
publicly-traded (other than an
equity exposure that receives a 600
percent risk weight).
600............................... An equity exposure to a hedge fund
or other investment firm that has
greater than immaterial leverage.
------------------------------------------------------------------------
---------------------------------------------------------------------------
\94\ The proposed rule generally defines Community Development
Exposures as exposures that would qualify as community development
investments under 12 U.S.C. 24(Eleventh), excluding equity exposures
to an unconsolidated small business investment company and equity
exposures held through a consolidated small business investment
company described in section 302 of the Small Business Investment
Act of 1958 (15 U.S.C. 682). For savings associations, community
development investments would be defined to mean equity investments
that are designed primarily to promote community welfare, including
the welfare of low- and moderate-income communities or families,
such as by providing services or jobs, and excluding equity
exposures to an unconsolidated small business investment company and
equity exposures held through a consolidated small business
investment company described in section 302 of the Small Business
Investment Act of 1958 (15 U.S.C. 682).
---------------------------------------------------------------------------
For more information, please refer to sections 51 and 52 of the
proposal, and any related definitions in section 2:
--Equity exposure
--Equity derivative contract
O. Equity Exposures to Investment Funds
The proposals described in this section would apply to equity
exposures to investment funds such as mutual funds, but not to hedge
funds or other leveraged investment funds (refer to section above).
For exposures to investment funds other than community development
exposures, a banking organization must use one of three risk-
weighting approaches described below:
1. Full look-through approach:
For this two-step approach, a banking organization would be
required to obtain information regarding the asset pool underlying
the investment fund as of the date of the calculation, as well as
the banking organization's proportional share of ownership in the
fund. For the first step the banking organization would assign risk
weights to the assets of the entire investment fund and calculates
the sum of those risk-weighted assets. For the second step, the
banking organization would multiply the sum of the fund's risk-
weighted assets by the banking organization's proportional ownership
in the fund.
2. Simple modified look-through approach:
Similar to the current capital rules, under this approach a
banking organization would multiply the adjusted carrying value of
its investment in the fund by the highest risk weight that applies
to any exposure the fund is permitted to hold as described in the
prospectus or fund documents.
3. Alternative modified look-through approach:
Similar to the current capital rules, under this approach a
banking organization would assign the adjusted carrying value of an
equity exposure to an investment fund on a pro rata basis to
different risk-weight categories based on the investment limits
described in the fund's prospectus. The banking organization's risk-
weighted asset amount is the sum of each portion of the adjusted
carrying value assigned to an exposure type multiplied by the
applicable risk weight under section 32 of the proposal. For
purposes of the calculation the banking organization must assume the
fund is invested in assets with the highest risk weight permitted by
its prospectus and to the maximum amounts permitted.
For community development exposures, a banking organization's
risk-weighted asset amount is equal to its adjusted carrying value
for the fund.
For more information please refer to section 53 of the proposal.
Also refer to section 2 for relevant definitions:
--Adjusted carrying value
--Investment fund
P. Treatment of Guarantees
The proposal would allow a banking organization to substitute
the risk weight of an eligible guarantor for the risk weight
otherwise applicable to the guaranteed exposure. This treatment
would apply only to eligible guarantees and eligible credit
derivatives, and would provide certain adjustments for maturity
mismatches, currency mismatches, and situations where restructuring
is not treated as a credit event.
Under the proposal, eligible guarantors would include sovereign
entities, certain supranational entities such as the International
Monetary Fund, Federal Home Loan Banks, Farmer Mac, a multilateral
development bank, a depository institution, a bank holding company,
a savings and loan holding company, a foreign bank, or an entity
that has investment-grade debt, whose creditworthiness is not
positively correlated with the credit risk of the exposures for
which it provides guarantees. Eligible guarantors would not include
monoline insurers, re-insurers, or special purpose entities.
To be an eligible guarantee, the guarantee would be required to
be from an eligible guarantor and must meet the requirements of the
proposal, including that the guarantee must:
--Be written;
--Be either:
[cir] Unconditional, or
[cir] A contingent obligation of the U.S. government or its
agencies, the enforceability of which to the beneficiary is
dependent upon some affirmative action on the part of the
beneficiary of the guarantee or a third party (for example,
servicing requirements);
--Cover all or a pro rata portion of all contractual payments of the
obligor on the reference exposure;
--Give the beneficiary a direct claim against the protection
provider; and
--And meet other requirements of the rule.
For more information please refer to section 36 of the proposal.
Also refer to section 2 for relevant definitions:
--Eligible guarantee
--Eligible guarantor
Q. Treatment of Collateralized Transactions
The proposal allows banking organizations to recognize the risk
mitigating benefits of financial collateral in risk-weighted assets,
and defines financial collateral to include:
--Cash on deposit at the bank or third-party custodian;
--Gold;
--Investment grade long-term securities (excluding
resecuritizations);
--Investment grade short-term instruments (excluding
resecuritizations);
--Publicly-traded equity securities;
--Publicly-traded convertible bonds; and,
--Money market mutual fund shares; and other mutual fund shares if a
price is quoted daily.
[[Page 52943]]
In all cases the banking organization would be required to have
a perfected, first priority interest in the financial collateral.
1. Simple approach: A banking organization may apply a risk
weight to the portion of an exposure that is secured by the market
value of financial collateral by using the risk weight of the
collateral--subject to a risk weight floor of 20 percent. To apply
the simple approach, the collateral must be subject to a collateral
agreement for at least the life of the exposure; the collateral must
be revalued at least every 6 months; and the collateral (other than
gold) must be in the same currency. There would be a few limited
exceptions to the 20 percent risk weight floor:
--A banking organization may assign a zero percent risk weight to
the collateralized portion of an exposure where:
[cir] The financial collateral is cash on deposit; or
[cir] The financial collateral is an exposure to a sovereign that
qualifies for a zero percent risk weight (including the United
States) and the banking organization has discounted the market value
of the collateral by 20 percent.
--A banking organization would be permitted to assign a zero percent
risk weight to an exposure to an OTC derivative contract that is
marked-to-market on a daily basis and subject to a daily margin
maintenance requirement, to the extent the contract is
collateralized by cash on deposit.
--A banking organization would be permitted to assign a 10 percent
risk weight to an exposure to an OTC derivative contract that is
marked-to-market on a daily basis and subject to a daily margin
maintenance requirement, to the extent the contract is
collateralized by U.S. government securities or an exposure to a
sovereign that qualifies for a zero percent risk weight under the
proposal.
2. Collateral Haircut Approach: For an eligible margin loan, a
repo-style transaction, a collateralized derivative contract, or a
single-product netting set of such transactions, a banking
organization may instead decide to use the collateral haircut
approach to recognize the credit risk mitigation benefits of
eligible collateral by reducing the amount of the exposure to be
risk weighted rather than by substituting the risk weight of the
collateral. Banking organizations considering the collateral haircut
approach should carefully read section 37 of the proposal. The
collateral haircut approach takes into account the value of the
banking organization's exposure, the value of the collateral, and
haircuts to account for potential volatility in position values and
foreign exchange rates. The haircuts may be determined using one of
two methodologies.
A banking organization may use standard haircuts based on the
table below and a standard foreign exchange rate haircut of 8
percent.
Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Haircut (in percents) assigned based on:
------------------------------------------------------------------------------ Investment
Sovereign issuers risk weight under Non-sovereign issuers risk weight grade
Residual maturity Sec. ----.32 \2\ under Sec. ----.32 securitization
------------------------------------------------------------------------------ exposures (in
Zero % 20% or 50% 100% 20% 50% 100% percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year.............................. 0.5 1.0 15.0 1.0 2.0 25.0 4.0
Greater than 1 year and less than or equal to 5 years..... 2.0 3.0 15.0 4.0 6.0 25.0 12.0
Greater than 5 years...................................... 4.0 6.0 15.0 8.0 12.0 25.0 24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold 15.0
Other publicly-traded equities (including convertible bonds) 25.0
Mutual funds Highest haircut applicable to any security in
which the fund can invest.
Cash collateral held Zero.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 2 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.
Alternatively, a banking organization may, with supervisory
approval, use own estimates of collateral haircuts when calculating
the appropriate capital charge for an eligible margin loan, a repo-
style transaction, or a collateralized derivative contract. Section
37 of the proposal provides the requirements for calculating own
estimates, including the requirement that such estimates be
determined based on a period of market stress appropriate for the
collateral under this approach.
For more information, please refer to section 37 of the
proposal. Also refer to section 2 for relevant definitions:
--Financial collateral
--Repo-style transaction
R. Treatment of Cleared Transactions
The proposal introduces a specific capital treatment for
exposures to central counterparties (CCPs), including certain
transactions conducted through clearing members by banking
organizations that are not themselves clearing members of a CCP.
Section 35 of the proposal describes the capital treatment of
cleared transactions and of default fund exposures to CCPs,
including more favorable capital treatment for cleared transactions
through CCPs that meet certain criteria.
S. Unsettled Transactions
The proposal provides for a separate risk-based capital
requirement for transactions involving securities, foreign exchange
instruments, and commodities that have a risk of delayed settlement
or delivery. The proposed capital requirement would not, however,
apply to certain types of transactions, including cleared
transactions that are marked-to-market daily and subject to daily
receipt and payment of variation margin. The proposal contains
separate treatments for delivery-versus-payment (DvP) and payment-
versus-payment (PvP) transactions with a normal settlement period,
and non-DvP/non-PvP transactions with a normal settlement period.
T. Foreign Exposures
Under the proposal a banking organization would risk weight an
exposure to a foreign government, foreign public sector entity
(PSE), and a foreign bank based on the Country Risk Classification
(CRC) that is applicable to the foreign government, or the home
country of the foreign PSE or foreign bank.
Country risk classification (CRC) for a sovereign means the CRC
published by the Organization for Economic Co-operation and
Development.
The risk weights for foreign sovereigns, foreign banks, and
foreign PSEs are shown in the tables below:
Risk Weights for Foreign Sovereign Exposures
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
Sovereign CRC:
0-1................................................. 0
2................................................... 20
3................................................... 50
4-6................................................. 100
7................................................... 150
No CRC.................................................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
--A sovereign exposure would be assigned a 150 percent risk weight
immediately upon
[[Page 52944]]
determining that an event of sovereign default has occurred, or if
an event of sovereign default has occurred during the previous five
years.
Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
Sovereign CRC:
0-1................................................. 20
2................................................... 50
3................................................... 100
4-7................................................. 150
No CRC.................................................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
Risk Weights for Foreign PSE General Obligations
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
Sovereign CRC:
0-1................................................. 20
2................................................... 50
3................................................... 100
4-7................................................. 150
No CRC.................................................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
Risk Weights for Foreign PSE Revenue Obligations
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
Sovereign CRC:
0-1................................................. 50
2-3................................................. 100
4-7................................................. 150
No CRC.................................................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
For more information, please refer to section 32(a), 32(d), and
32(e) of the proposal. Also refer to section 2 for relevant
definitions:
--Home country
--Public sector entity (PSE)
--Sovereign
--Sovereign exposure
The following is a table summarizing the proposed changes to the
general risk-based capital rules for risk weighting assets.
Comparison of Current Rules vs. Proposal
----------------------------------------------------------------------------------------------------------------
Current risk weight (in
Category general) Proposal Comments
----------------------------------------------------------------------------------------------------------------
Risk Weights for On-Balance Sheet Exposures Under Current and Proposed Rules
----------------------------------------------------------------------------------------------------------------
Cash................................. 0%..................... 0%..................... .......................
Direct and unconditional claims on 0%..................... 0%..................... .......................
the U.S. Government, its agencies,
and the Federal Reserve.
Claims on certain supranational 20%.................... 0%..................... Claims on supranational
entities and multilateral entities include, for
development banks. example, claims on the
International Monetary
Fund.
Cash items in the process of 20%.................... 20%.................... .......................
collection.
Conditional claims on the U.S. 20%.................... 20%.................... A conditional claim is
government. one that requires the
satisfaction of
certain conditions,
for example, servicing
requirements.
Claims on government-sponsored 20%.................... 20% on exposures other
entities (GSEs). than equity exposures.
100% on GSE preferred ....................... .......................
stock (20% for
national banks).
Claims on U.S. depository 20%.................... 20%.................... Instruments included in
institutions and National Credit 100% risk weight for an 100% risk weight for an the capital of the
Union Administration (NCUA)-insured instrument included in instrument included in depository institution
credit unions. the depository the depository may be deducted (refer
institution's institution's to Addendum 1 on the
regulatory capital. regulatory capital definition of capital)
(unless that or treated under the
instrument is an equities section
equity exposure or is below.
deducted--see Addendum
1).
Claims on U.S. public sector entities 20% for general 20% for general
(PSEs). obligations. obligations.
50% for revenue 50% for revenue
obligations. obligations.
Industrial development bonds......... 100%................... 100%.
Claims on qualifying securities firms 20% in general......... 100%................... Instruments included in
See commercial loans the capital of the
and corporate securities firm may be
exposures to financial deducted (refer to
companies section Addendum 1 on the
below.. definition of capital)
or treated under the
equities section
below.
1-4 family loans..................... 50% if first lien, Category 1: 35%, 50%, Category 1 is defined
prudently 75%,100% depending on to include first-lien
underwritten, owner LTV. mortgage products that
occupied or rented, meet certain
current or <90 days underwriting
past due; 100% characteristics.
otherwise.
Category 2: 100%, 150%, Category 2 is defined
200% depending on LTV. to include junior-
liens and mortgages
that do not meet the
category 1 criteria.
[[Page 52945]]
1-4 family loans modified under Home 50% and 100% The 35% to 200% The banking Under the proposal (as
Affordable Mortgage Program (HAMP). banking organization organization must under current rules)
must use the same risk determine whether the HAMP loans are not
weight assigned to the modified terms make treated as
loan prior to the the loan a Category 1 restructured loans.
modification so long or a Category 2
as the loan continues mortgage.
to meet other
applicable prudential
criteria.
Loans to builders secured by 1-4 50% if the loan meets 50% if the loan meets
family properties presold under firm all criteria in the all criteria in the
contracts. regulation; 100% if regulation; 100% if
the contract is the contract is
cancelled; 100% for cancelled; 100% for
loans not meeting the loans not meeting the
criteria. criteria.
Loans on multifamily properties...... 50% if the loan meets 50% if the loan meets .......................
all the criteria in all the criteria in
the regulation; 100% the regulation; 100%
otherwise. otherwise.
Corporate exposures.................. 100% 100%................... .......................
However, if the
exposure is an
instrument included in
the capital of the
financial company,
deduction treatment
may apply (see
Appendix 1)..
High-volatility commercial real 100%................... 150%................... The proposed treatment
estate (HVCRE) loans. would apply to certain
facilities that
finance the
acquisition,
development or
construction of real
property other than 1-
4 family residential
property.
Consumer loans....................... 100%................... 100%................... This is not a specific
category under the
proposal. Therefore
the default risk
weight of 100%
applies.
Past due exposures................... Generally the risk 150% for the portion .......................
weight does not change that is not guaranteed
when the loan is past or secured (does not
due; apply to sovereign
However, 1-4 family exposures or 1-4
loans that are past family residential
due 90 days or more mortgage exposures).
are 100% risk weight..
Assets not assigned to a risk weight 100%................... 100% .......................
category, including fixed assets,
premises, and other real estate
owned.
Claims on foreign governments and 0% for direct and Risk weight depends on Under the current and
their central banks. unconditional claims Country Risk proposed rules, a
on Organization for Classification (CRC) banking organization
Economic Co-operation applicable to the may apply a lower risk
and Development (OECD) sovereign and ranges weight to an exposure
governments; 20% for between 0% and 150%; denominated in the
conditional claims on 100% for sovereigns sovereign's own
OECD governments; 100% that do not have a currency if the
for claims on non-OECD CRC;. banking organization
governments that 150% for a sovereign has at least an
entail some degree of that has defaulted equivalent amount of
transfer risk. within the previous 5 liabilities in that
years.. currency.
Claims on foreign banks.............. 20% for claims on banks Risk weight depends on Under the proposed
in OECD countries; home country's CRC rule, instruments
20% for short-term rating and ranges included in the
claims on banks in non- between 20% and 50%; capital of a foreign
OECD countries;. 100% for foreign bank bank would be deducted
100% for long-term whose home country (refer to Addendum 1
claims on banks in non- does not have a CRC;. on the definition of
OECD countries.. 150% in the case of a capital) or treated
sovereign default in under the equities
the bank's home section below.
country;.
100% for an instrument
included in a bank's
regulatory capital
(unless that
instrument is an
equity exposure or is
deducted (see Addendum
1))..
Claims on foreign PSEs............... 20% for general Risk weight depends on .......................
obligations of states the home country's CRC
and political and ranges between 20%
subdivisions of OECD and 150% for general
countries; obligations; and
50% for revenue between 50% and 150%
obligations of states for revenue
and political obligations;
subdivisions of OECD 100% for exposures to a
countries;. PSE in a home country
100% for all that does not have a
obligations of states CRC;.
and political 150% for a PSE in a
subdivisions of non- home country with a
OECD countries.. sovereign default..
[[Page 52946]]
Mortgage backed security (MBS), asset Ratings Based Approach: Deduction for the after-
backed security (ABS), and --20%: AAA&AA;......... tax gain-on-sale of a
structured securities. --50%: A-rated......... securitization;
--100%: BBB............ 1,250% risk weight for
--200%: BB-rated....... a Credit-Enhancing
[Securitizations with Interest-Only Strip
short-term ratings-- (CEIO);.
20, 50, 100, and for 100% for interest-only
unrated positions, MBS that are not
where the banking credit-enhancing;.
organization Banking organizations
determines the credit may elect to follow a
rating--100 or 200];. gross up approach,
similar to existing
rules..
Gross-up approach the Simplified Supervisory .......................
risk-weighted asset Formula Approach
amount is calculated (SSFA)--the risk
using the risk weight weight for a position
of the underlying is determined by a
assets amount of the formula and is based
position and the full on the risk weight
amount of the assets applicable to the
supported by the underlying exposures,
position (that is, all the relative position
of the more senior of the securitization
positions); position in the
Dollar for dollar structure
capital for residual (subordination), and
interests;. measures of
Deduction for CEIO delinquency and loss
strips over on the securitized
concentration limit;. assets;
100% for stripped MBS 1250% otherwise........
(interest only (IOs)
and [FULL TERM] (Pos))
that are not credit
enhancing..
Unsettled transactions............... Not addressed. 100%, 625%, 937.5%, and DvP (delivery vs.
1,250% for DvP or PvP payment) and PvP
transactions depending (payment vs. payment)
on the number of are defined below.
business days past the
settlement date;
1,250% for non-DvP, non-
PvP transactions more
than 5 days past the
settlement date.
The proposed capital
requirement for
unsettled transactions
would not apply to
cleared transactions
that are marked-to-
market daily and
subject to daily
receipt and payment of
variation margin.
Equity exposures..................... 100% or incremental 0% risk weight: equity MDB = multilateral
deduction approach for exposures to a development bank.
nonfinancial equity sovereign, certain
investments. supranational
entities, or an MDB
whose debt exposures
are eligible for 0%
risk weight;
20%: Equity exposures
to a PSE, a FHLB, or
Farmer Mac;
100%: Equity exposures
to community
development
investments and small
business investment
companies and non-
significant equity
investments;
250%: Significant
investments in the
capital of
unconsolidated
financial institutions
that are not deducted
from capital pursuant
to section 22;
300%: Most publicly-
traded equity
exposures;
400%: Equity exposures
that are not publicly-
traded;
600%: Equity exposures
to certain investment
funds.
[[Page 52947]]
Equity exposures to investment funds. There is a 20% risk Full look-through: Risk
weight floor on mutual weight the assets of
fund holdings. the fund (as if owned
General rule: Risk directly) multiplied
weight is the same as by the banking
the highest risk organization's
weight investment the proportional ownership
fund is permitted to in the fund.
hold.. Simple modified look-
Option: A banking through: Multiply the
organization may banking organization's
assign risk weights exposure by the risk
pro rata according to weight of the highest
the investment limits risk weight asset in
in the fund's the fund..
prospectus.. Alternative modified
look-through: Assign
risk weight on a pro
rata basis based on
the investment limits
in the fund's
prospectus..
For community
development exposures,
risk-weighted asset
amount = adjusted
carrying value..
----------------------------------------------------------------------------------------------------------------
Credit Conversion Factors Under the Current and Proposed Rules
----------------------------------------------------------------------------------------------------------------
Conversion factors for off-balance 0% for the unused 0% for the unused
sheet items. portion of a portion of a
commitment with an commitment that is
original maturity of unconditionally
one year or less, or cancellable by the
which unconditionally banking organization;
cancellable at any
time;
10% for unused portions 20% for the unused
of eligible Asset- portion of a
Backed Commercial commitment with an
Paper (ABCP) liquidity original maturity of
facilities with an one year or less that
original maturity of is not unconditionally
one year or less; cancellable;
20% for self- 20% for self-
liquidating trade- liquidating, trade-
related contingent related contingent
items; items;
50% for the unused 50% for the unused
portion of a portion of a
commitment with an commitment over one
original maturity of year that are not
more than one year unconditionally
that are not cancellable;
unconditionally
cancellable;
50% for transaction- 50% for transaction-
related contingent related contingent
items (performance items (performance
bonds, bid bonds, bonds, bid bonds,
warranties, and warranties, and
standby letters of standby letters of
credit); credit);
100% for guarantees, 100% for guarantees, .......................
repurchase agreements, repurchase agreements,
securities lending and securities lending and
borrowing borrowing
transactions, transactions,
financial standby financial standby
letters of credit, and letters of credit, and
forward agreements. forward agreements.
Derivative contracts................. Conversion to an on- Conversion to an on- .......................
balance sheet amount balance sheet amount
based on current based on current
exposure plus exposure plus
potential future potential future
exposure and a set of exposure and a set of
conversion factors. conversion factors. No
50% risk weight cap. risk weight cap.
----------------------------------------------------------------------------------------------------------------
[[Page 52948]]
Credit Risk Mitigation Under the Current and Proposed Rules
----------------------------------------------------------------------------------------------------------------
Guarantees........................... Generally recognizes Recognizes guarantees Claims conditionally
guarantees provided by from eligible guaranteed by the U.S.
central governments, guarantors: sovereign government receive a
GSEs, public sector entities, Bank for risk weight of 20
entities (PSEs) in International percent under the
OECD countries, Settlements (BIS), standardized approach.
multilateral lending International Monetary
institutions, regional Fund (IMF), European
development banking Central Bank (ECB),
organizations, U.S. European Commission,
depository Federal Home Loan
institutions, foreign Banks (FHLBs), Farmer
banks, and qualifying Mac, a multilateral
securities firms in development bank, a
OECD countries. depository
Substitution approach institution, a bank
that allows the holding company, a
banking organization savings and loan
to substitute the risk holding company, a
weight of the foreign bank, or an
protection provider entity other than a
for the risk weight special purpose entity
ordinarily assigned to (SPE) that has
the exposure.. investment grade debt,
whose creditworthiness
is not positively
correlated with the
credit risk of the
exposures for which it
provides guarantees
and is not a monoline
insurer or re-insurer.
Substitution treatment
allows the banking
organization to
substitute the risk
weight of the
protection provider
for the risk weight
ordinarily assigned to
the exposure. Applies
only to eligible
guarantees and
eligible credit
derivatives, and
adjusts for maturity
mismatches, currency
mismatches, and where
restructuring is not
treated as a credit
event.
Collateralized transactions.......... Recognize only cash on For financial Financial collateral:
deposit, securities collateral only, the cash on deposit at the
issued or guaranteed proposal provides two banking organization
by OECD countries, approaches:. (or 3rd party
securities issued or 1. Simple approach: A custodian); gold;
guaranteed by the U.S. banking organization investment grade
government or a U.S. may apply a risk securities (excluding
government agency, and weight to the portion resecuritizations);
securities issued by of an exposure that is publicly-traded equity
certain multilateral secured by the market securities; publicly-
development banks. value of collateral by traded convertible
Substitute risk weight using the risk weight bonds; money market
of collateral for risk of the collateral-- mutual fund shares;
weight of exposure, with a general risk and other mutual fund
sometimes with a 20% weight floor of 20%.. shares if a price is
risk weight floor.. 2. Collateral haircut quoted daily. In all
approach using cases the banking
standard supervisory organization must have
haircuts or own a perfected, 1st
estimates of haircuts priority interest.
for eligible margin For the simple approach
loans, repo-style there must be a
transactions, collateral agreement
collateralized for at least the life
derivative contracts.. of the exposure;
collateral must be
revalued at least
every 6 months;
collateral other than
gold must be in the
same currency.
----------------------------------------------------------------------------------------------------------------
Addendum 2: Definitions used in the Proposal
Definitions of the terms used in this proposal can be found in
Part [----] CAPITAL ADEQUACY OF [BANK]s, Subpart A-General, Text
Sec. ----.2 Definitions, of the related document entitled
``Regulatory Capital Rules: Regulatory Capital, Implementation of
Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy,
Transition Provisions, and Prompt Corrective Action'' immediately
preceding this proposal and published elsewhere in today's Federal
Register.
Text of Proposed Common Rule
PART CAPITAL ADEQUACY OF [BANK]s
Subpart D--Risk-Weighted Assets--Standardized Approach
Sec.
----.30 Applicability.
RISK-WEIGHTED ASSETS FOR GENERAL CREDIT RISK
----.31 Mechanics for calculating risk-weighted assets for general
credit risk.
----.32 General risk weights.
----.33 Off-balance sheet exposures.
----.34 OTC derivative contracts.
----.35 Cleared transactions.
----.36 Guarantees and credit derivatives: substitution treatment.
----.37 Collateralized transactions.
RISK-WEIGHTED ASSETS FOR UNSETTLED TRANSACTIONS
----.38 Unsettled transactions.
[[Page 52949]]
RISK-WEIGHTED ASSETS FOR SECURITIZATION EXPOSURES
----.41 Operational requirements for securitization exposures.
----.42 Risk-weighted assets for securitization exposures.
----.43 Simplified supervisory formula approach (SSFA) and the
gross-up approach.
----.44 Securitization exposures to which the SSFA and gross-Up
approach do not apply.
----.45 Recognition of credit risk mitigants for securitization
exposures.
RISK-WEIGHTED ASSETS FOR EQUITY EXPOSURES
----.51 Introduction and exposure measurement.
----.52 Simple risk-weight approach (SRWA).
----.53 Equity exposures to investment funds.
DISCLOSURES
----.61 Purpose and scope.
----.62 Disclosure requirements.
----.63 Disclosures by [BANK]s described in Sec. ----.61.
Subpart D--Risk Weighted Assets--Standardized Approach
Sec. ----.30 Applicability.
(a) A market risk [BANK] must exclude from its calculation of risk-
weighted assets under this subpart the risk-weighted asset amounts of
all covered positions, as defined in subpart F of this part (except
foreign exchange positions that are not trading positions, over-the-
counter (OTC) derivative positions, cleared transactions, and unsettled
transactions).
(b) On January 1, 2015, and thereafter, a [BANK] must calculate
risk-weighted assets under subpart D of this part. On or before
December 31, 2014, the [BANK] must calculate risk-weighted assets under
either:
(i) The methodology described in the general risk-based capital
rules under 12 CFR part 3, appendix A, 12 CFR part 167 (OCC); 12 CFR
part 208, appendix A, 12 CFR part 225, appendix A (Board); 12 CFR part
325, appendix A, and 12 CFR part 390 (FDIC); or
(ii) Subpart D of this part.
(c) Notwithstanding paragraph (b) of this section, a [BANK] is
subject to the transition provisions under Sec. ----.300.
RISK-WEIGHTED ASSETS FOR GENERAL CREDIT RISK
Sec. ----.31 Mechanics for calculating risk-weighted assets for
general credit risk.
(a) General risk-weighting requirements. A [BANK] must apply risk
weights to its exposures as follows:
(1) A [BANK] must determine the exposure amount of each on-balance
sheet exposure, each OTC derivative contract, and each off-balance
sheet commitment, trade and transaction-related contingency, guarantee,
repo-style transaction, financial standby letter of credit, forward
agreement, or other similar transaction that is not:
(i) An unsettled transaction subject to Sec. ----.38;
(ii) A cleared transaction subject to Sec. ----.35;
(iii) A default fund contribution subject to Sec. ----.35;
(iv) A securitization exposure subject to Sec. Sec. ----.41
through ----.45; or
(v) An equity exposure (other than an equity OTC derivative
contract) subject to Sec. Sec. ----.51 through ----.53.
(2) The [BANK] must multiply each exposure amount by the risk
weight appropriate to the exposure based on the exposure type or
counterparty, eligible guarantor, or financial collateral to determine
the risk-weighted asset amount for each exposure.
(b) Total risk-weighted assets for general credit risk equals the
sum of the risk-weighted asset amounts calculated under this section.
Sec. ----.32 General risk weights.
(a) Sovereign exposures. (1) Exposures to the U.S. government. (i)
Notwithstanding any other requirement in this subpart, a [BANK] must
assign a zero percent risk weight to:
(A) An exposure to the U.S. government, its central bank, or a U.S.
government agency; and
(B) The portion of an exposure that is directly and unconditionally
guaranteed by the U.S. government, its central bank, or a U.S.
government agency.\95\
---------------------------------------------------------------------------
\95\ Under this section, a [BANK] must assign a zero percent
risk weight to a deposit, or the portion of a deposit, that is
insured by the FDIC or National Credit Union Administration.
---------------------------------------------------------------------------
(ii) A [BANK] must assign a 20 percent risk weight to the portion
of an exposure that is conditionally guaranteed by the U.S. government,
its central bank, or a U.S. government agency.
(2) Other sovereign exposures. A [BANK] must assign a risk weight
to a sovereign exposure based on the Country Risk Classification (CRC)
applicable to the sovereign in accordance with Table 1.
Table 1--Risk Weights for Sovereign Exposures
------------------------------------------------------------------------
------------------------------------------------------------------------
Risk weight
(in person)
------------------------------------------------------------------------
Sovereign CRC....................... 0-1 0
2 20
3 50
4-6 100
7 150
------------------------------------------------------------------------
No CRC 100
------------------------------------------------------------------------
Sovereign Default 150
------------------------------------------------------------------------
(3) Certain sovereign exposures. Notwithstanding paragraph (a)(2)
of this section, a [BANK] may assign to a sovereign exposure a risk
weight that is lower than the applicable risk weight in Table 1 if:
(i) The exposure is denominated in the sovereign's currency;
(ii) The [BANK] has at least an equivalent amount of liabilities in
that currency; and
(iii) The risk weight is not lower than the risk weight that the
sovereign allows [BANK]s under its jurisdiction to assign to the same
exposures to the sovereign.
(4) Sovereign exposures with no CRC. Except as provided in
paragraph (a)(5) of this section, a [BANK] must assign a 100 percent
risk weight to a sovereign exposure if the sovereign does not have a
CRC assigned to it.
(5) Sovereign default. A [BANK] must assign a 150 percent risk
weight to a
[[Page 52950]]
sovereign exposure immediately upon determining that an event of
sovereign default has occurred, or if an event of sovereign default has
occurred during the previous five years.
(b) Certain supranational entities and Multilateral Development
Banks (MDBs). A [BANK] must assign a zero percent risk weight to an
exposure to the Bank for International Settlements, the European
Central Bank, the European Commission, the International Monetary Fund,
or an MDB.
(c) Exposures to government-sponsored entities (GSEs). (1) A [BANK]
must assign a 20 percent risk weight to an exposure to a GSE that is
not an equity exposure.
(2) A [BANK] must assign a 100 percent risk weight to preferred
stock issued by a GSE.
(d) Exposures to depository institutions, foreign banks, and credit
unions. (1) Exposures to U.S. depository institutions and credit
unions. A [BANK] must assign a 20 percent risk weight to an exposure to
a depository institution or credit union that is organized under the
laws of the United States or any state thereof, except as otherwise
provided under paragraph (d)(3) of this section.
(2) Exposures to foreign banks. (i) Except as otherwise provided
under paragraphs (d)(2)(ii) and (d)(3) of this section, a [BANK] must
assign a risk weight to an exposure to a foreign bank using the CRC
rating that corresponds to the foreign bank's home country in
accordance with Table 2.
Table 2--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
Sovereign CRC:
0-1................................................. 20
2................................................... 50
3................................................... 100
4-7................................................. 150
No CRC.................................................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
(ii) A [BANK] must assign a 100 percent risk weight to an exposure
to a foreign bank whose home country does not have a CRC, with the
exception of self-liquidating, trade-related contingent items that
arise from the movement of goods, and that have a maturity of three
months or less, which may be assigned a 20 percent risk weight.
(iii) A [BANK] must assign a 150 percent risk weight to an exposure
to a foreign bank immediately upon determining that an event of
sovereign default has occurred in the bank's home country, or if an
event of sovereign default has occurred in the foreign bank's home
country during the previous five years.
(3) A [BANK] must assign a 100 percent risk weight to an exposure
to a financial institution that is includable in that financial
institution's capital unless the exposure is:
(i) An equity exposure;
(ii) A significant investment in the capital of an unconsolidated
financial institution in the form of common stock pursuant to Sec. --
--.22(d)(iii);
(iii) Is deducted from regulatory capital under Sec. ----.22 of
the proposal; and
(iv) Subject to a 150 percent risk weight under Table 2 of
paragraph (d)(2) of this section.
(e) Exposures to public sector entities (PSEs). (1) Exposures to
U.S. PSEs. (i) A [BANK] must assign a 20 percent risk weight to a
general obligation exposure to a PSE that is organized under the laws
of the United States or any state or political subdivision thereof.
(ii) A [BANK] must assign a 50 percent risk weight to a revenue
obligation exposure to a PSE that is organized under the laws of the
United States or any state or political subdivision thereof.
(2) Exposures to foreign PSEs. (i) Except as provided in paragraphs
(e)(1) and (e)(3) of this section, a [BANK] must assign a risk weight
to a general obligation exposure to a PSE based on the CRC that
corresponds to the PSE's home country, as set forth in Table 3.
(ii) Except as provided in paragraphs (e)(1) and (e)(3) of this
section, a [BANK] must assign a risk weight to a revenue obligation
exposure to a PSE based on the CRC that corresponds to the PSE's home
country, as set forth in Table 4.
(3) A [BANK] may assign a lower risk weight than would otherwise
apply under Table 3 and 4 to an exposure to a foreign PSE if:
(i) The PSE's home country allows banks under its jurisdiction to
assign a lower risk weight to such exposures; and
(ii) The risk weight is not lower than the risk weight that
corresponds to the PSE's home country in accordance with Table 1.
Table 3--Risk Weights for Non-U.S. PSE General Obligations
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
Sovereign CRC:
0-1................................................. 20
2................................................... 50
3................................................... 100
4-7................................................. 150
No CRC.................................................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
Table 4--Risk Weights for Non-U.S. PSE Revenue Obligations
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
Sovereign CRC:
0-1................................................. 20
2-3................................................. 100
4-7................................................. 150
No CRC.................................................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
(4) A [BANK] must assign a 100 percent risk weight to an exposure
to a PSE whose home country does not have a CRC.
(5) A [BANK] must assign a 150 percent risk weight to a PSE
exposure immediately upon determining that an event of sovereign
default has occurred in a PSE's home country or if an event of
sovereign default has occurred in the PSE's home country during the
previous five years.
(f) Corporate exposures. A [BANK] must assign a 100 percent risk
weight to all its corporate exposures.
(g) Residential mortgage exposures. (1) General Requirement. A
[BANK] must assign to a residential mortgage exposure the applicable
risk weight in Table 6, using the loan-to-value (LTV) ratio described
in paragraph (g)(3) of this section.
(2) Restructured or modified mortgages. (i) If a residential
mortgage exposure is restructured or modified, the [BANK] must classify
the residential mortgage exposure as a category 1 residential mortgage
exposure or category 2 residential mortgage exposure in accordance with
the terms and characteristics of the exposure after the modification or
restructuring.
(ii) A [BANK] may assign a risk weight lower than 100 percent to a
category 1 residential mortgage exposure after the exposure has been
modified or restructured only if:
(A) The residential mortgage exposure continues to meet category 1
criteria; and
(B) The [BANK] updates the LTV ratio at the time of restructuring,
as provided under paragraph (g)(3) of this section.
(iii) A [BANK] may assign a risk weight lower than 200 percent to a
category 2 residential mortgage
[[Page 52951]]
exposure after the exposure has been modified or restructured only if
the [BANK] updates the LTV ratio at the time of restructuring as
provided under paragraphs (g)(3) of this section.
Table 6--Risk Weights for Residential Mortgage Exposures
----------------------------------------------------------------------------------------------------------------
Category 1 residential Category 2 residential
Loan-to-value ratio (in percent) mortgage exposure (in mortgage exposure (in
percent) percent)
----------------------------------------------------------------------------------------------------------------
Less than or equal to 60...................................... 35 100
Greater than 60 and less than or equal to 80.................. 50 100
Greater than 80 and less than or equal to 90.................. 75 150
Greater than 90............................................... 100 200
----------------------------------------------------------------------------------------------------------------
(3) LTV ratio calculation. To determine the LTV ratio of a
residential mortgage loan for the purpose of this section, a [BANK]
must divide the loan amount by the value of the property, as described
in this section. A [BANK] must assign a risk weight to the exposure
according to its respective LTV ratio.
(i) Loan amount for calculating the LTV ratio of a residential
mortgage exposure. (A) First-lien residential mortgage exposure. The
loan amount of a first-lien residential mortgage exposure is the unpaid
principal balance of the loan. If the first-lien residential mortgage
exposure is a combination of a first and junior lien, the loan amount
is the maximum contractual principal amount of the exposure.
(B) Junior-lien residential mortgage exposure. The loan amount of a
junior-lien residential mortgage exposure is the maximum contractual
principal amount of the exposure, plus the maximum contractual
principal amounts of all senior exposures secured by the same
residential property on the date of origination of the junior-lien
residential mortgage exposure.
(ii) Value. (A) The value of the property is the lesser of the
actual acquisition cost (for a purchase transaction) or the estimate of
the property's value at the origination of the loan or at the time of
restructuring or modification.
(B) A [BANK] must base all estimates of a property's value on an
appraisal or evaluation of the property that satisfies 12 CFR part 34,
subpart C, 12 CFR part 164 (OCC); 12 CFR part 208, subpart E (Board);
12 CFR part 323, 12 CFR 390.442 (FDIC).
(4) Loans modified pursuant to the Home Affordable Mortgage
Program. A loan modified or restructured on a permanent or trial basis
solely pursuant to the U.S. Treasury's Home Affordable Mortgage Program
is not modified or restructured for purposes of this section.
(h) Pre-sold residential construction loans. A [BANK] must assign a
50 percent risk weight to a pre-sold construction loan unless the
purchase contract is cancelled. A [BANK] must assign a 100 percent risk
weight to such loan if the purchase contract is cancelled.
(i) Statutory multifamily mortgages. A [BANK] must assign a 50
percent risk weight to a statutory multifamily mortgage.
(j) High-volatility commercial real estate (HVCRE) exposures. A
[BANK] must assign a 150 percent risk weight to an HVCRE exposure.
(k) Past due exposures. Except for a sovereign exposure or a
residential mortgage exposure, if an exposure is 90 days or more past
due or on nonaccrual:
(1) A [BANK] must assign a 150 percent risk weight to the portion
of the exposure that is not guaranteed or that is unsecured.
(2) A [BANK] may assign a risk weight to the collateralized portion
of a past due exposure based on the risk weight that applies under
Sec. ----.37 if the collateral meets the requirements of that section.
(3) A [BANK] may assign a risk weight to the guaranteed portion of
a past due exposure based on the risk weight that applies under Sec.
----.36 if the guarantee or credit derivative meets the requirements of
that section.
(l) Other assets. (1) A [BANK] must assign a zero percent risk
weight to cash owned and held in all offices of the [BANK] or in
transit; to gold bullion held in the [BANK]'s own vaults or held in
another depository institution's vaults on an allocated basis, to the
extent the gold bullion assets are offset by gold bullion liabilities;
and to exposures that arise from the settlement of cash transactions
(such as equities, fixed income, spot FX and spot commodities) with a
central counterparty where there is no assumption of ongoing
counterparty credit risk by the central counterparty after settlement
of the trade and associated default fund contributions.
(2) A [BANK] must assign a 20 percent risk weight to cash items in
the process of collection.
(3) A [BANK] must assign a 100 percent risk weight to DTAs arising
from temporary differences that the [BANK] could realize through net
operating loss carrybacks.
(4) A [BANK] must assign a 250 percent risk weight to MSAs and DTAs
arising from temporary differences that the [BANK] could not realize
through net operating loss carrybacks that are not deducted from common
equity tier 1 capital pursuant to Sec. ----.22(d).
(5) A [BANK] must assign a 100 percent risk weight to all assets
not specifically assigned a different risk weight under this subpart
(other than exposures that are deducted from tier 1 or tier 2 capital).
(6) Notwithstanding the requirements of this section, a [BANK] may
assign an asset that is not included in one of the categories provided
in this section to the risk weight category applicable under the
capital rules applicable to bank holding companies and savings and loan
holding companies at 12 CFR part 217, provided that all of the
following conditions apply:
(i) The [BANK] is not authorized to hold the asset under applicable
law other than debt previously contracted or similar authority; and
(ii) The risks associated with the asset are substantially similar
to the risks of assets that are otherwise assigned to a risk weight
category of less than 100 percent under this subpart.
Sec. ----.33 Off-balance sheet exposures.
(a) General. (1) A [BANK] must calculate the exposure amount of an
off-balance sheet exposure using the credit conversion factors (CCFs)
in paragraph (b) of this section.
(2) Where a [BANK] commits to provide a commitment, the [BANK] may
apply the lower of the two applicable CCFs.
(3) Where a [BANK] provides a commitment structured as a
syndication or participation, the [BANK] is only
[[Page 52952]]
required to calculate the exposure amount for its pro rata share of the
commitment.
(b) Credit conversion factors. (1) Zero percent CCF. A [BANK] must
apply a zero percent CCF to the unused portion of commitments that are
unconditionally cancelable by the [BANK].
(2) 20 percent CCF. A [BANK] must apply a 20 percent CCF to:
(i) Commitments with an original maturity of one year or less that
are not unconditionally cancelable by the [BANK].
(ii) Self-liquidating, trade-related contingent items that arise
from the movement of goods, with an original maturity of one year or
less.
(3) 50 percent CCF. A [BANK] must apply a 50 percent CCF to:
(i) Commitments with an original maturity of more than one year
that are not unconditionally cancelable by the [BANK].
(ii) Transaction-related contingent items, including performance
bonds, bid bonds, warranties, and performance standby letters of
credit.
(4) 100 percent CCF. A [BANK] must apply a 100 percent CCF to the
following off-balance-sheet items and other similar transactions:
(i) Guarantees;
(ii) Repurchase agreements (the off-balance sheet component of
which equals the sum of the current market values of all positions the
[BANK] has sold subject to repurchase);
(iii) Off-balance sheet securities lending transactions (the off-
balance sheet component of which equals the sum of the current market
values of all positions the [BANK] has lent under the transaction);
(iv) Off-balance sheet securities borrowing transactions (the off-
balance sheet component of which equals the sum of the current market
values of all non-cash positions the [BANK] has posted as collateral
under the transaction);
(v) Financial standby letters of credit; and
(vi) Forward agreements.
Sec. ----.34 OTC derivative contracts.
(a) Exposure amount. (1) Single OTC derivative contract. Except as
modified by paragraph (b) of this section, the exposure amount for a
single OTC derivative contract that is not subject to a qualifying
master netting agreement is equal to the sum of the [BANK]'s current
credit exposure and potential future credit exposure (PFE) on the OTC
derivative contract.
(i) Current credit exposure. The current credit exposure for a
single OTC derivative contract is the greater of the mark-to-market
value of the OTC derivative contract or zero.
(ii) PFE. (A) The PFE for a single OTC derivative contract,
including an OTC derivative contract with a negative mark-to-market
value, is calculated by multiplying the notional principal amount of
the OTC derivative contract by the appropriate conversion factor in
Table 7.
(B) For purposes of calculating either the PFE under this paragraph
or the gross PFE under paragraph (a)(2) of this section for exchange
rate contracts and other similar contracts in which the notional
principal amount is equivalent to the cash flows, notional principal
amount is the net receipts to each party falling due on each value date
in each currency.
(C) For an OTC derivative contract that does not fall within one of
the specified categories in Table 7, the PFE must be calculated using
the appropriate ``other'' conversion factor.
(D) A [BANK] must use an OTC derivative contract's effective
notional principal amount (that is, the apparent or stated notional
principal amount multiplied by any multiplier in the OTC derivative
contract) rather than the apparent or stated notional principal amount
in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is
capped at the net present value of the amount of unpaid premiums.
Table 7--Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Credit (non-
Foreign (investment investment- Precious
Remaining maturity \2\ Interest rate exchange rate grade grade Equity metals (except Other
and gold reference reference gold)
asset) \3\ asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................ 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Greater than one year and less than or 0.005 0.05 0.05 0.10 0.08 0.07 0.12
equal to five years....................
Greater than five years................. 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A [BANK] must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative whose reference asset is an outstanding
unsecured long-term debt security without credit enhancement that is investment grade. A [BANK] must use the column labeled ``Credit (non-investment-
grade reference asset)'' for all other credit derivatives.
(2) Multiple OTC derivative contracts subject to a qualifying
master netting agreement. Except as modified by paragraph (b) of this
section, the exposure amount for multiple OTC derivative contracts
subject to a qualifying master netting agreement is equal to the sum of
the net current credit exposure and the adjusted sum of the PFE amounts
for all OTC derivative contracts subject to the qualifying master
netting agreement.
(i) Net current credit exposure. The net current credit exposure is
the greater of the net sum of all positive and negative mark-to-market
values of the individual OTC derivative contracts subject to the
qualifying master netting agreement or zero.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE
amounts, Anet, is calculated as Anet = (0.4xAgross) + (0.6xNGRxAgross),
where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts (as
determined under paragraph (a)(1)(ii) of this section for each
individual derivative contract subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = the net to gross ratio (that is, the
ratio of the net current credit exposure to the gross current credit
exposure). In calculating the NGR, the gross current credit exposure
equals the sum of the positive
[[Page 52953]]
current credit exposures (as determined under paragraph (a)(1)(i) of
this section) of all individual derivative contracts subject to the
qualifying master netting agreement).
(b) Recognition of credit risk mitigation of collateralized OTC
derivative contracts: (1) A [BANK] may recognize the credit risk
mitigation benefits of financial collateral that secures an OTC
derivative contract or multiple OTC derivative contracts subject to a
qualifying master netting agreement (netting set) by using the simple
approach in Sec. ----.37(b).
(2) As an alternative to the simple approach, a [BANK] may
recognize the credit risk mitigation benefits of financial collateral
that secures such a contract or netting set if the financial collateral
is marked-to-market on a daily basis and subject to a daily margin
maintenance requirement by applying a risk weight to the exposure as if
it is uncollateralized and adjusting the exposure amount calculated
under paragraph (a)(1)(i) or (ii) of this section using the collateral
haircut approach in Sec. ----.37(c). The [BANK] must substitute the
exposure amount calculated under paragraph (a)(1)(i) or (ii) of this
section for [sum]E in the equation in Sec. ----.37(c)(2).
(c) Counterparty credit risk for OTC credit derivatives. (1)
Protection purchasers. A [BANK] that purchases an OTC credit derivative
that is recognized under Sec. ----.36 as a credit risk mitigant for an
exposure that is not a covered position under subpart F is not required
to compute a separate counterparty credit risk capital requirement
under Sec. ----.32 provided that the [BANK] does so consistently for
all such credit derivatives. The [BANK] must either include all or
exclude all such credit derivatives that are subject to a qualifying
master netting agreement from any measure used to determine
counterparty credit risk exposure to all relevant counterparties for
risk-based capital purposes.
(2) Protection providers. (i) A [BANK] that is the protection
provider under an OTC credit derivative must treat the OTC credit
derivative as an exposure to the underlying reference asset. The [BANK]
is not required to compute a counterparty credit risk capital
requirement for the OTC credit derivative under Sec. ----.32, provided
that this treatment is applied consistently for all such OTC credit
derivatives. The [BANK] must either include all or exclude all such OTC
credit derivatives that are subject to a qualifying master netting
agreement from any measure used to determine counterparty credit risk
exposure.
(ii) The provisions of paragraph (c)(2) of this section apply to
all relevant counterparties for risk-based capital purposes unless the
[BANK] is treating the OTC credit derivative as a covered position
under subpart F, in which case the [BANK] must compute a supplemental
counterparty credit risk capital requirement under this section.
(d) Counterparty credit risk for OTC equity derivatives. (1) A
[BANK] must treat an OTC equity derivative contract as an equity
exposure and compute a risk-weighted asset amount for the OTC equity
derivative contract under Sec. Sec. ----.51 through ----.53 (unless
the [BANK] is treating the contract as a covered position under subpart
F).
(2) In addition, the [BANK] must also calculate a risk-based
capital requirement for the counterparty credit risk of an OTC equity
derivative contract under this section if the [BANK] is treating the
contract as a covered position under subpart F.
(3) If the [BANK] risk weights the contract under the Simple Risk-
Weight Approach (SRWA) in Sec. ----.52, the [BANK] may choose not to
hold risk-based capital against the counterparty credit risk of the OTC
equity derivative contract, as long as it does so for all such
contracts. Where the OTC equity derivative contracts are subject to a
qualified master netting agreement, a [BANK] using the SRWA must either
include all or exclude all of the contracts from any measure used to
determine counterparty credit risk exposure.
Sec. ----. 35 Cleared transactions.
(a) Requirements. (1) A [BANK] that is a clearing member client
must use the methodologies described in paragraph (b) of this section
to calculate risk-weighted assets for a cleared transaction.
(2) A [BANK] that is a clearing member must use the methodologies
described in paragraph (c) of this section to calculate its risk-
weighted assets for cleared transactions and paragraph (d) of this
section to calculate its risk-weighted assets for its default fund
contribution to a CCP.
(b) Clearing member client [BANK]s. (1) Risk-weighted assets for
cleared transactions. (i) To determine the risk-weighted asset amount
for a cleared transaction, a [BANK] that is a clearing member client
must multiply the trade exposure amount for the cleared transaction,
calculated in accordance with paragraph (b)(2) of this section, by the
risk weight appropriate for the cleared transaction, determined in
accordance with paragraph (b)(3) of this section.
(ii) A clearing member client [BANK]'s total risk-weighted assets
for cleared transactions is the sum of the risk-weighted asset amounts
for all its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is a
derivative contract or netting set of derivative contracts, the trade
exposure amount equals:
(A) The exposure amount for the derivative contract or netting set
of derivative contracts, calculated using the methodology used to
calculate exposure amount for OTC derivative contracts under Sec. --
--.34, plus
(B) The fair value of the collateral posted by the clearing member
client [BANK] and held by the CCP or a clearing member in a manner that
is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction,
the trade exposure amount equals:
(A) The exposure amount for the repo-style transaction calculated
using the methodologies under Sec. ----.37(c), plus
(B) The fair value of the collateral posted by the clearing member
client and held by the CCP or a clearing member in a manner that is not
bankruptcy remote.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client [BANK] must apply a risk weight
of:
(A) 2 percent if the collateral posted by the [BANK] to the QCCP or
clearing member is subject to an arrangement that prevents any losses
to the clearing member client due to the joint default or a concurrent
insolvency, liquidation, or receivership proceeding of the clearing
member and any other clearing member clients of the clearing member;
and the clearing member client [BANK] has conducted sufficient legal
review to conclude with a well-founded basis (and maintains sufficient
written documentation of that legal review) that in the event of a
legal challenge (including one resulting from default or from
liquidation, insolvency, or receivership proceeding) the relevant court
and administrative authorities would find the arrangements to be legal,
valid, binding and enforceable under the law of the relevant
jurisdictions; or
(B) 4 percent in all other circumstances.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client [BANK] must apply the risk weight appropriate
for the CCP according to Sec. ----.32.
(4) Collateral. (i) Notwithstanding any other requirements in this
section, collateral posted by a clearing member client [BANK] that is
held by a
[[Page 52954]]
custodian in a manner that is bankruptcy remote from the CCP, clearing
member and other clearing member clients of the clearing member, is not
subject to a capital requirement under this section.
(ii) A [BANK] must calculate a risk-weighted asset amount for any
collateral provided to a CCP, clearing member or a custodian in
connection with a cleared transaction in accordance with the
requirements under Sec. ----.32.
(c) Clearing member [BANK]s. (1) Risk-weighted assets for cleared
transactions. (i) To determine the risk-weighted asset amount for a
cleared transaction, a clearing member [BANK] must multiply the trade
exposure amount for the cleared transaction, calculated in accordance
with paragraph (c)(2) of this section, by the risk weight appropriate
for the cleared transaction, determined in accordance with paragraph
(c)(3) of this section.
(ii) A clearing member [BANK]'s total risk-weighted assets for
cleared transactions is the sum of the risk-weighted asset amounts for
all of its cleared transactions.
(2) Trade exposure amount. A clearing member [BANK] must calculate
its trade exposure amount for a cleared transaction as follows:
(i) For a derivative contract that is a cleared transaction, the
trade exposure amount equals:
(A) The exposure amount for the derivative contract, calculated
using the methodology to calculate exposure amount for OTC derivative
contracts under Sec. ----.34, plus
(B) The fair value of the collateral posted by the clearing member
[BANK] and held by the CCP in a manner that is not bankruptcy remote.
(ii) For a repo-style transaction that is a cleared transaction,
trade exposure amount equals:
(A) The exposure amount for repo-style transactions calculated
using methodologies under Sec. ----.37(c), plus
(B) The fair value of the collateral posted by the clearing member
[BANK] and held by the CCP in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weight. (i) For a cleared transaction
with a QCCP, a clearing member [BANK] must apply a risk weight of 2
percent.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member [BANK] must apply the risk weight appropriate for the
CCP according to Sec. ----.32.
(4) Collateral. (i) Notwithstanding any other requirement in this
section, collateral posted by a clearing member [BANK] that is held by
a custodian in a manner that is bankruptcy remote from the CCP is not
subject to a capital requirement under this section.
(ii) A [BANK] must calculate a risk-weighted asset amount for any
collateral provided to a CCP, clearing member or a custodian in
connection with a cleared transaction in accordance with requirements
under Sec. ----.32.
(d) Default fund contributions. (1) General requirement. A clearing
member [BANK] must determine the risk-weighted asset amount for a
default fund contribution to a CCP at least quarterly, or more
frequently if, in the opinion of the [BANK] or the [AGENCY], there is a
material change in the financial condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to
non-qualifying CCPs. A clearing member [BANK]'s risk-weighted asset
amount for default fund contributions to CCPs that are not QCCPs equals
the sum of such default fund contributions multiplied by 1,250 percent.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member [BANK]'s risk-weighted asset amount for
default fund contributions to QCCPs equals the sum of its capital
requirement, KCM for each QCCP, as calculated under Sec. --
--.35(d)(3)(i), multiplied by 1,250 percent.
(i) The hypothetical capital requirement of a QCCP
(KCCP) equals:
[GRAPHIC] [TIFF OMITTED] TP30AU12.013
Where
(A) EBRMi = the exposure amount for each transaction
cleared through the QCCP by clearing member i, calculated in
accordance with Sec. ----.34 for derivative transactions and Sec.
----.37(c)(2) for repo-style transactions, provided that:
(1) For purposes of this section, in calculating the exposure amount
the [BANK] may replace the formula provided in Sec. ----.34 with
the following: Anet = (0.3 x Agross) + (0.7 x NGR x Agross) or, if
the [BANK] cannot calculate NGR, it may use a value of 0.30 until
March 31, 2013; and
(2) For derivative contracts that are options, the PFE described in
Sec. ------.34(b)(2) must be adjusted by multiplying the notional
principal amount of the derivative contract by the appropriate
conversion factor in Table 7 and the absolute value of the option's
delta, that is, the ratio of the change in the value of the
derivative contract to the corresponding change in the price of the
underlying asset.
(B) VMi = any collateral posted by clearing member i to
the QCCP that it is entitled to receive from the QCCP, but has not
yet received, and any collateral that the QCCP is entitled to
receive from clearing member i, but has not yet received;
(C) IMi = the collateral posted as initial margin by
clearing member i to the QCCP;
(D) DFi = the funded portion of clearing member i's
default fund contribution that will be applied to reduce the QCCP's
loss upon a default by clearing member i; and
(E) RW = 20 percent, except when the [AGENCY] has determined that a
higher risk weight is more appropriate based on the specific
characteristics of the QCCP and its clearing members.
(ii) For a [BANK] that is a clearing member of a QCCP with a
default fund supported by funded commitments, KCM equals:
[[Page 52955]]
[GRAPHIC] [TIFF OMITTED] TP30AU12.014
Subscripts 1 and 2 denote the clearing members with the two largest
ANet values. For purposes of this paragraph, for derivatives
ANet is defined in Sec. ----.34(a)(2)(ii) and for repo-
style transactions, ANet means the exposure amount as
defined in Sec. ----.37(c)(2);
(B) N =the number of clearing members in the QCCP;
(C) DFCCP = the QCCP's own funds and other financial
resources that would be used to cover its losses before clearing
members' default fund contributions are used to cover losses;
(D) DFCM = funded default fund contributions from all
clearing members and any other clearing member contributed financial
resources that are available to absorb mutualized QCCP losses;
(E) DF = DFCCP + DFCM (that is, the total funded
default fund contribution);
[GRAPHIC] [TIFF OMITTED] TP30AU12.015
from surviving clearing members assuming that two average clearing
members have defaulted and their default fund contributions and initial
margins have been used to absorb the resulting losses);
[[Page 52956]]
[GRAPHIC] [TIFF OMITTED] TP30AU12.016
(B) For a [BANK] that is a clearing member of a QCCP with a default
fund supported by unfunded commitments and is unable to calculate
KCM using the methodology described in paragraph (d)(3)(iii)
of this section, KCM equals:
[[Page 52957]]
[GRAPHIC] [TIFF OMITTED] TP30AU12.017
(4) Total risk-weighted assets for default fund contributions.
Total risk-weighted assets for default fund contributions is the sum of
a clearing member [BANK]'s risk-weighted assets for all of its default
fund contributions to all CCPs of which the [BANK] is a clearing
member.
Sec. ----.36 Guarantees and credit derivatives: substitution
treatment.
(a) Scope. (1) General. A [BANK] may recognize the credit risk
mitigation benefits of an eligible guarantee or eligible credit
derivative by substituting the risk weight associated with the
protection provider for the risk weight assigned to an exposure, as
provided under this section.
(2) This section applies to exposures for which:
(i) Credit risk is fully covered by an eligible guarantee or
eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis (that is, on a
basis in which the [BANK] and the protection provider share losses
proportionately) by an eligible guarantee or eligible credit
derivative.
(3) Exposures on which there is a tranching of credit risk
(reflecting at least two different levels of seniority) generally are
securitization exposures subject to Sec. Sec. ----.41 through ----.45.
(4) If multiple eligible guarantees or eligible credit derivatives
cover a single exposure described in this section, a [BANK] may treat
the hedged exposure as multiple separate exposures each covered by a
single eligible guarantee or eligible credit derivative and may
calculate a separate risk-weighted asset amount for each separate
exposure as described in paragraph (c) of this section.
(5) If a single eligible guarantee or eligible credit derivative
covers multiple hedged exposures described in paragraph (a)(2) of this
section, a [BANK] must treat each hedged exposure as covered by a
separate eligible guarantee or eligible credit derivative and must
calculate a separate risk-weighted asset amount for each exposure as
described in paragraph (c) of this section.
(b) Rules of recognition. (1) A [BANK] may only recognize the
credit risk mitigation benefits of eligible guarantees and eligible
credit derivatives.
(2) A [BANK] may only recognize the credit risk mitigation benefits
of an eligible credit derivative to hedge an exposure that is different
from the credit derivative's reference exposure used for determining
the derivative's cash settlement value, deliverable obligation, or
occurrence of a credit event if:
(i) The reference exposure ranks pari passu with, or is
subordinated to, the hedged exposure; and
(ii) The reference exposure and the hedged exposure are to the same
legal entity, and legally enforceable cross-default or cross-
acceleration clauses are in place to ensure payments under the credit
derivative are triggered when the obligated party of the hedged
exposure fails to pay under the terms of the hedged exposure.
(c) Substitution approach. (1) Full coverage. If an eligible
guarantee or eligible credit derivative meets the conditions in
paragraphs (a) and (b) of this section and the protection amount (P) of
the guarantee or credit derivative is greater than or equal to the
exposure amount of the hedged exposure, a [BANK] may recognize the
guarantee or credit derivative in determining the risk-weighted asset
amount for the hedged exposure by substituting the risk weight
applicable to the guarantor or credit derivative protection provider
under Sec. ----.32 for the risk weight assigned to the exposure.
(2) Partial coverage. If an eligible guarantee or eligible credit
derivative meets the conditions in Sec. Sec. ----.36(a) and ----
--.37(b) and the protection amount (P) of the guarantee or credit
derivative is less than the exposure amount of the hedged exposure, the
[BANK] must treat the hedged exposure as two separate exposures
(protected and unprotected) in order to recognize the credit risk
mitigation benefit of the guarantee or credit derivative.
(i) The [BANK] may calculate the risk-weighted asset amount for the
protected exposure under Sec. ----.32, where the applicable risk
weight is the risk weight applicable to the guarantor or credit
derivative protection provider. (ii) The [BANK] must calculate the
risk-weighted asset amount for the unprotected exposure under Sec. --
--.32, where the applicable risk weight is that of the unprotected
portion of the hedged exposure.
(ii) The treatment provided in this section is applicable when the
credit risk of an exposure is covered on a partial pro rata basis and
may be applicable when an adjustment is made to the effective notional
amount of the guarantee or credit derivative under paragraphs (d), (e),
or (f) of this section.
(d) Maturity mismatch adjustment. (1) A [BANK] that recognizes an
eligible guarantee or eligible credit derivative in determining the
risk-weighted asset amount for a hedged exposure must adjust the
effective notional amount of the credit risk mitigant to reflect any
maturity mismatch between the hedged exposure and the credit risk
mitigant.
(2) A maturity mismatch occurs when the residual maturity of a
credit risk mitigant is less than that of the hedged exposure(s).
(3) The residual maturity of a hedged exposure is the longest
possible remaining time before the obligated party of the hedged
exposure is scheduled to fulfil its obligation on the hedged exposure.
If a credit risk mitigant has embedded options that may reduce its
term, the [BANK] (protection purchaser) must use the shortest possible
residual maturity for the credit risk mitigant. If a call is at the
discretion of the protection provider, the residual maturity of the
credit risk mitigant is at the first call date. If the call is at the
discretion of the [BANK]
[[Page 52958]]
(protection purchaser), but the terms of the arrangement at origination
of the credit risk mitigant contain a positive incentive for the [BANK]
to call the transaction before contractual maturity, the remaining time
to the first call date is the residual maturity of the credit risk
mitigant.
(4) A credit risk mitigant with a maturity mismatch may be
recognized only if its original maturity is greater than or equal to
one year and its residual maturity is greater than three months.
(5) When a maturity mismatch exists, the [BANK] must apply the
following adjustment to reduce the effective notional amount of the
credit risk mitigant: Pm = E x (t-0.25)/(T-0.25), where:
(i) Pm = effective notional amount of the credit risk mitigant,
adjusted for maturity mismatch;
(ii) E = effective notional amount of the credit risk mitigant;
(iii) t = the lesser of T or the residual maturity of the credit
risk mitigant, expressed in years; and
(iv) T = the lesser of five or the residual maturity of the hedged
exposure, expressed in years.
(e) Adjustment for credit derivatives without restructuring as a
credit event. If a [BANK] recognizes an eligible credit derivative that
does not include as a credit event a restructuring of the hedged
exposure involving forgiveness or postponement of principal, interest,
or fees that results in a credit loss event (that is, a charge-off,
specific provision, or other similar debit to the profit and loss
account), the [BANK] must apply the following adjustment to reduce the
effective notional amount of the credit derivative: Pr = Pm x 0.60,
where:
(1) Pr = effective notional amount of the credit risk mitigant,
adjusted for lack of restructuring event (and maturity mismatch, if
applicable); and
(2) Pm = effective notional amount of the credit risk mitigant
(adjusted for maturity mismatch, if applicable).
(f) Currency mismatch adjustment. (1) If a [BANK] recognizes an
eligible guarantee or eligible credit derivative that is denominated in
a currency different from that in which the hedged exposure is
denominated, the [BANK] must apply the following formula to the
effective notional amount of the guarantee or credit derivative: Pc =
Pr x (1-HFX), where:
(i) Pc = effective notional amount of the credit risk mitigant,
adjusted for currency mismatch (and maturity mismatch and lack of
restructuring event, if applicable);
(ii) Pr = effective notional amount of the credit risk mitigant
(adjusted for maturity mismatch and lack of restructuring event, if
applicable); and
(iii) HFX = haircut appropriate for the currency
mismatch between the credit risk mitigant and the hedged exposure.
(2) A [BANK] must set HFX equal to eight percent unless
it qualifies for the use of and uses its own internal estimates of
foreign exchange volatility based on a ten-business-day holding period.
A [BANK] qualifies for the use of its own internal estimates of foreign
exchange volatility if it qualifies for the use of its own-estimates
haircuts in Sec. ----.37(c)(4).
(3) A [BANK] must adjust HFX calculated in paragraph
(f)(2) of this section upward if the [BANK] revalues the guarantee or
credit derivative less frequently than once every 10 business days
using the following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TP30AU12.018
Sec. ----.37 Collateralized transactions.
(a) General. (1) To recognize the risk-mitigating effects of
financial collateral, a [BANK] may use:
(i) The simple approach in paragraph (b) of this section for any
exposure.
(ii) The collateral haircut approach in paragraph (c) of this
section for repo-style transactions, eligible margin loans,
collateralized derivative contracts, and single-product netting sets of
such transactions.
(2) A [BANK] may use any approach described in this section that is
valid for a particular type of exposure or transaction; however, it
must use the same approach for similar exposures or transactions.
(b) The simple approach. (1) General requirements. (i) A [BANK] may
recognize the credit risk mitigation benefits of financial collateral
that secures any exposure.
(ii) To qualify for the simple approach, the collateral must meet
the following requirements:
(A) The collateral must be subject to a collateral agreement for at
least the life of the exposure;
(B) The collateral must be revalued at least every six months; and
(C) The collateral (other than gold) and the exposure must be
denominated in the same currency.
(2) Risk weight substitution. (i) A [BANK] may apply a risk weight
to the portion of an exposure that is secured by the market value of
collateral (that meets the requirements of paragraph (b)(1) of this
section) based on the risk weight assigned to the collateral under
Sec. ----.32. For repurchase agreements, reverse repurchase
agreements, and securities lending and borrowing transactions, the
collateral is the instruments, gold, and cash the [BANK] has borrowed,
purchased subject to resale, or taken as collateral from the
counterparty under the transaction. Except as provided in paragraph
(b)(3) of this section, the risk weight assigned to the collateralized
portion of the exposure may not be less than 20 percent.
(ii) A [BANK] must apply a risk weight to the unsecured portion of
the exposure based on the risk weight assigned to the exposure under
this subpart.
(3) Exceptions to the 20 percent risk-weight floor and other
requirements. Notwithstanding paragraph (b)(2)(i) of this section:
(i) A [BANK] may assign a zero percent risk weight to an exposure
to an OTC derivative contract that is marked-to-market on a daily basis
and subject to a daily margin maintenance requirement, to the extent
the contract is collateralized by cash on deposit.
(ii) A [BANK] may assign a 10 percent risk weight to an exposure to
an OTC derivative contract that is marked-to-market daily and subject
to a daily margin maintenance requirement, to the extent that the
contract is collateralized by an exposure to a sovereign that qualifies
for a zero percent risk weight under Sec. ----.32.
(iii) A [BANK] may assign a zero percent risk weight to the
collateralized portion of an exposure where:
[[Page 52959]]
(A) The financial collateral is cash on deposit; or
(B) The financial collateral is an exposure to a sovereign that
qualifies for a zero percent risk weight under Sec. ----.32, and the
[BANK] has discounted the market value of the collateral by 20 percent.
(c) Collateral haircut approach. (1) General. A [BANK] may
recognize the credit risk mitigation benefits of financial collateral
that secures an eligible margin loan, repo-style transaction,
collateralized derivative contract, or single-product netting set of
such transactions, and of any collateral that secures a repo-style
transaction that is included in the [BANK]'s VaR-based measure under
subpart F by using the collateral haircut approach in this section. A
[BANK] may use the standard supervisory haircuts in paragraph (c)(3) of
this section or, with prior written approval of the [AGENCY], its own
estimates of haircuts according to paragraph (c)(4) of this section.
(2) Exposure amount equation. A [BANK] must determine the exposure
amount for an eligible margin loan, repo-style transaction,
collateralized derivative contract, or a single-product netting set of
such transactions by setting the exposure amount equal to max {0,
[([sum]E--[sum]C) + [sum](Es x Hs) + [sum](Efx x Hfx)]{time} , where:
(i)(A) For eligible margin loans and repo-style transactions and
netting sets thereof, [sum]E equals the value of the exposure (the sum
of the current market values of all instruments, gold, and cash the
[BANK] has lent, sold subject to repurchase, or posted as collateral to
the counterparty under the transaction (or netting set)); and
(B) For collateralized derivative contracts and netting sets
thereof, [sum]E equals the exposure amount of the OTC derivative
contract (or netting set) calculated under Sec. Sec. ----.34 (c) or
(d).
(ii) [sum]C equals the value of the collateral (the sum of the
current market values of all instruments, gold and cash the [BANK] has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty under the transaction (or netting set));
(iii) Es equals the absolute value of the net position in a given
instrument or in gold (where the net position in the instrument or gold
equals the sum of the current market values of the instrument or gold
the [BANK] has lent, sold subject to repurchase, or posted as
collateral to the counterparty minus the sum of the current market
values of that same instrument or gold the [BANK] has borrowed,
purchased subject to resale, or taken as collateral from the
counterparty);
(iv) Hs equals the market price volatility haircut appropriate to
the instrument or gold referenced in Es;
(v) Efx equals the absolute value of the net position of
instruments and cash in a currency that is different from the
settlement currency (where the net position in a given currency equals
the sum of the current market values of any instruments or cash in the
currency the [BANK] has lent, sold subject to repurchase, or posted as
collateral to the counterparty minus the sum of the current market
values of any instruments or cash in the currency the [BANK] has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty); and
(vi) Hfx equals the haircut appropriate to the mismatch between the
currency referenced in Efx and the settlement currency.
(3) Standard supervisory haircuts. (i) A [BANK] must use the
haircuts for market price volatility (Hs) provided in Table 8, as
adjusted in certain circumstances in accordance with the requirements
of paragraphs (c)(3)(iii) and (iv) of this section:
Table 8--Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Haircut (in percents) assigned based on:
------------------------------------------------------------------
Sovereign issuers risk weight Non-sovereign issuers risk Investment grade
Residual maturity under Sec. ----.32 \2\ weight under Sec. ----.32 securitization
------------------------------------------------------------------ exposures (in
20% or percent)
Zero % 50% 100% 20% 50% 100%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year....................................... 0.5 1.0 15.0 1.0 2.0 25.0 4.0
Greater than 1 year and less than or equal to 5 years.............. 2.0 3.0 15.0 4.0 6.0 25.0 12.0
Greater than 5 years............................................... 4.0 6.0 15.0 8.0 12.0 25.0 24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold..............................15.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other publicly-traded equities (including convertible bonds)............................25.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mutual funds.........................................................Highest haircut applicable to any security
in which the fund can invest.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash collateral held....................................................................Zero........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 2 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.
(ii) For currency mismatches, a [BANK] must use a haircut for
foreign exchange rate volatility (Hfx) of 8.0 percent, as adjusted in
certain circumstances under paragraphs (c)(3)(iii) and (iv) of this
section.
(iii) For repo-style transactions, a [BANK] may multiply the
standard supervisory haircuts provided in paragraphs (c)(3)(i) and (ii)
of this section by the square root of [frac12] (which equals 0.707107).
(iv) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, a [BANK] must adjust the supervisory haircuts
provided in paragraphs (c)(3)(i) and (ii) of this section upward on the
basis of a holding period of twenty business days for the following
quarter except in the calculation of the exposure amount for purposes
of Sec. ------.35. If a netting set contains one or more trades
involving illiquid collateral or an OTC derivative that cannot be
easily replaced, a [BANK] must adjust the supervisory haircuts upward
on the basis of a holding period of twenty business days. If over the
two previous quarters more than two margin disputes on a netting set
have occurred
[[Page 52960]]
that lasted more than the holding period, then the [BANK] must adjust
the supervisory haircuts upward for that netting set on the basis of a
holding period that is at least two times the minimum holding period
for that netting set. A [BANK] must adjust the standard supervisory
haircuts upward using the following formula:
[GRAPHIC] [TIFF OMITTED] TP30AU12.019
(A) TM equals a holding period of longer than 10 business
days for eligible margin loans and derivative contracts or longer
than 5 business days for repo-style transactions;
(B) HS equals the standard supervisory haircut; and
(C) TS equals 10 business days for eligible margin loans
and derivative contracts or 5 business days for repo-style
transactions.
(v) If the instrument a [BANK] has lent, sold subject to
repurchase, or posted as collateral does not meet the definition of
financial collateral, the [BANK] must use a 25.0 percent haircut for
market price volatility (Hs).
(4) Own internal estimates for haircuts. With the prior written
approval of the [AGENCY], a [BANK] may calculate haircuts (Hs and Hfx)
using its own internal estimates of the volatilities of market prices
and foreign exchange rates.
(i) To receive [AGENCY] approval to use its own internal estimates,
a [BANK] must satisfy the following minimum standards:
(A) A [BANK] must use a 99th percentile one-tailed confidence
interval.
(B) The minimum holding period for a repo-style transaction is five
business days and for an eligible margin loan is ten business days
except for transactions or netting sets for which paragraph
(c)(4)(i)(C) of this section applies. When a [BANK] calculates an own-
estimates haircut on a TN-day holding period, which is
different from the minimum holding period for the transaction type, the
applicable haircut (HM) is calculated using the following
square root of time formula:
[GRAPHIC] [TIFF OMITTED] TP30AU12.020
(1) TM equals 5 for repo-style transactions and 10 for
eligible margin loans;
(2) TN equals the holding period used by the [BANK] to
derive HN; and
(3) HN equals the haircut based on the holding period
TN.
(C) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, a [BANK] must calculate the haircut using a
minimum holding period of twenty business days for the following
quarter except in the calculation of the exposure amount for purposes
of Sec. ----.35. If a netting set contains one or more trades
involving illiquid collateral or an OTC derivative that cannot be
easily replaced, a [BANK] must calculate the haircut using a minimum
holding period of twenty business days. If over the two previous
quarters more than two margin disputes on a netting set have occurred
that lasted more than the holding period, then the [BANK] must
calculate the haircut for transactions in that netting set on the basis
of a holding period that is at least two times the minimum holding
period for that netting set.
(D) A [BANK] is required to calculate its own internal estimates
with inputs calibrated to historical data from a continuous 12-month
period that reflects a period of significant financial stress
appropriate to the security or category of securities.
(E) A [BANK] must have policies and procedures that describe how it
determines the period of significant financial stress used to calculate
the [BANK]'s own internal estimates for haircuts under this section and
must be able to provide empirical support for the period used. The
[BANK] must obtain the prior approval of the [AGENCY] for, and notify
the [AGENCY] if the [BANK] makes any material changes to, these
policies and procedures.
(F) Nothing in this section prevents the [AGENCY] from requiring a
[BANK] to use a different period of significant financial stress in the
calculation of own internal estimates for haircuts.
(G) A [BANK] must update its data sets and calculate haircuts no
less frequently than quarterly and must also reassess data sets and
haircuts whenever market prices change materially.
(ii) With respect to debt securities that are investment grade, a
[BANK] may calculate haircuts for categories of securities. For a
category of securities, the [BANK] must calculate the haircut on the
basis of internal volatility estimates for securities in that category
that are representative of the securities in that category that the
[BANK] has lent, sold subject to repurchase, posted as collateral,
borrowed, purchased subject to resale, or taken as collateral. In
determining relevant categories, the [BANK] must at a minimum take into
account:
(A) The type of issuer of the security;
(B) The credit quality of the security;
(C) The maturity of the security; and
(D) The interest rate sensitivity of the security.
(iii) With respect to debt securities that are not investment grade
and equity securities, a [BANK] must calculate a separate haircut for
each individual security.
(iv) Where an exposure or collateral (whether in the form of cash
or securities) is denominated in a currency that differs from the
settlement currency, the [BANK] must calculate a separate currency
mismatch haircut for its net position in each mismatched currency based
on estimated volatilities of foreign exchange rates between the
mismatched currency and the settlement currency.
(v) A [BANK]'s own estimates of market price and foreign exchange
rate volatilities may not take into account the correlations among
securities and foreign exchange rates on either the exposure or
collateral side of a transaction (or netting set) or the correlations
among securities and foreign exchange rates between the exposure and
collateral sides of the transaction (or netting set).
RISK-WEIGHTED ASSETS FOR UNSETTLED TRANSACTIONS
Sec. ----.38 Unsettled transactions.
(a) Definitions. For purposes of this section:
(1) Delivery-versus-payment (DvP) transaction means a securities or
commodities transaction in which the buyer is obligated to make payment
only if the seller has made delivery of the securities or commodities
and the seller is obligated to deliver the securities or commodities
only if the buyer has made payment.
(2) Payment-versus-payment (PvP) transaction means a foreign
exchange transaction in which each counterparty is obligated to make a
final transfer of one or more currencies only if the other counterparty
has made a final transfer of one or more currencies.
(3) Normal settlement period: a transaction has a normal settlement
period if the contractual settlement period for the transaction is
equal to or less than the market standard for the instrument underlying
the transaction and equal to or less than five business days.
(4) Positive current exposure of a [BANK] for a transaction is the
difference between the transaction value at the agreed settlement price
and the current market price of the transaction, if the difference
results in a credit exposure of the [BANK] to the counterparty.
(b) Scope. This section applies to all transactions involving
securities, foreign exchange instruments, and commodities
[[Page 52961]]
that have a risk of delayed settlement or delivery. This section does
not apply to:
(1) Cleared transactions that are marked-to-market daily and
subject to daily receipt and payment of variation margin;
(2) Repo-style transactions, including unsettled repo-style
transactions;
(3) One-way cash payments on OTC derivative contracts; or
(4) Transactions with a contractual settlement period that is
longer than the normal settlement period (which are treated as OTC
derivative contracts as provided in Sec. ----.34).
(c) System-wide failures. In the case of a system-wide failure of a
settlement, clearing system or central counterparty, the [AGENCY] may
waive risk-based capital requirements for unsettled and failed
transactions until the situation is rectified.
(d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP)
transactions. A [BANK] must hold risk-based capital against any DvP or
PvP transaction with a normal settlement period if the [BANK]'s
counterparty has not made delivery or payment within five business days
after the settlement date. The [BANK] must determine its risk-weighted
asset amount for such a transaction by multiplying the positive current
exposure of the transaction for the [BANK] by the appropriate risk
weight in Table 9.
Table 9--Risk Weights for Unsettled DvP and PvP Transactions
------------------------------------------------------------------------
Risk weight to
be applied to
Number of business days after contractual settlement positive
date current
exposure (in
percent)
------------------------------------------------------------------------
From 5 to 15............................................ 100.0
From 16 to 30........................................... 625.0
From 31 to 45........................................... 937.5
46 or more.............................................. 1,250.0
------------------------------------------------------------------------
(e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-
versus-payment) transactions. (1) A [BANK] must hold risk-based capital
against any non-DvP/non-PvP transaction with a normal settlement period
if the [BANK] has delivered cash, securities, commodities, or
currencies to its counterparty but has not received its corresponding
deliverables by the end of the same business day. The [BANK] must
continue to hold risk-based capital against the transaction until the
[BANK] has received its corresponding deliverables.
(2) From the business day after the [BANK] has made its delivery
until five business days after the counterparty delivery is due, the
[BANK] must calculate the risk-weighted asset amount for the
transaction by treating the current market value of the deliverables
owed to the [BANK] as an exposure to the counterparty and using the
applicable counterparty risk weight under Sec. ----.32.
(3) If the [BANK] has not received its deliverables by the fifth
business day after counterparty delivery was due, the [BANK] must
assign a 1,250 percent risk weight to the current market value of the
deliverables owed to the [BANK].
(f) Total risk-weighted assets for unsettled transactions. Total
risk-weighted assets for unsettled transactions is the sum of the risk-
weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP
transactions.
RISK-WEIGHTED ASSETS FOR SECURITIZATION EXPOSURES
Sec. ----.41 Operational requirements for securitization exposures.
(a) Operational criteria for traditional securitizations. A [BANK]
that transfers exposures it has originated or purchased to a
securitization SPE or other third party in connection with a
traditional securitization may exclude the exposures from the
calculation of its risk-weighted assets only if each condition in this
section is satisfied. A [BANK] that meets these conditions must hold
risk-based capital against any credit risk it retains in connection
with the securitization. A [BANK] that fails to meet these conditions
must hold risk-based capital against the transferred exposures as if
they had not been securitized and must deduct from common equity tier 1
capital any after-tax gain-on-sale resulting from the transaction. The
conditions are:
(1) The exposures are not reported on the [BANK]'s consolidated
balance sheet under GAAP;
(2) The [BANK] has transferred to one or more third parties credit
risk associated with the underlying exposures; and
(3) Any clean-up calls relating to the securitization are eligible
clean-up calls.
(4) The securitization does not:
(i) Include one or more underlying exposures in which the borrower
is permitted to vary the drawn amount within an agreed limit under a
line of credit; and
(ii) Contain an early amortization provision.
(b) Operational criteria for synthetic securitizations. For
synthetic securitizations, a [BANK] may recognize for risk-based
capital purposes the use of a credit risk mitigant to hedge underlying
exposures only if each condition in this paragraph is satisfied. A
[BANK] that meets these conditions must hold risk-based capital against
any credit risk of the exposures it retains in connection with the
synthetic securitization. A [BANK] that fails to meet these conditions
or chooses not to recognize the credit risk mitigant for purposes of
this section must instead hold risk-based capital against the
underlying exposures as if they had not been synthetically securitized.
The conditions are:
(1) The credit risk mitigant is financial collateral, an eligible
credit derivative, or an eligible guarantee;
(2) The [BANK] transfers credit risk associated with the underlying
exposures to one or more third parties, and the terms and conditions in
the credit risk mitigants employed do not include provisions that:
(i) Allow for the termination of the credit protection due to
deterioration in the credit quality of the underlying exposures;
(ii) Require the [BANK] to alter or replace the underlying
exposures to improve the credit quality of the pool of underlying
exposures;
(iii) Increase the [BANK]'s cost of credit protection in response
to deterioration in the credit quality of the underlying exposures;
(iv) Increase the yield payable to parties other than the [BANK] in
response to a deterioration in the credit quality of the underlying
exposures; or
(v) Provide for increases in a retained first loss position or
credit enhancement provided by the [BANK] after the inception of the
securitization;
(3) The [BANK] obtains a well-reasoned opinion from legal counsel
that confirms the enforceability of the credit risk mitigant in all
relevant jurisdictions; and
(4) Any clean-up calls relating to the securitization are eligible
clean-up calls.
(c) Due diligence requirements. (1) Except for exposures that are
deducted from common equity tier 1 capital, if a [BANK] is unable to
demonstrate to the satisfaction of the [AGENCY] a comprehensive
understanding of the features of a securitization exposure that would
materially affect the performance of the exposure, the [BANK] must
assign the securitization exposure a risk weight of 1,250 percent. The
[BANK]'s analysis must be commensurate with the complexity of the
securitization exposure and the materiality of the exposure in relation
to its capital.
(2) A [BANK] must demonstrate its comprehensive understanding of a
securitization exposure under paragraph (c)(1) of this section, for
each securitization exposure by:
[[Page 52962]]
(i) Conduct an analysis of the risk characteristics of a
securitization exposure prior to acquiring the exposure, and document
such analysis within three business days after acquiring the exposure,
considering:
(A) Structural features of the securitization that would materially
impact the performance of the exposure, for example, the contractual
cash flow waterfall, waterfall-related triggers, credit enhancements,
liquidity enhancements, market value triggers, the performance of
organizations that service the exposure, and deal-specific definitions
of default;
(B) Relevant information regarding the performance of the
underlying credit exposure(s), for example, the percentage of loans 30,
60, and 90 days past due; default rates; prepayment rates; loans in
foreclosure; property types; occupancy; average credit score or other
measures of creditworthiness; average LTV ratio; and industry and
geographic diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-
ask spread, most recent sales price and historic price volatility,
trading volume, implied market rating, and size, depth and
concentration level of the market for the securitization; and
(D) In addition, for resecuritization exposures, performance
information on the underlying securitization exposures, for example,
the issuer name and credit quality, and the characteristics and
performance of the exposures underlying the securitization exposures.
(ii) On an on-going basis (no less frequently than quarterly),
evaluating, reviewing, and updating as appropriate the analysis
required under paragraph (c)(1) of this section for each securitization
exposure.
Sec. ----.42 Risk-weighted assets for securitization exposures.
(a) Securitization risk weight approaches. Except as provided
elsewhere in this section or in Sec. ----.41:
(1) A [BANK] must deduct from common equity tier 1capital any
after-tax gain-on-sale resulting from a securitization and apply a
1,250 percent risk weight to the portion of a CEIO that does not
constitute after-tax gain-on-sale.
(2) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section, a [BANK] may assign a risk weight to
the securitization exposure using the simplified supervisory formula
approach (SSFA) in accordance with Sec. Sec. ----.43(a) through --
--.43(d). Alternatively, a [BANK] that is not subject to subpart F may
assign a risk weight to the securitization exposure using the gross-up
approach in accordance with Sec. ----.43(e). The [BANK] must apply
either the SSFA or the gross-up approach consistently across all of its
securitization exposures.
(3) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section and the [BANK] cannot, or chooses not
to apply the SSFA or the gross-up approach to the exposure, the [BANK]
must assign a risk weight to the exposure as described in Sec. --
--.44.
(4) If a securitization exposure is a derivative contract (other
than a credit derivative) that has a first priority claim on the cash
flows from the underlying exposures (notwithstanding amounts due under
interest rate or currency derivative contracts, fees due, or other
similar payments), with approval of the [AGENCY], a [BANK] may choose
to set the risk-weighted asset amount of the exposure equal to the
amount of the exposure as determined in paragraph (c) of this section.
(b) Total risk-weighted assets for securitization exposures. A
[BANK]'s total risk-weighted assets for securitization exposures equals
the sum of the risk-weighted asset amount for securitization exposures
that the [BANK] risk weights under Sec. Sec. ----.41(c), --
--.42(a)(1), and ----.43, ----.44, or ----.45, except as provided in
Sec. Sec. ----.42(e) through (j).
(c) Exposure amount of a securitization exposure. (1) On-balance
sheet securitization exposures. The exposure amount of an on-balance
sheet securitization exposure that is not a repo-style transaction,
eligible margin loan, or OTC derivative contract (other than a credit
derivative) is equal to the carrying value of the exposure.
(2) Off-balance sheet securitization exposures. (i) The exposure
amount of an off-balance sheet securitization exposure that is not a
repo-style transaction, eligible margin loan, or an OTC derivative
contract (other than a credit derivative) is the notional amount of the
exposure, except for an eligible asset-backed commercial paper (ABCP)
liquidity facility. For an off-balance sheet securitization exposure to
an ABCP program, such as an eligible ABCP liquidity facility, the
notional amount may be reduced to the maximum potential amount that the
[BANK] could be required to fund given the ABCP program's current
underlying assets (calculated without regard to the current credit
quality of those assets).
(ii) A [BANK] must determine the exposure amount of an eligible
ABCP liquidity facility for which the SSFA does not apply by
multiplying the notional amount of the exposure by a CCF of 50 percent.
(iii) A [BANK] must determine the exposure amount of an eligible
ABCP liquidity facility for which the SSFA applies by multiplying the
notional amount of the exposure by a CCF of 100 percent.
(3) Repo-style transactions, eligible margin loans, and derivative
contracts. The exposure amount of a securitization exposure that is a
repo-style transaction, eligible margin loan, or derivative contract
(other than a credit derivative) is the exposure amount of the
transaction as calculated under Sec. ----.34 or Sec. ----.37 as
applicable.
(d) Overlapping exposures. If a [BANK] has multiple securitization
exposures that provide duplicative coverage to the underlying exposures
of a securitization (such as when a [BANK] provides a program-wide
credit enhancement and multiple pool-specific liquidity facilities to
an ABCP program), the [BANK] is not required to hold duplicative risk-
based capital against the overlapping position. Instead, the [BANK] may
apply to the overlapping position the applicable risk-based capital
treatment that results in the highest risk-based capital requirement.
(e) Implicit support. If a [BANK] provides support to a
securitization in excess of the [BANK]'s contractual obligation to
provide credit support to the securitization (implicit support):
(1) The [BANK] must include in risk-weighted assets all of the
underlying exposures associated with the securitization as if the
exposures had not been securitized and must deduct from common equity
tier 1 capital any after-tax gain-on-sale resulting from the
securitization; and
(2) The [BANK] must disclose publicly:
(i) That it has provided implicit support to the securitization;
and
(ii) The risk-based capital impact to the [BANK] of providing such
implicit support.
(f) Undrawn portion of an eligible servicer cash advance facility.
Regardless of any other provision of this subpart, a [BANK] is not
required to hold risk-based capital against the undrawn portion of an
eligible servicer cash advance facility.
(g) Interest-only mortgage-backed securities. Regardless of any
other provisions of this subpart, the risk weight for a non-credit-
enhancing interest-only mortgage-backed security may not be less than
100 percent.
(h) Small-business loans and leases on personal property
transferred with retained contractual exposure. (1) Regardless of any
other provisions of
[[Page 52963]]
this subpart, a [BANK] that has transferred small-business loans and
leases on personal property (small-business obligations) must include
in risk-weighted assets only its contractual exposure to the small-
business obligations if all the following conditions are met:
(i) The transaction must be treated as a sale under GAAP.
(ii) The [BANK] establishes and maintains, pursuant to GAAP, a non-
capital reserve sufficient to meet the [BANK]'s reasonably estimated
liability under the contractual obligation.
(iii) The small business obligations are to businesses that meet
the criteria for a small-business concern established by the Small
Business Administration under section 3(a) of the Small Business Act.
(iv) The [BANK] is well capitalized, as defined in the [AGENCY]'s
prompt corrective action regulation. For purposes of determining
whether a [BANK] is well capitalized for purposes of this paragraph,
the [BANK]'s capital ratios must be calculated without regard to the
capital treatment for transfers of small-business obligations under
this paragraph.
(2) The total outstanding amount of contractual exposure retained
by a [BANK] on transfers of small-business obligations receiving the
capital treatment specified in paragraph (h)(1) of this section cannot
exceed 15 percent of the [BANK]'s total capital.
(3) If a [BANK] ceases to be well capitalized or exceeds the 15
percent capital limitation provided in paragraph (h)(2) of this
section, the capital treatment under paragraph (h)(1) of this section
will continue to apply to any transfers of small-business obligations
with retained contractual exposure that occurred during the time that
the [BANK] was well capitalized and did not exceed the capital limit.
(4) The risk-based capital ratios of the [BANK] must be calculated
without regard to the capital treatment for transfers of small-business
obligations specified in paragraph (h)(1) of this section for purposes
of:
(i) Determining whether a [BANK] is adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized under the [AGENCY]'s prompt corrective action
regulations; and
(ii) Reclassifying a well-capitalized [BANK] to adequately
capitalized and requiring an adequately capitalized [BANK] to comply
with certain mandatory or discretionary supervisory actions as if the
[BANK] were in the next lower prompt-corrective-action category.
(i) Nth-to-default credit derivatives. (1) Protection provider. A
[BANK] may assign a risk weight using the SSFA in Sec. ----.43 to an
nth-to-default credit derivative in accordance with this paragraph. A
[BANK] must determine its exposure in the nth-to-default credit
derivative as the largest notional dollar amount of all the underlying
exposures.
(2) For purposes of determining the risk weight for an nth-to-
default credit derivative using the SSFA, the [BANK] must calculate the
attachment point and detachment point of its exposure as follows:
(i) The attachment point (parameter A) is the ratio of the sum of
the notional amounts of all underlying exposures that are subordinated
to the [BANK]'s exposure to the total notional amount of all underlying
exposures. In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the [BANK]'s
exposure. In the case of a second-or-subsequent-to-default credit
derivative, the smallest (n-1) notional amounts of the underlying
exposure(s) are subordinated to the [BANK]'s exposure.
(ii) The detachment point (parameter D) equals the sum of parameter
A plus the ratio of the notional amount of the [BANK]'s exposure in the
nth-to-default credit derivative to the total notional amount of all
underlying exposures.
(3) A [BANK] that does not use the SSFA to determine a risk weight
for its nth-to-default credit derivative must assign a risk weight of
1,250 percent to the exposure.
(4) Protection purchaser. (i) First-to-default credit derivatives.
A [BANK] that obtains credit protection on a group of underlying
exposures through a first-to-default credit derivative that meets the
rules of recognition of Sec. --.36(b) must determine its risk-based
capital requirement for the underlying exposures as if the [BANK]
synthetically securitized the underlying exposure with the smallest
risk-weighted asset amount and had obtained no credit risk mitigant on
the other underlying exposures. A [BANK] must calculate a risk-based
capital requirement for counterparty credit risk according to Sec.
--.34 for a first-to-default credit derivative that does not meet the
rules of recognition of Sec. --.36(b).
(ii) Second-or-subsequent-to-default credit derivatives. (A) A
[BANK] that obtains credit protection on a group of underlying
exposures through a nth -to-default credit derivative that meets the
rules of recognition of Sec. --.36(b) (other than a first-to-default
credit derivative) may recognize the credit risk mitigation benefits of
the derivative only if:
(1) The [BANK] also has obtained credit protection on the same
underlying exposures in the form of first-through-(n-1)-to-default
credit derivatives; or
(2) If n-1 of the underlying exposures have already defaulted.
(B) If a [BANK] satisfies the requirements of paragraph
(i)(4)(ii)(A) of this section, the [BANK] must determine its risk-based
capital requirement for the underlying exposures as if the [BANK] had
only synthetically securitized the underlying exposure with the
smallest risk-weighted asset amount.
(C) A [BANK] must calculate a risk-based capital requirement for
counterparty credit risk according to Sec. --.34 for a nth-to-default
credit derivative that does not meet the rules of recognition of Sec.
--.36(b).
(j) Guarantees and credit derivatives other than N-th to default
credit derivatives. (1) Protection provider. For a guarantee or credit
derivative (other than an nth-to-default credit derivative) provided by
a [BANK] that covers the full amount or a pro rata share of a
securitization exposure's principal and interest, the [BANK] must risk
weight the guarantee or credit derivative as if it holds the portion of
the reference exposure covered by the guarantee or credit derivative.
(2) Protection purchaser. (i) If a [BANK] chooses (and is able) to
recognize a guarantee or credit derivative (other than an nth-to-
default credit derivative) that references a securitization exposure as
a credit risk mitigant, where applicable, the [BANK] must apply Sec.
--.45.
(ii) If a [BANK] cannot, or chooses not to, recognize a credit
derivative that references a securitization exposure as a credit risk
mitigant under Sec. --.45, the [BANK] must determine its capital
requirement only for counterparty credit risk in accordance with Sec.
----.31.
Sec. ----.43. Simplified supervisory formula approach (SSFA) and the
gross-up approach.
(a) General requirements. To use the SSFA to determine the risk
weight for a securitization exposure, a [BANK] must have data that
enables it to assign accurately the parameters described in paragraph
(b) of this section. Data used to assign the parameters described in
paragraph (b) of this section must be the most currently available data
and no more than 91 calendar days old. A [BANK] that does not have the
appropriate data to assign the parameters described in paragraph (b) of
[[Page 52964]]
this section must assign a risk weight of 1,250 percent to the
exposure.
(b) SSFA parameters. To calculate the risk weight for a
securitization exposure using the SSFA, a [BANK] must have accurate
information on the following five inputs to the SSFA calculation:
(1) KG is the weighted-average (with unpaid principal
used as the weight for each exposure) total capital requirement of the
underlying exposures calculated using this subpart. KG is
expressed as a decimal value between zero and 1 (that is, an average
risk weight of 100 percent represents a value of KG equal to
.08).
(2) Parameter W is expressed as a decimal value between zero and
one. Parameter W is the ratio of the sum of the dollar amounts of any
underlying exposures within the securitized pool that meet any of the
criteria as set forth in paragraphs (b)(2)(i) through (vi) of this
section to the ending balance, measured in dollars, of underlying
exposures:
(i) Ninety days or more past due,
(ii) Subject to a bankruptcy or insolvency proceeding,
(iii) In the process of foreclosure,
(iv) Held as real estate owned;
(v) Has contractually deferred interest payments for 90 days or
more; or
(vi) Is in default.
(3) Parameter A is the attachment point for the exposure, which
represents the threshold at which credit losses will first be allocated
to the exposure. Parameter A equals the ratio of the current dollar
amount of underlying exposures that are subordinated to the exposure of
the [BANK] to the current dollar amount of underlying exposures. Any
reserve account funded by the accumulated cash flows from the
underlying exposures that is subordinated to the [BANK]'s
securitization exposure may be included in the calculation of parameter
A to the extent that cash is present in the account. Parameter A is
expressed as a decimal value between zero and one.
(4) Parameter D is the detachment point for the exposure, which
represents the threshold at which credit losses of principal allocated
to the exposure would result in a total loss of principal. Parameter D
equals parameter A plus the ratio of the current dollar amount of the
securitization exposures that are pari passu with the exposure (that
is, have equal seniority with respect to credit risk) to the current
dollar amount of the underlying exposures. Parameter D is expressed as
a decimal value between zero and one.
(5) A supervisory calibration parameter, p, is equal to 0.5 for
securitization exposures that are not resecuritization exposures and
equal to 1.5 for resecuritization exposures.
(c) Mechanics of the SSFA. KG and W are used to
calculate KA, the augmented value of KG, which
reflects the observed credit quality of the underlying pool of
exposures. KA is defined in paragraph (d) of this section.
The values of parameters A and D, relative to KA determine
the risk weight assigned to a securitization exposure as described in
paragraph (d) of this section. The risk weight assigned to a
securitization exposure, or portion of a exposure, as appropriate, is
the larger of the risk weight determined in accordance with this
paragraphs (c) and (d) of this section and a risk weight of 20 percent.
(1) When the detachment point, parameter D, for a securitization
exposure is less than or equal to KA, the exposure must be
assigned a risk weight of 1,250 percent.
(2) When the attachment point, parameter A, for a securitization
exposure is greater than or equal to KA, the [BANK] must
calculate the risk weight in accordance with paragraph (d) of this
section.
(3) When A is less than KA and D is greater than
KA, the risk weight is a weighted-average of 1,250 percent
and 1,250 percent times KSSFA calculated in accordance with
paragraph (d) of this section, but with the parameter A revised to be
set equal to KA. For the purpose of this weighted-average
calculation:
[[Page 52965]]
[GRAPHIC] [TIFF OMITTED] TP30AU12.021
(e) Gross-up approach. (1) Applicability. A [BANK] that is not
subject to subpart F may apply the gross-up approach set forth in this
section instead of the SSFA to determine the risk weight of its
securitization exposures, provided that it applies the gross-up
approach or a 1,250 percent risk weight to all of its securitization
exposures, except as otherwise provided for certain securitization
exposures in Sec. --.44 and --.45.
(2) To use the gross-up approach, a [BANK] must calculate the
following four inputs:
(i) Pro rata share, which is the par value of the [BANK]'s
securitization exposure as a percent of the par value of the tranche in
which the securitization exposure resides;
(ii) Enhanced amount, which is the value of tranches that are more
senior to the tranche in which the [BANK]'s securitization resides;
(iii) Exposure amount of the [BANK]'s securitization exposure
calculated under Sec. ----.42(c); and
(iv) Risk weight, which is the weighted-average risk weight of
underlying exposures in the securitization pool as calculated under
this subpart.
(3) Credit equivalent amount. The credit equivalent amount of a
securitization exposure under this section equals the sum of the
exposure amount of the [BANK]'s securitization exposure and the pro
rata share multiplied by the enhanced amount, each calculated in
accordance with paragraph (e)(2) of this section.
(4) Risk-weighted assets. To calculate risk-weighted assets for a
securitization exposure under the gross-up approach, a [BANK] must
apply the risk weight calculated under paragraph (e)(2) of this section
to the credit equivalent amount calculated in paragraph (e)(3) of this
section.
(f) Limitations. Notwithstanding any other provision of this
section, a [BANK] must assign a risk weight of not less than 20 percent
to a securitization exposure.
[[Page 52966]]
Sec. ----.44. Securitization exposures to which the SSFA and gross-up
approach do not apply.
(a) General Requirement. A [BANK] must assign a 1,250 percent risk
weight to all securitization exposures to which the [BANK] does not
apply the SSFA or the gross up approach under Sec. ----.43, except as
set forth in this section;
(b) Eligible ABCP liquidity facilities. A [BANK] may determine the
risk-weighted asset amount of an eligible ABCP liquidity facility by
multiplying the exposure amount by the highest risk weight applicable
to any of the individual underlying exposures covered by the facility.
(c) A securitization exposure in a second loss position or better
to an ABCP program. (1) Risk weighting. A [BANK] may determine the
risk-weighted asset amount of a securitization exposure that is in a
second loss position or better to an ABCP program that meets the
requirements of paragraph (c)(2) of this section by multiplying the
exposure amount by the higher of the following risk weights:
(i) 100 percent; and
(ii) The highest risk weight applicable to any of the individual
underlying exposures of the ABCP program.
(2) Requirements. (i) The exposure is not an eligible ABCP
liquidity facility;
(ii) The exposure must be economically in a second loss position or
better, and the first loss position must provide significant credit
protection to the second loss position;
(iii) The exposure qualifies as investment grade; and
(iv) The [BANK] holding the exposure must not retain or provide
protection to the first loss position.
Sec. ----.45 Recognition of credit risk mitigants for securitization
exposures.
(a) General. (1) An originating [BANK] that has obtained a credit
risk mitigant to hedge its exposure to a synthetic or traditional
securitization that satisfies the operational criteria provided in
Sec. ----.41 may recognize the credit risk mitigant under Sec. Sec.
----.36 or ----.37, but only as provided in this section.
(2) An investing [BANK] that has obtained a credit risk mitigant to
hedge a securitization exposure may recognize the credit risk mitigant
under Sec. Sec. ----.36 or ----.37, but only as provided in this
section.
(b) Eligible guarantors for securitization exposures. A [BANK] may
only recognize an eligible guarantee or eligible credit derivative from
an eligible guarantor.
(c) Mismatches. A [BANK] must make any applicable adjustment to the
protection amount of an eligible guarantee or credit derivative as
required in Sec. Sec. ----.36(d), (e), and (f) for any hedged
securitization exposure. In the context of a synthetic securitization,
when an eligible guarantee or eligible credit derivative covers
multiple hedged exposures that have different residual maturities, the
[BANK] must use the longest residual maturity of any of the hedged
exposures as the residual maturity of all hedged exposures.
Risk-weighted Assets For Equity Exposures
Sec. ----.51 Introduction and exposure measurement.
(a) General. To calculate its risk-weighted asset amounts for
equity exposures that are not equity exposures to an investment fund, a
[BANK] must use the Simple Risk-Weight Approach (SRWA) provided in
Sec. ----.52. A [BANK] must use the look-through approaches provided
in Sec. ----.53 to calculate its risk-weighted asset amounts for
equity exposures to investment funds.
(b) Adjusted carrying value. For purposes of Sec. Sec. ----.51
through ----.53, the adjusted carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure, the
[BANK]'s carrying value of the exposure and
(2) For the off-balance sheet component of an equity exposure that
is not an equity commitment, the effective notional principal amount of
the exposure, the size of which is equivalent to a hypothetical on-
balance sheet position in the underlying equity instrument that would
evidence the same change in fair value (measured in dollars) given a
small change in the price of the underlying equity instrument, minus
the adjusted carrying value of the on-balance sheet component of the
exposure as calculated in paragraph (b)(1) of this section.
(3) For a commitment to acquire an equity exposure (an equity
commitment), the effective notional principal amount of the exposure is
multiplied by the following conversion factors (CFs):
(i) Conditional equity commitments with an original maturity of one
year or less receive a CF of 20 percent.
(ii) Conditional equity commitments with an original maturity of
over one year receive a CF of 50 percent.
(iii) Unconditional equity commitments receive a CF of 100 percent.
Sec. ----.52 Simple risk-weight approach (SRWA).
(a) General. Under the SRWA, a [BANK]'s total risk-weighted assets
for equity exposures equals the sum of the risk-weighted asset amounts
for each of the [BANK]'s individual equity exposures (other than equity
exposures to an investment fund) as determined under this section and
the risk-weighted asset amounts for each of the [BANK]'s individual
equity exposures to an investment fund as determined under Sec. --
--.53.
(b) SRWA computation for individual equity exposures. A [BANK] must
determine the risk-weighted asset amount for an individual equity
exposure (other than an equity exposure to an investment fund) by
multiplying the adjusted carrying value of the equity exposure or the
effective portion and ineffective portion of a hedge pair (as defined
in paragraph (c) of this section) by the lowest applicable risk weight
in this paragraph.
(1) Zero percent risk weight equity exposures. An equity exposure
to a sovereign, the Bank for International Settlements, the European
Central Bank, the European Commission, the International Monetary Fund,
an MDB, and any other entity whose credit exposures receive a zero
percent risk weight under Sec. ----.32 may be assigned a zero percent
risk weight.
(2) 20 percent risk weight equity exposures. An equity exposure to
a PSE, Federal Home Loan Bank or the Federal Agricultural Mortgage
Corporation (Farmer Mac) must be assigned a 20 percent risk weight.
(3) 100 percent risk weight equity exposures. The following equity
exposures must be assigned a 100 percent risk weight:
(i) Community development equity exposures.
(A) For [BANK]s, savings and loan holding companies, and bank
holding companies, an equity exposure that qualifies as a community
development investment under Sec. ----.24 (Eleventh) of the National
Bank Act, excluding equity exposures to an unconsolidated small
business investment company and equity exposures held through a
consolidated small business investment company described in section 302
of the Small Business Investment Act.
(B) For savings associations, an equity exposure that is designed
primarily to promote community welfare, including the welfare of low-
and moderate-income communities or families, such as by providing
services or employment, and excluding equity exposures to an
unconsolidated small business investment company and equity
[[Page 52967]]
exposures held through a small business investment company described in
section 302 of the Small Business Investment Act.
(ii) Effective portion of hedge pairs. The effective portion of a
hedge pair.
(iii) Non-significant equity exposures. Equity exposures, excluding
exposures to an investment firm that would meet the definition of a
traditional securitization were it not for the application of paragraph
(8) of that definition in Sec. ------.2 and has greater than
immaterial leverage, to the extent that the aggregate adjusted carrying
value of the exposures does not exceed 10 percent of the [BANK]'s total
capital.
(A) To compute the aggregate adjusted carrying value of a [BANK]'s
equity exposures for purposes of this section, the [BANK] may exclude
equity exposures described in paragraphs (b)(1), (b)(2), (b)(3)(i), and
(b)(3)(ii) of this section, the equity exposure in a hedge pair with
the smaller adjusted carrying value, and a proportion of each equity
exposure to an investment fund equal to the proportion of the assets of
the investment fund that are not equity exposures or that meet the
criterion of paragraph (b)(3)(i) of this section. If a [BANK] does not
know the actual holdings of the investment fund, the [BANK] may
calculate the proportion of the assets of the fund that are not equity
exposures based on the terms of the prospectus, partnership agreement,
or similar contract that defines the fund's permissible investments. If
the sum of the investment limits for all exposure classes within the
fund exceeds 100 percent, the [BANK] must assume for purposes of this
section that the investment fund invests to the maximum extent possible
in equity exposures.
(B) When determining which of a [BANK]'s equity exposures qualify
for a 100 percent risk weight under this paragraph, a [BANK] first must
include equity exposures to unconsolidated small business investment
companies or held through consolidated small business investment
companies described in section 302 of the Small Business Investment
Act, then must include publicly-traded equity exposures (including
those held indirectly through investment funds), and then must include
nonpublicly-traded equity exposures (including those held indirectly
through investment funds).
(4) 250 percent risk weight equity exposures. Significant
investments in the capital of unconsolidated financial institutions
that are not deducted from capital pursuant to Sec. ----.22(d) are
assigned a 250 percent risk weight.
(5) 300 percent risk weight equity exposures. A publicly-traded
equity exposure (other than an equity exposure described in paragraph
(b)(7) of this section and including the ineffective portion of a hedge
pair) must be assigned a 300 percent risk weight.
(6) 400 percent risk weight equity exposures. An equity exposure
(other than an equity exposure described in paragraph (b)(7)) of this
section that is not publicly-traded must be assigned a 400 percent risk
weight.
(7) 600 percent risk weight equity exposures. An equity exposure to
an investment firm must be assigned a 600 percent risk weight, provided
that the investment firm:
(i) Would meet the definition of a traditional securitization were
it not for the application of paragraph (8) of that definition; and
(ii) Has greater than immaterial leverage.
(c) Hedge transactions. (1) Hedge pair. A hedge pair is two equity
exposures that form an effective hedge so long as each equity exposure
is publicly-traded or has a return that is primarily based on a
publicly-traded equity exposure.
(2) Effective hedge. Two equity exposures form an effective hedge
if the exposures either have the same remaining maturity or each has a
remaining maturity of at least three months; the hedge relationship is
formally documented in a prospective manner (that is, before the [BANK]
acquires at least one of the equity exposures); the documentation
specifies the measure of effectiveness (E) the [BANK] will use for the
hedge relationship throughout the life of the transaction; and the
hedge relationship has an E greater than or equal to 0.8. A [BANK] must
measure E at least quarterly and must use one of three alternative
measures of E:
(i) Under the dollar-offset method of measuring effectiveness, the
[BANK] must determine the ratio of value change (RVC). The RVC is the
ratio of the cumulative sum of the changes in value of one equity
exposure to the cumulative sum of the changes in the value of the other
equity exposure. If RVC is positive, the hedge is not effective and E
equals 0. If RVC is negative and greater than or equal to -1 (that is,
between zero and -1), then E equals the absolute value of RVC. If RVC
is negative and less than -1, then E equals 2 plus RVC.
(ii) Under the variability-reduction method of measuring
effectiveness:
[GRAPHIC] [TIFF OMITTED] TP30AU12.022
(A) Xt = At - Bt;
(B) At = the value at time t of one exposure in a hedge pair; and
(C) Bt = the value at time t of the other exposure in a hedge pair.
(iii) Under the regression method of measuring effectiveness, E
equals the coefficient of determination of a regression in which the
change in value of one exposure in a hedge pair is the dependent
variable and the change in value of the other exposure in a hedge pair
is the independent variable. However, if the estimated regression
coefficient is positive, then E equals zero.
(3) The effective portion of a hedge pair is E multiplied by the
greater of the adjusted carrying values of the equity exposures forming
a hedge pair.
(4) The ineffective portion of a hedge pair is (1-E) multiplied by
the greater of the adjusted carrying values of the equity exposures
forming a hedge pair.
Sec. ----.53 Equity exposures to investment funds.
(a) Available approaches. (1) Unless the exposure meets the
requirements for a community development equity exposure under Sec. --
----.52(b)(3)(i), a [BANK] must determine the risk-weighted asset
amount of an equity exposure to an investment fund under the Full Look-
Through Approach described in paragraph (b) of this section, the Simple
Modified Look-Through Approach described in
[[Page 52968]]
paragraph (c) of this section, or the Alterative Modified Look-Through
Approach described paragraph (d) of this section.
(2) The risk-weighted asset amount of an equity exposure to an
investment fund that meets the requirements for a community development
equity exposure in Sec. ----.52(b)(3)(i) is its adjusted carrying
value.
(3) If an equity exposure to an investment fund is part of a hedge
pair and the [BANK] does not use the Full Look-Through Approach, the
[BANK] may use the ineffective portion of the hedge pair as determined
under Sec. ----.52(c) as the adjusted carrying value for the equity
exposure to the investment fund. The risk-weighted asset amount of the
effective portion of the hedge pair is equal to its adjusted carrying
value.
(b) Full Look-Through Approach. A [BANK] that is able to calculate
a risk-weighted asset amount for its proportional ownership share of
each exposure held by the investment fund (as calculated under this
subpart as if the proportional ownership share of each exposure were
held directly by the [BANK]) may set the risk-weighted asset amount of
the [BANK]'s exposure to the fund equal to the product of:
(1) The aggregate risk-weighted asset amounts of the exposures held
by the fund as if they were held directly by the [BANK]; and
(2) The [BANK]'s proportional ownership share of the fund.
(c) Simple Modified Look-Through Approach. Under the Simple
Modified Look-Through Approach, the risk-weighted asset amount for a
[BANK]'s equity exposure to an investment fund equals the adjusted
carrying value of the equity exposure multiplied by the highest risk
weight that applies to any exposure the fund is permitted to hold under
the prospectus, partnership agreement, or similar agreement that
defines the fund's permissible investments (excluding derivative
contracts that are used for hedging rather than speculative purposes
and that do not constitute a material portion of the fund's exposures).
(d) Alternative Modified Look-Through Approach. Under the
Alternative Modified Look-Through Approach, a [BANK] may assign the
adjusted carrying value of an equity exposure to an investment fund on
a pro rata basis to different risk weight categories under this subpart
based on the investment limits in the fund's prospectus, partnership
agreement, or similar contract that defines the fund's permissible
investments. The risk-weighted asset amount for the [BANK]'s equity
exposure to the investment fund equals the sum of each portion of the
adjusted carrying value assigned to an exposure type multiplied by the
applicable risk weight under this subpart. If the sum of the investment
limits for all exposure types within the fund exceeds 100 percent, the
[BANK] must assume that the fund invests to the maximum extent
permitted under its investment limits in the exposure type with the
highest applicable risk weight under this subpart and continues to make
investments in order of the exposure type with the next highest
applicable risk weight under this subpart until the maximum total
investment level is reached. If more than one exposure type applies to
an exposure, the [BANK] must use the highest applicable risk weight. A
[BANK] may exclude derivative contracts held by the fund that are used
for hedging rather than for speculative purposes and do not constitute
a material portion of the fund's exposures.
DISCLOSURES
Sec. ----.61 Purpose and scope.
Sections ----.61-----.63 of this subpart establish public
disclosure requirements related to the capital requirements described
in Subpart B for a [BANK] with total consolidated assets of $50 billion
or more that is not an advanced approaches [BANK] making public
disclosures pursuant to Sec. ----.172. Such a [BANK] must comply with
Sec. ----.62 of this part unless it is a consolidated subsidiary of a
bank holding company, savings and loan holding company, or depository
institution that is subject to these disclosure requirements or a
subsidiary of a non-U.S. banking organization that is subject to
comparable public disclosure requirements in its home jurisdiction. For
purposes of this section, total consolidated assets are determined
based on the average of the [BANK]'s total consolidated assets in the
four most recent quarters as reported on the [REGULATORY REPORT]; or
the average of the [BANK]'s total consolidated assets in the most
recent consecutive quarters as reported quarterly on the [BANK]'s
[REGULATORY REPORT] if the [BANK] has not filed such a report for each
of the most recent four quarters.
Sec. ----.62 Disclosure requirements.
(a) A [BANK] described in Sec. ----.61 must provide timely public
disclosures each calendar quarter of the information in the applicable
tables in Sec. ----.63. If a significant change occurs, such that the
most recent reported amounts are no longer reflective of the [BANK]'s
capital adequacy and risk profile, then a brief discussion of this
change and its likely impact must be disclosed as soon as practicable
thereafter. Qualitative disclosures that typically do not change each
quarter (for example, a general summary of the [BANK]'s risk management
objectives and policies, reporting system, and definitions) may be
disclosed annually, provided that any significant changes are disclosed
in the interim. The [BANK]'s management is encouraged to provide all of
the disclosures required by Sec. Sec. ----.61 through ----.63 of this
part in one place on the [BANK]'s public Web site.\96\
---------------------------------------------------------------------------
\96\ Alternatively, a [BANK] may provide the disclosures in more
than one place, as some of them may be included in public financial
reports (for example, in Management's Discussion and Analysis
included in SEC filings) or other regulatory reports. The [BANK]
must publicly provide a summary table that specifically indicates
where all the disclosures may be found (for example, regulatory
report schedules, page numbers in annual reports).
---------------------------------------------------------------------------
(b) A [BANK] described in Sec. ----.61 must have a formal
disclosure policy approved by the board of directors that addresses its
approach for determining the disclosures it makes. The policy must
address the associated internal controls and disclosure controls and
procedures. The board of directors and senior management are
responsible for establishing and maintaining an effective internal
control structure over financial reporting, including the disclosures
required by this subpart, and must ensure that appropriate review of
the disclosures takes place. One or more senior officers of the [BANK]
must attest that the disclosures meet the requirements of this subpart.
(c) If a [BANK] described in Sec. ----.61 concludes that specific
commercial or financial information that it would otherwise be required
to disclose under this section would be exempt from disclosure by the
[AGENCY] under the Freedom of Information Act (5 U.S.C. 552), then the
[BANK] is not required to disclose that specific information pursuant
to this section, but must disclose more general information about the
subject matter of the requirement, together with the fact that, and the
reason why, the specific items of information have not been disclosed.
Sec. ----.63 Disclosures by [BANK]s described in Sec. ----.61.
(a) Except as provided in Sec. ----.62, a [BANK] described in
Sec. ----.61 must make the disclosures described in Tables 14.1
through 14.10 of this section. The [BANK] must make these disclosures
publicly available for each of the last three years (that is, twelve
quarters) or such shorter period beginning on the effective date of
this subpart D.
[[Page 52969]]
(b) A [BANK] must publicly disclose each quarter the following:
(1) Common equity tier 1 capital, additional tier 1 capital, tier 2
capital, tier 1 and total capital ratios, including the regulatory
capital elements and all the regulatory adjustments and deductions
needed to calculate the numerator of such ratios;
(2) Total risk-weighted assets, including the different regulatory
adjustments and deductions needed to calculate total risk-weighted
assets;
(3) Regulatory capital ratios during any transition periods,
including a description of all the regulatory capital elements and all
regulatory adjustments and deductions needed to calculate the numerator
and denominator of each capital ratio during any transition period; and
(4) A reconciliation of regulatory capital elements as they relate
to its balance sheet in any audited consolidated financial statements.
Table 14.1--Scope of Application
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative Disclosures..... (a)....... The name of the top corporate
entity in the group to which
subpart D of this [PART]
applies.
-------------------------------------------
(b)....... A brief description of the
differences in the basis for
consolidating entities \97\
for accounting and regulatory
purposes, with a description
of those entities:
(1) That are fully
consolidated;
(2) That are deconsolidated
and deducted from total
capital;
(3) For which the total
capital requirement is
deducted; and
(4) That are neither
consolidated nor deducted
(for example, where the
investment in the entity is
assigned a risk weight in
accordance with this
subpart).
(c)....... Any restrictions, or other
major impediments, on
transfer of funds or total
capital within the group.
Quantitative Disclosures.... (d)....... The aggregate amount of
surplus capital of insurance
subsidiaries included in the
total capital of the
consolidated group.
(e)....... The aggregate amount by which
actual total capital is less
than the minimum total
capital requirement in all
subsidiaries, with total
capital requirements and the
name(s) of the subsidiaries
with such deficiencies.
------------------------------------------------------------------------
\97\ Entities include securities, insurance and other financial
subsidiaries, commercial subsidiaries (where permitted), and
significant minority equity investments in insurance, financial, and
commercial entities.
Table 14.2--Capital Structure
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative Disclosures..... (a)....... Summary information on the
terms and conditions of the
main features of all
regulatory capital
instruments.
------------------------------------------------------------------------
Quantitative Disclosures.... (b)....... The amount of common equity
tier 1 capital, with separate
disclosure of:
(1) Common stock and related
surplus;
(2) Retained earnings;
(3) Common equity minority
interest;
(4) AOCI; and
(5) Regulatory deductions and
adjustments made to common
equity tier 1 capital.
(c)....... The amount of tier 1 capital,
with separate disclosure of:
(1) Additional tier 1 capital
elements, including
additional tier 1 capital
instruments and tier 1
minority interest not
included in common equity
tier 1 capital; and
(2) Regulatory deductions and
adjustments made to tier 1
capital.
(d)....... The amount of total capital,
with separate disclosure of:
(1) Tier 2 capital elements,
including tier 2 capital
instruments and total capital
minority interest not
included in tier 1 capital;
and
(2) Regulatory deductions and
adjustments made to total
capital.
------------------------------------------------------------------------
Table 14.3--Capital Adequacy
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative disclosures..... (a)....... A summary discussion of the
[BANK]'s approach to
assessing the adequacy of its
capital to support current
and future activities.
Quantitative disclosures.... (b)....... Risk-weighted assets for:
(1) Exposures to sovereign
entities;
(2) Exposures to certain
supranational entities and
MDBs;
(3) Exposures to depository
institutions, foreign banks,
and credit unions;
(4) Exposures to PSEs;
(5) Corporate exposures;
(6) Residential mortgage
exposures;
(7) Statutory multifamily
mortgages and pre-sold
construction loans;
(8) HVCRE loans;
(9) Past due loans;
(10) Other assets;
(11) Cleared transactions;
(12) Default fund
contributions;
(13) Unsettled transactions;
(14) Securitization exposures;
and
(15) Equity exposures.
(c)....... Standardized market risk-
weighted assets as calculated
under subpart F of this
[PART].\98\
[[Page 52970]]
(d)....... Common equity tier 1, tier 1
and total risk-based capital
ratios:
(1) For the top consolidated
group; and
(2) For each depository
institution subsidiary.
(e)....... Total risk-weighted assets.
------------------------------------------------------------------------
\98\ Standardized market risk-weighted assets determined under subpart F
are to be disclosed only for the approaches used.
Table 14.4--Capital Conservation Buffer
------------------------------------------------------------------------
------------------------------------------------------------------------
Quantitative Disclosures.... (a)....... At least quarterly, the [BANK]
must calculate and publicly
disclose the capital
conservation buffer as
described under Sec. ------
.11.
(b)....... At least quarterly, the [BANK]
must calculate and publicly
disclose the eligible
retained income of the
[BANK], as described under
Sec. ----.11.
(c)....... At least quarterly, the [BANK]
must calculate and publicly
disclose any limitations it
has on capital distributions
and discretionary bonus
payments resulting from the
capital conservation buffer
framework described under
Sec. ----.11, including the
maximum payout amount for the
quarter.
------------------------------------------------------------------------
General Qualitative Disclosure Requirement
For each separate risk area described in tables 14.5 through 14.10,
the [BANK] must describe its risk management objectives and policies,
including: strategies and processes; the structure and organization of
the relevant risk management function; the scope and nature of risk
reporting and/or measurement systems; policies for hedging and/or
mitigating risk and strategies and processes for monitoring the
continuing effectiveness of hedges/mitigants.
Table 14.5 99--Credit Risk: General Disclosures
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative Disclosures..... (a)....... The general qualitative
disclosure requirement with
respect to credit risk
(excluding counterparty
credit risk disclosed in
accordance with Table 14.6),
including the:
(1) Policy for determining
past due or delinquency
status;
(2) Policy for placing loans
on nonaccrual;
(3) Policy for returning loans
to accrual status;
(4) Definition of and policy
for identifying impaired
loans (for financial
accounting purposes);
(5) Description of the
methodology that the [BANK]
uses to estimate its
allowance for loan losses,
including statistical methods
used where applicable;
(6) Policy for charging-off
uncollectible amounts; and
(7) Discussion of the [BANK]'s
credit risk management
policy.
Quantitative Disclosures.... (b)....... Total credit risk exposures
and average credit risk
exposures, after accounting
offsets in accordance with
GAAP, without taking into
account the effects of credit
risk mitigation techniques
(for example, collateral and
netting not permitted under
GAAP), over the period
categorized by major types of
credit exposure. For example,
[BANK]s could use categories
similar to that used for
financial statement purposes.
Such categories might
include, for instance
(1) Loans, off-balance sheet
commitments, and other non-
derivative off-balance sheet
exposures,
(2) Debt securities, and
(3) OTC derivatives.\100\
(c)....... Geographic distribution of
exposures, categorized in
significant areas by major
types of credit
exposure.\101\
(d)....... Industry or counterparty type
distribution of exposures,
categorized by major types of
credit exposure.
(e)....... By major industry or
counterparty type:
(1) Amount of impaired loans
for which there was a related
allowance under GAAP;
(2) Amount of impaired loans
for which there was no
related allowance under GAAP;
(3) Amount of loans past due
90 days and on nonaccrual;
(4) Amount of loans past due
90 days and still
accruing;\102\
(5) The balance in the
allowance for credit losses
at the end of each period,
disaggregated on the basis of
the [BANK]'s impairment
method. To disaggregate the
information required on the
basis of impairment
methodology, an entity shall
separately disclose the
amounts based on the
requirements in GAAP; and
(6) Charge-offs during the
period.
(f)....... Amount of impaired loans and,
if available, the amount of
past due loans categorized by
significant geographic areas
including, if practical, the
amounts of allowances related
to each geographical area
\103\, further categorized as
required by GAAP.
(g)....... Reconciliation of changes in
ALLL.\104\
(h)....... Remaining contractual maturity
delineation (for example, one
year or less) of the whole
portfolio, categorized by
credit exposure.
------------------------------------------------------------------------
\99\ Table 14.5 does not cover equity exposures.
\100\ See, for example, ASC Topic 815-10 and 210-20 (formerly FASB
Interpretation Numbers 37 and 41).
\101\ Geographical areas may consist of individual countries, groups of
countries, or regions within countries. A [BANK] might choose to
define the geographical areas based on the way the [BANK]'s portfolio
is geographically managed. The criteria used to allocate the loans to
geographical areas must be specified.
\102\ A [BANK] is encouraged also to provide an analysis of the aging of
past-due loans.
\103\ The portion of the general allowance that is not allocated to a
geographical area should be disclosed separately.
[[Page 52971]]
\104\ The reconciliation should include the following: a description of
the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or
reversed) for estimated probable loan losses during the period; any
other adjustments (for example, exchange rate differences, business
combinations, acquisitions and disposals of subsidiaries), including
transfers between allowances; and the closing balance of the
allowance. Charge-offs and recoveries that have been recorded directly
to the income statement should be disclosed separately.
Table 14.6--General Disclosure for Counterparty Credit Risk-Related
Exposures
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative Disclosures..... (a)....... The general qualitative
disclosure requirement with
respect to OTC derivatives,
eligible margin loans, and
repo-style transactions,
including a discussion of:
(1) The methodology used to
assign credit limits for
counterparty credit
exposures;
(2) Policies for securing
collateral, valuing and
managing collateral, and
establishing credit reserves;
(3) The primary types of
collateral taken; and
(4) The impact of the amount
of collateral the [BANK]
would have to provide given a
deterioration in the [BANK]'s
own creditworthiness.
Quantitative Disclosures.... (b)....... Gross positive fair value of
contracts, collateral held
(including type, for example,
cash, government securities),
and net unsecured credit
exposure.\105\ A [BANK] also
must disclose the notional
value of credit derivative
hedges purchased for
counterparty credit risk
protection and the
distribution of current
credit exposure by exposure
type.\106\
(c)....... Notional amount of purchased
and sold credit derivatives,
segregated between use for
the [BANK]'s own credit
portfolio and in its
intermediation activities,
including the distribution of
the credit derivative
products used, categorized
further by protection bought
and sold within each product
group.
------------------------------------------------------------------------
\105\ Net unsecured credit exposure is the credit exposure after
considering both the benefits from legally enforceable netting
agreements and collateral arrangements without taking into account
haircuts for price volatility, liquidity, etc.
\106\ This may include interest rate derivative contracts, foreign
exchange derivative contracts, equity derivative contracts, credit
derivatives, commodity or other derivative contracts, repo-style
transactions, and eligible margin loans.
Table 14.7--Credit Risk Mitigation 107 108
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative Disclosures..... (a)....... The general qualitative
disclosure requirement with
respect to credit risk
mitigation, including:
(1) Policies and processes for
collateral valuation and
management;
(2) A description of the main
types of collateral taken by
the [BANK];
(3) The main types of
guarantors/credit derivative
counterparties and their
creditworthiness; and
(4) Information about (market
or credit) risk
concentrations with respect
to credit risk mitigation.
Quantitative Disclosures.... (b)....... For each separately disclosed
credit risk portfolio, the
total exposure that is
covered by eligible financial
collateral, and after the
application of haircuts.
(c)....... For each separately disclosed
portfolio, the total exposure
that is covered by guarantees/
credit derivatives and the
risk-weighted asset amount
associated with that
exposure.
------------------------------------------------------------------------
\107\ At a minimum, a [BANK] must provide the disclosures in Table 14.7
in relation to credit risk mitigation that has been recognized for the
purposes of reducing capital requirements under this subpart. Where
relevant, [BANK]s are encouraged to give further information about
mitigants that have not been recognized for that purpose.
\108\ Credit derivatives that are treated, for the purposes of this
subpart, as synthetic securitization exposures should be excluded from
the credit risk mitigation disclosures and included within those
relating to securitization (Table 14.8).
Table 14.8--Securitization
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative Disclosures..... (a)....... The general qualitative
disclosure requirement with
respect to a securitization
(including synthetic
securitizations), including a
discussion of:
(1) The [BANK]'s objectives
for securitizing assets,
including the extent to which
these activities transfer
credit risk of the underlying
exposures away from the
[BANK] to other entities and
including the type of risks
assumed and retained with
resecuritization activity;
\109\
(2) The nature of the risks
(e.g. liquidity risk)
inherent in the securitized
assets;
(3) The roles played by the
[BANK] in the securitization
process \110\ and an
indication of the extent of
the [BANK]'s involvement in
each of them;
(4) The processes in place to
monitor changes in the credit
and market risk of
securitization exposures
including how those processes
differ for resecuritization
exposures;
(5) The [BANK]'s policy for
mitigating the credit risk
retained through
securitization and
resecuritization exposures;
and
(6) The risk-based capital
approaches that the [BANK]
follows for its
securitization exposures
including the type of
securitization exposure to
which each approach applies.
(b)....... A list of:
(1) The type of securitization
SPEs that the [BANK], as
sponsor, uses to securitize
third-party exposures. The
[BANK] must indicate whether
it has exposure to these SPEs
, either on- or off-balance
sheet; and
(2) Affiliated entities--
(i) That the [BANK] manages or
advises; and
(ii) That invest either in the
securitization exposures that
the [BANK] has securitized or
in securitization SPEs that
the [BANK] sponsors.\111\
(c)....... Summary of the [BANK]'s
accounting policies for
securitization activities,
including:
(1) Whether the transactions
are treated as sales or
financings;
(2) Recognition of gain-on-
sale;
(3) Methods and key
assumptions applied in
valuing retained or purchased
interests;
[[Page 52972]]
(4) Changes in methods and key
assumptions from the previous
period for valuing retained
interests and impact of the
changes;
(5) Treatment of synthetic
securitizations;
(6) How exposures intended to
be securitized are valued and
whether they are recorded
under subpart D; and
(7) Policies for recognizing
liabilities on the balance
sheet for arrangements that
could require the [BANK] to
provide financial support for
securitized assets.
(d)....... An explanation of significant
changes to any quantitative
information since the last
reporting period.
Quantitative Disclosures.... (e)....... The total outstanding
exposures securitized by the
[BANK] in securitizations
that meet the operational
criteria provided in Sec. --
--.41 (categorized into
traditional and synthetic
securitizations), by exposure
type, separately for
securitizations of third-
party exposures for which the
bank acts only as
sponsor.\112\
(f)....... For exposures securitized by
the [BANK] in securitizations
that meet the operational
criteria in Sec. ----.41:
(1) Amount of securitized
assets that are impaired/past
due categorized by exposure
type; \113\ and
(2) Losses recognized by the
[BANK] during the current
period categorized by
exposure type.\114\
(g)....... The total amount of
outstanding exposures
intended to be securitized
categorized by exposure type.
(h)....... Aggregate amount of:
(1) On-balance sheet
securitization exposures
retained or purchased
categorized by exposure type;
and
(2) Off-balance sheet
securitization exposures
categorized by exposure type.
(i)....... (1) Aggregate amount of
securitization exposures
retained or purchased and the
associated capital
requirements for these
exposures, categorized
between securitization and
resecuritization exposures,
further categorized into a
meaningful number of risk
weight bands and by risk-
based capital approach (e.g.,
SSFA); and
(2) Exposures that have been
deducted entirely from tier 1
capital, credit enhancing I/
Os deducted from total
capital (as described in Sec.
----.42(a)(1), and other
exposures deducted from total
capital should be disclosed
separately by exposure type.
(j)....... Summary of current year's
securitization activity,
including the amount of
exposures securitized (by
exposure type), and
recognized gain or loss on
sale by exposure type.
(k)....... Aggregate amount of
resecuritization exposures
retained or purchased
categorized according to:
(1) Exposures to which credit
risk mitigation is applied
and those not applied; and
(2) Exposures to guarantors
categorized according to
guarantor credit worthiness
categories or guarantor name.
------------------------------------------------------------------------
\109\ The [BANK] should describe the structure of resecuritizations in
which it participates; this description should be provided for the
main categories of resecuritization products in which the [BANK] is
active.
\110\ For example, these roles may include originator, investor,
servicer, provider of credit enhancement, sponsor, liquidity provider,
or swap provider.
\111\ Such affiliated entities may include, for example, money market
funds, to be listed individually, and personal and private trusts, to
be noted collectively.
\112\ ``Exposures securitized'' include underlying exposures originated
by the bank, whether generated by them or purchased, and recognized in
the balance sheet, from third parties, and third-party exposures
included in sponsored transactions. Securitization transactions
(including underlying exposures originally on the bank's balance sheet
and underlying exposures acquired by the bank from third-party
entities) in which the originating bank does not retain any
securitization exposure should be shown separately but need only be
reported for the year of inception. Banks are required to disclose
exposures regardless of whether there is a capital charge under Pillar
1.
\113\ Include credit-related other than temporary impairment (OTTI).
\114\ For example, charge-offs/allowances (if the assets remain on the
bank's balance sheet) or credit-related OTTI of I/O strips and other
retained residual interests, as well as recognition of liabilities for
probable future financial support required of the bank with respect to
securitized assets.
Table 14.9--Equities Not Subject to Subpart F of this [PART]
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative Disclosures..... (a)....... The general qualitative
disclosure requirement with
respect to equity risk for
equities not subject to
subpart F of this [PART],
including:
(1) Differentiation between
holdings on which capital
gains are expected and those
taken under other objectives
including for relationship
and strategic reasons; and
(2) Discussion of important
policies covering the
valuation of and accounting
for equity holdings not
subject to subpart F of this
[PART]. This includes the
accounting techniques and
valuation methodologies used,
including key assumptions and
practices affecting valuation
as well as significant
changes in these practices.
Quantitative Disclosures.... (b)....... Value disclosed on the balance
sheet of investments, as well
as the fair value of those
investments; for securities
that are publicly-traded, a
comparison to publicly-quoted
share values where the share
price is materially different
from fair value.
(c)....... The types and nature of
investments, including the
amount that is:
(1) Publicly-traded; and
(2) Non publicly-traded.
(d)....... The cumulative realized gains
(losses) arising from sales
and liquidations in the
reporting period.
(e)....... (1) Total unrealized gains
(losses).\115\
(2) Total latent revaluation
gains (losses).\116\
(3) Any amounts of the above
included in tier 1 or tier 2
capital.
[[Page 52973]]
(f)....... Capital requirements
categorized by appropriate
equity groupings, consistent
with the [BANK]'s
methodology, as well as the
aggregate amounts and the
type of equity investments
subject to any supervisory
transition regarding
regulatory capital
requirements.
------------------------------------------------------------------------
\115\ Unrealized gains (losses) recognized on the balance sheet but not
through earnings.
\116\ Unrealized gains (losses) not recognized either on the balance
sheet or through earnings.
Table 14.10--Interest Rate Risk for Non-trading Activities
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative disclosures..... (a)....... The general qualitative
disclosure requirement,
including the nature of
interest rate risk for non-
trading activities and key
assumptions, including
assumptions regarding loan
prepayments and behavior of
non-maturity deposits, and
frequency of measurement of
interest rate risk for non-
trading activities.
Quantitative disclosures.... (b)....... The increase (decline) in
earnings or economic value
(or relevant measure used by
management) for upward and
downward rate shocks
according to management's
method for measuring interest
rate risk for non-trading
activities, categorized by
currency (as appropriate).
------------------------------------------------------------------------
[End of Proposed Common Rule Text]
List of Subjects
12 CFR Part 3
Administrative practices and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
12 CFR Part 217
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 non-member banks.
Adoption of Proposed Common Rule
The adoption of the proposed common rules by the agencies, as
modified by agency-specific text, is set forth below:
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the common preamble and under the
authority of 12 U.S.C. 93a and 5412(b)(2)(B), the Office of the
Comptroller of the Currency proposes to further amend part 3 of chapter
I of title 12, Code of Federal Regulations as proposed to be amended
elsewhere in this issue of the Federal Register under Docket IDs OCC-
2012-0008 and OCC-2012-0010, as follows:
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 is revised to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
2. Designate the text set forth at the end of the common preamble
as subpart D of part 3.
3. Newly designated subpart D is amended as set forth below:
i. Remove ``[AGENCY]'' and add ``OCC'' in its place, wherever it
appears;
ii. Remove ``[BANK]'' and add ``national bank or Federal savings
association'' in its place, wherever it appears;
iii. Remove ``[BANK]s'' and add ``national banks and Federal
savings associations'' in its place, wherever it appears;
iv. Remove ``[BANK]'s'' and add ``national bank's and Federal
savings association's'' in its place, wherever it appears;
v. Remove ``[PART]'' and add ``Part 3'' in its place, wherever it
appears; and
vi. Remove ``[REGULATORY REPORT]'' and add ``Call Report'' in its
place, wherever it appears.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the common preamble, part 217 of
chapter II of title 12 of the Code of Federal Regulations is proposed
to be amended as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
1. The authority citation for part 217 continues to read as
follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 3904, 3906-
3909, 4808, 5365, 5371.
2. Subpart D is added as set forth at the end of the common
preamble.
3. Subpart D is amended as set forth below:
a. Remove ``[AGENCY]'' and add ``Board'' in its place wherever it
appears.
b. Remove ``[BANK]'' and add ``Board-regulated institution'' in its
place wherever it appears.
c. Remove ``[BANK]s'' and add ``Board-regulated institutions'' in
its place, wherever it appears;
d. Remove ``[BANK]'s'' and add ``Board-regulated institution's'' in
its place, wherever it appears;
e. Remove ``[REGULATORY REPORT]'' wherever it appears and add in
its place ``Consolidated Reports of Condition and Income (Call Report),
for a state member bank, or the Consolidated Financial Statements for
Bank Holding Companies (FR Y-9C), for a bank holding company or savings
and loan holding company, as applicable'' the first time it appears and
``Call Report, for a state member bank, or FR Y-9C, for a bank holding
company or savings and loan holding company, as applicable'' every time
thereafter;
f. Remove ``[PART]'' and add ``part'' in its place wherever it
appears.
4. In Sec. 217.30, revise paragraph (b)(1)(i) to read as follows:
[[Page 52974]]
Sec. 217.30 Applicability.
* * * * *
(b) * * *
(1) * * *
(i) The methodology described in the general risk-based capital
rules under 12 CFR part 208, appendix A, 12 CFR part 225, appendix A
(Board); or
* * * * *
5. In Sec. 217.32, revise paragraphs (g)(3)(ii)(B), (k)
introductory text, (l)(1) and (l)(6) introductory text, and add new
paragraph (m) to read as follows:
Sec. 217.32 General risk weights.
* * * * *
(g) * * *
(3) * * *
(ii) * * *
(B) A Board-regulated institution must base all estimates of a
property's value on an appraisal or evaluation of the property that
satisfies subpart E of 12 CFR part 208.
* * * * *
(k) Past due exposures. Except for an exposure to a sovereign
entity or a residential mortgage exposure or a policy loan, if an
exposure is 90 days or more past due or on nonaccrual:
* * * * *
(l) Other assets. (1)(i) A bank holding company or savings and loan
holding company must assign a zero percent risk weight to cash owned
and held in all offices of subsidiary depository institutions or in
transit, and to gold bullion held in a subsidiary depository
institution's own vaults, or held in another depository institution's
vaults on an allocated basis, to the extent the gold bullion assets are
offset by gold bullion liabilities.
(ii) A state member bank must assign a zero percent risk weight to
cash owned and held in all offices of the state member bank or in
transit; to gold bullion held in the state member bank's own vaults or
held in another depository institution's vaults on an allocated basis,
to the extent the gold bullion assets are offset by gold bullion
liabilities; and to exposures that arise from the settlement of cash
transactions (such as equities, fixed income, spot foreign exchange and
spot commodities) with a central counterparty where there is no
assumption of ongoing counterparty credit risk by the central
counterparty after settlement of the trade and associated default fund
contributions.
* * * * *
(6) Notwithstanding the requirements of this section, a state
member bank may assign an asset that is not included in one of the
categories provided in this section to the risk weight category
applicable under the capital rules applicable to bank holding companies
and savings and loan holding companies under this part, provided that
all of the following conditions apply:
* * * * *
(m) Other--insurance assets--(1) Assets held in a separate account.
(i) A bank holding company or savings and loan holding company must
risk-weight the individual assets held in a separate account that does
not qualify as a non-guaranteed separate account as if the individual
assets were held directly by the bank holding company or savings and
loan holding company.
(ii) A bank holding company or savings and loan holding company
must assign a zero percent risk weight to an asset that is held in a
non-guaranteed separate account.
(2) Policy loans. A bank holding company or savings and loan
holding company must assign a 20 percent risk weight to a policy loan.
6. In Sec. 217. 42, revise paragraph (h)(1)(iv) to read as
follows:
Sec. 217.42 Risk-weighted assets for securitization exposures.
* * * * *
(h) * * *
(1) * * *
(iv) In the case of a state member bank, the bank is well
capitalized, as defined in 12 CFR 208.43. For purposes of determining
whether a state member bank is well capitalized for purposes of this
paragraph, the state member bank's capital ratios must be calculated
without regard to the capital treatment for transfers of small-business
obligations under this paragraph.
(B) In the case of a bank holding company or savings and loan
holding company, the bank holding company or savings and loan holding
company is well capitalized, as defined in 12 CFR 225.2. For purposes
of determining whether a bank holding company or savings and loan
holding company is well capitalized for purposes of this paragraph, the
bank holding company or savings and loan holding company's capital
ratios must be calculated without regard to the capital treatment for
transfers of small-business obligations with recourse specified in
paragraph (k)(1) of this section.
* * * * *
7. In Sec. 217.52, revise paragraph (b)(3)(i) to read as follows:
Sec. 217.52 Simple risk-weight approach (SRWA).
* * * * *
(b) * * *
(3) * * *
(i) Community development equity exposures.
(A) For state member banks and bank holding companies, an equity
exposure that qualifies as a community development investment under 12
U.S.C. 24 (Eleventh), excluding equity exposures to an unconsolidated
small business investment company and equity exposures held through a
consolidated small business investment company described in section 302
of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(B) For savings and loan holding companies, an equity exposure that
is designed primarily to promote community welfare, including the
welfare of low- and moderate-income communities or families, such as by
providing services or employment, and excluding equity exposures to an
unconsolidated small business investment company and equity exposures
held through a small business investment company described in section
302 of the Small Business Investment Act of 1958 (15 U.S.C. 682).
* * * * *
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the common preamble, the Federal
Deposit Insurance Corporation proposes to amend part 324 of chapter III
of title 12 of the Code of Federal Regulations as follows:
PART 324--CAPITAL ADEQUACY
1. The authority citation for part 324 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; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, 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); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
2. Subpart D is added as set forth at the end of the common
preamble.
3. Subpart D is amended as set forth below:
a. Remove ``[AGENCY]'' and add ``FDIC'' in its place, wherever it
appears;
b. Remove ``[BANK]'' and add ``bank and state savings association''
in its place, wherever it appears in the phrase ``Each [BANK]'' or
``each [BANK]'';
c. Remove ``[BANK]'' and add ``bank or state savings association''
in its place,
[[Page 52975]]
wherever it appears in the phrase ``A [BANK]'', ``a [BANK]'', ``The
[BANK]'', or ``the [BANK]'';
d. Remove ``[BANK]S'' and add ``banks and state savings
associations'' in its place, wherever it appears;
e. Remove ``[BANK]'S'' and add ``banks and state savings
associations''' in its place, wherever it appears;
f. Remove ``[PART]'' and add ``Part 324'' in its place, wherever it
appears;
g. Remove ``[REGULATORY REPORT]'' and add ``Consolidated Reports of
Condition and Income (Call Report)'' in its place the first time it
appears, and add ``Call Report'' in its place, wherever it appears
every time thereafter.
Dated: June 11, 2012.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, July 3, 2012.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 12th day of June, 2012.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2012-17010 Filed 8-10-12; 8:45 am]
BILLING CODE 6210-01-P