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pdfVol. 78
Tuesday,
No. 175
September 10, 2013
Part II
Federal Deposit Insurance Corporation
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12 CFR Parts 303, 308, 324, et al.
Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III,
Capital Adequacy, Transition Provisions, Prompt Corrective Action,
Standardized Approach for Risk-weighted Assets, Market Discipline and
Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule,
and Market Risk Capital Rule; Interim Final Rule
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Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 303, 308, 324, 327, 333,
337, 347, 349, 360, 362, 363, 364, 365,
390, and 391
RIN 3064–AD95
Regulatory Capital Rules: Regulatory
Capital, Implementation of Basel III,
Capital Adequacy, Transition
Provisions, Prompt Corrective Action,
Standardized Approach for Riskweighted Assets, Market Discipline
and Disclosure Requirements,
Advanced Approaches Risk-Based
Capital Rule, and Market Risk Capital
Rule
Federal Deposit Insurance
Corporation.
ACTION: Interim final rule with request
for comments.
AGENCY:
The Federal Deposit
Insurance Corporation (FDIC) is
adopting an interim final rule that
revises its risk-based and leverage
capital requirements for FDICsupervised institutions. This interim
final rule is substantially identical to a
joint final rule issued by the Office of
the Comptroller of the Currency (OCC)
and the Board of Governors of the
Federal Reserve System (Federal
Reserve) (together, with the FDIC, the
agencies). The interim final rule
consolidates three separate notices of
proposed rulemaking that the agencies
jointly published in the Federal
Register on August 30, 2012, with
selected changes. The interim final rule
implements a revised definition of
regulatory capital, a new common
equity tier 1 minimum capital
requirement, a higher minimum tier 1
capital requirement, and, for FDICsupervised institutions subject to the
advanced approaches risk-based capital
rules, a supplementary leverage ratio
that incorporates a broader set of
exposures in the denominator. The
interim final rule incorporates these
new requirements into the FDIC’s
prompt corrective action (PCA)
framework. In addition, the interim final
rule establishes limits on FDICsupervised institutions’ capital
distributions and certain discretionary
bonus payments if the FDIC-supervised
institution does not hold a specified
amount of common equity tier 1 capital
in addition to the amount necessary to
meet its minimum risk-based capital
requirements. The interim final rule
amends the methodologies for
determining risk-weighted assets for all
FDIC-supervised institutions. The
interim final rule also adopts changes to
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SUMMARY:
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the FDIC’s regulatory capital
requirements that meet the requirements
of section 171 and section 939A of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act.
The interim final rule also codifies the
FDIC’s regulatory capital rules, which
have previously resided in various
appendices to their respective
regulations, into a harmonized
integrated regulatory framework. In
addition, the FDIC is amending the
market risk capital rule (market risk
rule) to apply to state savings
associations.
The FDIC is issuing these revisions to
its capital regulations as an interim final
rule. The FDIC invites comments on the
interaction of this rule with other
proposed leverage ratio requirements
applicable to large, systemically
important banking organizations. This
interim final rule otherwise contains
regulatory text that is identical to the
common rule text adopted as a final rule
by the Federal Reserve and the OCC.
This interim final rule enables the FDIC
to proceed on a unified, expedited basis
with the other federal banking agencies
pending consideration of other issues.
Specifically, the FDIC intends to
evaluate this interim final rule in the
context of the proposed well-capitalized
and buffer levels of the supplementary
leverage ratio applicable to large,
systemically important banking
organizations, as described in a separate
Notice of Proposed Rulemaking (NPR)
published in the Federal Register
August 20, 2013.
The FDIC is seeking commenters’
views on the interaction of this interim
final rule with the proposed rule
regarding the supplementary leverage
ratio for large, systemically important
banking organizations.
DATES: Effective date: January 1, 2014.
Mandatory compliance date: January 1,
2014 for advanced approaches FDICsupervised institutions; January 1, 2015
for all other FDIC-supervised
institutions. Comments on the interim
final rule must be received no later than
November 12, 2013.
ADDRESSES: You may submit comments,
identified by RIN 3064–AD95, by any of
the following methods:
• Agency Web site: http://
www.fdic.gov/regulations/laws/federal/
propose.html. Follow instructions for
submitting comments on the Agency
Web site.
• Email: [email protected]. Include
the RIN 3064–AD95 on the subject line
of the message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street NW., Washington, DC 20429.
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• Hand Delivery: Comments may be
hand delivered to 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.
Public Inspection: All comments
received must include the agency name
and RIN 3064–AD95 for this
rulemaking. All comments received will
be posted without change to http://
www.fdic.gov/regulations/laws/federal/
propose.html, including any personal
information provided. Paper copies of
public comments may be ordered from
the FDIC Public Information Center,
3501 North Fairfax Drive, Room E–1002,
Arlington, VA 22226 by telephone at
(877) 275–3342 or (703) 562–2200.
FOR FURTHER INFORMATION CONTACT:
Bobby R. Bean, Associate Director,
[email protected]; Ryan Billingsley, Chief,
Capital Policy Section, rbillingsley@
fdic.gov; Karl Reitz, Chief, Capital
Markets Strategies Section, kreitz@
fdic.gov; David Riley, Senior Policy
Analyst, [email protected]; Benedetto
Bosco, Capital Markets Policy Analyst,
[email protected], regulatorycapital@
fdic.gov, Capital Markets Branch,
Division of Risk Management
Supervision, (202) 898–6888; or Mark
Handzlik, Counsel, [email protected];
Michael Phillips, Counsel, mphillips@
fdic.gov; Greg Feder, Counsel, gfeder@
fdic.gov; Ryan Clougherty, Senior
Attorney, [email protected]; or
Rachel Jones, Attorney, racjones@
fdic.gov, Supervision Branch, Legal
Division, Federal Deposit Insurance
Corporation, 550 17th Street NW.,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Summary of the Three Notices of Proposed
Rulemaking
A. The Basel III Notice of Proposed
Rulemaking
B. The Standardized Approach Notice of
Proposed Rulemaking
C. The Advanced Approaches Notice of
Proposed Rulemaking
III. Summary of General Comments on the
Basel III Notice of Proposed Rulemaking
and on the Standardized Approach
Notice of Proposed Rulemaking;
Overview of the Interim Final Rule
A. General Comments on the Basel III
Notice of Proposed Rulemaking and on
the Standardized Approach Notice of
Proposed Rulemaking
1. Applicability and Scope
2. Aggregate Impact
3. Competitive Concerns
4. Costs
B. Comments on Particular Aspects of the
Basel III Notice of Proposed Rulemaking
and on the Standardized Approach
Notice of Proposed Rulemaking
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1. Accumulated Other Comprehensive
Income
2. Residential Mortgages
3. Trust Preferred Securities for Smaller
FDIC-Supervised Institutions
C. Overview of the Interim Final Rule
D. Timeframe for Implementation and
Compliance
IV. Minimum Regulatory Capital Ratios,
Additional Capital Requirements, and
Overall Capital Adequacy
A. Minimum Risk-Based Capital Ratios and
Other Regulatory Capital Provisions
B. Leverage Ratio
C. Supplementary Leverage Ratio for
Advanced Approaches FDIC-Supervised
Institutions
D. Capital Conservation Buffer
E. Countercyclical Capital Buffer
F. Prompt Corrective Action Requirements
G. Supervisory Assessment of Overall
Capital Adequacy
H. Tangible Capital Requirement for State
Savings Associations
V. Definition of Capital
A. Capital Components and Eligibility
Criteria for Regulatory Capital
Instruments
1. Common Equity Tier 1 Capital
2. Additional Tier 1 Capital
3. Tier 2 Capital
4. Capital Instruments of Mutual FDICSupervised Institutions
5. Grandfathering of Certain Capital
Instruments
6. Agency Approval of Capital Elements
7. Addressing the Point of Non-Viability
Requirements Under Basel III
8. Qualifying Capital Instruments Issued by
Consolidated Subsidiaries of an FDICSupervised Institution
9. Real Estate Investment Trust Preferred
Capital
B. Regulatory Adjustments and Deductions
1. Regulatory Deductions from Common
Equity Tier 1 Capital
a. Goodwill and Other Intangibles (other
than Mortgage Servicing Assets)
b. Gain-on-Sale Associated with a
Securitization Exposure
c. Defined Benefit Pension Fund Net Assets
d. Expected Credit Loss That Exceeds
Eligible Credit Reserves
e. Equity Investments in Financial
Subsidiaries
f. Deduction for Subsidiaries of Savings
Associations That Engage in Activities
That Are Not Permissible for National
Banks
g. Identified Losses for State Nonmember
Banks
2. Regulatory Adjustments to Common
Equity Tier 1 Capital
a. Accumulated Net Gains and Losses on
Certain Cash-Flow Hedges
b. Changes in an FDIC-Supervised
Institution’s Own Credit Risk
c. Accumulated Other Comprehensive
Income
d. Investments in Own Regulatory Capital
Instruments
e. Definition of Financial Institution
f. The Corresponding Deduction Approach
g. Reciprocal Crossholdings in the Capital
Instruments of Financial Institutions
h. Investments in the FDIC-Supervised
Institution’s Own Capital Instruments or
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in the Capital of Unconsolidated
Financial Institutions
i. Indirect Exposure Calculations
j. Non-Significant Investments in the
Capital of Unconsolidated Financial
Institutions
k. Significant Investments in the Capital of
Unconsolidated Financial Institutions
That Are Not in the Form of Common
Stock
l. Items Subject to the 10 and 15 Percent
Common Equity Tier 1 Capital Threshold
Deductions
m. Netting of Deferred Tax Liabilities
Against Deferred Tax Assets and Other
Deductible Assets
3. Investments in Hedge Funds and Private
Equity Funds Pursuant to Section 13 of
the Bank Holding Company Act
VI. Denominator Changes Related to the
Regulatory Capital Changes
VII. Transition Provisions
A. Transitions Provisions for Minimum
Regulatory Capital Ratios
B. Transition Provisions for Capital
Conservation and Countercyclical
Capital Buffers
C. Transition Provisions for Regulatory
Capital Adjustments and Deductions
1. Deductions for Certain Items Under
Section 22(a) of the Interim Final Rule
2. Deductions for Intangibles Other Than
Goodwill and Mortgage Servicing Assets
3. Regulatory Adjustments Under Section
22(b)(1) of the Interim Final Rule
4. Phase-Out of Current Accumulated
Other Comprehensive Income Regulatory
Capital Adjustments
5. Phase-Out of Unrealized Gains on
Available for Sale Equity Securities in
Tier 2 Capital
6. Phase-In of Deductions Related to
Investments in Capital Instruments and
to the Items Subject to the 10 and 15
Percent Common Equity Tier 1 Capital
Deduction Thresholds (Sections 22(c)
and 22(d)) of the Interim Final Rule
D. Transition Provisions for NonQualifying Capital Instruments
VIII. Standardized Approach for RiskWeighted Assets
A. Calculation of Standardized Total RiskWeighted Assets
B. Risk-Weighted Assets for General Credit
Risk
1. Exposures to Sovereigns
2. Exposures to Certain Supranational
Entities and Multilateral Development
Banks
3. Exposures to Government-Sponsored
Enterprises
4. Exposures to Depository Institutions,
Foreign Banks, and Credit Unions
5. Exposures to Public-Sector Entities
6. Corporate Exposures
7. Residential Mortgage Exposures
8. Pre-Sold Construction Loans and
Statutory Multifamily Mortgages
9. High-Volatility Commercial Real Estate
10. Past-Due Exposures
11. Other Assets
C. Off-Balance Sheet Items
1. Credit Conversion Factors
2. Credit-Enhancing Representations and
Warranties
D. Over-the-Counter Derivative Contracts
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E. Cleared Transactions
1. Definition of Cleared Transaction
2. Exposure Amount Scalar for Calculating
for Client Exposures
3. Risk Weighting for Cleared Transactions
4. Default Fund Contribution Exposures
F. Credit Risk Mitigation
1. Guarantees and Credit Derivatives
a. Eligibility Requirements
b. Substitution Approach
c. Maturity Mismatch Haircut
d. Adjustment for Credit Derivatives
Without Restructuring as a Credit Event
e. Currency Mismatch Adjustment
f. Multiple Credit Risk Mitigants
2. Collateralized Transactions
a. Eligible Collateral
b. Risk-Management Guidance for
Recognizing Collateral
c. Simple Approach
d. Collateral Haircut Approach
e. Standard Supervisory Haircuts
f. Own Estimates of Haircuts
g. Simple Value-at-Risk and Internal
Models Methodology
G. Unsettled Transactions
H. Risk-Weighted Assets for Securitization
Exposures
1. Overview of the Securitization
Framework and Definitions
2. Operational Requirements
a. Due Diligence Requirements
b. Operational Requirements for
Traditional Securitizations
c. Operational Requirements for Synthetic
Securitizations
d. Clean-Up Calls
3. Risk-Weighted Asset Amounts for
Securitization Exposures
a. Exposure Amount of a Securitization
Exposure
b. Gains-on-Sale and Credit-Enhancing
Interest-Only Strips
c. Exceptions Under the Securitization
Framework
d. Overlapping Exposures
e. Servicer Cash Advances
f. Implicit Support
4. Simplified Supervisory Formula
Approach
5. Gross-Up Approach
6. Alternative Treatments for Certain Types
of Securitization Exposures
a. Eligible Asset-Backed Commercial Paper
Liquidity Facilities
b. A Securitization Exposure in a SecondLoss Position or Better to an AssetBacked Commercial Paper Program
7. Credit Risk Mitigation for Securitization
Exposures
8. Nth-to-Default Credit Derivatives
IX. Equity Exposures
A. Definition of Equity Exposure and
Exposure Measurement
B. Equity Exposure Risk Weights
C. Non-Significant Equity Exposures
D. Hedged Transactions
E. Measures of Hedge Effectiveness
F. Equity Exposures to Investment Funds
1. Full Look-through Approach
2. Simple Modified Look-through
Approach
3. Alternative Modified Look-Through
Approach
X. Market Discipline and Disclosure
Requirements
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Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations
A. Proposed Disclosure Requirements
B. Frequency of Disclosures
C. Location of Disclosures and Audit
Requirements
D. Proprietary and Confidential
Information
E. Specific Public Disclosure Requirements
XI. Risk-Weighted Assets—Modifications to
the Advanced Approaches
A. Counterparty Credit Risk
1. Recognition of Financial Collateral
a. Financial Collateral
b. Revised Supervisory Haircuts
2. Holding Periods and the Margin Period
of Risk
3. Internal Models Methodology
a. Recognition of Wrong-Way Risk
b. Increased Asset Value Correlation Factor
4. Credit Valuation Adjustments
a. Simple Credit Valuation Adjustment
Approach
b. Advanced Credit Valuation Adjustment
Approach
5. Cleared Transactions (Central
Counterparties)
6. Stress Period for Own Estimates
B. Removal of Credit Ratings
1. Eligible Guarantor
2. Money Market Fund Approach
3. Modified Look-Through Approaches for
Equity Exposures to Investment F
C. Revisions to the Treatment of
Securitization Exposures
1. Definitions
2. Operational Criteria for Recognizing Risk
Transference in Traditional
Securitizations
3. The Hierarchy of Approaches
4. Guarantees and Credit Derivatives
Referencing a Securitization Expo
5. Due Diligence Requirements for
Securitization Exposures
6. Nth-to-Default Credit Derivatives
D. Treatment of Exposures Subject to
Deduction
E. Technical Amendments to the Advanced
Approaches Rule
1. Eligible Guarantees and Contingent U.S.
Government Guarantees
2. Calculation of Foreign Exposures for
Applicability of the Advanced
Approaches—Changes to Federal
Financial Institutions Examination
Council 009
3. Applicability of the Interim Final Rule
4. Change to the Definition of Probability
of Default Related to Seasoning
5. Cash Items in Process of Collection
6. Change to the Definition of Qualifying
Revolving Exposure
7. Trade-Related Letters of Credit
8. Defaulted Exposures That Are
Guaranteed by the U.S. Government
9. Stable Value Wraps
10. Treatment of Pre-Sold Construction
Loans and Multi-Family Residential
Loans
F. Pillar 3 Disclosures
1. Frequency and Timeliness of Disclosures
2. Enhanced Securitization Disclosure
Requirements
3. Equity Holdings That Are Not Covered
Positions
XII. Market Risk Rule
XIII. Abbreviations
XIV. Regulatory Flexibility Act
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XV. Paperwork Reduction Act
XVI. Plain Language
XVII. Small Business Regulatory Enforcement
Fairness Act of 1996
I. Introduction
On August 30, 2012, the agencies
published in the Federal Register three
joint notices of proposed rulemaking
seeking public comment on revisions to
their risk-based and leverage capital
requirements and on methodologies for
calculating risk-weighted assets under
the standardized and advanced
approaches (each, a proposal, and
together, the NPRs, the proposed rules,
or the proposals).1 The proposed rules,
in part, reflected 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), including subsequent
changes to the BCBS’s capital standards
and recent BCBS consultative papers.2
Basel III is intended to improve both the
quality and quantity of banking
organizations’ capital, as well as to
strengthen various aspects of the
international capital standards for
calculating regulatory capital. The
proposed rules also reflect aspects of the
Basel II Standardized Approach and
other Basel Committee standards.
The proposals also included changes
consistent with the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (the Dodd-Frank Act); 3 would apply
the risk-based and leverage capital rules
to top-tier savings and loan holding
companies (SLHCs) domiciled in the
United States; and would apply the
market risk capital rule (the market risk
rule) 4 to Federal and state savings
associations (as appropriate based on
trading activity).
The NPR titled ‘‘Regulatory Capital
Rules: Regulatory Capital,
Implementation of Basel III, Minimum
Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and
Prompt Corrective Action’’ 5 (the Basel
III NPR), provided for the
1 77 FR 52792 (August 30, 2012); 77 FR 52888
(August 30, 2012); 77 FR 52978 (August 30, 2012).
2 Basel III was published in December 2010 and
revised in June 2011. The text is available at
http://www.bis.org/publ/bcbs189.htm. The BCBS is
a committee of banking supervisory authorities,
which was established by the central bank
governors of the G–10 countries in 1975. More
information regarding the BCBS and its
membership is available at http://www.bis.org/bcbs/
about.htm. Documents issued by the BCBS are
available through the Bank for International
Settlements Web site at http://www.bis.org.
3 Public Law 111–203, 124 Stat. 1376, 1435–38
(2010).
4 The FDIC’s market risk rule is at 12 CFR part
325, appendix C.
5 77 FR 52792 (August 30, 2012).
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implementation of the Basel III revisions
to international capital standards related
to minimum capital requirements,
regulatory capital, and additional
capital ‘‘buffer’’ standards to enhance
the resilience of FDIC-supervised
institutions to withstand periods of
financial stress. FDIC-supervised
institutions include state nonmember
banks and state savings associations.
The term banking organizations
includes 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 Federal Reserve’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, except certain savings
and loan holding companies that are
substantially engaged in insurance
underwriting or commercial activities.
The proposal included transition
periods for many of the requirements,
consistent with Basel III and the DoddFrank Act. The NPR titled ‘‘Regulatory
Capital Rules: Standardized Approach
for Risk-weighted Assets; Market
Discipline and Disclosure
Requirements’’ 6 (the Standardized
Approach NPR), would revise the
methodologies for calculating riskweighted assets in the agencies’ general
risk-based capital rules 7 (the general
risk-based capital rules), incorporating
aspects of the Basel II standardized
approach,8 and establish alternative
standards of creditworthiness in place
of credit ratings, consistent with section
939A of the Dodd-Frank Act.9 The
proposed minimum capital
requirements in section 10(a) of the
Basel III NPR, as determined using the
standardized capital ratio calculations
in section 10(b), would establish
minimum capital requirements that
would be the ‘‘generally applicable’’
capital requirements for purpose of
section 171 of the Dodd-Frank Act (Pub.
L. 111–203, 124 Stat. 1376, 1435–38
(2010).10
The NPR titled ‘‘Regulatory Capital
Rules: Advanced Approaches RiskBased Capital Rule; Market Risk Capital
6 77
FR 52888 (August 30, 2012).
FDIC’s general risk-based capital rules is at
12 CFR part 325, appendix A, and 12 CFR part 390,
subpart Z . The general risk-based capital rule is
supplemented by the FDIC’s market risk rule in 12
CFR part 325, appendix C.
8 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).
9 See section 939A of the Dodd-Frank Act (15
U.S.C. 78o–7 note).
10 See 77 FR 52856 (August 30, 2012).
7 The
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Rule’’ 11 (the Advanced Approaches
NPR) included proposed changes to the
agencies’ current advanced approaches
risk-based capital rules (the advanced
approaches rule) 12 to incorporate
applicable provisions of Basel III and
the ‘‘Enhancements to the Basel II
framework’’ (2009 Enhancements)
published in July 2009 13 and
subsequent consultative papers, to
remove references to credit ratings, to
apply the market risk rule to savings
associations and SLHCs, and to apply
the advanced approaches rule to SLHCs
meeting the scope of application of
those rules. Taken together, the three
proposals also would have restructured
the agencies’ regulatory capital rules
(the general risk-based capital rules,
leverage rules,14 market risk rule, and
advanced approaches rule) into a
harmonized, codified regulatory capital
framework.
The FDIC is finalizing the Basel III
NPR, Standardized Approach NPR, and
Advanced Approaches NPR in this
interim final rule, with certain changes
to the proposals, as described further
below. The OCC and Federal Reserve
are jointly finalizing the Basel III NPR,
Standardized Approach NPR, and
Advanced Approaches NPR as a final
rule, with identical changes to the
proposals as the FDIC. This interim final
rule applies to FDIC-supervised
institutions.
Certain aspects of this interim final
rule apply only to FDIC-supervised
institutions subject to the advanced
approaches rule (advanced approaches
FDIC-supervised institutions) or to
FDIC-supervised institutions with
significant trading activities, as further
described below.
Likewise, the enhanced disclosure
requirements in the interim final rule
apply only to FDIC-supervised
institutions with $50 billion or more in
total consolidated assets.
As under the proposal, the minimum
capital requirements in section 10(a) of
the interim final rule, as determined
using the standardized capital ratio
calculations in section 10(b), which
apply to all FDIC-supervised
institutions, establish the ‘‘generally
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11 77
FR 52978 (August 30, 2012).
FDIC’s advanced approaches rules is at 12
CFR part 325, appendix D, and 12 CFR part 390,
subpart Z, appendix A. The advanced approaches
rule is supplemented by the market risk rule.
13 See ‘‘Enhancements to the Basel II framework’’
(July 2009), available at http://www.bis.org/publ/
bcbs157.htm.
14 The FDIC’s tier 1 leverage rules are at 12 CFR
325.3 (state nonmember banks) and 390.467 (state
savings associations).
12 The
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applicable’’ capital requirements under
section 171 of the Dodd-Frank Act.15
Under the interim final rule, as under
the proposal, in order to determine its
minimum risk-based capital
requirements, an advanced approaches
FDIC-supervised institution that has
completed the parallel run process and
that has received notification from its
primary Federal supervisor pursuant to
section 324.121(d) of subpart E must
determine its minimum risk-based
capital requirements by calculating the
three risk-based capital ratios using total
risk-weighted assets under the
standardized approach and, separately,
total risk-weighted assets under the
advanced approaches.16 The lower ratio
for each risk-based capital requirement
is the ratio the FDIC-supervised
institution must use to determine its
compliance with the minimum capital
requirement.17 These enhanced
prudential standards help ensure that
advanced approaches FDIC-supervised
institutions, which are among the
largest and most complex FDICsupervised institutions, have capital
adequate to address their more complex
operations and risks.
II. Summary of the Three Notices of
Proposed Rulemaking
A. The Basel III Notice of Proposed
Rulemaking
As discussed in the proposals, the
recent financial crisis demonstrated that
the amount of high-quality capital held
by banking organizations was
insufficient to absorb the losses
generated over that period. In addition,
some non-common stock capital
instruments included in tier 1 capital
did not absorb losses to the extent
previously expected. A lack of clear and
easily understood disclosures regarding
the characteristics of regulatory capital
instruments, as well as inconsistencies
in the definition of capital across
jurisdictions, contributed to difficulties
in evaluating a banking organization’s
capital strength. Accordingly, the BCBS
assessed the international capital
framework and, in 2010, published
Basel III, a comprehensive reform
package designed to improve the quality
and quantity of regulatory capital and
build additional capacity into the
15 See note 14, supra. Risk-weighted assets
calculated under the market risk framework in
subpart F of the interim final rule are included in
calculations of risk-weighted assets both under the
standardized approach and the advanced
approaches.
16 An advanced approaches FDIC-supervised
institution must also use its advanced-approachesadjusted total to determine its total risk-based
capital ratio.
17 See section 10(c) of the interim final rule.
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banking system to absorb losses in times
of market and economic stress. On
August 30, 2012, the agencies published
the NPRs in the Federal Register to
revise regulatory capital requirements,
as discussed above. As proposed, the
Basel III NPR generally would have
applied to all U.S. banking
organizations.
Consistent with Basel III, the Basel III
NPR would have required banking
organizations to comply with the
following minimum capital ratios: (i) A
new requirement for a ratio of common
equity tier 1 capital to risk-weighted
assets (common equity tier 1 capital
ratio) of 4.5 percent; (ii) a ratio of tier
1 capital to risk-weighted assets (tier 1
capital ratio) of 6 percent, increased
from 4 percent; (iii) a ratio of total
capital to risk-weighted assets (total
capital ratio) of 8 percent; (iv) a ratio of
tier 1 capital to average total
consolidated assets (leverage ratio) of 4
percent; and (v) for advanced
approaches banking organizations only,
an additional requirement that the ratio
of tier 1 capital to total leverage
exposure (supplementary leverage ratio)
be at least 3 percent.
The Basel III NPR also proposed
implementation of a capital
conservation buffer equal to 2.5 percent
of risk-weighted assets above the
minimum risk-based capital ratio
requirements, which could be expanded
by a countercyclical capital buffer for
advanced approaches banking
organizations under certain
circumstances. If a banking organization
failed to hold capital above the
minimum capital ratios and proposed
capital conservation buffer (as
potentially expanded by the
countercyclical capital buffer), it would
be subject to certain restrictions on
capital distributions and discretionary
bonus payments. The proposed
countercyclical capital buffer was
designed to take into account the macrofinancial environment in which large,
internationally active banking
organizations function. The
countercyclical capital buffer could be
implemented if the agencies determined
that credit growth in the economy
became excessive. As proposed, the
countercyclical capital buffer would
initially be set at zero, and could
expand to as much as 2.5 percent of
risk-weighted assets.
The Basel III NPR proposed to apply
a 4 percent minimum leverage ratio
requirement to all banking organizations
(computed using the new definition of
capital), and to eliminate the exceptions
for banking organizations with strong
supervisory ratings or subject to the
market risk rule. The Basel III NPR also
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proposed to require advanced
approaches banking organizations to
satisfy a minimum supplementary
leverage ratio requirement of 3 percent,
measured in a manner consistent with
the international leverage ratio set forth
in Basel III. Unlike the FDIC’s current
leverage ratio requirement, the proposed
supplementary leverage ratio
incorporates certain off-balance sheet
exposures in the denominator.
To strengthen the quality of capital,
the Basel III NPR proposed more
conservative eligibility criteria for
regulatory capital instruments. For
example, the Basel III NPR proposed
that trust preferred securities (TruPS)
and cumulative perpetual preferred
securities, which were tier-1-eligible
instruments (subject to limits) at the
BHC level, would no longer be
includable in tier 1 capital under the
proposal and would be gradually
phased out from tier 1 capital. The
proposal also eliminated the existing
limitations on the amount of tier 2
capital that could be recognized in total
capital, as well as the limitations on the
amount of certain capital instruments
(for example, term subordinated debt)
that could be included in tier 2 capital.
In addition, the proposal would have
required banking organizations to
include in common equity tier 1 capital
accumulated other comprehensive
income (AOCI) (with the exception of
gains and losses on cash-flow hedges
related to items that are not fair-valued
on the balance sheet), and also would
have established new limits on the
amount of minority interest a banking
organization could include in regulatory
capital. The proposal also would have
established more stringent requirements
for several deductions from and
adjustments to regulatory capital,
including with respect to deferred tax
assets (DTAs), investments in a banking
organization’s own capital instruments
and the capital instruments of other
financial institutions, and mortgage
servicing assets (MSAs). The proposed
revisions would have been incorporated
into the regulatory capital ratios in the
prompt corrective action (PCA)
framework for depository institutions.
B. The Standardized Approach Notice
of Proposed Rulemaking
The Standardized Approach NPR
proposed changes to the agencies’
general risk-based capital rules for
determining risk-weighted assets (that
is, the calculation of the denominator of
a banking organization’s risk-based
capital ratios). The proposed changes
were intended to revise and harmonize
the agencies’ rules for calculating riskweighted assets, enhance risk
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sensitivity, and address weaknesses in
the regulatory capital framework
identified over recent years, including
by strengthening the risk sensitivity of
the regulatory capital treatment for,
among other items, credit derivatives,
central counterparties (CCPs), highvolatility commercial real estate, and
collateral and guarantees.
In the Standardized Approach NPR,
the agencies also proposed alternatives
to credit ratings for calculating riskweighted assets for certain assets,
consistent with section 939A of the
Dodd-Frank Act. These alternatives
included methodologies for determining
risk-weighted assets for exposures to
sovereigns, foreign banks, and public
sector entities, securitization exposures,
and counterparty credit risk. The
Standardized Approach NPR also
proposed to include a framework for
risk weighting residential mortgages
based on underwriting and product
features, as well as loan-to-value (LTV)
ratios, and disclosure requirements for
top-tier banking organizations
domiciled in the United States with $50
billion or more in total assets, including
disclosures related to regulatory capital
instruments.
C. The Advanced Approaches Notice of
Proposed Rulemaking
The Advanced Approaches NPR
proposed revisions to the advanced
approaches rule to incorporate certain
aspects of Basel III, the 2009
Enhancements, and subsequent
consultative papers. The proposal also
would have implemented relevant
provisions of the Dodd-Frank Act,
including section 939A (regarding the
use of credit ratings in agency
regulations),18 and incorporated certain
technical amendments to the existing
requirements. In addition, the Advanced
Approaches NPR proposed to codify the
market risk rule in a manner similar to
the codification of the other regulatory
capital rules under the proposals.
Consistent with Basel III and the 2009
Enhancements, under the Advanced
Approaches NPR, the agencies proposed
further steps to strengthen capital
requirements for internationally active
banking organizations. This NPR would
have required advanced approaches
banking organizations to hold more
appropriate levels of capital for
counterparty credit risk, credit valuation
adjustments (CVA), and wrong-way risk;
would have strengthened the risk-based
capital requirements for certain
securitization exposures by requiring
advanced approaches banking
18 See section 939A of Dodd-Frank Act (15 U.S.C.
78o–7 note).
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organizations to conduct more rigorous
credit analysis of securitization
exposures; and would have enhanced
the disclosure requirements related to
those exposures.
The agencies proposed to apply the
market risk rule to SLHCs and to state
and Federal savings associations.
III. Summary of General Comments on
the Basel III Notice of Proposed
Rulemaking and on the Standardized
Approach Notice of Proposed
Rulemaking; Overview of the Interim
Final Rule
A. General Comments on the Basel III
Notice of Proposed Rulemaking and on
the Standardized Approach Notice of
Proposed Rulemaking
Each agency received over 2,500
public comments on the proposals from
banking organizations, trade
associations, supervisory authorities,
consumer advocacy groups, public
officials (including members of the U.S.
Congress), private individuals, and
other interested parties. Overall, while
most commenters supported more
robust capital standards and the
agencies’ efforts to improve the
resilience of the banking system, many
commenters expressed concerns about
the potential costs and burdens of
various aspects of the proposals,
particularly for smaller banking
organizations. A substantial number of
commenters also requested withdrawal
of, or significant revisions to, the
proposals. A few commenters argued
that new capital rules were not
necessary at this time. Some
commenters requested that the agencies
perform additional studies of the
economic impact of part or all of the
proposed rules. Many commenters
asked for additional time to transition to
the new requirements. A more detailed
discussion of the comments provided on
particular aspects of the proposals is
provided in the remainder of this
preamble.
1. Applicability and Scope
The agencies received a significant
number of comments regarding the
proposed scope and applicability of the
Basel III NPR and the Standardized
Approach NPR. The majority of
comments submitted by or on behalf of
community banking organizations
requested an exemption from the
proposals. These commenters suggested
basing such an exemption on a banking
organization’s asset size—for example,
total assets of less than $500 million, $1
billion, $10 billion, $15 billion, or $50
billion—or on its risk profile or business
model. Under the latter approach, the
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commenters suggested providing an
exemption for banking organizations
with balance sheets that rely less on
leverage, short-term funding, or
complex derivative transactions.
In support of an exemption from the
proposed rule for community banking
organizations, a number of commenters
argued that the proposed revisions to
the definition of capital would be overly
conservative and would prohibit some
of the instruments relied on by
community banking organizations from
satisfying regulatory capital
requirements. Many of these
commenters stated that, in general,
community banking organizations have
less access to the capital markets
relative to larger banking organizations
and could increase capital only by
accumulating retained earnings. Owing
to slow economic growth and relatively
low earnings among community
banking organizations, the commenters
asserted that implementation of the
proposal would be detrimental to their
ability to serve local communities while
providing reasonable returns to
shareholders. Other commenters
requested exemptions from particular
sections of the proposed rules, such as
maintaining capital against transactions
with particular counterparties, or based
on transaction types that they
considered lower-risk, such as
derivative transactions hedging interest
rate risk.
The commenters also argued that
application of the Basel III NPR and
Standardized Approach NPR to
community banking organizations
would be unnecessary and
inappropriate for the business model
and risk profile of such organizations.
These commenters asserted that Basel III
was designed for large, internationallyactive banking organizations in response
to a financial crisis attributable
primarily to those institutions.
Accordingly, the commenters were of
the view that community banking
organizations require a different capital
framework with less stringent capital
requirements, or should be allowed to
continue to use the general risk-based
capital rules. In addition, many
commenters, in particular minority
depository institutions (MDIs), mutual
banking organizations, and community
development financial institutions
(CDFIs), expressed concern regarding
their ability to raise capital to meet the
increased minimum requirements in the
current environment and upon
implementation of the proposed
definition of capital. One commenter
asked for an exemption from all or part
of the proposed rules for CDFIs,
indicating that the proposal would
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significantly reduce the availability of
capital for low- and moderate-income
communities. Another commenter
stated that the U.S. Congress has a
policy of encouraging the creation of
MDIs and expressed concern that the
proposed rules contradicted this
purpose.
In contrast, however, a few
commenters supported the proposed
application of the Basel III NPR to all
banking organizations. For example, one
commenter stated that increasing the
quality and quantity of capital at all
banking organizations would create a
more resilient financial system and
discourage inappropriate risk-taking by
forcing banking organizations to put
more of their own ‘‘skin in the game.’’
This commenter also asserted that the
proposed scope of the Basel III NPR
would reduce the probability and
impact of future financial crises and
support the objectives of sustained
growth and high employment. Another
commenter favored application of the
Basel III NPR to all banking
organizations to ensure a level playing
field among banking organizations
within the same competitive market.
2. Aggregate Impact
A majority of the commenters
expressed concern regarding the
potential aggregate impact of the
proposals, together with other
provisions of the Dodd-Frank Act. Some
of these commenters urged the agencies
to withdraw the proposals and to
conduct a quantitative impact study
(QIS) to assess the potential aggregate
impact of the proposals on banking
organizations and the overall U.S.
economy. Many commenters argued that
the proposals would have significant
negative consequences for the financial
services industry. According to the
commenters, by requiring banking
organizations to hold more capital and
increase risk weighting on some of their
assets, as well as to meet higher riskbased and leverage capital measures for
certain PCA categories, the proposals
would negatively affect the banking
sector. Commenters cited, among other
potential consequences of the proposals:
restricted job growth; reduced lending
or higher-cost lending, including to
small businesses and low-income or
minority communities; limited
availability of certain types of financial
products; reduced investor demand for
banking organizations’ equity; higher
compliance costs; increased mergers
and consolidation activity, specifically
in rural markets, because banking
organizations would need to spread
compliance costs among a larger
customer base; and diminished access to
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the capital markets resulting from
reduced profit and from dividend
restrictions associated with the capital
buffers. The commenters also asserted
that the recovery of the U.S. economy
would be impaired by the proposals as
a result of reduced lending by banking
organizations that the commenters
believed would be attributable to the
higher costs of regulatory compliance.
In particular, the commenters expressed
concern that a contraction in smallbusiness lending would adversely affect
job growth and employment.
3. Competitive Concerns
Many commenters raised concerns
that implementation of the proposals
would create an unlevel playing field
between banking organizations and
other financial services providers. For
example, a number of commenters
expressed concern that credit unions
would be able to gain market share from
banking organizations by offering
similar products at substantially lower
costs because of differences in taxation
combined with potential costs from the
proposals. The commenters also argued
that other financial service providers,
such as foreign banks with significant
U.S. operations, members of the Federal
Farm Credit System, and entities in the
shadow banking industry, would not be
subject to the proposed rule and,
therefore, would have a competitive
advantage over banking organizations.
These commenters also asserted that the
proposals could cause more consumers
to choose lower-cost financial products
from the unregulated, nonbank financial
sector.
4. Costs
Commenters representing all types of
banking organizations expressed
concern that the complexity and
implementation cost of the proposals
would exceed their expected benefits.
According to these commenters,
implementation of the proposals would
require software upgrades for new
internal reporting systems, increased
employee training, and the hiring of
additional employees for compliance
purposes. Some commenters urged the
agencies to recognize that compliance
costs have increased significantly over
recent years due to other regulatory
changes and to take these costs into
consideration. As an alternative, some
commenters encouraged the agencies to
consider a simple increase in the
minimum regulatory capital
requirements, suggesting that such an
approach would provide increased
protection to the Deposit Insurance
Fund and increase safety and soundness
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without adding complexity to the
regulatory capital framework.
interest rate risk, such as the use of
derivative instruments.
B. Comments on Particular Aspects of
the Basel III Notice of Proposed
Rulemaking and on the Standardized
Approach Notice of Proposed
Rulemaking
2. Residential Mortgages
In addition to the general comments
described above, the agencies received a
significant number of comments on four
particular elements of the proposals: the
requirement to include most elements of
AOCI in regulatory capital; the new
framework for risk weighting residential
mortgages; and the requirement to phase
out TruPS from tier 1 capital for all
banking organizations.
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1. Accumulated Other Comprehensive
Income
AOCI generally includes accumulated
unrealized gains and losses on certain
assets and liabilities that have not been
included in net income, yet are
included in equity under U.S. generally
accepted accounting principles (GAAP)
(for example, unrealized gains and
losses on securities designated as
available-for-sale (AFS)). Under the
agencies’ general risk-based capital
rules, most components of AOCI are not
reflected in a banking organization’s
regulatory capital. In the proposed rule,
consistent with Basel III, the agencies
proposed to require banking
organizations to include the majority of
AOCI components in common equity
tier 1 capital.
The agencies received a significant
number of comments on the proposal to
require banking organizations to
recognize AOCI in common equity tier
1 capital. Generally, the commenters
asserted that the proposal would
introduce significant volatility in
banking organizations’ capital ratios due
in large part to fluctuations in
benchmark interest rates, and would
result in many banking organizations
moving AFS securities into a held-tomaturity (HTM) portfolio or holding
additional regulatory capital solely to
mitigate the volatility resulting from
temporary unrealized gains and losses
in the AFS securities portfolio. The
commenters also asserted that the
proposed rules would likely impair
lending and negatively affect banking
organizations’ ability to manage
liquidity and interest rate risk and to
maintain compliance with legal lending
limits. Commenters representing
community banking organizations in
particular asserted that they lack the
sophistication of larger banking
organizations to use certain riskmanagement techniques for hedging
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The Standardized Approach NPR
would have required banking
organizations to place residential
mortgage exposures into one of two
categories to determine the applicable
risk weight. Category 1 residential
mortgage exposures were defined to
include mortgage products with
underwriting and product features that
have demonstrated a lower risk of
default, such as consideration and
documentation of a borrower’s ability to
repay, and generally excluded mortgage
products that included terms or other
characteristics that the agencies have
found to be indicative of higher credit
risk, such as deferral of repayment of
principal. Residential mortgage
exposures with higher risk
characteristics were defined as category
2 residential mortgage exposures. The
agencies proposed to apply relatively
lower risk weights to category 1
residential mortgage exposures, and
higher risk weights to category 2
residential mortgage exposures. The
proposal provided that the risk weight
assigned to a residential mortgage
exposure also depended on its LTV
ratio.
The agencies received a significant
number of comments objecting to the
proposed treatment for one-to-four
family residential mortgages and
requesting retention of the mortgage
treatment in the agencies’ general riskbased capital rules. Commenters
generally expressed concern that the
proposed treatment would inhibit
lending to creditworthy borrowers and
could jeopardize the recovery of a stillfragile housing market. Commenters
also criticized the distinction between
category 1 and category 2 mortgages,
asserting that the characteristics
proposed for each category did not
appropriately distinguish between
lower- and higher-risk products and
would adversely impact certain loan
products that performed relatively well
even during the recent crisis.
Commenters also highlighted concerns
regarding regulatory burden and the
uncertainty of other regulatory
initiatives involving residential
mortgages. In particular, these
commenters expressed considerable
concern regarding the potential
cumulative impact of the proposed new
mortgage requirements combined with
the Dodd-Frank Act’s requirements
relating to the definitions of qualified
mortgage and qualified residential
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mortgage 19 and asserted that when
considered together with the proposed
mortgage treatment, the combined effect
could have an adverse impact on the
mortgage industry.
3. Trust Preferred Securities for Smaller
FDIC-Supervised Institutions
The proposed rules would have
required all banking organizations to
phase-out TruPS from tier 1 capital
under either a 3- or 10-year transition
period based on the organization’s total
consolidated assets. The proposal would
have required banking organizations
with more than $15 billion in total
consolidated assets (as of December 31,
2009) to phase-out of tier 1 capital any
non-qualifying capital instruments
(such as TruPS and cumulative
preferred shares) issued before May 19,
2010. The exclusion of non-qualifying
capital instruments would have taken
place incrementally over a three-year
period beginning on January 1, 2013.
Section 171 provides an exception that
permits banking organizations with total
consolidated assets of less than $15
billion as of December 31, 2009, and
banking organizations that were mutual
holding companies as of May 19, 2010
(2010 MHCs), to include in tier 1 capital
all TruPS (and other instruments that
could no longer be included in tier 1
capital pursuant to the requirements of
section 171) that were issued prior to
May 19, 2010.20 However, consistent
with Basel III and the general policy
purpose of the proposed revisions to
regulatory capital, the agencies
proposed to require banking
organizations with total consolidated
assets less than $15 billion as of
December 31, 2009 and 2010 MHCs to
phase out their non-qualifying capital
instruments from regulatory capital over
ten years.21
19 See, e.g., the definition of ‘‘qualified mortgage’’
in section 1412 of the Dodd-Frank Act (15 U.S.C.
129C) and ‘‘qualified residential mortgage’’ in
section 941(e)(4) of the Dodd-Frank Act (15 U.S.C.
78o–11(e)(4)).
20 Specifically, section 171 provides that
deductions of instruments ‘‘that would be required’’
under the section are not required for depository
institution holding companies with total
consolidated assets of less than $15 billion as of
December 31, 2009 and 2010 MHCs. See 12 U.S.C.
5371(b)(4)(C).
21 See 12 U.S.C. 5371(b)(5)(A). While section 171
of the Dodd-Frank Act requires the agencies to
establish minimum risk-based and leverage capital
requirements subject to certain limitations, the
agencies retain their general authority to establish
capital requirements under other laws and
regulations, including under the National Bank Act,
12 U.S.C. 1, et seq., Federal Reserve Act, Federal
Deposit Insurance Act, Bank Holding Company Act,
International Lending Supervision Act, 12 U.S.C.
3901, et seq., and Home Owners Loan Act, 12
U.S.C. 1461, et seq.
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Many commenters representing
community banking organizations
criticized the proposal’s phase-out
schedule for TruPS and encouraged the
agencies to grandfather TruPS in tier 1
capital to the extent permitted by
section 171 of the Dodd-Frank Act.
Commenters asserted that this was the
intent of the U.S. Congress, including
this provision in the statute. These
commenters also asserted that this
aspect of the proposal would unduly
burden community banking
organizations that have limited ability to
raise capital, potentially impairing the
lending capacity of these banking
organizations.
C. Overview of the Interim Final Rule
The interim final rule will replace the
FDIC’s general risk-based capital rules,
advanced approaches rule, market risk
rule, and leverage rules in accordance
with the transition provisions described
below. After considering the comments
received, the FDIC has made substantial
modifications in the interim final rule to
address specific concerns raised by
commenters regarding the cost,
complexity, and burden of the
proposals.
During the recent financial crisis, lack
of confidence in the banking sector
increased banking organizations’ cost of
funding, impaired banking
organizations’ access to short-term
funding, depressed values of banking
organizations’ equities, and required
many banking organizations to seek
government assistance. Concerns about
banking organizations arose not only
because market participants expected
steep losses on banking organizations’
assets, but also because of substantial
uncertainty surrounding estimated loss
rates, and thus future earnings. Further,
heightened systemic risks, falling asset
values, and reduced credit availability
had an adverse impact on business and
consumer confidence, significantly
affecting the overall economy. The
interim final rule addresses these
weaknesses by helping to ensure a
banking and financial system that will
be better able to absorb losses and
continue to lend in future periods of
economic stress. This important benefit
in the form of a safer, more resilient,
and more stable banking system is
expected to substantially outweigh any
short-term costs that might result from
the interim final rule.
In this context, the FDIC is adopting
most aspects of the proposals, including
the minimum risk-based capital
requirements, the capital conservation
and countercyclical capital buffers, and
many of the proposed risk weights. The
FDIC has also decided to apply most
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aspects of the Basel III NPR and
Standardized Approach NPR to all
banking organizations, with some
significant changes. Implementing the
interim final rule in a consistent fashion
across the banking system will improve
the quality and increase the level of
regulatory capital, leading to a more
stable and resilient system for banking
organizations of all sizes and risk
profiles. The improved resilience will
enhance their ability to continue
functioning as financial intermediaries,
including during periods of financial
stress and reduce risk to the deposit
insurance fund and to the financial
system. The FDIC believes that,
together, the revisions to the proposals
meaningfully address the commenters’
concerns regarding the potential
implementation burden of the
proposals.
The FDIC has considered the concerns
raised by commenters and believe that
it is important to take into account and
address regulatory costs (and their
potential effect on FDIC-supervised
institutions’ role as financial
intermediaries in the economy) when
the FDIC establishes or revises
regulatory requirements. In developing
regulatory capital requirements, these
concerns are considered in the context
of the FDIC’s broad goals—to enhance
the safety and soundness of FDICsupervised institutions and promote
financial stability through robust capital
standards for the entire banking system.
The agencies participated in the
development of a number of studies to
assess the potential impact of the
revised capital requirements, including
participating in the BCBS’s
Macroeconomic Assessment Group as
well as its QIS, the results of which
were made publicly available by the
BCBS upon their completion.22 The
BCBS analysis suggested that stronger
capital requirements help reduce the
likelihood of banking crises while
yielding positive net economic
benefits.23 To evaluate the potential
reduction in economic output resulting
from the new framework, the analysis
assumed that banking organizations
replaced debt with higher-cost equity to
the extent needed to comply with the
new requirements, that there was no
reduction in the cost of equity despite
22 See ‘‘Assessing the macroeconomic impact of
the transition to stronger capital and liquidity
requirements’’ (MAG Analysis), Attachment E, also
available at: http://www.bis.orpublIothp12.pdf. See
also ‘‘Results of the comprehensive quantitative
impact study,’’ Attachment F, also available at:
http://www.bis.org/publ/bcbs186.pdf.
23 See ‘‘An assessment of the long-term economic
impact of stronger capital and liquidity
requirements,’’ Executive Summary, pg. 1,
Attachment G.
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the reduction in the riskiness of banking
organizations’ funding mix, and that the
increase in funding cost was entirely
passed on to borrowers. Given these
assumptions, the analysis concluded
there would be a slight increase in the
cost of borrowing and a slight decrease
in the growth of gross domestic product.
The analysis concluded that this cost
would be more than offset by the benefit
to gross domestic product resulting from
a reduced likelihood of prolonged
economic downturns associated with a
banking system whose lending capacity
is highly vulnerable to economic
shocks.
The agencies’ analysis also indicates
that the overwhelming majority of
banking organizations already have
sufficient capital to comply with the
new capital rules. In particular, the
agencies estimate that over 95 percent of
all insured depository institutions
would be in compliance with the
minimums and buffers established
under the interim final rule if it were
fully effective immediately. The interim
final rule will help to ensure that these
FDIC-supervised institutions maintain
their capacity to absorb losses in the
future. Some FDIC-supervised
institutions may need to take advantage
of the transition period in the interim
final rule to accumulate retained
earnings, raise additional external
regulatory capital, or both. As noted
above, however, the overwhelming
majority of banking organizations have
sufficient capital to comply with the
revised capital rules, and the FDIC
believes that the resulting
improvements to the stability and
resilience of the banking system
outweigh any costs associated with its
implementation.
The interim final rule includes some
significant revisions from the proposals
in response to commenters’ concerns,
particularly with respect to the
treatment of AOCI; residential
mortgages; tier 1 non-qualifying capital
instruments; and the implementation
timeframes. The timeframes for
compliance are described in the next
section and more detailed discussions of
modifications to the proposals are
provided in the remainder of the
preamble.
Consistent with the proposed rules,
the interim final rule requires all FDICsupervised institutions to recognize in
regulatory capital all components of
AOCI, excluding accumulated net gains
and losses on cash-flow hedges that
relate to the hedging of items that are
not recognized at fair value on the
balance sheet. However, while the FDIC
believes that the proposed AOCI
treatment results in a regulatory capital
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measure that better reflects FDICsupervised institutions’ actual loss
absorption capacity at a specific point in
time, the FDIC recognizes that for many
FDIC-supervised institutions, the
volatility in regulatory capital that could
result from the proposals could lead to
significant difficulties in capital
planning and asset-liability
management. The FDIC also recognizes
that the tools used by larger, more
complex FDIC-supervised institutions
for managing interest rate risk are not
necessarily readily available for all
FDIC-supervised institutions.
Accordingly, under the interim final
rule, and as discussed in more detail in
section V.B of this preamble, an FDICsupervised institution that is not subject
to the advanced approaches rule may
make a one-time election not to include
most elements of AOCI in regulatory
capital under the interim final rule and
instead effectively use the existing
treatment under the general risk-based
capital rules that excludes most AOCI
elements from regulatory capital (AOCI
opt-out election). Such an FDICsupervised institution must make its
AOCI opt-out election in its
Consolidated Reports of Condition and
Income (Call Report) filed for the first
reporting period after it becomes subject
to the interim final rule. Consistent with
regulatory capital calculations under the
FDIC’s general risk-based capital rules,
an FDIC-supervised institution that
makes an AOCI opt-out election under
the interim final rule must adjust
common equity tier 1 capital by: (1)
Subtracting any net unrealized gains
and adding any net unrealized losses on
AFS securities; (2) subtracting any
unrealized losses on AFS preferred
stock classified as an equity security
under GAAP and AFS equity exposures;
(3) subtracting any accumulated net
gains and adding any accumulated net
losses on cash-flow hedges; (4)
subtracting amounts recorded in AOCI
attributed to defined benefit
postretirement plans resulting from the
initial and subsequent application of the
relevant GAAP standards that pertain to
such plans (excluding, at the FDICsupervised institution’s option, the
portion relating to pension assets
deducted under section 22(a)(5) of the
interim final rule); and (5) subtracting
any net unrealized gains and adding any
net unrealized losses on held-tomaturity securities that are included in
AOCI. Consistent with the general riskbased capital rules, common equity tier
1 capital includes any net unrealized
losses on AFS equity securities and any
foreign currency translation adjustment.
An FDIC-supervised institution that
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makes an AOCI opt-out election may
incorporate up to 45 percent of any net
unrealized gains on AFS preferred stock
classified as an equity security under
GAAP and AFS equity exposures into
its tier 2 capital.
An FDIC-supervised institution that
does not make an AOCI opt-out election
on the Call Report filed for the first
reporting period after the FDICsupervised institution becomes subject
to the interim final rule will be required
to recognize AOCI (excluding
accumulated net gains and losses on
cash-flow hedges that relate to the
hedging of items that are not recognized
at fair value on the balance sheet) in
regulatory capital as of the first quarter
in which it calculates its regulatory
capital requirements under the interim
final rule and continuing thereafter.
The FDIC has decided not to adopt
the proposed treatment of residential
mortgages. The FDIC has considered the
commenters’ observations about the
burden of calculating the risk weights
for FDIC-supervised institutions’
existing mortgage portfolios, and has
taken into account the commenters’
concerns that the proposal did not
properly assess the use of different
mortgage products across different types
of markets in establishing the proposed
risk weights. The FDIC is also
particularly mindful of comments
regarding the potential effect of the
proposal and other mortgage-related
rulemakings on credit availability. In
light of these considerations, as well as
others raised by commenters, the FDIC
has decided to retain in the interim final
rule the current treatment for residential
mortgage exposures under the general
risk-based capital rules.
Consistent with the general risk-based
capital rules, the interim final rule
assigns a 50 or 100 percent risk weight
to exposures secured by one-to-four
family residential properties. Generally,
residential mortgage exposures secured
by a first lien on a one-to-four family
residential property that are prudently
underwritten and that are performing
according to their original terms receive
a 50 percent risk weight. All other oneto four-family residential mortgage
loans, including exposures secured by a
junior lien on residential property, are
assigned a 100 percent risk weight. If an
FDIC-supervised institution holds the
first and junior lien(s) on a residential
property and no other party holds an
intervening lien, the FDIC-supervised
institution must treat the combined
exposure as a single loan secured by a
first lien for purposes of assigning a risk
weight.
The agencies also considered
comments on the proposal to require
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certain depository institution holding
companies to phase out their nonqualifying tier 1 capital instruments
from regulatory capital over ten years.
Although the agencies continue to
believe that non-qualifying instruments
do not absorb losses sufficiently to be
included in tier 1 capital as a general
matter, the agencies are also sensitive to
the difficulties community banking
organizations often face when issuing
new capital instruments and are aware
of the importance their capacity to lend
can play in local economies. Therefore,
the final rule adopted by the Federal
Reserve allows certain depository
institution holding companies to
include in regulatory capital debt or
equity instruments issued prior to
September 12, 2010 that do not meet the
criteria for additional tier 1 or tier 2
capital instruments but that were
included in tier 1 or tier 2 capital
respectively as of September 12, 2010
up to the percentage of the outstanding
principal amount of such non-qualifying
capital instruments.
D. Timeframe for Implementation and
Compliance
In order to give non-internationally
active FDIC-supervised institutions
more time to comply with the interim
final rule and simplify their transition to
the new regime, the interim final rule
will require compliance from different
types of organizations at different times.
Generally, and as described in further
detail below, FDIC-supervised
institutions that are not subject to the
advanced approaches rule must begin
complying with the interim final rule on
January 1, 2015, whereas advanced
approaches FDIC-supervised
institutions must begin complying with
the interim final rule on January 1,
2014. The FDIC believes that advanced
approaches FDIC-supervised
institutions have the sophistication,
infrastructure, and capital markets
access to implement the interim final
rule earlier than either FDIC-supervised
institutions that do not meet the asset
size or foreign exposure threshold for
application of those rules.
A number of commenters requested
that the agencies clarify the point at
which a banking organization that meets
the asset size or foreign exposure
threshold for application of the
advanced approaches rule becomes
subject to subpart E of the proposed
rule, and thus all of the provisions that
apply to an advanced approaches
banking organization. In particular,
commenters requested that the agencies
clarify whether subpart E of the
proposed rule only applies to those
banking organizations that have
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completed the parallel run process and
that have received notification from
their primary Federal supervisor
pursuant to section 324.121(d) of
subpart E, or whether subpart E would
apply to all banking organizations that
meet the relevant thresholds without
reference to completion of the parallel
run process.
The interim final rule provides that an
advanced approaches FDIC-supervised
institution is one that meets the asset
size or foreign exposure thresholds for
or has opted to apply the advanced
approaches rule, without reference to
whether that FDIC-supervised
institution has completed the parallel
run process and has received
notification from its primary Federal
supervisor pursuant to section
324.121(d) of subpart E of the interim
final rule. The FDIC has also clarified in
the interim final rule when completion
of the parallel run process and receipt
of notification from the primary Federal
supervisor pursuant to section
324.121(d) of subpart E is necessary for
an advanced approaches FDICsupervised institution to comply with a
particular aspect of the rules. For
example, only an advanced approaches
FDIC-supervised institution that has
completed parallel run and received
notification from its primary Federal
supervisor under Section 324.121(d) of
subpart E must make the disclosures set
forth under subpart E of the interim
final rule. However, an advanced
approaches FDIC-supervised institution
must recognize most components of
AOCI in common equity tier 1 capital
and must meet the supplementary
leverage ratio when applicable without
reference to whether the FDICsupervised institution has completed its
parallel run process.
Beginning on January 1, 2015, FDICsupervised institutions that are not
subject to the advanced approaches rule
become subject to the revised
definitions of regulatory capital, the
new minimum regulatory capital ratios,
and the regulatory capital adjustments
and deductions according to the
transition provisions.24 All FDICsupervised institutions must begin
calculating standardized total riskweighted assets in accordance with
subpart D of the interim final rule, and
if applicable, the revised market risk
rule under subpart F, on January 1,
2015.25
Beginning on January 1, 2014,
advanced approaches FDIC-supervised
institutions must begin the transition
period for the revised minimum
regulatory capital ratios, definitions of
regulatory capital, and regulatory capital
adjustments and deductions established
under the interim final rule. The
revisions to the advanced approaches
risk-weighted asset calculations will
become effective on January 1, 2014.
From January 1, 2014 to December 31,
2014, an advanced approaches FDICsupervised institution that is on parallel
run must calculate risk-weighted assets
using the general risk-based capital
rules and substitute such risk-weighted
assets for its standardized total riskweighted assets for purposes of
determining its risk-based capital ratios.
An advanced approaches FDICsupervised institution on parallel run
must also calculate advanced
approaches total risk-weighted assets
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using the advanced approaches rule in
subpart E of the interim final rule for
purposes of confidential reporting to its
primary Federal supervisor on the
Federal Financial Institutions
Examination Council’s (FFIEC) 101
report. An advanced approaches FDICsupervised institution that has
completed the parallel run process and
that has received notification from its
primary Federal supervisor pursuant to
section 121(d) of subpart E will
calculate its risk-weighted assets using
the general risk-based capital rules and
substitute such risk-weighted assets for
its standardized total risk-weighted
assets and also calculate advanced
approaches total risk-weighted assets
using the advanced approaches rule in
subpart E of the interim final rule for
purposes of determining its risk-based
capital ratios from January 1, 2014 to
December 31, 2014. Regardless of an
advanced approaches FDIC-supervised
institution’s parallel run status, on
January 1, 2015, the FDIC-supervised
institution must begin to apply subpart
D, and if applicable, subpart F, of the
interim final rule to determine its
standardized total risk-weighted assets.
The transition period for the capital
conservation and countercyclical capital
buffers for all FDIC-supervised
institutions will begin on January 1,
2016.
An FDIC-supervised institution that is
required to comply with the market risk
rule must comply with the revised
market risk rule (subpart F) as of the
same date that it must comply with
other aspects of the rule for determining
its total risk-weighted assets.
Date
FDIC-Supervised institutions not subject to the advanced approaches rule*
January 1, 2015 ...................
January 1, 2016 ...................
Begin compliance with the revised minimum regulatory capital ratios and begin the transition period for the revised definitions of regulatory capital and the revised regulatory capital adjustments and deductions.
Begin compliance with the standardized approach for determining risk-weighted assets.
Begin the transition period for the capital conservation and countercyclical capital buffers.
Date
Advanced approaches FDIC-supervised institutions*
January 1, 2014 ...................
Begin the transition period for the revised minimum regulatory capital ratios, definitions of regulatory capital, and
regulatory capital adjustments and deductions.
Begin compliance with the revised advanced approaches rule for determining risk-weighted assets.
Begin compliance with the standardized approach for determining risk-weighted assets.
Begin the transition period for the capital conservation and countercyclical capital buffers.
January 1, 2015 ...................
January 1, 2016 ...................
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*If applicable, FDIC-supervised institutions must use the calculations in subpart F of the interim final rule (market risk) concurrently with the
calculation of risk-weighted assets according either to subpart D (standardized approach) or subpart E (advanced approaches) of the interim final
rule.
24 Prior to January 1, 2015, such FDIC-supervised
institutions must continue to use the FDIC’s general
risk-based capital rules and tier 1 leverage rules.
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25 The revised PCA thresholds, discussed further
in section IV.E. of this preamble, become effective
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for all insured depository institutions on January 1,
2015.
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IV. Minimum Regulatory Capital
Ratios, Additional Capital
Requirements, and Overall Capital
Adequacy
A. Minimum Risk-based Capital Ratios
and Other Regulatory Capital Provisions
Consistent with Basel III, the
proposed rule would have required
banking organizations to comply with
the following minimum capital ratios: a
common equity tier 1 capital to riskweighted assets ratio of 4.5 percent; a
tier 1 capital to risk-weighted assets
ratio of 6 percent; a total capital to riskweighted assets ratio of 8 percent; a
leverage ratio of 4 percent; and for
advanced approaches banking
organizations only, a supplementary
leverage ratio of 3 percent. The common
equity tier 1 capital ratio is a new
minimum requirement designed to
ensure that banking organizations hold
sufficient high-quality regulatory capital
that is available to absorb losses on a
going-concern basis. The proposed
capital ratios would apply to a banking
organization on a consolidated basis.
The agencies received a substantial
number of comments on the proposed
minimum risk-based capital
requirements. Several commenters
supported the proposal to increase the
minimum tier 1 risk-based capital
requirement. Other commenters
commended the agencies for proposing
to implement a minimum capital
requirement that focuses primarily on
common equity. These commenters
argued that common equity is the
strongest form of capital and that the
proposed minimum common equity tier
1 capital ratio of 4.5 percent would
promote the safety and soundness of the
banking industry.
Other commenters provided general
support for the proposed increases in
minimum risk-based capital
requirements, but expressed concern
that the proposals could present unique
challenges to mutual institutions
because they can only raise common
equity through retained earnings. A
number of commenters asserted that the
objectives of the proposal could be
achieved through regulatory
mechanisms other than the proposed
risk-based capital requirements,
including enhanced safety and
soundness examinations, more stringent
underwriting standards, and alternative
measures of capital.
Other commenters objected to the
proposed increase in the minimum tier
1 capital ratio and the implementation
of a common equity tier 1 capital ratio.
One commenter indicated that increases
in regulatory capital ratios would
severely limit growth at many
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community banking organizations and
could encourage consolidation through
mergers and acquisitions. Other
commenters stated that for banks under
$750 million in total assets, increased
compliance costs would not allow them
to provide a reasonable return to
shareholders, and thus would force
them to consolidate. Several
commenters urged the agencies to
recognize community banking
organizations’ limited access to the
capital markets and related difficulties
raising capital to comply with the
proposal.
One banking organization indicated
that implementation of the common
equity tier 1 capital ratio would
significantly reduce its capacity to grow
and recommended that the proposal
recognize differences in the risk and
complexity of banking organizations
and provide favorable, less stringent
requirements for smaller and noncomplex institutions. Another
commenter suggested that the proposed
implementation of an additional riskbased capital ratio would confuse
market observers and recommended that
the agencies implement a regulatory
capital framework that allows investors
and the market to ascertain regulatory
capital from measures of equity derived
from a banking organization’s balance
sheet.
Other commenters expressed concern
that the proposed common equity tier 1
capital ratio would disadvantage MDIs
relative to other banking organizations.
According to the commenters, in order
to retain their minority-owned status,
MDIs historically maintain a relatively
high percentage of non-voting preferred
stockholders that provide long-term,
stable sources of capital. Any public
offering to increase common equity tier
1 capital levels would dilute the
minority investors owning the common
equity of the MDI and could potentially
compromise the minority-owned status
of such institutions. One commenter
asserted that, for this reason, the
implementation of the Basel III NPR
would be contrary to the statutory
mandate of section 308 of the Financial
Institutions, Reform, Recovery and
Enforcement Act (FIRREA).26
Accordingly, the commenters
encouraged the agencies to exempt
MDIs from the proposed common equity
tier 1 capital ratio requirement.
The FDIC believes that all FDICsupervised institutions must have an
adequate amount of loss-absorbing
capital to continue to lend to their
communities during times of economic
stress, and therefore have decided to
26 12
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implement the regulatory capital
requirements, including the minimum
common equity tier 1 capital
requirement, as proposed. For the
reasons described in the NPR, including
the experience during the crisis with
lower quality capital instruments, the
FDIC does not believe it is appropriate
to maintain the general risk-based
capital rules or to rely on the
supervisory process or underwriting
standards alone. Accordingly, the
interim final rule maintains the
minimum common equity tier 1 capital
to total risk-weighted assets ratio of 4.5
percent. The FDIC has decided not to
pursue the alternative regulatory
mechanisms suggested by commenters,
as such alternatives would be difficult
to implement consistently across FDICsupervised institutions and would not
necessarily fulfill the objective of
increasing the amount and quality of
regulatory capital for all FDICsupervised institutions.
In view of the concerns expressed by
commenters with respect to MDIs, the
FDIC evaluated the risk-based and
leverage capital levels of MDIs to
determine whether the interim final rule
would disproportionately impact such
institutions. This analysis found that of
the 178 MDIs in existence as of March
31, 2013, 12 currently are not well
capitalized for PCA purposes, whereas
(according to the FDIC’s estimates) 14
would not be considered well
capitalized for PCA purposes under the
interim final rule if it were fully
implemented without transition today.
Accordingly, the FDIC does not believe
that the interim final rule would
disproportionately impact MDIs and are
not adopting any exemptions or special
provisions for these institutions. While
the FDIC recognizes MDIs may face
impediments in meeting the common
equity tier 1 capital ratio, the FDIC
believes that the improvements to the
safety and soundness of these
institutions through higher capital
standards are warranted and consistent
with their obligations under section 308
of FIRREA. As a prudential matter, the
FDIC has a long-established regulatory
policy that FDIC-supervised institutions
should hold capital commensurate with
the level and nature of the risks to
which they are exposed, which may
entail holding capital significantly
above the minimum requirements,
depending on the nature of the FDICsupervised institution’s activities and
risk profile. Section IV.G of this
preamble describes the requirement for
overall capital adequacy of FDICsupervised institutions and the
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supervisory assessment of capital
adequacy.
Furthermore, consistent with the
FDIC’s authority under the general riskbased capital rules and the proposals,
section 1(d) of the interim final rule
includes a reservation of authority that
allows FDIC to require the FDICsupervised institution to hold a greater
amount of regulatory capital than
otherwise is required under the interim
final rule, if the FDIC determines that
the regulatory capital held by the FDICsupervised institution is not
commensurate with its credit, market,
operational, or other risks. In exercising
reservation of authority under the rule,
the FDIC expects to consider the size,
complexity, risk profile, and scope of
operations of the FDIC-supervised
institution; and whether any public
benefits would be outweighed by risk to
an insured depository institution or to
the financial system.
B. Leverage Ratio
The proposals would require a
banking organization to satisfy a
leverage ratio of 4 percent, calculated
using the proposed definition of tier 1
capital and the banking organization’s
average total consolidated assets, minus
amounts deducted from tier 1 capital.
The agencies also proposed to eliminate
the exception in the agencies’ leverage
rules that provides for a minimum
leverage ratio of 3 percent for banking
organizations with strong supervisory
ratings.
The agencies received a number of
comments on the proposed leverage
ratio applicable to all banking
organizations. Several of these
commenters supported the proposed
leverage ratio, stating that it serves as a
simple regulatory standard that
constrains the ability of a banking
organization to leverage its equity
capital base. Some of the commenters
encouraged the agencies to consider an
alternative leverage ratio measure of
tangible common equity to tangible
assets, which would exclude noncommon stock elements from the
numerator and intangible assets from
the denominator of the ratio and thus,
according to these commenters, provide
a more reliable measure of a banking
organization’s viability in a crisis.
A number of commenters criticized
the proposed removal of the 3 percent
exception to the minimum leverage ratio
requirement for certain banking
organizations. One of these commenters
argued that removal of this exception is
unwarranted in view of the cumulative
impact of the proposals and that raising
the minimum leverage ratio requirement
for the strongest banking organizations
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may lead to a deleveraging by the
institutions most able to extend credit in
a safe and sound manner. In addition,
the commenters cautioned the agencies
that a restrictive leverage measure,
together with more stringent risk-based
capital requirements, could magnify the
potential impact of an economic
downturn.
Several commenters suggested
modifications to the minimum leverage
ratio requirement. One commenter
suggested increasing the minimum
leverage ratio requirement for all
banking organizations to 6 percent,
whereas another commenter
recommended a leverage ratio
requirement as high as 20 percent.
Another commenter suggested a tiered
approach, with minimum leverage ratio
requirements of 6.25 percent and 8.5
percent for community banking
organizations and large banking
organizations, respectively. According
to this commenter, such an approach
could be based on the risk
characteristics of a banking
organization, including liquidity, asset
quality, and local deposit levels, as well
as its supervisory rating. Another
commenter suggested a fluid leverage
ratio requirement that would adjust
based on certain macroeconomic
variables. Under such an approach, the
agencies could require banking
organizations to meet a minimum
leverage ratio of 10 percent under
favorable economic conditions and a 6
percent leverage ratio during an
economic contraction.
The FDIC continues to believe that a
minimum leverage ratio requirement of
4 percent for all FDIC-supervised
institutions is appropriate in light of its
role as a complement to the risk-based
capital ratios. The proposed leverage
ratio is more conservative than the
current leverage ratio because it
incorporates a more stringent definition
of tier 1 capital. In addition, the FDIC
believes that it is appropriate for all
FDIC-supervised institutions, regardless
of their supervisory rating or trading
activities, to meet the same minimum
leverage ratio requirements. As a
practical matter, the FDIC generally has
found a leverage ratio of less than 4
percent to be inconsistent with a
supervisory composite rating of ‘‘1.’’
Modifying the scope of the leverage
ratio measure or implementing a fluid or
tiered approach for the minimum
leverage ratio requirement would create
additional operational complexity and
variability in a minimum ratio
requirement that is intended to place a
constraint on the maximum degree to
which an FDIC-supervised institution
can leverage its equity base.
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Accordingly, the interim final rule
retains the existing minimum leverage
ratio requirement of 4 percent and
removes the 3 percent leverage ratio
exception as of January 1, 2014 for
advanced approaches FDIC-supervised
institutions and as of January 1, 2015 for
all other FDIC-supervised institutions.
C. Supplementary Leverage Ratio for
Advanced Approaches FDIC-Supervised
Institutions
As part of Basel III, the BCBS
introduced a minimum leverage ratio
requirement of 3 percent (the Basel III
leverage ratio) as a backstop measure to
the risk-based capital requirements,
designed to improve the resilience of
the banking system worldwide by
limiting the amount of leverage that a
banking organization may incur. The
Basel III leverage ratio is defined as the
ratio of tier 1 capital to a combination
of on- and off-balance sheet exposures.
As discussed in the Basel III NPR, the
agencies proposed the supplementary
leverage ratio only for advanced
approaches banking organizations
because these banking organizations
tend to have more significant amounts
of off-balance sheet exposures that are
not captured by the current leverage
ratio. Under the proposal, consistent
with Basel III, advanced approaches
banking organizations would be
required to maintain a minimum
supplementary leverage ratio of 3
percent of tier 1 capital to on- and offbalance sheet exposures (total leverage
exposure).
The agencies received a number of
comments on the proposed
supplementary leverage ratio. Several
commenters stated that the proposed
supplementary leverage ratio is
unnecessary in light of the minimum
leverage ratio requirement applicable to
all banking organizations. These
commenters stated that the
implementation of the supplementary
leverage ratio requirement would create
market confusion as to the interrelationships among the ratios and as to
which ratio serves as the binding
constraint for an individual banking
organization. One commenter noted that
an advanced approaches banking
organization would be required to
calculate eight distinct regulatory
capital ratios (common equity tier 1, tier
1, and total capital to risk-weighted
assets under the advanced approaches
and the standardized approach, as well
as two leverage ratios) and encouraged
the agencies to streamline the
application of regulatory capital ratios.
In addition, commenters suggested that
the agencies postpone the
implementation of the supplementary
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leverage ratio until January 1, 2018, after
the international supervisory
monitoring process is complete, and to
collect supplementary leverage ratio
information on a confidential basis until
then.
At least one commenter encouraged
the agencies to consider extending the
application of the proposed
supplementary leverage ratio on a caseby-case basis to banking organizations
with total assets of between $50 billion
and $250 billion, stating that such
institutions may have significant offbalance sheet exposures and engage in
a substantial amount of repo-style
transactions. Other commenters
suggested increasing the proposed
supplementary leverage ratio
requirement to at least 8 percent for
BHCs, under the Federal Reserve’s
authority in section 165 of the DoddFrank Act to implement enhanced
capital requirements for systemically
important financial institutions.27
With respect to specific aspects of the
supplementary leverage ratio, some
commenters criticized the methodology
for the total leverage exposure.
Specifically, one commenter expressed
concern that using GAAP as the basis
for determining a banking organization’s
total leverage exposure would exclude a
wide range of off-balance sheet
exposures, including derivatives and
securities lending transactions, as well
as permit extensive netting. To address
these issues, the commenter suggested
requiring advanced approaches banking
organizations to determine their total
leverage exposure using International
Financial Reporting Standards (IFRS),
asserting that it restricts netting and,
relative to GAAP, requires the
recognition of more off-balance sheet
securities lending transactions.
Several commenters criticized the
proposed incorporation of off-balance
sheet exposures into the total leverage
exposure. One commenter argued that
including unfunded commitments in
the total leverage exposure runs counter
to the purpose of the supplementary
leverage ratio as an on-balance sheet
measure of capital that complements the
risk-based capital ratios. This
commenter was concerned that the
proposed inclusion of unfunded
commitments would result in a
duplicative assessment against banking
organizations when the forthcoming
liquidity ratio requirements are
implemented in the United States. The
commenter noted that the proposed 100
percent credit conversion factor for all
unfunded commitments is not
27 See section 165 of the Dodd-Frank Act, 12
U.S.C. 5365.
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appropriately calibrated to the vastly
different types of commitments that
exist across the industry. If the
supplementary leverage ratio is retained
in the interim final rule, the commenter
requested that the agencies align the
credit conversion factors for unfunded
commitments under the supplementary
leverage ratio and any forthcoming
liquidity ratio requirements.
Another commenter encouraged the
agencies to allow advanced approaches
banking organizations to exclude from
total leverage exposure the notional
amount of any unconditionally
cancellable commitment. According to
this commenter, unconditionally
cancellable commitments are not credit
exposures because they can be
extinguished at any time at the sole
discretion of the issuing entity.
Therefore, the commenter argued, the
inclusion of these commitments could
potentially distort a banking
organization’s measure of total leverage
exposure.
A few commenters requested that the
agencies exclude off-balance sheet trade
finance instruments from the total
leverage exposure, asserting that such
instruments are based on underlying
client transactions (for example, a
shipment of goods) and are generally
short-term. The commenters argued that
trade finance instruments do not create
excessive systemic leverage and that
they are liquidated by fulfillment of the
underlying transaction and payment at
maturity. Another commenter requested
that the agencies apply the same credit
conversion factors to trade finance
instruments as under the general riskbased capital rules—that is, 20 percent
of the notional value for trade-related
contingent items that arise from the
movement of goods, and 50 percent of
the notional value for transactionrelated contingent items, including
performance bonds, bid bonds,
warranties, and performance standby
letters of credit. According to this
commenter, such an approach would
appropriately consider the low-risk
characteristics of these instruments and
ensure price stability in trade finance.
Several commenters supported the
proposed treatment for repo-style
transactions (including repurchase
agreements, securities lending and
borrowing transactions, and reverse
repos). These commenters stated that
securities lending transactions are fully
collateralized and marked to market
daily and, therefore, the on-balance
sheet amounts generated by these
transactions appropriately capture the
exposure for purposes of the
supplementary leverage ratio. These
commenters also supported the
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proposed treatment for indemnified
securities lending transactions and
encouraged the agencies to retain this
treatment in the interim final rule. Other
commenters stated that the proposed
measurement of repo-style transactions
is not sufficiently conservative and
recommended that the agencies
implement a methodology that includes
in total leverage exposure the notional
amounts of these transactions.
A few commenters raised concerns
about the proposed methodology for
determining the exposure amount of
derivative contracts. Some commenters
criticized the agencies for not allowing
advanced approaches banking
organizations to use the internal models
methodology to calculate the exposure
amount for derivative contracts.
According to these commenters, the
agencies should align the methods for
calculating exposure for derivative
contracts for purposes of the
supplementary leverage ratio and the
advanced approaches risk-based capital
ratios to more appropriately reflect the
risk-management activities of advanced
approaches banking organizations and
to measure these exposures consistently
across the regulatory capital ratios. At
least one commenter requested
clarification of the proposed treatment
of collateral received in connection with
derivative contracts. This commenter
also encouraged the agencies to permit
recognition of eligible collateral for
purposes of reducing total leverage
exposure, consistent with proposed
legislation in other BCBS member
jurisdictions.
The introduction of an international
leverage ratio requirement in the Basel
III capital framework is an important
development that would provide a
consistent leverage ratio measure across
internationally-active institutions.
Furthermore, the supplementary
leverage ratio is reflective of the on- and
off-balance sheet activities of large,
internationally active banking
organizations. Accordingly, consistent
with Basel III, the interim final rule
implements for reporting purposes the
proposed supplementary leverage ratio
for advanced approaches FDICsupervised institutions starting on
January 1, 2015 and requires advanced
approaches FDIC-supervised
institutions to comply with the
minimum supplementary leverage ratio
requirement starting on January 1, 2018.
Public reporting of the supplementary
leverage ratio during the international
supervisory monitoring period is
consistent with the international
implementation timeline and enables
transparency and comparability of
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reporting the leverage ratio requirement
across jurisdictions.
The FDIC is not applying the
supplementary leverage ratio
requirement to FDIC-supervised
institutions that are not subject to the
advanced approaches rule in the interim
final rule. Applying the supplementary
leverage ratio routinely could create
operational complexity for smaller
FDIC-supervised institutions that are
not internationally active, and that
generally do not have off-balance sheet
activities that are as extensive as FDICsupervised institutions that are subject
to the advanced approaches rule. The
FDIC notes that the interim final rule
imposes risk-based capital requirements
on all repo-style transactions and
otherwise imposes constraints on all
FDIC-supervised institutions’ offbalance sheet exposures.
With regard to the commenters’ views
to require the use of IFRS for purposes
of the supplementary leverage ratio, the
FDIC notes that the use of GAAP in the
interim final rule as a starting point to
measure exposure of certain derivatives
and repo-style transactions, has the
advantage of maintaining consistency
between regulatory capital calculations
and regulatory reporting, the latter of
which must be consistent with GAAP
or, if another accounting principle is
used, no less stringent than GAAP.28
In response to the commenters’ views
regarding the scope of the total leverage
exposure, the FDIC notes that the
supplementary leverage ratio is
intended to capture on- and off-balance
sheet exposures of an FDIC-supervised
institution. Commitments represent an
agreement to extend credit and thus
including commitments (both funded
and unfunded) in the supplementary
leverage ratio is consistent with its
purpose to measure the on- and offbalance sheet leverage of an FDICsupervised institution, as well as with
safety and soundness principles.
Accordingly, the FDIC believes that total
leverage exposure should include FDICsupervised institutions’ off-balance
sheet exposures, including all loan
commitments that are not
unconditionally cancellable, financial
standby letters of credit, performance
standby letters of credit, and
commercial and other similar letters of
credit.
The proposal to include
unconditionally cancellable
commitments in the total leverage
exposure recognizes that a banking
organization may extend credit under
the commitment before it is cancelled.
If the banking organization exercises its
28 See
12 U.S.C. 1831n(a)(2).
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option to cancel the commitment, its
total leverage exposure amount with
respect to the commitment will be
limited to any extension of credit prior
to cancellation. The proposal
considered banking organizations’
ability to cancel such commitments and,
therefore, limited the amount of
unconditionally cancellable
commitments included in total leverage
exposure to 10 percent of the notional
amount of such commitments.
The FDIC notes that the credit
conversion factors used in the
supplementary leverage ratio and in any
forthcoming liquidity ratio requirements
have been developed to serve the
purposes of the respective frameworks
and may not be identical. Similarly, the
commenters’ proposed modifications to
credit conversion factors for trade
finance transactions would be
inconsistent with the purpose of the
supplementary leverage ratio—to
capture all off-balance sheet exposures
of banking organizations in a primarily
non-risk-based manner.
For purposes of incorporating
derivative contracts in the total leverage
exposure, the proposal would require all
advanced approaches banking
organizations to use the same
methodology to measure such
exposures. The proposed approach
provides a uniform measure of exposure
for derivative contracts across banking
organizations, without regard to their
models. Accordingly, the FDIC does not
believe an FDIC-supervised institution
should be permitted to use internal
models to measure the exposure amount
of derivative contracts for purposes of
the supplementary leverage ratio.
With regard to commenters requesting
a modification of the proposed
treatment for repo-style transactions, the
FDIC does not believe that the proposed
modifications are warranted at this time
because international discussions and
quantitative analysis of the exposure
measure for repo-style transactions are
still ongoing.
The FDIC is continuing to work with
the BCBS to assess the Basel III leverage
ratio, including its calibration and
design, as well as the impact of any
differences in national accounting
frameworks material to the denominator
of the Basel III leverage ratio. The FDIC
will consider any changes to the
supplementary leverage ratio as the
BCBS revises the Basel III leverage ratio.
Therefore, the FDIC has adopted the
proposed supplementary leverage ratio
in the interim final rule without
modification. An advanced approaches
FDIC-supervised institution must
calculate the supplementary leverage
ratio as the simple arithmetic mean of
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the ratio of the FDIC-supervised
institution’s tier 1 capital to total
leverage exposure as of the last day of
each month in the reporting quarter.
The FDIC also notes that collateral may
not be applied to reduce the potential
future exposure (PFE) amount for
derivative contracts.
Under the interim final rule, total
leverage exposure equals the sum of the
following:
(1) The balance sheet carrying value
of all of the FDIC-supervised
institution’s on-balance sheet assets less
amounts deducted from tier 1 capital
under section 22(a), (c), and (d) of the
interim final rule;
(2) The PFE amount for each
derivative contract to which the FDICsupervised institution is a counterparty
(or each single-product netting set of
such transactions) determined in
accordance with section 34 of the
interim final rule, but without regard to
section 34(b);
(3) 10 percent of the notional amount
of unconditionally cancellable
commitments made by the FDICsupervised institution; and
(4) The notional amount of all other
off-balance sheet exposures of the FDICsupervised institution (excluding
securities lending, securities borrowing,
reverse repurchase transactions,
derivatives and unconditionally
cancellable commitments).
Advanced approaches FDICsupervised institutions must maintain a
minimum supplementary leverage ratio
of 3 percent beginning on January 1,
2018, consistent with Basel III.
However, as noted above, beginning on
January 1, 2015, advanced approaches
FDIC-supervised institutions must
calculate and report their
supplementary leverage ratio.
The FDIC is seeking commenters’
views on the interaction of this interim
final rule with the proposed rule
regarding the supplementary leverage
ratio for large, systemically important
banking organizations.
D. Capital Conservation Buffer
During the recent financial crisis,
some banking organizations continued
to pay dividends and substantial
discretionary bonuses even as their
financial condition weakened. Such
capital distributions had a significant
negative impact on the overall strength
of the banking sector. To encourage
better capital conservation by banking
organizations and to enhance the
resilience of the banking system, the
proposed rule would have limited
capital distributions and discretionary
bonus payments for banking
organizations that do not hold a
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specified amount of common equity tier
1 capital in addition to the amount of
regulatory capital necessary to meet the
minimum risk-based capital
requirements (capital conservation
buffer), consistent with Basel III. In this
way, the capital conservation buffer is
intended to provide incentives for
banking organizations to hold sufficient
capital to reduce the risk that their
capital levels would fall below their
minimum requirements during a period
of financial stress.
The proposed rules incorporated a
capital conservation buffer composed of
common equity tier 1 capital in addition
to the minimum risk-based capital
requirements. Under the proposal, a
banking organization would need to
hold a capital conservation buffer in an
amount greater than 2.5 percent of total
risk-weighted assets (plus, for an
advanced approaches banking
organization, 100 percent of any
applicable countercyclical capital buffer
amount) to avoid limitations on capital
distributions and discretionary bonus
payments to executive officers, as
defined in the proposal. The proposal
provided that the maximum dollar
amount that a banking organization
could pay out in the form of capital
distributions or discretionary bonus
payments during the current calendar
quarter (the maximum payout amount)
would be equal to a maximum payout
ratio, multiplied by the banking
organization’s eligible retained income,
as discussed below. The proposal
provided that a banking organization
with a buffer of more than 2.5 percent
of total risk-weighted assets (plus, for an
advanced approaches banking
organization, 100 percent of any
applicable countercyclical capital
buffer), would not be subject to a
maximum payout amount. The proposal
clarified that the agencies reserved the
ability to restrict capital distributions
under other authorities and that
restrictions on capital distributions and
discretionary bonus payments
associated with the capital conservation
buffer would not be part of the PCA
framework. The calibration of the buffer
is supported by an evaluation of the loss
experience of U.S. banking
organizations as part of an analysis
conducted by the BCBS, as well as by
evaluation of historical levels of capital
at U.S. banking organizations.29
The agencies received a significant
number of comments on the proposed
capital conservation buffer. In general,
29 ‘‘Calibrating regulatory capital requirements
and buffers: A top-down approach.’’ Basel
Committee on Banking Supervision, October, 2010,
available at www.bis.org.
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the commenters characterized the
capital conservation buffer as overly
conservative, and stated that the
aggregate amount of capital that would
be required for a banking organization to
avoid restrictions on dividends and
discretionary bonus payments under the
proposed rule exceeded the amount
required for a safe and prudent banking
system. Commenters expressed concern
that the capital conservation buffer
could disrupt the priority of payments
in a banking organization’s capital
structure, as any restrictions on
dividends would apply to both common
and preferred stock. Commenters also
questioned the appropriateness of
restricting a banking organization that
fails to comply with the capital
conservation buffer from paying
dividends or bonus payments if it has
established and maintained cash
reserves to cover future uncertainty.
One commenter supported the
establishment of a formal mechanism
for banking organizations to request
agency approval to make capital
distributions even if doing so would
otherwise be restricted under the capital
conservation buffer.
Other commenters recommended an
exemption from the proposed capital
conservation buffer for certain types of
banking organizations, such as
community banking organizations,
banking organizations organized in
mutual form, and rural BHCs that rely
heavily on bank stock loans for growth
and expansion purposes. Commenters
also recommended a wide range of
institutions that should be excluded
from the buffer based on a potential size
threshold, such as banking
organizations with total consolidated
assets of less than $250 billion.
Commenters also recommended that Scorporations be exempt from the
proposed capital conservation buffer
because under the U.S. Internal Revenue
Code, S-corporations are not subject to
a corporate-level tax; instead, Scorporation shareholders must report
income and pay income taxes based on
their share of the corporation’s profit or
loss. An S-corporation generally
declares a dividend to help shareholders
pay their tax liabilities that arise from
reporting their share of the corporation’s
profits. According to some commenters,
the proposal disadvantaged Scorporations because shareholders of Scorporations would be liable for tax on
the S-corporation’s net income, and the
S-corporation may be prohibited from
making a dividend to these shareholders
to fund the tax payment.
One commenter criticized the
proposed composition of the capital
conservation buffer (which must consist
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solely of common equity tier 1 capital)
and encouraged the agencies to allow
banking organizations to include
noncumulative perpetual preferred
stock and other tier 1 capital
instruments. Several commenters
questioned the empirical basis for a
capital conservation buffer of 2.5
percent, and encouraged the agencies to
provide a quantitative analysis for the
proposal. One commenter suggested
application of the capital conservation
buffer only during economic downturn
scenarios, consistent with the agencies’
objective to restrict dividends and
discretionary bonus payments during
these periods. According to this
commenter, a banking organization that
fails to maintain a sufficient capital
conservation buffer during periods of
economic stress also could be required
to submit a plan to increase its capital.
After considering these comments, the
FDIC has decided to maintain common
equity tier 1 capital as the basis of the
capital conservation buffer and to apply
the capital conservation buffer to all
types of FDIC-supervised institutions at
all times. Application of the buffer to all
types of FDIC-supervised institutions
and maintenance of a capital buffer
during periods of market and economic
stability is appropriate to encourage
sound capital management and help
ensure that FDIC-supervised institutions
will maintain adequate amounts of lossabsorbing capital going forward,
strengthening the ability of the banking
system to continue serving as a source
of credit to the economy in times of
stress. A buffer framework that restricts
dividends and discretionary bonus
payments only for certain types of FDICsupervised institutions or only during
an economic contraction would not
achieve these objectives. Similarly,
basing the capital conservation buffer on
the most loss-absorbent form of capital
is most consistent with the purpose of
the capital conservation buffer as it
helps to ensure that the buffer can be
used effectively by FDIC-supervised
institutions at a time when they are
experiencing losses.
The FDIC recognizes that Scorporation FDIC-supervised
institutions structure their tax payments
differently from C corporations.
However, the FDIC notes that this
distinction results from S-corporations’
pass-through taxation, in which profits
are not subject to taxation at the
corporate level, but rather at the
shareholder level. The FDIC is charged
with evaluating the capital levels and
safety and soundness of the FDICsupervised institution. At the point
where a decrease in the organization’s
capital triggers dividend restrictions, the
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FDIC believes that capital should stay
within the FDIC-supervised institution.
S-corporation shareholders may receive
a benefit from pass-through taxation, but
with that benefit comes the risk that the
corporation has no obligation to make
dividend distributions to help
shareholders pay their tax liabilities.
Therefore, the interim final rule does
not exempt S-corporations from the
capital conservation buffer.
Accordingly, under the interim final
rule an FDIC-supervised institution
must maintain a capital conservation
buffer of common equity tier 1 capital
in an amount greater than 2.5 percent of
total risk-weighted assets (plus, for an
advanced approaches FDIC-supervised
institution, 100 percent of any
applicable countercyclical capital buffer
amount) to avoid being subject to
limitations on capital distributions and
discretionary bonus payments to
executive officers.
The proposal defined eligible retained
income as a banking organization’s net
income (as reported in the banking
organization’s quarterly regulatory
reports) for the four calendar quarters
preceding the current calendar quarter,
net of any capital distributions and
associated tax effects not already
reflected in net income. The agencies
received a number of comments
regarding the proposed definition of
eligible retained income, which is used
to calculate the maximum payout
amount. Some commenters suggested
that the agencies limit capital
distributions based on retained earnings
instead of eligible retained income,
citing the Federal Reserve’s Regulation
H as an example of this regulatory
practice.30 Several commenters
representing banking organizations
organized as S-corporations
recommended revisions to the
definition of eligible retained income so
that it would be net of pass-through tax
distributions to shareholders that have
made a pass-through election for tax
purposes, allowing S-corporation
shareholders to pay their tax liability
notwithstanding any dividend
restrictions resulting from failure to
comply with the capital conservation
buffer. Some commenters suggested that
the definition of eligible retained
income be adjusted for items such as
goodwill impairment that are captured
in the definition of ‘‘net income’’ for
regulatory reporting purposes but which
do not affect regulatory capital.
The interim final rule adopts the
proposed definition of eligible retained
income without change. The FDIC
believes the commenters’ suggested
30 See
12 CFR part 208.
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modifications to the definition of
eligible retained income would add
complexity to the interim final rule and
in some cases may be counterproductive by weakening the incentives
of the capital conservation buffer. The
FDIC notes that the definition of eligible
retained income appropriately accounts
for impairment charges, which reduce
eligible retained income but also
reduces the balance sheet amount of
goodwill that is deducted from
regulatory capital. Further, the proposed
definition of eligible retained income,
which is based on net income as
reported in the banking organization’s
quarterly regulatory reports, reflects a
simple measure of a banking
organization’s recent performance upon
which to base restrictions on capital
distributions and discretionary
payments to executive officers. For the
same reasons as described above
regarding the application of the capital
conservation buffer to S-corporations
generally, the FDIC has determined that
the definition of eligible retained
income should not be modified to
address the tax-related concerns raised
by commenters writing on behalf of Scorporations.
The proposed rule generally defined a
capital distribution as a reduction of tier
1 or tier 2 capital through the
repurchase or redemption of a capital
instrument or by other means; a
dividend declaration or payment on any
tier 1 or tier 2 capital instrument if the
banking organization has full discretion
to permanently or temporarily suspend
such payments without triggering an
event of default; or any similar
transaction that the primary Federal
supervisor determines to be in
substance a distribution of capital.
Commenters provided suggestions on
the definition of ‘‘capital distribution.’’
One commenter requested that a
‘‘capital distribution’’ be defined to
exclude any repurchase or redemption
to the extent the capital repurchased or
redeemed was replaced in a
contemporaneous transaction by the
issuance of capital of an equal or higher
quality tier. The commenter maintained
that the proposal would unnecessarily
penalize banking organizations that
redeem capital but contemporaneously
replace such capital with an equal or
greater amount of capital of an
equivalent or higher quality. In response
to comments, and recognizing that
redeeming capital instruments that are
replaced with instruments of the same
or similar quality does not weaken a
banking organization’s overall capital
position, the interim final rule provides
that a redemption or repurchase of a
capital instrument is not a distribution
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provided that the banking organization
fully replaces that capital instrument by
issuing another capital instrument of the
same or better quality (that is, more
subordinate) based on the interim final
rule’s eligibility criteria for capital
instruments, and provided that such
issuance is completed within the same
calendar quarter the banking
organization announces the repurchase
or redemption. For purposes of this
definition, a capital instrument is issued
at the time that it is fully paid in. For
purposes of the interim final rule, the
FDIC changed the defined term from
‘‘capital distribution’’ to ‘‘distribution’’
to avoid confusion with the term
‘‘capital distribution’’ used in the
Federal Reserve’s capital plan rule.31
The proposed rule defined
discretionary bonus payment as a
payment made to an executive officer of
a banking organization (as defined
below) that meets the following
conditions: The banking organization
retains discretion as to the fact of the
payment and as to the amount of the
payment until the payment is awarded
to the executive officer; the amount paid
is determined by the banking
organization without prior promise to,
or agreement with, the executive officer;
and the executive officer has no
contractual right, express or implied, to
the bonus payment.
The agencies received a number of
comments on the proposed definition of
discretionary bonus payments to
executive officers. One commenter
expressed concern that the proposed
definition of discretionary bonus
payment may not be effective unless the
agencies provided clarification as to the
type of payments covered, as well as the
timing of such payments. This
commenter asked whether the proposed
rule would prohibit the establishment of
a pre-funded bonus pool with
mandatory distributions and sought
clarification as to whether non-cash
compensation payments, such as stock
options, would be considered a
discretionary bonus payment.
The interim final rule’s definition of
discretionary bonus payment is
unchanged from the proposal. The FDIC
notes that if an FDIC-supervised
institution prefunds a pool for bonuses
payable under a contract, the bonus
pool is not discretionary and, therefore,
is not subject to the capital conservation
buffer limitations. In addition, the
definition of discretionary bonus
payment does not include non-cash
compensation payments that do not
affect capital or earnings such as, in
some cases, stock options.
31 See
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Commenters representing community
banking organizations maintained that
the proposed restrictions on
discretionary bonus payments would
disproportionately impact such
institutions’ ability to attract and retain
qualified employees. One commenter
suggested revising the proposed rule so
that a banking organization that fails to
satisfy the capital conservation buffer
would be restricted from making a
discretionary bonus payment only to the
extent it exceeds 15 percent of the
employee’s salary, asserting that this
would prevent excessive bonus
payments while allowing community
banking organizations flexibility to
compensate key employees. The interim
final rule does not incorporate this
suggestion. The FDIC notes that the
potential limitations and restrictions
under the capital conservation buffer
framework do not automatically
translate into a prohibition on
discretionary bonus payments. Instead,
the overall dollar amount of dividends
and bonuses to executive officers is
capped based on how close the banking
organization’s regulatory capital ratios
are to its minimum capital ratios and on
the earnings of the banking organization
that are available for distribution. This
approach provides appropriate
incentives for capital conservation
while preserving flexibility for
institutions to decide how to allocate
income available for distribution
between discretionary bonus payments
and other distributions.
The proposal defined executive
officer as a person who holds the title
or, without regard to title, salary, or
compensation, performs the function of
one or more of the following positions:
President, chief executive officer,
executive chairman, chief operating
officer, chief financial officer, chief
investment officer, chief legal officer,
chief lending officer, chief risk officer,
or head of a major business line, and
other staff that the board of directors of
the banking organization deems to have
equivalent responsibility.32
Commenters generally supported a
more restrictive definition of executive
officer, arguing that the definition of
executive officer should be no broader
than the definition under the Federal
Reserve’s Regulation O,33 which
governs any extension of credit between
a member bank and an executive officer,
director, or principal shareholder. Some
commenters, however, favored a more
expansive definition of executive
officer, with one commenter supporting
32 See 76 FR 21170 (April 14, 2011) for a
comparable definition of ‘‘executive officer.’’
33 See 12 CFR part 215.
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the inclusion of directors of the banking
organization or directors of any of the
banking organization’s affiliates, any
other person in control of the banking
organization or the banking
organizations’ affiliates, and any person
in control of a major business line. In
accordance with the FDIC’s objective to
include those individuals within an
FDIC-supervised institution with the
greatest responsibility for the
organization’s financial condition and
risk exposure, the interim final rule
maintains the definition of executive
officer as proposed.
Under the proposal, advanced
approaches banking organizations
would have calculated their capital
conservation buffer (and any applicable
countercyclical capital buffer amount)
using their advanced approaches total
risk-weighted assets. Several
commenters supported this aspect of the
proposal, and one stated that the
methodologies for calculating riskweighted assets under the advanced
approaches rule would more effectively
capture the individual risk profiles of
such banking organizations, asserting
further that advanced approaches
banking organizations would face a
competitive disadvantage relative to
foreign banking organizations if they
were required to use standardized total
risk-weighted assets to determine
compliance with the capital
conservation buffer. In contrast, another
commenter suggested that advanced
approaches banking organizations be
allowed to use the advanced approaches
methodologies as the basis for
calculating the capital conservation
buffer only when it would result in a
more conservative outcome than under
the standardized approach in order to
maintain competitive equity
domestically. Another commenter
expressed concerns that the capital
conservation buffer is based only on
risk-weighted assets and recommended
additional application of a capital
conservation buffer to the leverage ratio
to avoid regulatory arbitrage
opportunities and to accomplish the
agencies’ stated objective of ensuring
that banking organizations have
sufficient capital to absorb losses.
The interim final rule requires that
advanced approaches FDIC-supervised
institutions that have completed the
parallel run process and that have
received notification from the FDIC
supervisor pursuant to section 121(d) of
subpart E use their risk-based capital
ratios under section 10 of the interim
final rule (that is, the lesser of the
standardized and the advanced
approaches ratios) as the basis for
calculating their capital conservation
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buffer (and any applicable
countercyclical capital buffer). The
FDIC believes such an approach is
appropriate because it is consistent with
how advanced approaches FDICsupervised institutions compute their
minimum risk-based capital ratios.
Many commenters discussed the
interplay between the proposed capital
conservation buffer and the PCA
framework. Some commenters
encouraged the agencies to reset the
buffer requirement to two percent of
total risk-weighted assets in order to
align it with the margin between the
‘‘adequately-capitalized’’ category and
the ‘‘well-capitalized’’ category under
the PCA framework. Similarly, some
commenters characterized the proposal
as confusing because a banking
organization could be considered well
capitalized for PCA purposes, but at the
same time fail to maintain a sufficient
capital conservation buffer and be
subject to restrictions on capital
distributions and discretionary bonus
payments. These commenters
encouraged the agencies to remove the
capital conservation buffer for purposes
of the interim final rule, and instead use
their existing authority to impose
restrictions on dividends and
discretionary bonus payments on a caseby-case basis through formal
enforcement actions. Several
commenters stated that compliance with
a capital conservation buffer that
operates outside the traditional PCA
framework adds complexity to the
interim final rule, and suggested
increasing minimum capital
requirements if the agencies determine
they are currently insufficient.
Specifically, one commenter encouraged
the agencies to increase the minimum
total risk-based capital requirement to
10.5 percent and remove the capital
conservation buffer from the rule.
The capital conservation buffer has
been designed to give banking
organizations the flexibility to use the
buffer while still being well capitalized.
Banking organizations that maintain
their risk-based capital ratios at least 50
basis points above the well capitalized
PCA levels will not be subject to any
restrictions imposed by the capital
conservation buffer, as applicable. As
losses begin to accrue or a banking
organization’s risk-weighted assets
begin to grow such that the capital ratios
of a banking organization are below the
capital conservation buffer but above
the well capitalized thresholds, the
incremental limitations on distributions
are unlikely to affect planned capital
distributions or discretionary bonus
payments but may provide a check on
rapid expansion or other activities that
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would weaken the organization’s capital
position.
Under the interim final rule, the
maximum payout ratio is the percentage
of eligible retained income that an FDICsupervised institution is allowed to pay
out in the form of distributions and
discretionary bonus payments, each as
defined under the rule, during the
current calendar quarter. The maximum
payout ratio is determined by the FDICsupervised institution’s capital
conservation buffer as calculated as of
the last day of the previous calendar
quarter.
An FDIC-supervised institution’s
capital conservation buffer is the lowest
of the following ratios: (i) The FDICsupervised institution’s common equity
tier 1 capital ratio minus its minimum
common equity tier 1 capital ratio; (ii)
the FDIC-supervised institution’s tier 1
capital ratio minus its minimum tier 1
capital ratio; and (iii) the FDICsupervised institution’s total capital
ratio minus its minimum total capital
ratio. If the FDIC-supervised
institution’s common equity tier 1, tier
1 or total capital ratio is less than or
equal to its minimum common equity
tier 1, tier 1 or total capital ratio,
respectively, the FDIC-supervised
institution’s capital conservation buffer
is zero.
The mechanics of the capital
conservation buffer under the interim
final rule are unchanged from the
proposal. An FDIC-supervised
institution’s maximum payout amount
for the current calendar quarter is equal
to the FDIC-supervised institution’s
eligible retained income, multiplied by
the applicable maximum payout ratio,
in accordance with Table 1. An FDICsupervised institution with a capital
conservation buffer that is greater than
2.5 percent (plus, for an advanced
approaches FDIC-supervised institution,
100 percent of any applicable
countercyclical capital buffer) is not
subject to a maximum payout amount as
a result of the application of this
provision. However, an FDIC-supervised
institution may otherwise be subject to
limitations on capital distributions as a
result of supervisory actions or other
laws or regulations.34
Table 1 illustrates the relationship
between the capital conservation buffer
and the maximum payout ratio. The
maximum dollar amount that an FDICsupervised institution is permitted to
pay out in the form of distributions or
discretionary bonus payments during
34 See, e.g., 1831o(d)(1), 12 CFR 303.241, and 12
CFR part 324, Subpart H (state nonmember banks
and state savings associations as of January 1, 2014
for advanced approaches banks and as of January
1, 2015 for all other organizations).
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the current calendar quarter is equal to
the maximum payout ratio multiplied
by the FDIC-supervised institution’s
eligible retained income. The
calculation of the maximum payout
amount is made as of the last day of the
previous calendar quarter and any
resulting restrictions apply during the
current calendar quarter.
TABLE 1—CAPITAL CONSERVATION
BUFFER AND MAXIMUM PAYOUT
RATIO 35
Capital conservation buffer
(as a percentage of standardized or advanced total riskweighted assets, as applicable)
Maximum
payout ratio
(as a percentage of eligible
retained income)
Greater than 2.5 percent .......
No payout
ratio limitation applies.
60 percent.
Less than or equal to 2.5
percent, and greater than
1.875 percent.
Less than or equal to 1.875
percent, and greater than
1.25 percent.
Less than or equal to 1.25
percent, and greater than
0.625 percent.
Less than or equal to 0.625
percent.
40 percent.
20 percent.
0 percent.
Table 1 illustrates that the capital
conservation buffer requirements are
divided into equal quartiles, each
associated with increasingly stringent
limitations on distributions and
discretionary bonus payments to
executive officers as the capital
conservation buffer approaches zero. As
described in the next section, each
quartile expands proportionately for
advanced approaches FDIC-supervised
institutions when the countercyclical
capital buffer amount is greater than
zero. In a scenario where an FDICsupervised institution’s risk-based
capital ratios fall below its minimum
risk-based capital ratios plus 2.5 percent
of total risk-weighted assets, the
maximum payout ratio also would
decline. An FDIC-supervised institution
that becomes subject to a maximum
payout ratio remains subject to
restrictions on capital distributions and
certain discretionary bonus payments
until it is able to build up its capital
conservation buffer through retained
earnings, raising additional capital, or
reducing its risk-weighted assets. In
addition, as a general matter, an FDICsupervised institution cannot make
35 Calculations in this table are based on the
assumption that the countercyclical capital buffer
amount is zero.
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55357
distributions or certain discretionary
bonus payments during the current
calendar quarter if the FDIC-supervised
institution’s eligible retained income is
negative and its capital conservation
buffer was less than 2.5 percent as of the
end of the previous quarter.
Compliance with the capital
conservation buffer is determined prior
to any distribution or discretionary
bonus payment. Therefore, an FDICsupervised institution with a capital
buffer of more than 2.5 percent is not
subject to any restrictions on
distributions or discretionary bonus
payments even if such distribution or
payment would result in a capital buffer
of less than or equal to 2.5 percent in
the current calendar quarter. However,
to remain free of restrictions for
purposes of any subsequent quarter, the
FDIC-supervised institution must
restore capital to increase the buffer to
more than 2.5 percent prior to any
distribution or discretionary bonus
payment in any subsequent quarter.
In the proposal, the agencies solicited
comment on the impact, if any, of
prohibiting a banking organization that
is subject to a maximum payout ratio of
zero percent from making a penny
dividend to common stockholders. One
commenter stated that such banking
organizations should be permitted to
pay a penny dividend on their common
stock notwithstanding the limitations
imposed by the capital conservation
buffer. This commenter maintained that
the inability to pay any dividend on
common stock could make it more
difficult to attract equity investors such
as pension funds that often are required
to invest only in institutions that pay a
quarterly dividend. While the FDIC did
not incorporate a blanket exemption for
penny dividends on common stock,
under the interim final rule, as under
the proposal, it may permit an FDICsupervised institution to make a
distribution or discretionary bonus
payment if it determines that such
distribution or payment would not be
contrary to the purpose of the capital
conservation buffer or the safety and
soundness of the organization. In
making such determinations, the FDIC
would consider the nature of and
circumstances giving rise to the request.
E. Countercyclical Capital Buffer
The proposed rule introduced a
countercyclical capital buffer applicable
to advanced approaches banking
organizations to augment the capital
conservation buffer during periods of
excessive credit growth. Under the
proposed rule, the countercyclical
capital buffer would have required
advanced approaches banking
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organizations to hold additional
common equity tier 1 capital during
specific, agency-determined periods in
order to avoid limitations on
distributions and discretionary bonus
payments. The agencies requested
comment on the countercyclical capital
buffer and, specifically, on any factors
that should be considered for purposes
of determining whether to activate it.
One commenter encouraged the
agencies to consider readily available
indicators of economic growth,
employment levels, and financial sector
profits. This commenter stated generally
that the agencies should activate the
countercyclical capital buffer during
periods of general economic growth or
high financial sector profits, instead of
reserving it only for periods of
‘‘excessive credit growth.’’
Other commenters did not support
using the countercyclical capital buffer
as a macroeconomic tool. One
commenter encouraged the agencies not
to include the countercyclical capital
buffer in the interim final rule and,
instead, rely on the Federal Reserve’s
longstanding authority over monetary
policy to mitigate excessive credit
growth and potential asset bubbles.
Another commenter questioned the
buffer’s effectiveness and encouraged
the agencies to conduct a QIS prior to
its implementation. One commenter
recommended expanding the
applicability of the proposed
countercyclical capital buffer on a caseby-case basis to institutions with total
consolidated assets between $50 and
$250 billion. Another commenter,
however, supported the application of
the countercyclical capital buffer only to
institutions with total consolidated
assets above $250 billion.
The Dodd-Frank Act requires the
agencies to consider the use of
countercyclical aspects of capital
regulation, and the countercyclical
capital buffer is an explicitly
countercyclical element of capital
regulation.36 The FDIC notes that
implementation of the countercyclical
capital buffer for advanced approaches
FDIC-supervised institutions is an
important part of the Basel III
framework, which aims to enhance the
resilience of the banking system and
reduce systemic vulnerabilities. The
FDIC believes that the countercyclical
capital buffer is most appropriately
applied only to advanced approaches
FDIC-supervised institutions because,
generally, such organizations are more
interconnected with other financial
institutions. Therefore, the marginal
benefits to financial stability from a
countercyclical capital buffer function
should be greater with respect to such
institutions. Application of the
countercyclical capital buffer only to
advanced approaches FDIC-supervised
institutions also reflects the fact that
making cyclical adjustments to capital
requirements may produce smaller
financial stability benefits and
potentially higher marginal costs for
smaller FDIC-supervised institutions.
The countercyclical capital buffer is
designed to take into account the macrofinancial environment in which FDICsupervised institutions function and to
protect the banking system from the
systemic vulnerabilities that may buildup during periods of excessive credit
growth, which may potentially unwind
in a disorderly way, causing disruptions
to financial institutions and ultimately
economic activity.
The countercyclical capital buffer
aims to protect the banking system and
reduce systemic vulnerabilities in two
ways. First, the accumulation of a
capital buffer during an expansionary
phase could increase the resilience of
the banking system to declines in asset
prices and consequent losses that may
occur when the credit conditions
weaken. Specifically, when the credit
cycle turns following a period of
excessive credit growth, accumulated
capital buffers act to absorb the abovenormal losses that an FDIC-supervised
institution likely would face.
Consequently, even after these losses are
realized, FDIC-supervised institutions
would remain healthy and able to access
funding, meet obligations, and continue
to serve as credit intermediaries.
Second, a countercyclical capital buffer
also may reduce systemic vulnerabilities
and protect the banking system by
mitigating excessive credit growth and
increases in asset prices that are not
supported by fundamental factors. By
increasing the amount of capital
required for further credit extensions, a
countercyclical capital buffer may limit
excessive credit.37 Thus, the FDIC
believes that the countercyclical capital
buffer is an appropriate macroeconomic
tool and is including it in the interim
final rule. One commenter expressed
concern that the proposed rule would
not require the agencies to activate the
countercyclical capital buffer pursuant
to a joint, interagency determination.
This commenter encouraged the
36 Section 616(a), (b), and (c) of the Dodd-Frank
Act, codified at 12 U.S.C. 1844(b), 1464a(g)(1), and
3907(a)(1).
.
37 The operation of the countercyclical capital
buffer is also consistent with sections 616(a), (b),
and (c) of the Dodd-Frank Act, codified at 12 U.S.C.
1844(b), 1464a(g)(1), and 3907(a)(1).
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agencies to adopt an interagency process
for activating the buffer for purposes of
the interim final rule. As discussed in
the Basel III NPR, the agencies
anticipate making such determinations
jointly. Because the countercyclical
capital buffer amount would be linked
to the condition of the overall U.S.
financial system and not the
characteristics of an individual banking
organization, the agencies expect that
the countercyclical capital buffer
amount would be the same at the
depository institution and holding
company levels. The agencies solicited
comment on the appropriateness of the
proposed 12-month prior notification
period for the countercyclical capital
buffer amount. One commenter
expressed concern regarding the
potential for the agencies to activate the
countercyclical capital buffer without
providing banking organizations
sufficient notice, and specifically
requested the implementation of a prior
notification requirement of not less than
12 months for purposes of the interim
final rule.
In general, to provide banking
organizations with sufficient time to
adjust to any changes to the
countercyclical capital buffer under the
interim final rule, the agencies expect to
announce an increase in the U.S.
countercyclical capital buffer amount
with an effective date at least 12 months
after their announcement. However, if
the agencies determine that a more
immediate implementation is necessary
based on economic conditions, the
agencies may require an earlier effective
date. The agencies will follow the same
procedures in adjusting the
countercyclical capital buffer applicable
for exposures located in foreign
jurisdictions.
For purposes of the interim final rule,
consistent with the proposal, a decrease
in the countercyclical capital buffer
amount will be effective on the day
following announcement of the final
determination or the earliest date
permissible under applicable law or
regulation, whichever is later. In
addition, the countercyclical capital
buffer amount will return to zero
percent 12 months after its effective
date, unless the agencies announce a
decision to maintain the adjusted
countercyclical capital buffer amount or
adjust it again before the expiration of
the 12-month period.
The countercyclical capital buffer
augments the capital conservation buffer
by up to 2.5 percent of an FDICsupervised institution’s total riskweighted assets. Consistent with the
proposal, the interim final rule requires
an advanced approaches FDIC-
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supervised institution to determine its
countercyclical capital buffer amount by
calculating the weighted average of the
countercyclical capital buffer amounts
established for the national jurisdictions
where the FDIC-supervised institution
has private sector credit exposures. The
contributing weight assigned to a
jurisdiction’s countercyclical capital
buffer amount is calculated by dividing
the total risk-weighted assets for the
FDIC-supervised institution’s private
sector credit exposures located in the
jurisdiction by the total risk-weighted
assets for all of the FDIC-supervised
institution’s private sector credit
exposures.
Under the proposed rule, private
sector credit exposure was defined as an
exposure to a company or an individual
that is included in credit risk-weighted
assets, not including an exposure to a
sovereign entity, the Bank for
International Settlements, the European
Central Bank, the European
Commission, the International Monetary
Fund, a multilateral development bank
(MDB), a public sector entity (PSE), or
a Government-sponsored Enterprise
(GSE). While the proposed definition
excluded covered positions with
specific risk under the market risk rule,
the agencies explicitly recognized that
they should be included in the measure
of risk-weighted assets for private-sector
exposures and asked a question
regarding how to incorporate these
positions in the measure of riskweighted assets, particularly for
positions for which an FDIC-supervised
institution uses models to measure
specific risk. The agencies did not
receive comments on this question.
The interim final rule includes
covered positions under the market risk
rule in the definition of private sector
credit exposure. Thus, a private sector
credit exposure is an exposure to a
company or an individual, not
including an exposure to a sovereign
entity, the Bank for International
Settlements, the European Central Bank,
the European Commission, the
International Monetary Fund, an MDB,
a PSE, or a GSE. The interim final rule
is also more specific than the proposal
regarding how to calculate riskweighted assets for private sector credit
exposures, and harmonizes that
calculation with the advanced
approaches FDIC-supervised
institution’s determination of its capital
conservation buffer generally. An
advanced approaches FDIC-supervised
institution is subject to the
countercyclical capital buffer regardless
of whether it has completed the parallel
run process and received notification
from the FDIC pursuant to section
121(d) of the rule. The methodology an
advanced approaches FDIC-supervised
institution must use for determining
risk-weighted assets for private sector
credit exposures must be the
methodology that the FDIC-supervised
institution uses to determine its riskbased capital ratios under section 10 of
the interim final rule. Notwithstanding
this provision, the risk-weighted asset
amount for a private sector credit
exposure that is a covered position is its
specific risk add-on, as determined
under the market risk rule’s
standardized measurement method for
specific risk, multiplied by 12.5. The
FDIC chose this methodology because it
allows the specific risk of a position to
be allocated to the position’s geographic
location in a consistent manner across
FDIC-supervised institutions.
Consistent with the proposal, under
the interim final rule the geographic
location of a private sector credit
exposure (that is not a securitization
exposure) is the national jurisdiction
where the borrower is located (that is,
where the borrower is incorporated,
chartered, or similarly established or, if
it is an individual, where the borrower
55359
resides). If, however, the decision to
issue the private sector credit exposure
is based primarily on the
creditworthiness of a protection
provider, the location of the nonsecuritization exposure is the location of
the protection provider. The location of
a securitization exposure is the location
of the underlying exposures, determined
by reference to the location of the
borrowers on those exposures. If the
underlying exposures are located in
more than one national jurisdiction, the
location of a securitization exposure is
the national jurisdiction where the
underlying exposures with the largest
aggregate unpaid principal balance are
located.
Table 2 illustrates how an advanced
approaches FDIC-supervised institution
calculates its weighted average
countercyclical capital buffer amount.
In the following example, the
countercyclical capital buffer
established in the various jurisdictions
in which the FDIC-supervised
institution has private sector credit
exposures is reported in column A.
Column B contains the FDIC-supervised
institution’s risk-weighted asset
amounts for the private sector credit
exposures in each jurisdiction. Column
C shows the contributing weight for
each countercyclical capital buffer
amount, which is calculated by dividing
each of the rows in column B by the
total for column B. Column D shows the
contributing weight applied to each
countercyclical capital buffer amount,
calculated as the product of the
corresponding contributing weight
(column C) and the countercyclical
capital buffer set by each jurisdiction’s
national supervisor (column A). The
sum of the rows in column D shows the
FDIC-supervised institution’s weighted
average countercyclical capital buffer,
which is 1.4 percent of risk-weighted
assets.
TABLE 2—EXAMPLE OF WEIGHTED AVERAGE BUFFER CALCULATION FOR AN ADVANCED APPROACHES FDIC-SUPERVISED
INSTITUTION
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(A) Countercyclical capital
buffer amount
set by national
supervisor
(percent)
(B) FDIC-supervised institution’s riskweighted assets for private
sector credit
exposures
($b)
(C) Contributing weight
(column B/column B total)
(D) Contributing weight
applied to
each countercyclical capital
buffer amount
(column A *
column C)
Non-U.S. jurisdiction 1 ...................................................................................
Non-U.S. jurisdiction 2 ...................................................................................
U.S. ................................................................................................................
2.0
1.5
1
250
100
500
0.29
0.12
0.59
0.6
0.2
0.6
Total ........................................................................................................
..........................
850
1.00
1.4
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The countercyclical capital buffer
expands an FDIC-supervised
institution’s capital conservation buffer
range for purposes of determining the
FDIC-supervised institution’s maximum
payout ratio. For instance, if an
advanced approaches FDIC-supervised
institution’s countercyclical capital
buffer amount is equal to zero percent
of total risk-weighted assets, the FDICsupervised institution must maintain a
buffer of greater than 2.5 percent of total
risk-weighted assets to avoid restrictions
on its distributions and discretionary
bonus payments. However, if its
countercyclical capital buffer amount is
equal to 2.5 percent of total riskweighted assets, the FDIC-supervised
institution must maintain a buffer of
greater than 5 percent of total riskweighted assets to avoid restrictions on
its distributions and discretionary bonus
payments.
As another example, if the advanced
approaches FDIC-supervised institution
from the example in Table 2 above has
a capital conservation buffer of 2.0
percent, and each of the jurisdictions in
which it has private sector credit
exposures sets its countercyclical
capital buffer amount equal to zero, the
FDIC-supervised institution would be
subject to a maximum payout ratio of 60
percent. If, instead, each country sets its
countercyclical capital buffer amount as
shown in Table 2, resulting in a
countercyclical capital buffer amount of
1.4 percent of total risk-weighted assets,
the FDIC-supervised institution’s capital
conservation buffer ranges would be
expanded as shown in Table 3 below.
As a result, the FDIC-supervised
institution would now be subject to a
stricter 40 percent maximum payout
ratio based on its capital conservation
buffer of 2.0 percent.
TABLE 3—CAPITAL CONSERVATION
BUFFER AND MAXIMUM PAYOUT
RATIO 38
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Capital conservation buffer as
expanded by the countercyclical capital buffer amount
from Table 2
Greater than 3.9 percent (2.5
percent + 100 percent of
the countercyclical capital
buffer of 1.4).
Less than or equal to 3.9
percent, and greater than
2.925 percent (1.875 percent plus 75 percent of the
countercyclical capital buffer of 1.4).
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Maximum
payout ratio
(as a percentage of eligible
retained income)
No payout
ratio limitation applies.
60 percent.
leverage ratio, tier 1 risk-based capital
TABLE 3—CAPITAL CONSERVATION
BUFFER AND MAXIMUM PAYOUT ratio, and the total risk-based capital
ratio for insured depository institutions.
RATIO 38—Continued
Capital conservation buffer as
expanded by the countercyclical capital buffer amount
from Table 2
Less than or equal to 2.925
percent, and greater than
1.95 percent (1.25 percent
plus 50 percent of the
countercyclical capital buffer of 1.4).
Less than or equal to 1.95
percent, and greater than
0.975 percent (.625 percent plus 25 percent of the
countercyclical capital buffer of 1.4).
Less than or equal to 0.975
percent.
Maximum
payout ratio
(as a percentage of eligible
retained income)
40 percent.
20 percent.
0 percent.
The countercyclical capital buffer
amount under the interim final rule for
U.S. credit exposures is initially set to
zero, but it could increase if the
agencies determine that there is
excessive credit in the markets that
could lead to subsequent wide-spread
market failures. Generally, a zero
percent countercyclical capital buffer
amount will reflect an assessment that
economic and financial conditions are
consistent with a period of little or no
excessive ease in credit markets
associated with no material increase in
system-wide credit risk. A 2.5 percent
countercyclical capital buffer amount
will reflect an assessment that financial
markets are experiencing a period of
excessive ease in credit markets
associated with a material increase in
system-wide credit risk.
F. Prompt Corrective Action
Requirements
All insured depository institutions,
regardless of total asset size or foreign
exposure, currently are required to
compute PCA capital levels using the
agencies’ general risk-based capital
rules, as supplemented by the market
risk rule. Section 38 of the Federal
Deposit Insurance Act directs the
federal banking agencies to resolve the
problems of insured depository
institutions at the least cost to the
Deposit Insurance Fund.39 To facilitate
this purpose, the agencies have
established five regulatory capital
categories in the PCA regulations that
include capital thresholds for the
38 Calculations in this table are based on the
assumption that the countercyclical capital buffer
amount is 1.4 percent of risk-weighted assets, per
the example in Table 2.
39 12 U.S.C. 1831o.
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These five PCA categories under section
38 of the Act and the PCA regulations
are: ‘‘well capitalized,’’ ‘‘adequately
capitalized,’’ ‘‘undercapitalized,’’
‘‘significantly undercapitalized,’’ and
‘‘critically undercapitalized.’’ Insured
depository institutions that fail to meet
these capital measures are subject to
increasingly strict limits on their
activities, including their ability to
make capital distributions, pay
management fees, grow their balance
sheet, and take other actions.40 Insured
depository institutions are expected to
be closed within 90 days of becoming
‘‘critically undercapitalized,’’ unless
their primary Federal supervisor takes
such other action as that primary
Federal supervisor determines, with the
concurrence of the FDIC, would better
achieve the purpose of PCA.41
The proposal maintained the structure
of the PCA framework while increasing
some of the thresholds for the PCA
capital categories and adding the
proposed common equity tier 1 capital
ratio. For example, under the proposed
rule, the thresholds for adequately
capitalized FDIC-supervised institutions
would be equal to the minimum capital
requirements. The risk-based capital
ratios for well capitalized FDICsupervised institutions under PCA
would continue to be two percentage
points higher than the ratios for
adequately-capitalized FDIC-supervised
institutions, and the leverage ratio for
well capitalized FDIC-supervised
institutions under PCA would be one
percentage point higher than for
adequately-capitalized FDIC-supervised
institutions. Advanced approaches
FDIC-supervised institutions that are
insured depository institutions also
would be required to satisfy a
supplementary leverage ratio of 3
percent in order to be considered
adequately capitalized. While the
proposed PCA levels do not incorporate
the capital conservation buffer, the PCA
and capital conservation buffer
frameworks would complement each
other to ensure that FDIC-supervised
institutions hold an adequate amount of
common equity tier 1 capital.
The agencies received a number of
comments on the proposed PCA
framework. Several commenters
suggested modifications to the proposed
PCA levels, particularly with respect to
the leverage ratio. For example, a few
commenters encouraged the agencies to
40 12 U.S.C. 1831o(e)–(i). See 12 CFR part 325,
subpart B.
41 12 U.S.C. 1831o(g)(3).
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increase the adequately-capitalized and
well capitalized categories for the
leverage ratio to six percent or more and
eight percent or more, respectively.
According to one commenter, such
thresholds would more closely align
with the actual leverage ratios of many
state-charted depository institutions.
Another commenter expressed
concern regarding the operational
complexity of the proposed PCA
framework in view of the addition of the
common equity tier 1 capital ratio and
the interaction of the PCA framework
and the capital conservation buffer. For
example, under the proposed rule a
banking organization could be well
capitalized for PCA purposes and, at the
same time, be subject to restrictions on
dividends and bonus payments. Other
banking organizations expressed
concern that the proposed PCA levels
would adversely affect their ability to
lend and generate income. This,
according to a commenter, also would
reduce net income and return-on-equity.
The FDIC believes the capital
conservation buffer complements the
PCA framework—the former works to
keep FDIC-supervised institutions above
the minimum capital ratios, whereas the
latter imposes increasingly stringent
consequences on depository
institutions, particularly as they fall
below the minimum capital ratios.
Because the capital conservation buffer
is designed to absorb losses in stressful
periods, the FDIC believes it is
appropriate for a depository institution
to be able to use some of its capital
conservation buffer without being
considered less than well capitalized for
PCA purposes.
Consistent with the proposal, the
interim final rule augments the PCA
capital categories by introducing a
common equity tier 1 capital measure
for four of the five PCA categories
(excluding the critically
undercapitalized PCA category).42 In
addition, the interim final rule revises
the three current risk-based capital
measures for four of the five PCA
categories to reflect the interim final
rule’s changes to the minimum riskbased capital ratios, as provided in
revisions to the FDIC’s PCA regulations.
All FDIC-supervised institutions will
remain subject to leverage measure
thresholds using the current leverage
ratio in the form of tier 1 capital to
average total consolidated assets. In
addition, the interim final rule amends
the PCA leverage measure for advanced
approaches depository institutions to
include the supplementary leverage
ratio that explicitly applies to the
‘‘adequately capitalized’’ and
‘‘undercapitalized’’ capital categories.
All insured depository institutions
must comply with the revised PCA
thresholds beginning on January 1,
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2015. Consistent with transition
provisions in the proposed rules, the
supplementary leverage measure for
advanced approaches FDIC-supervised
institutions that are insured depository
institutions becomes effective on
January 1, 2018. Changes to the
definitions of the individual capital
components that are used to calculate
the relevant capital measures under
PCA are governed by the transition
arrangements discussed in section VIII.3
below. Thus, the changes to these
definitions, including any deductions
from or adjustments to regulatory
capital, automatically flow through to
the definitions in the PCA framework.
Table 4 sets forth the risk-based
capital and leverage ratio thresholds
under the interim final rule for each of
the PCA capital categories for all
insured depository institutions. For
each PCA category except critically
undercapitalized, an insured depository
institution must satisfy a minimum
common equity tier 1 capital ratio, in
addition to a minimum tier 1 risk-based
capital ratio, total risk-based capital
ratio, and leverage ratio. In addition to
the aforementioned requirements,
advanced approaches FDIC-supervised
institutions that are insured depository
institutions are also subject to a
supplementary leverage ratio.
TABLE 4—PCA LEVELS FOR ALL INSURED DEPOSITORY INSTITUTIONS
PCA category
Total risk-based
Capital (RBC)
measure (total
RBC ratio)
(percent)
Tier 1 RBC
measure (tier 1
RBC ratio)
(percent)
Common equity
tier 1 RBC
measure
(common
equity tier 1 RBC
ratio)
(percent)
Well capitalized ......
≥10 ......................
≥8 ........................
Adequately-capitalized.
Undercapitalized ....
Significantly undercapitalized.
≥8 ........................
<8 ........................
<6 ........................
Critically undercapitalized.
Leverage measure
Leverage ratio
(percent)
Supplementary
leverage ratio
(percent)*
≥6.5 .....................
≥5 ........................
Not applicable .....
≥6 ........................
≥4.5 .....................
≥4 ........................
>3.0 .....................
Unchanged from
current rule.*
(*).
<6 ........................
<4 ........................
<4.5 .....................
<3 ........................
<4 ........................
<3 ........................
<3.00 ...................
Not applicable .....
(*).
(*).
Not applicable .....
(*).
Tangible Equity (defined as tier 1 capital plus non-tier 1 perpetual preferred
stock) to Total Assets ≤2
PCA requirements
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* The supplementary leverage ratio as a PCA requirement applies only to advanced approaches FDIC-supervised institutions that are insured
depository institutions. The supplementary leverage ratio also applies to advanced approaches bank holding companies, although not in the form
of a PCA requirement.
To be well capitalized for purposes of
the interim final rule, an insured
depository institution must maintain a
total risk-based capital ratio of 10
percent or more; a tier 1 capital ratio of
8 percent or more; a common equity tier
1 capital ratio of 6.5 percent or more;
42 12
and a leverage ratio of 5 percent or
more. An adequately-capitalized
depository institution must maintain a
total risk-based capital ratio of 8 percent
or more; a tier 1 capital ratio of 6
percent or more; a common equity tier
1 capital ratio of 4.5 percent or more;
and a leverage ratio of 4 percent or
more.
An insured depository institution is
undercapitalized under the interim final
rule if its total capital ratio is less than
8 percent, if its tier 1 capital ratio is less
than 6 percent, its common equity tier
U.S.C. 1831o(c)(1)(B)(i).
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1 capital ratio is less than 4.5 percent,
or its leverage ratio is less than 4
percent. If an institution’s tier 1 capital
ratio is less than 4 percent, or its
common equity tier 1 capital ratio is less
than 3 percent, it would be considered
significantly undercapitalized. The
other numerical capital ratio thresholds
for being significantly undercapitalized
remain unchanged from the current
rules.43
The determination of whether an
insured depository institution is
critically undercapitalized for PCA
purposes is based on its ratio of tangible
equity to total assets.44 This is a
statutory requirement within the PCA
framework, and the experience of the
recent financial crisis has confirmed
that tangible equity is of critical
importance in assessing the viability of
an insured depository institution.
Tangible equity for PCA purposes is
currently defined as including core
capital elements, which consist of: (1)
common stockholder’s equity, (2)
qualifying noncumulative perpetual
preferred stock (including related
surplus), and (3) minority interest in the
equity accounts of consolidated
subsidiaries; plus outstanding
cumulative preferred perpetual stock;
minus all intangible assets except
mortgage servicing rights to the extent
permitted in tier 1 capital. The current
PCA definition of tangible equity does
not address the treatment of DTAs in
determining whether an insured
depository institution is critically
undercapitalized.
Consistent with the proposal, the
interim final rule revises the calculation
of the capital measure for the critically
undercapitalized PCA category by
revising the definition of tangible equity
to consist of tier 1 capital, plus
outstanding perpetual preferred stock
(including related surplus) not included
in tier 1 capital. The revised definition
more appropriately aligns the
calculation of tangible equity with the
calculation of tier 1 capital generally for
regulatory capital requirements. Assets
43 Under current PCA standards, in order to
qualify as well-capitalized, an insured depository
institution must not be subject to any written
agreement, order, capital directive, or prompt
corrective action directive issued by its primary
Federal regulator pursuant to section 8 of the
Federal Deposit Insurance Act, the International
Lending Supervision Act of 1983, or section 38 of
the Federal Deposit Insurance Act, or any regulation
thereunder. See 12 CFR 325.103(b)(1)(iv) (state
nonmember banks) and 12 CFR 390.453(b)(1)(iv)
(state savings associations). The interim final rule
does not change this requirement.
44 See 12 U.S.C. 1831o(c)(3)(A) and (B), which for
purposes of the ‘‘critically undercapitalized’’ PCA
category requires the ratio of tangible equity to total
assets to be set at an amount ‘‘not less than 2
percent of total assets’’.
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included in an FDIC-supervised
institution’s equity under GAAP, such
as DTAs, are included in tangible equity
only to the extent that they are included
in tier 1 capital. The FDIC believes this
modification promotes consistency and
provides for clearer boundaries across
and between the various PCA categories.
G. Supervisory Assessment of Overall
Capital Adequacy
Capital helps to ensure that
individual banking organizations can
continue to serve as credit
intermediaries even during times of
stress, thereby promoting the safety and
soundness of the overall U.S. banking
system. The FDIC’s general risk-based
capital rules indicate that the capital
requirements are minimum standards
generally based on broad credit-risk
considerations.45 The risk-based capital
ratios under these rules do not explicitly
take account of the quality of individual
asset portfolios or the range of other
types of risk to which FDIC-supervised
institutions may be exposed, such as
interest-rate, liquidity, market, or
operational risks.46
An FDIC-supervised institution is
generally expected to have internal
processes for assessing capital adequacy
that reflect a full understanding of its
risks and to ensure that it holds capital
corresponding to those risks to maintain
overall capital adequacy.47 The nature
of such capital adequacy assessments
should be commensurate with FDICsupervised institutions’ size,
complexity, and risk-profile. Consistent
with longstanding practice, supervisory
assessment of capital adequacy will take
account of whether an FDIC-supervised
institution plans appropriately to
maintain an adequate level of capital
given its activities and risk profile, as
well as risks and other factors that can
affect an FDIC-supervised institution’s
financial condition, including, for
example, the level and severity of
problem assets and its exposure to
operational and interest rate risk, and
significant asset concentrations. For this
reason, a supervisory assessment of
capital adequacy may differ
significantly from conclusions that
45 See 12 CFR 325.3(a) (state nonmember banks)
and 12 CFR 390.463 (state savings associations).
46 The risk-based capital ratios of an FDICsupervised institution subject to the market risk
rule do include capital requirements for the market
risk of covered positions, and the risk-based capital
ratios calculated using advanced approaches total
risk-weighted assets for an advanced approaches
FDIC-supervised institution that has completed the
parallel run process and received notification from
the FDIC pursuant to section 324.121(d) do include
a capital requirement for operational risks.
47 The Basel framework incorporates similar
requirements under Pillar 2 of Basel II.
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might be drawn solely from the level of
an FDIC-supervised institution’s
regulatory capital ratios.
In light of these considerations, as a
prudential matter, an FDIC-supervised
institution is generally expected to
operate with capital positions well
above the minimum risk-based ratios
and to hold capital commensurate with
the level and nature of the risks to
which it is exposed, which may entail
holding capital significantly above the
minimum requirements. For example,
FDIC-supervised institutions
contemplating significant expansion
proposals are expected to maintain
strong capital levels substantially above
the minimum ratios and should not
allow significant diminution of financial
strength below these strong levels to
fund their expansion plans. FDICsupervised institutions with high levels
of risk are also expected to operate even
further above minimum standards. In
addition to evaluating the
appropriateness of an FDIC-supervised
institution’s capital level given its
overall risk profile, the supervisory
assessment takes into account the
quality and trends in an FDICsupervised institution’s capital
composition, including the share of
common and non-common-equity
capital elements.
Some commenters stated that they
manage their capital so that they operate
with a buffer over the minimum and
that examiners expect such a buffer.
These commenters expressed concern
that examiners will expect even higher
capital levels, such as a buffer in
addition to the new higher minimums
and capital conservation buffer (and
countercyclical capital buffer, if
applicable). Consistent with the
longstanding approach employed by the
FDIC in its supervision of FDICsupervised institutions, section 10(d) of
the interim final rule maintains and
reinforces supervisory expectations by
requiring that an FDIC-supervised
institution maintain capital
commensurate with the level and nature
of all risks to which it is exposed and
that an FDIC-supervised institution have
a process for assessing its overall capital
adequacy in relation to its risk profile,
as well as a comprehensive strategy for
maintaining an appropriate level of
capital.
The supervisory evaluation of an
FDIC-supervised institution’s capital
adequacy, including compliance with
section 10(d), may include such factors
as whether the FDIC-supervised
institution is newly chartered, entering
new activities, or introducing new
products. The assessment also would
consider whether an FDIC-supervised
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institution is receiving special
supervisory attention, has or is expected
to have losses resulting in capital
inadequacy, has significant exposure
due to risks from concentrations in
credit or nontraditional activities, or has
significant exposure to interest rate risk,
operational risk, or could be adversely
affected by the activities or condition of
an FDIC-supervised institution’s
holding company or other affiliates.
Supervisors also evaluate the
comprehensiveness and effectiveness of
an FDIC-supervised institution’s capital
planning in light of its activities and
capital levels. An effective capital
planning process involves an
assessment of the risks to which an
FDIC-supervised institution is exposed
and its processes for managing and
mitigating those risks, an evaluation of
its capital adequacy relative to its risks,
and consideration of the potential
impact on its earnings and capital base
from current and prospective economic
conditions. While the elements of
supervisory review of capital adequacy
would be similar across FDICsupervised institutions, evaluation of
the level of sophistication of an
individual FDIC-supervised institution’s
capital adequacy process would be
commensurate with the FDICsupervised institution’s size,
sophistication, and risk profile, similar
to the current supervisory practice.
associations applies the advanced
approaches rule, the FDIC is defining
‘‘tangible capital’’ as the amount of tier
1 capital plus the amount of outstanding
perpetual preferred stock (including
related surplus) not included in tier 1
capital.50 This definition is analogous to
the definition of tangible capital
adopted under the interim final rule for
purposes of the PCA framework. The
FDIC believes that this approach will
reduce implementation burden
associated with separate measures of
tangible capital and is consistent with
the purposes of HOLA and PCA.
The FDIC notes that for purposes of
the interim final rule, as of January 1,
2015, the term ‘‘total adjusted assets’’ in
the definition of ‘‘state savings
associations tangible capital ratio’’ has
been replaced with the term ‘‘total
assets.’’ The term total assets has the
same definition as provided in the
FDIC’s PCA rules.51 As a result of this
change, which should further reduce
implementation burden, state savings
associations will no longer calculate the
tangible equity ratio using period-end
total assets.
H. Tangible Capital Requirement for
State Savings Associations
State savings associations currently
are required to maintain tangible capital
in an amount not less than 1.5 percent
of total assets.48 This statutory
requirement is implemented under the
FDIC’s current capital rules applicable
to state savings associations.49 For
purposes of the Basel III NPR, the FDIC
also proposed to include a tangible
capital requirement for state savings
associations. The FDIC received no
comments on this aspect of the
proposal.
Concerning state savings associations,
the FDIC does not believe that a unique
regulatory definition of ‘‘tangible
capital’’ is necessary for purposes of
implementing HOLA. Accordingly, for
purposes of the interim final rule, as of
January 1, 2014 or January 1, 2015
depending on whether the state savings
Under the proposed rule, common
equity tier 1 capital was defined as the
sum of a banking organization’s
outstanding common equity tier 1
capital instruments that satisfy the
criteria set forth in section 20(b) of the
proposal, related surplus (net of treasury
stock), retained earnings, AOCI, and
common equity tier 1 minority interest
subject to certain limitations, minus
regulatory adjustments and deductions.
The proposed rule set forth a list of
criteria that an instrument would be
required to meet to be included in
common equity tier 1 capital. The
proposed criteria were designed to
ensure that common equity tier 1 capital
instruments do not possess features that
would cause a banking organization’s
condition to further weaken during
periods of economic and market stress.
In the proposals, the agencies indicated
that they believe most existing common
stock instruments issued by U.S.
banking organizations already would
satisfy the proposed criteria.
48 Tangible capital is defined in section 5(t)(9)(B)
of HOLA to mean ‘‘core capital minus any
intangible assets (as intangible assets are defined by
the OCC for national banks).’’ 12 U.S.C.
1464(t)(9)(B). Core capital means ‘‘core capital as
defined by the OCC for national banks, less
unidentifiable intangible assets’’, unless the OCC
prescribes a more stringent definition. 12 U.S.C.
1464(t)(9)(A).
49 12 CFR 390.468.
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V. Definition of Capital
A. Capital Components and Eligibility
Criteria for Regulatory Capital
Instruments
1. Common Equity Tier 1 Capital
50 Until January 1, 2014 or January 1, 2015
depending on whether the state savings association
applies the advanced approaches rule, the state
savings association shall determine its tangible
capital ratio as provided under 12 CFR 390.468.
51 See 12 CFR 324.401(g).
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The proposed criteria also applied to
instruments issued by banking
organizations such as mutual banking
organizations where ownership of the
organization is not freely transferable or
evidenced by certificates of ownership
or stock. For these entities, the proposal
provided that instruments issued by
such organizations would be considered
common equity tier 1 capital if they are
fully equivalent to common stock
instruments in terms of their
subordination and availability to absorb
losses, and do not possess features that
could cause the condition of the
organization to weaken as a going
concern during periods of market stress.
The agencies noted in the proposal
that stockholders’ voting rights
generally are a valuable corporate
governance tool that permits parties
with an economic interest to participate
in the decision-making process through
votes on establishing corporate
objectives and policy, and in electing
the banking organization’s board of
directors. Therefore, the agencies
believe that voting common
stockholders’ equity (net of the
adjustments to and deductions from
common equity tier 1 capital proposed
under the rule) should be the dominant
element within common equity tier 1
capital. The proposal also provided that
to the extent that a banking organization
issues non-voting common stock or
common stock with limited voting
rights, the underlying stock must be
identical to those underlying the
banking organization’s voting common
stock in all respects except for any
limitations on voting rights.
To ensure that a banking
organization’s common equity tier 1
capital would be available to absorb
losses as they occur, the proposed rule
would have required common equity
tier 1 capital instruments issued by a
banking organization to satisfy the
following criteria:
(1) The instrument is paid-in, issued
directly by the banking organization,
and represents the most subordinated
claim in a receivership, insolvency,
liquidation, or similar proceeding of the
banking organization.
(2) The holder of the instrument is
entitled to a claim on the residual assets
of the banking organization that is
proportional with the holder’s share of
the banking organization’s issued
capital after all senior claims have been
satisfied in a receivership, insolvency,
liquidation, or similar proceeding. That
is, the holder has an unlimited and
variable claim, not a fixed or capped
claim.
(3) The instrument has no maturity
date, can only be redeemed via
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discretionary repurchases with the prior
approval of the banking organization’s
primary Federal supervisor, and does
not contain any term or feature that
creates an incentive to redeem.
(4) The banking organization did not
create at issuance of the instrument,
through any action or communication,
an expectation that it will buy back,
cancel, or redeem the instrument, and
the instrument does not include any
term or feature that might give rise to
such an expectation.
(5) Any cash dividend payments on
the instrument are paid out of the
banking organization’s net income and
retained earnings and are not subject to
a limit imposed by the contractual terms
governing the instrument.
(6) The banking organization has full
discretion at all times to refrain from
paying any dividends and making any
other capital distributions on the
instrument without triggering an event
of default, a requirement to make a
payment-in-kind, or an imposition of
any other restrictions on the banking
organization.
(7) Dividend payments and any other
capital distributions on the instrument
may be paid only after all legal and
contractual obligations of the banking
organization have been satisfied,
including payments due on more senior
claims.
(8) The holders of the instrument bear
losses as they occur equally,
proportionately, and simultaneously
with the holders of all other common
stock instruments before any losses are
borne by holders of claims on the
banking organization with greater
priority in a receivership, insolvency,
liquidation, or similar proceeding.
(9) The paid-in amount is classified as
equity under GAAP.
(10) The banking organization, or an
entity that the banking organization
controls, did not purchase or directly or
indirectly fund the purchase of the
instrument.
(11) The instrument is not secured,
not covered by a guarantee of the
banking organization or of an affiliate of
the banking organization, and is not
subject to any other arrangement that
legally or economically enhances the
seniority of the instrument.
(12) The instrument has been issued
in accordance with applicable laws and
regulations. In most cases, the agencies
understand that the issuance of these
instruments would require the approval
of the board of directors of the banking
organization or, where applicable, of the
banking organization’s shareholders or
of other persons duly authorized by the
banking organization’s shareholders.
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(13) The instrument is reported on the
banking organization’s regulatory
financial statements separately from
other capital instruments.
The agencies requested comment on
the proposed criteria for inclusion in
common equity tier 1, and specifically
on whether any of the criteria would be
problematic, given the main
characteristics of existing outstanding
common stock instruments.
A substantial number of comments
addressed the criteria for common
equity tier 1 capital. Generally,
commenters stated that the proposed
criteria could prevent some instruments
currently included in tier 1 capital from
being included in the new common
equity tier 1 capital measure.
Commenters stated that this could
create complicated and unnecessary
burden for banking organizations that
either would have to raise capital to
meet the common equity tier 1 capital
requirement or shrink their balance
sheets by selling off or winding down
assets and exposures. Many commenters
stated that the burden of raising new
capital would have the effect of
reducing lending overall, and that it
would be especially acute for smaller
banking organizations that have limited
access to capital markets.
Many commenters asked the agencies
to clarify several aspects of the proposed
criteria. For instance, a few commenters
asked the agencies to clarify the
proposed requirement that a common
equity tier 1 capital instrument be
redeemed only with prior approval by a
banking organization’s primary Federal
supervisor. These commenters asked if
this criterion would require a banking
organization to note this restriction on
the face of a regulatory capital
instrument that it may be redeemed
only with the prior approval of the
banking organization’s primary Federal
supervisor.
The FDIC notes that the requirement
that common equity tier 1 capital
instruments be redeemed only with
prior agency approval is consistent with
the FDIC’s rules and federal law, which
generally provide that an FDICsupervised institution may not reduce
its capital by redeeming capital
instruments without receiving prior
approval from the FDIC.52 The interim
final rule does not obligate the FDICsupervised institution to include this
restriction explicitly in the common
equity tier 1 capital instrument’s
documentation. However, regardless of
whether the instrument documentation
states that its redemption is subject to
52 See 12 CFR 303.241 (state nonmember banks)
and 12 CFR 390.345 (state savings associations).
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FDIC approval, the FDIC-supervised
institution must receive prior approval
before redeeming such instruments. The
FDIC believes that the approval
requirement is appropriate as it
provides for the monitoring of the
strength of an FDIC-supervised
institution’s capital position, and
therefore, have retained the proposed
requirement in the interim final rule.
Several commenters also expressed
concern about the proposed requirement
that dividend payments and any other
distributions on a common equity tier 1
capital instrument may be paid only
after all legal and contractual
obligations of the banking organization
have been satisfied, including payments
due on more senior claims. Commenters
stated that, as proposed, this
requirement could be construed to
prevent a banking organization from
paying a dividend on a common equity
tier 1 capital instrument because of
obligations that have not yet become
due or because of immaterial delays in
paying trade creditors 53 for obligations
incurred in the ordinary course of
business.
The FDIC notes that this criterion
should not prevent an FDIC-supervised
institution from paying a dividend on a
common equity tier 1 capital instrument
where it has incurred operational
obligations in the normal course of
business that are not yet due or that are
subject to minor delays for reasons
unrelated to the financial condition of
the FDIC-supervised institution, such as
delays related to contractual or other
legal disputes.
A number of commenters also
suggested that the proposed criteria
providing that dividend payments may
be paid only out of current and retained
earnings potentially could conflict with
state corporate law, including Delaware
state law. According to these
commenters, Delaware state law permits
a corporation to make dividend
payments out of its capital surplus
account, even when the organization
does not have current or retained
earnings.
The FDIC observes that requiring that
dividends be paid only out of net
income and retained earnings is
consistent with federal law and the
existing regulations applicable to
insured depository institutions. Under
applicable statutes and regulations this
aspect of the proposal did not include
any substantive changes from the
53 Trade creditors, for this purpose, would
include counterparties with whom the banking
organization contracts to procure office space and/
or supplies as well as basic services, such as
building maintenance.
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general risk-based capital rules.54 With
respect to FDIC-supervised institutions,
prior supervisory approval is required to
make a distribution that involves a
reduction or retirement of capital stock.
Under FDIC’s general risk-based capital
rules, a state nonmember bank is
prohibited from paying a dividend that
reduces the amount of its common or
preferred capital stock (which includes
any surplus), or retiring any part of its
capital notes or debentures without
prior approval from the FDIC.
Finally, several commenters
expressed concerns about the potential
impact of the proposed criteria on stock
issued as part of certain employee stock
ownership plans (ESOPs) (as defined
under Employee Retirement Income
Security Act of 1974 55 (ERISA)
regulations at 29 CFR 2550.407d–6).
Under the proposed rule, an instrument
would not be included in common
equity tier 1 capital if the banking
organization creates an expectation that
it will buy back, cancel, or redeem the
instrument, or if the instrument
includes any term or feature that might
give rise to such an expectation.
Additionally, the criteria would prevent
a banking organization from including
in common equity tier 1 capital any
instrument that is subject to any type of
arrangement that legally or
economically enhances the seniority of
the instrument. Commenters noted that
under ERISA, stock that is not publicly
traded and issued as part of an ESOP
must include a ‘‘put option’’ that
requires the company to repurchase the
stock. By exercising the put option, an
employee can redeem the stock
instrument upon termination of
employment. Commenters noted that
this put option clearly creates an
expectation that the instrument will be
redeemed and arguably enhances the
seniority of the instrument. Therefore,
the commenters stated that the put
option could prevent a privately-held
banking organization from including
earned ESOP shares in its common
equity tier 1 capital.
The FDIC does not believe that an
ERISA-mandated put option should
prohibit ESOP shares from being
included in common equity tier 1
capital. Therefore, under the interim
final rule, shares issued under an ESOP
by an FDIC-supervised institution that is
not publicly-traded are exempt from the
criteria that the shares can be redeemed
only via discretionary repurchases and
are not subject to any other arrangement
54 12
U.S.C. 1828(i), 12 CFR 303.241 (state
nonmember banks), and 12 CFR 390.345 (state
savings associations).
55 29 U.S.C. 1002, et seq.
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that legally or economically enhances
their seniority, and that the FDICsupervised institution not create an
expectation that the shares will be
redeemed. In addition to the concerns
described above, because stock held in
an ESOP is awarded by a banking
organization for the retirement benefit of
its employees, some commenters
expressed concern that such stock may
not conform to the criterion prohibiting
a banking organization from directly or
indirectly funding a capital instrument.
Because the FDIC believes that an FDICsupervised institution should have the
flexibility to provide an ESOP as a
benefit for its employees, the interim
final rule provides that ESOP stock does
not violate such criterion. Under the
interim final rule, an FDIC-supervised
institution’s common stock held in trust
for the benefit of employees as part of
an ESOP in accordance with both ERISA
and ERISA-related U.S. tax code
requirements will qualify for inclusion
as common equity tier 1 capital only to
the extent that the instrument is
includable as equity under GAAP and
that it meets all other criteria of section
20(b)(1) of the interim final rule. Stock
instruments held by an ESOP that are
unawarded or unearned by employees
or reported as ‘‘temporary equity’’ under
GAAP (in the case of U.S. Securities and
Exchange Commission (SEC)
registrants), may not be counted as
equity under GAAP and therefore may
not be included in common equity tier
1 capital.
After reviewing the comments
received, the FDIC has decided to
finalize the proposed criteria for
common equity tier 1 capital
instruments, modified as discussed
above. Although it is possible some
currently outstanding common equity
instruments may not meet the common
equity tier 1 capital criteria, the FDIC
believes that most common equity
instruments that are currently eligible
for inclusion in FDIC-supervised
institutions’ tier 1 capital meet the
common equity tier 1 capital criteria,
and have not received information that
would support a different conclusion.
The FDIC therefore believes that most
FDIC-supervised institutions will not be
required to reissue common equity
instruments in order to comply with the
final common equity tier 1 capital
criteria. The final revised criteria for
inclusion in common equity tier 1
capital are set forth in section
324.20(b)(1) of the interim final rule.
2. Additional Tier 1 Capital
Consistent with Basel III, the agencies
proposed that additional tier 1 capital
would equal the sum of: Additional tier
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1 capital instruments that satisfy the
criteria set forth in section 20(c) of the
proposal, related surplus, and any tier 1
minority interest that is not included in
a banking organization’s common equity
tier 1 capital (subject to the proposed
limitations on minority interest), less
applicable regulatory adjustments and
deductions. The agencies proposed the
following criteria for additional tier 1
capital instruments in section 20(c):
(1) The instrument is issued and paidin.
(2) The instrument is subordinated to
depositors, general creditors, and
subordinated debt holders of the
banking organization in a receivership,
insolvency, liquidation, or similar
proceeding.
(3) The instrument is not secured, not
covered by a guarantee of the banking
organization or of an affiliate of the
banking organization, and not subject to
any other arrangement that legally or
economically enhances the seniority of
the instrument.
(4) The instrument has no maturity
date and does not contain a dividend
step-up or any other term or feature that
creates an incentive to redeem.
(5) If callable by its terms, the
instrument may be called by the
banking organization only after a
minimum of five years following
issuance, except that the terms of the
instrument may allow it to be called
earlier than five years upon the
occurrence of a regulatory event (as
defined in the agreement governing the
instrument) that precludes the
instrument from being included in
additional tier 1 capital or a tax event.
In addition:
(i) The banking organization must
receive prior approval from its primary
Federal supervisor to exercise a call
option on the instrument.
(ii) The banking organization does not
create at issuance of the instrument,
through any action or communication,
an expectation that the call option will
be exercised.
(iii) Prior to exercising the call option,
or immediately thereafter, the banking
organization must either:
(A) Replace the instrument to be
called with an equal amount of
instruments that meet the criteria under
section 20(b) or (c) of the proposed rule
(replacement can be concurrent with
redemption of existing additional tier 1
capital instruments); or
(B) Demonstrate to the satisfaction of
its primary Federal supervisor that
following redemption, the banking
organization will continue to hold
capital commensurate with its risk.
(6) Redemption or repurchase of the
instrument requires prior approval from
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the banking organization’s primary
Federal supervisor.
(7) The banking organization has full
discretion at all times to cancel
dividends or other capital distributions
on the instrument without triggering an
event of default, a requirement to make
a payment-in-kind, or an imposition of
other restrictions on the banking
organization except in relation to any
capital distributions to holders of
common stock.
(8) Any capital distributions on the
instrument are paid out of the banking
organization’s net income and retained
earnings.
(9) The instrument does not have a
credit-sensitive feature, such as a
dividend rate that is reset periodically
based in whole or in part on the banking
organization’s credit quality, but may
have a dividend rate that is adjusted
periodically independent of the banking
organization’s credit quality, in relation
to general market interest rates or
similar adjustments.
(10) The paid-in amount is classified
as equity under GAAP.
(11) The banking organization, or an
entity that the banking organization
controls, did not purchase or directly or
indirectly fund the purchase of the
instrument.
(12) The instrument does not have
any features that would limit or
discourage additional issuance of
capital by the banking organization,
such as provisions that require the
banking organization to compensate
holders of the instrument if a new
instrument is issued at a lower price
during a specified time frame.
(13) If the instrument is not issued
directly by the banking organization or
by a subsidiary of the banking
organization that is an operating entity,
the only asset of the issuing entity is its
investment in the capital of the banking
organization, and proceeds must be
immediately available without
limitation to the banking organization or
to the banking organization’s top-tier
holding company in a form which meets
or exceeds all of the other criteria for
additional tier 1 capital instruments.56
(14) For an advanced approaches
banking organization, the governing
agreement, offering circular, or
prospectus of an instrument issued after
January 1, 2013, must disclose that the
holders of the instrument may be fully
subordinated to interests held by the
U.S. government in the event that the
banking organization enters into a
receivership, insolvency, liquidation, or
similar proceeding.
56 De minimis assets related to the operation of
the issuing entity could be disregarded for purposes
of this criterion.
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The proposed criteria were designed
to ensure that additional tier 1 capital
instruments would be available to
absorb losses on a going-concern basis.
TruPS and cumulative perpetual
preferred securities, which are eligible
for limited inclusion in tier 1 capital
under the general risk-based capital
rules for bank holding companies,
generally would not qualify for
inclusion in additional tier 1 capital.57
As explained in the proposal, the
agencies believe that instruments that
allow for the accumulation of interest
payable, like cumulative preferred
securities, are not likely to absorb losses
to the degree appropriate for inclusion
in tier 1 capital. In addition, the
exclusion of these instruments from the
tier 1 capital of depository institution
holding companies would be consistent
with section 171 of the Dodd-Frank Act.
The agencies noted in the proposal
that under Basel III, instruments
classified as liabilities for accounting
purposes could potentially be included
in additional tier 1 capital. However, the
agencies proposed that an instrument
classified as a liability under GAAP
could not qualify as additional tier 1
capital, reflecting the agencies’ view
that allowing only instruments
classified as equity under GAAP in tier
1 capital helps strengthen the lossabsorption capabilities of additional tier
1 capital instruments, thereby
increasing the quality of the capital base
of U.S. banking organizations.
The agencies also proposed to allow
banking organizations to include in
additional tier 1 capital instruments that
were: (1) Issued under the Small
Business Jobs Act of 2010 58 or, prior to
October 4, 2010, under the Emergency
Economic Stabilization Act of 2008,59
and (2) included in tier 1 capital under
the agencies’ general risk-based capital
rules. Under the proposal, these
instruments would be included in tier 1
capital regardless of whether they
satisfied the proposed qualifying criteria
for common equity tier 1 or additional
tier 1 capital. The agencies explained in
the proposal that continuing to permit
these instruments to be included in tier
1 capital is important to promote
financial recovery and stability
following the recent financial crisis.60
A number of commenters addressed
the proposed criteria for additional tier
1 capital. Consistent with comments on
the criteria for common equity tier 1
57 See 12 CFR part 225, appendix A, section
II.A.1.
58 Public Law 111–240, 124 Stat. 2504 (2010).
59 Public Law 110–343, 122 Stat. 3765 (October 3,
2008).
60 See, e.g., 73 FR 43982 (July 29, 2008); see also
76 FR 35959 (June 21, 2011).
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capital, commenters generally argued
that imposing new restrictions on
qualifying regulatory capital
instruments would be burdensome for
many banking organizations that would
be required to raise additional capital or
to shrink their balance sheets to phase
out existing regulatory capital
instruments that no longer qualify as
regulatory capital under the proposed
rule.
With respect to the proposed criteria,
commenters requested that the agencies
make a number of changes and
clarifications. Specifically, commenters
asked the agencies to clarify the use of
the term ‘‘secured’’ in criterion (3)
above. In this context, a ‘‘secured’’
instrument is an instrument that is
backed by collateral. In order to qualify
as additional tier 1 capital, an
instrument may not be collateralized,
guaranteed by the issuing organization
or an affiliate of the issuing
organization, or subject to any other
arrangement that legally or
economically enhances the seniority of
the instrument relative to more senior
claims. Instruments backed by
collateral, guarantees, or other
arrangements that affect their seniority
are less able to absorb losses than
instruments without such
enhancements. Therefore, instruments
secured by collateral, guarantees, or
other enhancements would not be
included in additional tier 1 capital
under the proposal. The FDIC has
adopted this criterion as proposed.
Commenters also asked the agencies
to clarify whether terms allowing a
banking organization to convert a fixedrate instrument to a floating rate in
combination with a call option, without
any increase in credit spread, would
constitute an ‘‘incentive to redeem’’
under criterion (4). The FDIC does not
consider the conversion from a fixed
rate to a floating rate (or from a floating
rate to a fixed rate) in combination with
a call option without any increase in
credit spread to constitute an ‘‘incentive
to redeem’’ for purposes of this
criterion. More specifically, a call
option combined with a change in
reference rate where the credit spread
over the second reference rate is equal
to or less than the initial dividend rate
less the swap rate (that is, the fixed rate
paid to the call date to receive the
second reference rate) would not be
considered an incentive to redeem. For
example, if the initial reference rate is
0.9 percent, the credit spread over the
initial reference rate is 2 percent (that is,
the initial dividend rate is 2.9 percent),
and the swap rate to the call date is 1.2
percent, a credit spread over the second
reference rate greater than 1.7 percent
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(2.9 percent minus 1.2 percent) would
be considered an incentive to redeem.
The FDIC believes that the clarification
above should address the commenters’
concerns, and the FDIC is retaining this
criterion in the interim final rule as
proposed.
Several commenters noted that the
proposed requirement that a banking
organization seek prior approval from
its primary Federal supervisor before
exercising a call option is redundant
with the existing requirement that a
banking organization seek prior
approval before reducing regulatory
capital by redeeming a capital
instrument. The FDIC believes that the
proposed requirement clarifies existing
requirements and does not add any new
substantive restrictions or burdens.
Including this criterion also helps to
ensure that the regulatory capital rules
provide FDIC-supervised institutions a
complete list of the requirements
applicable to regulatory capital
instruments in one location.
Accordingly, the FDIC has retained this
requirement in the interim final rule.
Banking industry commenters also
asserted that some of the proposed
criteria could have an adverse impact on
ESOPs. Specifically, the commenters
noted that the proposed requirement
that instruments not be callable for at
least five years after issuance could be
problematic for compensation plans that
enable a company to redeem shares after
employment is terminated. Commenters
asked the agencies to exempt from this
requirement stock issued as part of an
ESOP. For the reasons stated above in
the discussion of common equity tier 1
capital instruments, under the interim
final rule, additional tier 1 instruments
issued under an ESOP by an FDICsupervised institution that is not
publicly traded are exempt from the
criterion that additional tier 1
instruments not be callable for at least
five years after issuance. Moreover,
similar to the discussion above
regarding the criteria for common equity
tier 1 capital, the FDIC believes that
required compliance with ERISA and
ERISA-related tax code requirements
alone should not prevent an instrument
from being included in regulatory
capital. Therefore, the FDIC is including
a provision in the interim final rule to
clarify that the criterion prohibiting an
FDIC-supervised institution from
directly or indirectly funding a capital
instrument, the criterion prohibiting a
capital instrument from being covered
by a guarantee of the FDIC-supervised
institution or from being subject to an
arrangement that enhances the seniority
of the instrument, and the criterion
pertaining to the creation of an
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expectation that the instrument will be
redeemed, shall not prevent an
instrument issued by a non-publicly
traded FDIC-supervised institution as
part of an ESOP from being included in
additional tier 1 capital. In addition,
capital instruments held by an ESOP
trust that are unawarded or unearned by
employees or reported as ‘‘temporary
equity’’ under GAAP (in the case of U.S.
SEC registrants) may not be counted as
equity under GAAP and therefore may
not be included in additional tier 1
capital.
Commenters also asked the agencies
to add exceptions for early calls within
five years of issuance in the case of an
‘‘investment company event’’ or a
‘‘rating agency event,’’ in addition to the
proposed exceptions for regulatory and
tax events. After considering the
comments on these issues, the FDIC has
decided to revise the interim final rule
to permit an FDIC-supervised institution
to call an instrument prior to five years
after issuance in the event that the
issuing entity is required to register as
an investment company pursuant to the
Investment Company Act of 1940.61 The
FDIC recognizes that the legal and
regulatory burdens of becoming an
investment company could make it
uneconomic to leave some structured
capital instruments outstanding, and
thus would permit the FDIC-supervised
institution to call such instruments
early.
In order to ensure the loss-absorption
capacity of additional tier 1 capital
instruments, the FDIC has decided not
to revise the rule to permit an FDICsupervised institution to include in its
additional tier 1 capital instruments
issued on or after the effective date of
the interim final rule that may be called
prior to five years after issuance upon
the occurrence of a rating agency event.
However, understanding that many
currently outstanding instruments have
this feature, the FDIC has decided to
revise the rule to allow an instrument
that may be called prior to five years
after its issuance upon the occurrence of
a rating agency event to be included into
additional tier 1 capital, provided that
(i) the instrument was issued and
included in an FDIC-supervised
institution’s tier 1 capital prior to the
effective date of the rule, and (ii) that
such instrument meets all other criteria
for additional tier 1 capital instruments
under the interim final rule.
In addition, a number of commenters
reiterated the concern that restrictions
on the payment of dividends from net
income and current and retained
earnings may conflict with state
61 15
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corporate laws that permit an
organization to issue dividend payments
from its capital surplus accounts. This
criterion for additional tier 1 capital in
the interim final rule reflects the
identical final criterion for common
equity tier 1 for the reasons discussed
above with respect to common equity
tier 1 capital.
Commenters also noted that proposed
criterion (10), which requires the paidin amounts of tier 1 capital instruments
to be classified as equity under GAAP
before they may be included in
regulatory capital, generally would
prevent contingent capital instruments,
which are classified as liabilities, from
qualifying as additional tier 1 capital.
These commenters asked the agencies to
revise the rules to provide that
contingent capital instruments will
qualify as additional tier 1 capital,
regardless of their treatment under
GAAP. Another commenter noted the
challenges for U.S. banking
organizations in devising contingent
capital instruments that would satisfy
the proposed criteria, and noted that if
U.S. banking organizations develop an
acceptable instrument, the instrument
likely would initially be classified as
debt instead of equity for GAAP
purposes. Thus, in order to
accommodate this possibility, the
commenter urged the agencies to revise
the criterion to allow the agencies to
permit such an instrument in additional
tier 1 capital through interpretive
guidance or specifically in the case of a
particular instrument.
The FDIC continues to believe that
restricting tier 1 capital instruments to
those classified as equity under GAAP
will help to ensure those instruments’
capacity to absorb losses and further
increase the quality of U.S. FDICsupervised institutions’ regulatory
capital. The FDIC therefore has decided
to retain this aspect of the proposal. To
the extent that a contingent capital
instrument is considered a liability
under GAAP, an FDIC-supervised
institution may not include the
instrument in its tier 1 capital under the
interim final rule. At such time as an
instrument converts from debt to equity
under GAAP, the instrument would
then satisfy this criterion.
In the preamble to the proposed rule,
the agencies included a discussion
regarding whether criterion (7) should
be revised to require banking
organizations to reduce the dividend
payment on tier 1 capital instruments to
a penny when a banking organization
reduces dividend payments on a
common equity tier 1 capital instrument
to a penny per share. Such a revision
would increase the capacity of
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additional tier 1 instruments to absorb
losses as it would permit a banking
organization to reduce its capital
distributions on additional tier 1
instruments without eliminating
entirely its common stock dividend.
Commenters asserted that such a
revision would be unnecessary and
could affect the hierarchy of
subordination in capital instruments.
Commenters also claimed the revision
could prove burdensome as it could
substantially increase the cost of raising
capital through additional tier 1 capital
instruments. In light of these comments
the FDIC has decided to not modify
criterion (7) to accommodate the
issuance of a penny dividend as
discussed in the proposal.
Several commenters expressed
concern that criterion (7) for additional
tier 1 capital, could affect the tier 1
eligibility of existing noncumulative
perpetual preferred stock. Specifically,
the commenters were concerned that
such a criterion would disallow
contractual terms of an additional tier 1
capital instrument that restrict payment
of dividends on another capital
instrument that is pari passu in
liquidation with the additional tier 1
capital instrument (commonly referred
to as dividend stoppers). Consistent
with Basel III, the FDIC agrees that
restrictions related to capital
distributions to holders of common
stock instruments and holders of other
capital instruments that are pari passu
in liquidation with such additional tier
1 capital instruments are acceptable,
and have amended this criterion
accordingly for purposes of the interim
final rule.
After considering the comments on
the proposal, the FDIC has decided to
finalize the criteria for additional tier 1
capital instruments with the
modifications discussed above. The
final revised criteria for additional tier
1 capital are set forth in section
324.20(c)(1) of the interim final rule.
The FDIC expects that most outstanding
noncumulative perpetual preferred
stock that qualifies as tier 1 capital
under the FDIC’s general risk-based
capital rules will qualify as additional
tier 1 capital under the interim final
rule.
3. Tier 2 Capital
Consistent with Basel III, under the
proposed rule, tier 2 capital would
equal the sum of: tier 2 capital
instruments that satisfy the criteria set
forth in section 20(d) of the proposal,
related surplus, total capital minority
interest not included in a banking
organization’s tier 1 capital (subject to
certain limitations and requirements),
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and limited amounts of the allowance
for loan and lease losses (ALLL) less any
applicable regulatory adjustments and
deductions. Consistent with the general
risk-based capital rules, when
calculating its total capital ratio using
the standardized approach, a banking
organization would be permitted to
include in tier 2 capital the amount of
ALLL that does not exceed 1.25 percent
of its standardized total risk-weighted
assets which would not include any
amount of the ALLL. A banking
organization subject to the market risk
rule would exclude its standardized
market risk-weighted assets from the
calculation.62 In contrast, when
calculating its total capital ratio using
the advanced approaches, a banking
organization would be permitted to
include in tier 2 capital the excess of its
eligible credit reserves over its total
expected credit loss, provided the
amount does not exceed 0.6 percent of
its credit risk-weighted assets.
Consistent with Basel III, the agencies
proposed the following criteria for tier
2 capital instruments:
(1) The instrument is issued and paidin.
(2) The instrument is subordinated to
depositors and general creditors of the
banking organization.
(3) The instrument is not secured, not
covered by a guarantee of the banking
organization or of an affiliate of the
banking organization, and not subject to
any other arrangement that legally or
economically enhances the seniority of
the instrument in relation to more
senior claims.
(4) The instrument has a minimum
original maturity of at least five years.
At the beginning of each of the last five
years of the life of the instrument, the
amount that is eligible to be included in
tier 2 capital is reduced by 20 percent
of the original amount of the instrument
(net of redemptions) and is excluded
from regulatory capital when remaining
maturity is less than one year. In
addition, the instrument must not have
any terms or features that require, or
create significant incentives for, the
banking organization to redeem the
instrument prior to maturity.
(5) The instrument, by its terms, may
be called by the banking organization
only after a minimum of five years
following issuance, except that the
terms of the instrument may allow it to
be called sooner upon the occurrence of
an event that would preclude the
62 A
banking organization would deduct the
amount of ALLL in excess of the amount permitted
to be included in tier 2 capital, as well as allocated
transfer risk reserves, from its standardized total
risk-weighted risk assets.
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instrument from being included in tier
2 capital, or a tax event. In addition:
(i) The banking organization must
receive the prior approval of its primary
Federal supervisor to exercise a call
option on the instrument.
(ii) The banking organization does not
create at issuance, through action or
communication, an expectation the call
option will be exercised.
(iii) Prior to exercising the call option,
or immediately thereafter, the banking
organization must either:
(A) Replace any amount called with
an equivalent amount of an instrument
that meets the criteria for regulatory
capital under section 20 of the proposed
rule; 63 or
(B) Demonstrate to the satisfaction of
the banking organization’s primary
Federal supervisor that following
redemption, the banking organization
would continue to hold an amount of
capital that is commensurate with its
risk.
(6) The holder of the instrument must
have no contractual right to accelerate
payment of principal or interest on the
instrument, except in the event of a
receivership, insolvency, liquidation, or
similar proceeding of the banking
organization.
(7) The instrument has no creditsensitive feature, such as a dividend or
interest rate that is reset periodically
based in whole or in part on the banking
organization’s credit standing, but may
have a dividend rate that is adjusted
periodically independent of the banking
organization’s credit standing, in
relation to general market interest rates
or similar adjustments.
(8) The banking organization, or an
entity that the banking organization
controls, has not purchased and has not
directly or indirectly funded the
purchase of the instrument.
(9) If the instrument is not issued
directly by the banking organization or
by a subsidiary of the banking
organization that is an operating entity,
the only asset of the issuing entity is its
investment in the capital of the banking
organization, and proceeds must be
immediately available without
limitation to the banking organization or
the banking organization’s top-tier
holding company in a form that meets
or exceeds all the other criteria for tier
2 capital instruments under this
section.64
(10) Redemption of the instrument
prior to maturity or repurchase requires
63 Replacement of tier 2 capital instruments can
be concurrent with redemption of existing tier 2
capital instruments.
64 De minimis assets related to the operation of
the issuing entity can be disregarded for purposes
of this criterion.
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the prior approval of the banking
organization’s primary Federal
supervisor.
(11) For an advanced approaches
banking organization, the governing
agreement, offering circular, or
prospectus of an instrument issued after
January 1, 2013, must disclose that the
holders of the instrument may be fully
subordinated to interests held by the
U.S. government in the event that the
banking organization enters into a
receivership, insolvency, liquidation, or
similar proceeding.
The agencies also proposed to
eliminate the inclusion of a portion of
certain unrealized gains on AFS equity
securities in tier 2 capital given that
unrealized gains and losses on AFS
securities would flow through to
common equity tier 1 capital under the
proposed rules.
As a result of the proposed new
minimum common equity tier 1 capital
requirement, higher tier 1 capital
requirement, and the broader goal of
simplifying the definition of tier 2
capital, the proposal eliminated the
existing limitations on the amount of
tier 2 capital that could be recognized in
total capital, as well as the existing
limitations on the amount of certain
capital instruments (that is, term
subordinated debt) that could be
included in tier 2 capital.
Finally, the agencies proposed to
allow an instrument that qualified as
tier 2 capital under the general riskbased capital rules and that was issued
under the Small Business Jobs Act of
2010,65 or, prior to October 4, 2010,
under the Emergency Economic
Stabilization Act of 2008, to continue to
be includable in tier 2 capital regardless
of whether it met all of the proposed
qualifying criteria.
Several commenters addressed the
proposed eligibility criteria for tier 2
capital. A few banking industry
commenters asked the agencies to
clarify criterion (2) above to provide that
trade creditors are not among the class
of senior creditors whose claims rank
ahead of subordinated debt holders. In
response to these comments, the FDIC
notes that the intent of the final rule,
with its requirement that tier 2 capital
instruments be subordinated to
depositors and general creditors, is to
effectively retain the subordination
standards for the tier 2 capital
subordinated debt under the general
risk-based capital rules. Therefore, the
FDIC is clarifying that under the interim
final rule, and consistent with the
FDIC’s general risk-based capital rules,
subordinated debt instruments that
65 Public
Law 111–240, 124 Stat. 2504 (2010).
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qualify as tier 2 capital must be
subordinated to general creditors, which
generally means senior indebtedness,
excluding trade creditors. Such
creditors include at a minimum all
borrowed money, similar obligations
arising from off-balance sheet
guarantees and direct-credit substitutes,
and obligations associated with
derivative products such as interest rate
and foreign-exchange contracts,
commodity contracts, and similar
arrangements, and, in addition, for
depository institutions, depositors.
In addition, one commenter noted
that while many existing banking
organizations’ subordinated debt
indentures contain subordination
provisions, they may not explicitly
include a subordination provision with
respect to ‘‘general creditors’’ of the
banking organization. Thus, they
recommended that this aspect of the
rules be modified to have only
prospective application. The FDIC notes
that if it is clear from an instrument’s
governing agreement, offering circular,
or prospectus, that the instrument is
subordinated to general creditors
despite not specifically stating ‘‘general
creditors,’’ criterion (2) above is
satisfied (that is, criterion (2) should not
be read to mean that the phrase ‘‘general
creditors’’ must appear in the
instrument’s governing agreement,
offering circular, or prospectus, as the
case may be).
One commenter also asked whether a
debt instrument that automatically
converts to an equity instrument within
five years of issuance, and that satisfies
all criteria for tier 2 instruments other
than the five-year maturity requirement,
would qualify as tier 2 capital. The FDIC
notes that because such an instrument
would automatically convert to a
permanent form of regulatory capital,
the five-year maturity requirement
would not apply and, thus, it would
qualify as tier 2 capital. The FDIC has
clarified the interim final rule in this
respect.
Commenters also expressed concern
about the impact of a number of the
proposed criteria on outstanding TruPS.
For example, commenters stated that a
strict reading of criterion (3) above
could exclude certain TruPS under
which the banking organization
guarantees that any payments made by
the banking organization to the trust
will be used by the trust to pay its
obligations to security holders.
However, the proposed rule would not
have disqualified an instrument with
this type of guarantee, which does not
enhance or otherwise alter the
subordination level of an instrument.
Additionally, the commenters asked the
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agencies to allow in tier 2 capital
instruments that provide for default and
the acceleration of principal and interest
if the issuer banking organization defers
interest payments for five consecutive
years. Commenters stated that these
exceptions would be necessary to
accommodate existing TruPS, which
generally include such call, default and
acceleration features.
Commenters also asked the agencies
to clarify the use of the term ‘‘secured’’
in criterion (3). As discussed above with
respect to the criteria for additional tier
1 capital, a ‘‘secured’’ instrument is an
instrument where payments on the
instrument are secured by collateral.
Therefore, under criterion (3), a
collateralized instrument will not
qualify as tier 2 capital. Instruments
secured by collateral are less able to
absorb losses than instruments without
such enhancement.
With respect to subordinated debt
instruments included in tier 2 capital, a
commenter recommended eliminating
criterion (4)’s proposed five-year
amortization requirement, arguing that
that it was unnecessary given other
capital planning requirements that
banking organizations must satisfy. The
FDIC declined to adopt the commenter’s
recommendation, as it believes that the
proposed amortization schedule results
in a more accurate reflection of the lossabsorbency of an FDIC-supervised
institution’s tier 2 capital. The FDIC
notes that if an FDIC-supervised
institution begins deferring interest
payments on a TruPS instrument
included in tier 2 capital, such an
instrument will be treated as having a
maturity of five years at that point and
the FDIC-supervised institution must
begin excluding the appropriate amount
of the instrument from capital in
accordance with section 324.20(d)(1)(iv)
of the interim final rule.
Similar to the comments received on
the criteria for additional tier 1 capital,
commenters asked the agencies to add
exceptions to the prohibition against
call options that could be exercised
within five years of the issuance of a
capital instrument, specifically for an
‘‘investment company event’’ and a
‘‘rating agency event.’’
Although the FDIC declined to permit
instruments that include acceleration
provisions in tier 2 capital in the
interim final rule, the FDIC believes that
the inclusion in tier 2 capital of existing
TruPS, which allow for acceleration
after five years of interest deferral, does
not raise safety and soundness concerns.
Although the majority of existing TruPS
would not technically comply with the
interim final rule’s tier 2 eligibility
criteria, the FDIC acknowledges that the
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inclusion of existing TruPS in tier 2
capital (until they are redeemed or they
mature) would benefit certain FDICsupervised institutions until they are
able to replace such instruments with
new capital instruments that fully
comply with the eligibility criteria of
the interim final rule.
As with additional tier 1 capital
instruments, the interim final rule
permits an FDIC-supervised institution
to call an instrument prior to five years
after issuance in the event that the
issuing entity is required to register with
the SEC as an investment company
pursuant to the Investment Company
Act of 1940, for the reasons discussed
above with respect to additional tier 1
capital. Also for the reasons discussed
above with respect to additional tier 1
capital instruments, the FDIC has
decided not to permit an FDICsupervised institution to include in its
tier 2 capital an instrument issued on or
after the effective date of the interim
final rule that may be called prior to five
years after its issuance upon the
occurrence of a rating agency event.
However, the FDIC has decided to allow
such an instrument to be included in
tier 2 capital, provided that the
instrument was issued and included in
an FDIC-supervised institution’s tier 1
or tier 2 capital prior to January 1, 2014,
and that such instrument meets all other
criteria for tier 2 capital instruments
under the interim final rule.
In addition, similar to the comment
above with respect to the proposed
criteria for additional tier 1 capital
instruments, commenters noted that the
proposed criterion that a banking
organization seek prior approval from
its primary Federal supervisor before
exercising a call option is redundant
with the requirement that a banking
organization seek prior approval before
reducing regulatory capital by
redeeming a capital instrument. Again,
the FDIC believes that this proposed
requirement restates and clarifies
existing requirements without adding
any new substantive restrictions, and
that it will help to ensure that the
regulatory capital rules provide FDICsupervised institutions with a complete
list of the requirements applicable to
their regulatory capital instruments.
Therefore, the FDIC is retaining the
requirement as proposed.
Under the proposal, an advanced
approaches banking organization may
include in tier 2 capital the excess of its
eligible credit reserves over expected
credit loss (ECL) to the extent that such
amount does not exceed 0.6 percent of
credit risk-weighted assets, rather than
including the amount of ALLL
described above. Commenters asked the
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agencies to clarify whether an advanced
approaches banking organization that is
in parallel run includes in tier 2 capital
its ECL or ALLL (as described above).
To clarify, for purposes of the interim
final rule, an advanced approaches
FDIC-supervised institution will always
include in total capital its ALLL up to
1.25 percent of (non-market risk) riskweighted assets when measuring its
total capital relative to standardized
risk-weighted assets. When measuring
its total capital relative to its advanced
approaches risk-weighted assets, as
described in section 324.10(c)(3)(ii) of
the interim final rule, an advanced
approaches FDIC-supervised institution
that has completed the parallel run
process and that has received
notification from the FDIC pursuant to
section 324.121(d) of subpart E must
adjust its total capital to reflect its
excess eligible credit reserves rather
than its ALLL.
Some commenters recommended that
the agencies remove the limit on the
amount of the ALLL includable in
regulatory capital. Specifically, one
commenter recommended allowing
banking organizations to include ALLL
in tier 1 capital equal to an amount of
up to 1.25 percent of total risk-weighted
assets, with the balance in tier 2 capital,
so that the entire ALLL would be
included in regulatory capital.
Moreover, some commenters
recommended including in tier 2 capital
the entire amount of reserves held for
residential mortgage loans sold with
recourse, given that the proposal would
require a 100 percent credit conversion
factor for such loans. Consistent with
the ALLL treatment under the general
risk-based capital rules, for purposes of
the interim final rule the FDIC has
elected to permit only limited amounts
of the ALLL in tier 2 capital given its
limited purpose of covering incurred
rather than unexpected losses. For
similar reasons, the FDIC has further
elected not to recognize in tier 2 capital
reserves held for residential mortgage
loans sold with recourse.
As described above, an FDICsupervised institution that has made an
AOCI opt-out election may incorporate
up to 45 percent of any net unrealized
gains on AFS preferred stock classified
as an equity security under GAAP and
AFS equity exposures into its tier 2
capital.
After reviewing the comments
received on this issue, the FDIC has
determined to finalize the criteria for
tier 2 capital instruments to include the
aforementioned changes. The revised
criteria for inclusion in tier 2 capital are
set forth in section 324.20(d)(1) of the
interim final rule.
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4. Capital Instruments of Mutual FDICSupervised Institutions
Under the proposed rule, the
qualifying criteria for common equity
tier 1, additional tier 1, and tier 2 capital
generally would apply to mutual
banking organizations. Mutual banking
organizations and industry groups
representing mutual banking
organizations encouraged the agencies
to expand the qualifying criteria for
additional tier 1 capital to recognize
certain cumulative instruments. These
commenters stressed that mutual
banking organizations, which do not
issue common stock, have fewer options
for raising regulatory capital relative to
other types of banking organizations.
The FDIC does not believe that
cumulative instruments are able to
absorb losses sufficiently reliably to be
included in tier 1 capital. Therefore,
after considering these comments, the
FDIC has decided not to include in tier
1 capital under the interim final rule
any cumulative instrument. This would
include any previously-issued mutual
capital instrument that was included in
the tier 1 capital of mutual FDICsupervised institutions under the
general risk-based capital rules, but that
does not meet the eligibility
requirements for tier 1 capital under the
interim final rule. These cumulative
capital instruments will be subject to
the transition provisions and phased out
of the tier 1 capital of mutual FDICsupervised institutions over time, as set
forth in Table 9 of section 324.300 in the
interim final rule. However, if a mutual
FDIC-supervised institution develops a
new capital instrument that meets the
qualifying criteria for regulatory capital
under the interim final rule, such an
instrument may be included in
regulatory capital with the prior
approval of the FDIC under section
324.20(e) of the interim final rule.
The FDIC notes that the qualifying
criteria for regulatory capital
instruments under the interim final rule
permit mutual FDIC-supervised
institutions to include in regulatory
capital many of their existing regulatory
capital instruments (for example, nonwithdrawable accounts, pledged
deposits, or mutual capital certificates).
The FDIC believes that the quality and
quantity of regulatory capital currently
maintained by most mutual FDICsupervised institutions should be
sufficient to satisfy the requirements of
the interim final rule. For those
organizations that do not currently hold
enough capital to meet the revised
minimum requirements, the transition
arrangements are designed to ease the
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burden of increasing regulatory capital
over time.
5. Grandfathering of Certain Capital
Instruments
As described above, a substantial
number of commenters objected to the
proposed phase-out of non-qualifying
capital instruments, including TruPS
and cumulative perpetual preferred
stock, from tier 1 capital. Community
FDIC-supervised institutions in
particular expressed concerns that the
costs related to the replacement of such
capital instruments, which they
generally characterized as safe and lossabsorbent, would be excessive and
unnecessary. Commenters noted that the
proposal was more restrictive than
section 171 of the Dodd-Frank Act,
which requires the phase-out of nonqualifying capital instruments issued
prior to May 19, 2010, only for
depository institution holding
companies with $15 billion or more in
total consolidated assets as of December
31, 2009. Commenters argued that the
agencies were exceeding Congressional
intent by going beyond what was
required under the Dodd-Frank Act
Commenters requested that the agencies
grandfather existing TruPS and
cumulative perpetual preferred stock
issued by depository institution holding
companies with less than $15 billion
and 2010 MHCs.
Although the FDIC continues to
believe that TruPS are not sufficiently
loss-absorbing to be includable in tier 1
capital as a general matter, the FDIC is
also sensitive to the difficulties
community banking organizations often
face when issuing new capital
instruments and are aware of the
importance their capacity to lend plays
in local economies. Therefore the FDIC
has decided in the interim final rule to
grandfather such non-qualifying capital
instruments in tier 1 capital subject to
a limit of 25 percent of tier 1 capital
elements excluding any non-qualifying
capital instruments and after all
regulatory capital deductions and
adjustments applied to tier 1 capital,
which is substantially similar to the
limit in the general risk-based capital
rules. In addition, the FDIC
acknowledges that the inclusion of
existing TruPS in tier 2 capital would
benefit certain FDIC-supervised
institutions until they are able to replace
such instruments with new capital
instruments that fully comply with the
eligibility criteria of the interim final
rule.
6. Agency Approval of Capital Elements
The agencies noted in the proposal
that they believe most existing
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regulatory capital instruments will
continue to be includable in banking
organizations’ regulatory capital.
However, over time, capital instruments
that are equivalent in quality and
capacity to absorb losses to existing
instruments may be created to satisfy
different market needs. Therefore, the
agencies proposed to create a process to
consider the eligibility of such
instruments on a case-by-case basis.
Under the proposed rule, a banking
organization must request approval from
its primary Federal supervisor before
including a capital element in
regulatory capital, unless: (i) such
capital element is currently included in
regulatory capital under the agencies’
general risk-based capital and leverage
rules and the underlying instrument
complies with the applicable proposed
eligibility criteria for regulatory capital
instruments; or (ii) the capital element
is equivalent, in terms of capital quality
and ability to absorb losses, to an
element described in a previous
decision made publicly available by the
banking organization’s primary Federal
supervisor.
In the preamble to the proposal, the
agencies indicated that they intend to
consult each other when determining
whether a new element should be
included in common equity tier 1,
additional tier 1, or tier 2 capital, and
indicated that once one agency
determines that a capital element may
be included in a banking organization’s
common equity tier 1, additional tier 1,
or tier 2 capital, that agency would
make its decision publicly available,
including a brief description of the
capital element and the rationale for the
conclusion.
The FDIC continues to believe that it
is appropriate to retain the flexibility
necessary to consider new instruments
on a case-by-case basis as they are
developed over time to satisfy different
market needs. The FDIC has decided to
move its authority in section 20(e)(1) of
the proposal to the its reservation of
authority provision included in section
324.1(d)(2)(ii) of the interim final rule.
Therefore, the FDIC is adopting this
aspect of the interim final rule
substantively as proposed to create a
process to consider the eligibility of
such instruments on a permanent or
temporary basis, in accordance with the
applicable requirements in subpart C of
the interim final rule (section 324.20(e)
of the interim final rule).
Section 324.20(e)(1) of the interim
final rule provides that an FDICsupervised institution must receive
FDIC’s prior approval to include a
capital element in its common equity
tier 1 capital, additional tier 1 capital,
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55371
or tier 2 capital unless that element: (i)
was included in the FDIC-supervised
institution’s tier 1 capital or tier 2
capital prior to May 19, 2010 in
accordance with that supervisor’s riskbased capital rules that were effective as
of that date and the underlying
instrument continues to be includable
under the criteria set forth in this
section; or (ii) is equivalent, in terms of
capital quality and ability to absorb
credit losses with respect to all material
terms, to a regulatory capital element
determined by that supervisor to be
includable in regulatory capital
pursuant to paragraph (e)(3) of section
324.20. In exercising this reservation of
authority, the FDIC expects to consider
the requirements for capital elements in
the interim final rule; the size,
complexity, risk profile, and scope of
operations of the FDIC-supervised
institution, and whether any public
benefits would be outweighed by risk to
an insured depository institution or to
the financial system.
7. Addressing the Point of Non-Viability
Requirements Under Basel III
During the recent financial crisis, the
United States and foreign governments
lent to, and made capital investments
in, banking organizations. These
investments helped to stabilize the
recipient banking organizations and the
financial sector as a whole. However,
because of the investments, the
recipient banking organizations’ existing
tier 2 capital instruments, and (in some
cases) tier 1 capital instruments, did not
absorb the banking organizations’ credit
losses consistent with the purpose of
regulatory capital. At the same time,
taxpayers became exposed to potential
losses.
On January 13, 2011, the BCBS issued
international standards for all additional
tier 1 and tier 2 capital instruments
issued by internationally-active banking
organizations to ensure that such
regulatory capital instruments fully
absorb losses before taxpayers are
exposed to such losses (the Basel nonviability standard). Under the Basel
non-viability standard, all non-common
stock regulatory capital instruments
issued by an internationally-active
banking organization must include
terms that subject the instruments to
write-off or conversion to common
equity at the point at which either: (1)
the write-off or conversion of those
instruments occurs; or (2) a public
sector injection of capital would be
necessary to keep the banking
organization solvent. Alternatively, if
the governing jurisdiction of the
banking organization has established
laws that require such tier 1 and tier 2
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capital instruments to be written off or
otherwise fully absorb losses before
taxpayers are exposed to loss, the
standard is already met. If the governing
jurisdiction has such laws in place, the
Basel non-viability standard states that
documentation for such instruments
should disclose that information to
investors and market participants, and
should clarify that the holders of such
instruments would fully absorb losses
before taxpayers are exposed to loss.66
U.S. law is consistent with the Basel
non-viability standard. The resolution
regime established in Title II, section
210 of the Dodd-Frank Act provides the
FDIC with the authority necessary to
place failing financial companies that
pose a significant risk to the financial
stability of the United States into
receivership.67 The Dodd-Frank Act
provides that this authority shall be
exercised in a manner that minimizes
systemic risk and moral hazard, so that
(1) creditors and shareholders will bear
the losses of the financial company; (2)
management responsible for the
condition of the financial company will
not be retained; and (3) the FDIC and
other appropriate agencies will take
steps necessary and appropriate to
ensure that all parties, including holders
of capital instruments, management,
directors, and third parties having
responsibility for the condition of the
financial company, bear losses
consistent with their respective
ownership or responsibility.68 Section
11 of the Federal Deposit Insurance Act
has similar provisions for the resolution
of depository institutions.69
Additionally, under U.S. bankruptcy
law, regulatory capital instruments
issued by a company would absorb
losses in bankruptcy before instruments
held by more senior unsecured
creditors.
Consistent with the Basel nonviability standard, under the proposal,
additional tier 1 and tier 2 capital
instruments issued by advanced
approaches banking organizations after
the date on which such organizations
would have been required to comply
with any interim final rule would have
been required to include a disclosure
that the holders of the instrument may
be fully subordinated to interests held
by the U.S. government in the event that
the banking organization enters into a
receivership, insolvency, liquidation, or
similar proceeding. The FDIC is
66 See ‘‘Final Elements of the Reforms to Raise the
Quality of Regulatory Capital’’ (January 2011),
available at: http://www.bis.org/press/p110113.pdf.
67 See 12 U.S.C. 5384.
68 See 12 U.S.C. 5384.
69 12 U.S.C. 1821.
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adopting this provision of the proposed
rule without change.
8. Qualifying Capital Instruments Issued
by Consolidated Subsidiaries of an
FDIC-Supervised Institution
As highlighted during the recent
financial crisis, capital issued by
consolidated subsidiaries and not
owned by the parent banking
organization (minority interest) is
available to absorb losses at the
subsidiary level, but that capital does
not always absorb losses at the
consolidated level. Accordingly, and
consistent with Basel III, the proposed
rule revised limitations on the amount
of minority interest that may be
included in regulatory capital at the
consolidated level to prevent highly
capitalized subsidiaries from overstating
the amount of capital available to absorb
losses at the consolidated organization.
Under the proposal, minority interest
would have been classified as a
common equity tier 1, tier 1, or total
capital minority interest depending on
the terms of the underlying capital
instrument and on the type of
subsidiary issuing such instrument. Any
instrument issued by a consolidated
subsidiary to third parties would have
been required to satisfy the qualifying
criteria under the proposal to be
included in the banking organization’s
common equity tier 1, additional tier 1,
or tier 2 capital, as appropriate. In
addition, common equity tier 1 minority
interest would have been limited to
instruments issued by a depository
institution or a foreign bank that is a
consolidated subsidiary of a banking
organization.
The proposed limits on the amount of
minority interest that could have been
included in the consolidated capital of
a banking organization would have been
based on the amount of capital held by
the consolidated subsidiary, relative to
the amount of capital the subsidiary
would have had to hold to avoid any
restrictions on capital distributions and
discretionary bonus payments under the
capital conservation buffer framework.
For example, a subsidiary with a
common equity tier 1 capital ratio of 8
percent that needs to maintain a
common equity tier 1 capital ratio of
more than 7 percent to avoid limitations
on capital distributions and
discretionary bonus payments would
have been considered to have ‘‘surplus’’
common equity tier 1 capital and, at the
consolidated level, the banking
organization would not have been able
to include the portion of such surplus
common equity tier 1 capital that is
attributable to third party investors.
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In general, the amount of common
equity tier 1 minority interest that could
have been included in the common
equity tier 1 capital of a banking
organization under the proposal would
have been equal to:
(i) The common equity tier 1 minority
interest of the subsidiary minus
(ii) The ratio of the subsidiary’s
common equity tier 1 capital owned by
third parties to the total common equity
tier 1 capital of the subsidiary,
multiplied by the difference between the
common equity tier 1 capital of the
subsidiary and the lower of:
(1) the amount of common equity tier
1 capital the subsidiary must hold to
avoid restrictions on capital
distributions and discretionary bonus
payments, or
(2)(a) the standardized total riskweighted assets of the banking
organization that relate to the
subsidiary, multiplied by
(b) The common equity tier 1 capital
ratio needed by the banking
organization subsidiary to avoid
restrictions on capital distributions and
discretionary bonus payments.
If a subsidiary were not subject to the
same minimum regulatory capital
requirements or capital conservation
buffer framework as the banking
organization, the banking organization
would have needed to assume, for the
purposes of the calculation described
above, that the subsidiary is in fact
subject to the same minimum capital
requirements and the same capital
conservation buffer framework as the
banking organization.
To determine the amount of tier 1
minority interest that could be included
in the tier 1 capital of the banking
organization and the total capital
minority interest that could be included
in the total capital of the banking
organization, a banking organization
would follow the same methodology as
the one outlined previously for common
equity tier 1 minority interest. The
proposal set forth sample calculations.
The amount of tier 1 minority interest
that could have been included in the
additional tier 1 capital of a banking
organization under the proposal was
equivalent to the banking organization’s
tier 1 minority interest, subject to the
limitations outlined above, less any
common equity tier 1 minority interest
included in the banking organization’s
common equity tier 1 capital. Likewise,
the amount of total capital minority
interest that could have been included
in the tier 2 capital of the banking
organization was equivalent to its total
capital minority interest, subject to the
limitations outlined above, less any tier
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1 minority interest that is included in
the banking organization’s tier 1 capital.
Under the proposal, minority interest
related to qualifying common or
noncumulative perpetual preferred
stock directly issued by a consolidated
U.S. depository institution or foreign
bank subsidiary, which is eligible for
inclusion in tier 1 capital under the
general risk-based capital rules without
limitation, generally would qualify for
inclusion in common equity tier 1 and
additional tier 1 capital, respectively,
subject to the proposed limits. However,
under the proposal, minority interest
related to qualifying cumulative
perpetual preferred stock directly issued
by a consolidated U.S. depository
institution or foreign bank subsidiary,
which is eligible for limited inclusion in
tier 1 capital under the general riskbased capital rules, generally would not
have qualified for inclusion in
additional tier 1 capital under the
proposal.
A number of commenters addressed
the proposed limits on the inclusion of
minority interest in regulatory capital.
Commenters generally asserted that the
proposed methodology for calculating
the amount of minority interest that
could be included in regulatory capital
was overly complex, overly
conservative, and would reduce
incentives for bank subsidiaries to issue
capital to third-party investors. Several
commenters suggested that the agencies
should adopt a more straightforward
and simple approach that would
provide a single blanket limitation on
the amount of minority interest
includable in regulatory capital. For
example, one commenter suggested
allowing a banking organization to
include minority interest equal to 18
percent of common equity tier 1 capital.
Another commenter suggested that
minority interest where shareholders
have commitments to provide
additional capital, as well as minority
interest in joint ventures where there are
guarantees or other credit
enhancements, should not be subject to
the proposed limitations.
Commenters also objected to any
limitations on the amount of minority
interest included in the regulatory
capital of a parent banking organization
attributable to instruments issued by a
subsidiary when the subsidiary is a
depository institution. These
commenters stated that restricting such
minority interest could create a
disincentive for depository institutions
to issue capital instruments directly or
to maintain capital at levels
substantially above regulatory
minimums. To address this concern,
commenters asked the agencies to
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consider allowing a depository
institution subsidiary to consider a
portion of its capital above its minimum
as not being part of its ‘‘surplus’’ capital
for the purpose of calculating the
minority interest limitation.
Alternatively, some commenters
suggested allowing depository
institution subsidiaries to calculate
surplus capital independently for each
component of capital.
Several commenters also addressed
the proposed minority interest
limitation as it would apply to
subordinated debt issued by a
depository institution. Generally, these
commenters stated that the proposed
minority interest limitation either
should not apply to such subordinated
debt, or that the limitation should be
more flexible to permit a greater amount
to be included in the total capital of the
consolidated organization.
Finally, some commenters pointed
out that the application of the proposed
calculation for the minority interest
limitation was unclear in circumstances
where a subsidiary depository
institution does not have ‘‘surplus’’
capital. With respect to this comment,
the FDIC has revised the proposed rule
to specifically provide that the minority
interest limitation will not apply in
circumstances where a subsidiary’s
capital ratios are equal to or below the
level of capital necessary to meet the
minimum capital requirements plus the
capital conservation buffer. That is, in
the interim final rule the minority
interest limitation would apply only
where a subsidiary has ‘‘surplus’’
capital.
The FDIC continues to believe that the
proposed limitations on minority
interest are appropriate, including for
capital instruments issued by depository
institution subsidiaries, tier 2 capital
instruments, and situations in which a
depository institution holding company
conducts the majority of its business
through a single depository institution
subsidiary. As noted above, the FDIC’s
experience during the recent financial
crisis showed that while minority
interest generally is available to absorb
losses at the subsidiary level, it may not
always absorb losses at the consolidated
level. Therefore, the FDIC continues to
believe limitations on including
minority interest will prevent highlycapitalized subsidiaries from overstating
the amount of capital available to absorb
losses at the consolidated organization.
The increased safety and soundness
benefits resulting from these limitations
should outweigh any compliance
burden issues related to the complexity
of the calculations. Therefore, the FDIC
is adopting the proposed treatment of
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minority interest without change, except
for the clarification described above.
9. Real Estate Investment Trust
Preferred Capital
A real estate investment trust (REIT)
is a company that is required to invest
in real estate and real estate-related
assets and make certain distributions in
order to maintain a tax-advantaged
status. Some banking organizations have
consolidated subsidiaries that are REITs,
and such REITs may have issued capital
instruments included in the regulatory
capital of the consolidated banking
organization as minority interest under
the general risk-based capital rules.
Under the general risk-based capital
rules, preferred stock issued by a REIT
subsidiary generally can be included in
a banking organization’s tier 1 capital as
minority interest if the preferred stock
meets the eligibility requirements for
tier 1 capital.70 The agencies interpreted
this to require that the REIT-preferred
stock be exchangeable automatically
into noncumulative perpetual preferred
stock of the banking organization under
certain circumstances. Specifically, the
primary Federal supervisor may direct
the banking organization in writing to
convert the REIT preferred stock into
noncumulative perpetual preferred
stock of the banking organization
because the banking organization: (1)
became undercapitalized under the PCA
regulations; 71 (2) was placed into
conservatorship or receivership; or (3)
was expected to become
undercapitalized in the near term.72
Under the proposed rule, the
limitations described previously on the
inclusion of minority interest in
regulatory capital would have applied to
capital instruments issued by
consolidated REIT subsidiaries.
Specifically, preferred stock issued by a
REIT subsidiary that met the proposed
definition of an operating entity (as
defined below) would have qualified for
inclusion in the regulatory capital of a
banking organization subject to the
limitations outlined in section 21 of the
proposed rule only if the REIT preferred
stock met the criteria for additional tier
1 or tier 2 capital instruments outlined
in section 20 of the proposed rules.
Because a REIT must distribute 90
percent of its earnings to maintain its
tax-advantaged status, a banking
organization might be reluctant to
cancel dividends on the REIT preferred
70 12
CFR part 325, subpart B.
CFR part 325, subpart A (state nonmember
banks), and 12 CFR part 390, subpart Y (state
savings associations).
72 12 CFR part 325, subpart B (state nonmember
banks) and 12 CFR part 390, subpart Y (state
savings associations).
71 12
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stock. However, for a capital instrument
to qualify as additional tier 1 capital the
issuer must have the ability to cancel
dividends. In cases where a REIT could
maintain its tax status, for example, by
declaring a consent dividend and it has
the ability to do so, the agencies
generally would consider REIT
preferred stock to satisfy criterion (7) of
the proposed eligibility criteria for
additional tier 1 capital instruments.73
The FDIC notes that the ability to
declare a consent dividend need not be
included in the documentation of the
REIT preferred instrument, but the
FDIC-supervised institution must
provide evidence to the relevant
banking agency that it has such an
ability. The FDIC does not expect
preferred stock issued by a REIT that
does not have the ability to declare a
consent dividend or otherwise cancel
cash dividends to qualify as tier 1
minority interest under the interim final
rule; however, such an instrument could
qualify as total capital minority interest
if it meets all of the relevant tier 2
capital eligibility criteria under the
interim final rule.
Commenters requested clarification
on whether a REIT subsidiary would be
considered an operating entity for the
purpose of the interim final rule. For
minority interest issued from a
subsidiary to be included in regulatory
capital, the subsidiary must be either an
operating entity or an entity whose only
asset is its investment in the capital of
the parent banking organization and for
which proceeds are immediately
available without limitation to the
banking organization. Since a REIT has
assets that are not an investment in the
capital of the parent banking
organization, minority interest in a REIT
subsidiary can be included in the
regulatory capital of the consolidated
parent banking organization only if the
REIT is an operating entity. For
purposes of the interim final rule, an
operating entity is defined as a company
established to conduct business with
clients with the intention of earning a
profit in its own right. However, certain
REIT subsidiaries currently used by
FDIC-supervised institutions to raise
regulatory capital are not actively
managed for the purpose of earning a
profit in their own right, and therefore,
will not qualify as operating entities for
the purpose of the interim final rule.
Minority interest investments in REIT
subsidiaries that are actively managed
73 A consent dividend is a dividend that is not
actually paid to the shareholders, but is kept as part
of a company’s retained earnings, yet the
shareholders have consented to treat the dividend
as if paid in cash and include it in gross income
for tax purposes.
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for purposes of earning a profit in their
own right will be eligible for inclusion
in the regulatory capital of the FDICsupervised institution subject to the
limits described in section 21 of the
interim final rule. To the extent that an
FDIC-supervised institution is unsure
whether minority interest investments
in a particular REIT subsidiary will be
includable in the FDIC-supervised
institution’s regulatory capital, the
organization should discuss the concern
with its primary Federal supervisor
prior to including any amount of the
minority interest in its regulatory
capital.
Several commenters objected to the
application of the limitations on the
inclusion of minority interest resulting
from noncumulative perpetual preferred
stock issued by REIT subsidiaries.
Commenters noted that to be included
in the regulatory capital of the
consolidated parent banking
organization under the general riskbased capital rules, REIT preferred stock
must include an exchange feature that
allows the REIT preferred stock to
absorb losses at the parent banking
organization through the exchange of
REIT preferred instruments into
noncumulative perpetual preferred
stock of the parent banking
organization. Because of this exchange
feature, the commenters stated that REIT
preferred instruments should be
included in the tier 1 capital of the
parent consolidated organization
without limitation. Alternatively, some
commenters suggested that the agencies
should allow REIT preferred
instruments to be included in the tier 2
capital of the consolidated parent
organization without limitation.
Commenters also noted that in light of
the eventual phase-out of TruPS
pursuant to the Dodd-Frank Act, REIT
preferred stock would be the only taxadvantaged means for bank holding
companies to raise tier 1 capital.
According to these commenters,
limiting this tax-advantaged option
would increase the cost of doing
business for many banking
organizations.
After considering these comments, the
FDIC has decided not to create specific
exemptions to the limitations on the
inclusion of minority interest with
respect to REIT preferred instruments.
As noted above, the FDIC believes that
the inclusion of minority interest in
regulatory capital at the consolidated
level should be limited to prevent
highly-capitalized subsidiaries from
overstating the amount of capital
available to absorb losses at the
consolidated organization.
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B. Regulatory Adjustments and
Deductions
1. Regulatory Deductions From
Common Equity Tier 1 Capital
Under the proposal, a banking
organization must deduct from common
equity tier 1 capital elements the items
described in section 22 of the proposed
rule. A banking organization would
exclude the amount of these deductions
from its total risk-weighted assets and
leverage exposure. This section B
discusses the deductions from
regulatory capital elements as revised
for purposes of the interim final rule.
a. Goodwill and Other Intangibles
(Other Than Mortgage Servicing Assets)
U.S. federal banking statutes generally
prohibit the inclusion of goodwill (as it
is an ‘‘unidentified intangible asset’’) in
the regulatory capital of insured
depository institutions.74 Accordingly,
goodwill and other intangible assets
have long been either fully or partially
excluded from regulatory capital in the
United States because of the high level
of uncertainty regarding the ability of
the banking organization to realize value
from these assets, especially under
adverse financial conditions.75 Under
the proposed rule, a banking
organization was required to deduct
from common equity tier 1 capital
elements goodwill and other intangible
assets other than MSAs 76 net of
associated deferred tax liabilities
(DTLs). For purposes of this deduction,
goodwill would have included any
goodwill embedded in the valuation of
significant investments in the capital of
an unconsolidated financial institution
in the form of common stock. This
deduction of embedded goodwill would
have applied to investments accounted
for under the equity method.77
Consistent with Basel III, these items
would have been deducted from
common equity tier 1 capital elements.
MSAs would have been subject to a
different treatment under Basel III and
the proposal, as explained below in this
section.
One commenter sought clarification
regarding the amount of goodwill that
must be deducted from common equity
tier 1 capital elements when a banking
organization has an investment in the
74 12
U.S.C. 1828(n).
FR 11500, 11509 (March 21, 1989).
76 Examples of other intangible assets include
purchased credit card relationships (PCCRs) and
non-mortgage servicing assets.
77 Under GAAP, if there is a difference between
the initial cost basis of the investment and the
amount of underlying equity in the net assets of the
investee, the resulting difference should be
accounted for as if the investee were a consolidated
subsidiary (which may include imputed goodwill).
75 54
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any after-tax gain-on-sale associated
with a securitization exposure. Under
the proposal, gain-on-sale was defined
as an increase in the equity capital of a
banking organization resulting from a
securitization (other than an increase in
equity capital resulting from the
banking organization’s receipt of cash in
connection with the securitization).
A number of commenters requested
clarification that the proposed
deduction for gain-on-sale would not
require a double deduction for MSAs.
According to the commenters, a sale of
loans to a securitization structure that
creates a gain may include an MSA that
also meets the proposed definition of
‘‘gain-on-sale.’’ The FDIC agrees that a
double deduction for MSAs is not
required, and the interim final rule
clarifies in the definition of ‘‘gain-onsale’’ that a gain-on-sale excludes any
portion of the gain that was reported by
the FDIC-supervised institution as an
MSA. The FDIC also notes that the
definition of gain-on-sale was intended
to relate only to gains associated with
the sale of loans for the purpose of
traditional securitization. Thus, the
definition of gain-on-sale has been
revised in the interim final rule to mean
an increase in common equity tier 1
capital of the FDIC-supervised
institution resulting from a traditional
securitization except where such an
increase results from the FDICsupervised institution’s receipt of cash
in connection with the securitization or
initial recognition of an MSA.
capital of an unconsolidated financial
institution that is accounted for under
the equity method of accounting under
GAAP. The FDIC has revised section
22(a)(1) in the interim final rule to
clarify that it is the amount of goodwill
that is embedded in the valuation of a
significant investment in the capital of
an unconsolidated financial institution
in the form of common stock that is
accounted for under the equity method,
and reflected in the consolidated
financial statements of the FDICsupervised institution that an FDICsupervised institution must deduct from
common equity tier 1 capital elements.
Another commenter requested
clarification regarding the amount of
embedded goodwill that a banking
organization would be required to
deduct where there are impairments to
the embedded goodwill subsequent to
the initial investment. The FDIC notes
that, for purposes of the interim final
rule, an FDIC-supervised institution
must deduct from common equity tier 1
capital elements any embedded
goodwill in the valuation of significant
investments in the capital of an
unconsolidated financial institution in
the form of common stock net of any
related impairments (subsequent to the
initial investment) as determined under
GAAP, not the goodwill reported on the
balance sheet of the unconsolidated
financial institution.
The proposal did not include a
transition period for the implementation
of the requirement to deduct goodwill
from common equity tier 1 capital. A
number of commenters expressed
concern that this could disadvantage
U.S. banking organizations relative to
those in jurisdictions that permit such a
transition period. The FDIC notes that
section 221 of FIRREA (12 U.S.C.
1828(n)) requires all unidentifiable
intangible assets (goodwill) acquired
after April 12, 1989, to be deducted
from an FDIC-supervised institution’s
capital elements. The only exception to
this requirement, permitted under 12
U.S.C. 1464(t) (applicable to Federal
savings association), has expired.
Therefore, consistent with the
requirements of section 221 of FIRREA
and the general risk-based capital rules,
the FDIC believes that it is not
appropriate to permit any goodwill to be
included in an FDIC-supervised
institution’s capital. The interim final
rule does not include a transition period
for the deduction of goodwill.
c. Defined Benefit Pension Fund Net
Assets
For banking organizations other than
insured depository institutions, the
proposal required the deduction of a net
pension fund asset in calculating
common equity tier 1 capital. A banking
organization was permitted to make
such deduction net of any associated
DTLs. This deduction would be
required where a defined benefit
pension fund is over-funded due to the
high level of uncertainty regarding the
ability of the banking organization to
realize value from such assets.
The proposal provided that, with
supervisory approval, a banking
organization would not have been
required to deduct defined benefit
pension fund assets to which the
banking organization had unrestricted
and unfettered access.78 In this case, the
proposal established that the banking
b. Gain-on-sale Associated With a
Securitization Exposure
Under the proposal, a banking
organization would deduct from
common equity tier 1 capital elements
78 The FDIC has unfettered access to the pension
fund assets of an insured depository institution’s
pension plan in the event of receivership; therefore,
the FDIC determined that an insured depository
institution would not be required to deduct a net
pension fund asset.
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55375
organization would have assigned to
such assets the risk weight they would
receive if the assets underlying the plan
were directly owned and included on
the balance sheet of the banking
organization. The proposal set forth that
unrestricted and unfettered access
would mean that a banking organization
would not have been required to request
and receive specific approval from
pension beneficiaries each time it
accessed excess funds in the plan.
One commenter asked whether shares
of a banking organization that are
owned by the banking organization’s
pension fund are subject to deduction.
The FDIC notes that the interim final
rule does not require deduction of
banking organization shares owned by
the pension fund. Another commenter
asked for clarification regarding the
treatment of an overfunded pension
asset at an insured depository
institution if the pension plan sponsor
is the parent BHC. The FDIC clarifies
that the requirement to deduct a defined
benefit pension plan net asset is not
dependent upon the sponsor of the plan;
rather it is dependent upon whether the
net pension fund asset is an asset of an
insured depository institution. The
agencies also received questions
regarding the appropriate risk-weight
treatment for a pension fund asset. As
discussed above, with the prior agency
approval, a banking organization that is
not an insured depository institution
may elect to not deduct any defined
benefit pension fund net asset to the
extent such banking organization has
unrestricted and unfettered access to the
assets in that defined benefit pension
fund. Any portion of the defined benefit
pension fund net asset that is not
deducted by the banking organization
must be risk-weighted as if the banking
organization directly holds a
proportional ownership share of each
exposure in the defined benefit pension
fund. For example, if the banking
organization has a defined benefit
pension fund net asset of $10 and it has
unfettered and unrestricted access to the
assets of defined benefit pension fund,
and assuming 20 percent of the defined
benefit pension fund is composed of
assets that are risk-weighted at 100
percent and 80 percent is composed of
assets that are risk-weighted at 300
percent, the banking organization would
risk weight $2 at 100 percent and $8 at
300 percent. This treatment is consistent
with the full look-through approach
described in section 53(b) of the interim
final rule. If the defined benefit pension
fund invests in the capital of a financial
institution, including an investment in
the banking organization’s own capital
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instruments, the banking organization
would risk weight the proportional
share of such exposure in accordance
with the treatment under subparts D or
E, as appropriate.
The FDIC is adopting as final this
section of the proposal with the changes
described above.
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d. Expected Credit Loss That Exceeds
Eligible Credit Reserves
The proposal required an advanced
approaches banking organization to
deduct from common equity tier 1
capital elements the amount of expected
credit loss that exceeds the banking
organization’s eligible credit reserves.
Commenters sought clarification that
the proposed deduction would not
apply for advanced approaches banking
organizations that have not received the
approval of their primary Federal
supervisor to exit parallel run. The FDIC
agrees that the deduction would not
apply to FDIC-supervised institutions
that have not received approval from
their primary Federal supervisor to exit
parallel run. In response, the FDIC has
revised this provision of the interim
final rule to apply to an FDICsupervised institution subject to subpart
E of the interim final rule that has
completed the parallel run process and
that has received notification from the
FDIC under section 324.121(d) of the
advanced approaches rule.
e. Equity Investments in Financial
Subsidiaries
Section 121 of the Gramm-LeachBliley Act allows national banks and
insured state banks to establish entities
known as financial subsidiaries.79 One
of the statutory requirements for
establishing a financial subsidiary is
that a national bank or insured state
bank must deduct any investment in a
financial subsidiary from the depository
institution’s assets and tangible
equity.80 The FDIC implemented this
statutory requirement through
regulation at 12 CFR 362.18.
Under section 22(a)(7) of the proposal,
investments by an insured state bank in
financial subsidiaries would be
deducted entirely from the bank’s
common equity tier 1 capital.81 Because
common equity tier 1 capital is a
component of tangible equity, the
proposed deduction from common
equity tier 1 would have automatically
resulted in a deduction from tangible
equity. The FDIC believes that the more
79 Public Law 106–102, 113 Stat. 1338, 1373 (Nov.
12, 1999).
80 12 U.S.C. 24a(c); 12 U.S.C. 1831w(a)(2).
81 The deduction provided for in the FDIC’s
existing regulations would be removed and would
exist solely in the interim final rule.
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conservative treatment is appropriate for
financial subsidiaries given the risks
associated with nonbanking activities,
and are finalizing this treatment as
proposed. Therefore, under the interim
final rule, an FDIC-supervised
institution must deduct the aggregate
amount of its outstanding equity
investment in a financial subsidiary,
including the retained earnings of a
subsidiary from common equity tier 1
capital elements, and the assets and
liabilities of the subsidiary may not be
consolidated with those of the parent
bank.
f. Deduction for Subsidiaries of Savings
Associations That Engage in Activities
That Are Not Permissible for National
Banks
Section 5(t)(5) 82 of HOLA requires a
separate capital calculation for state
savings associations for ‘‘investments in
and extensions of credit to any
subsidiary engaged in activities not
permissible for a national bank.’’ This
statutory provision was implemented in
the state savings associations’ capital
rules through a deduction from the core
(tier 1) capital of the state savings
association for those subsidiaries that
are not ‘‘includable subsidiaries.’’ The
FDIC proposed to continue the general
risk-based capital treatment of
includable subsidiaries, with some
technical modifications. Aside from
those technical modifications, the
proposal would have transferred,
without substantive change, the current
general regulatory treatment of
deducting subsidiary investments where
a subsidiary is engaged in activities not
permissible for a national bank. Such
treatment is consistent with how a
national bank deducts its equity
investments in financial subsidiaries.
The FDIC proposed an identical
treatment for state savings
associations.83
The FDIC received no comments on
this proposed deduction. The interim
final rule adopts the proposal with one
change and other minor technical edits,
consistent with 12 U.S.C. 1464(t)(5), to
clarify that the required deduction for a
state savings association’s investment in
a subsidiary that is engaged in activities
not permissible for a national bank
includes extensions of credit to such a
subsidiary.
g. Identified Losses for State
Nonmember Banks
Under its existing capital rules, the
FDIC requires state nonmember banks to
deduct from tier 1 capital elements
82 12
83 12
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CFR 324.22.
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Fmt 4701
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identified losses to the extent that tier
1 capital would have been reduced if
the appropriate accounting entries had
been recorded on the insured depository
institution’s books. Generally, for
purposes of these rules, identified losses
are those items that an examiner from
the federal or state supervisor for that
institution determines to be chargeable
against income, capital, or general
valuation allowances. For example,
identified losses may include, among
other items, assets classified loss, offbalance sheet items classified loss, any
expenses that are necessary for the
institution to record in order to
replenish its general valuation
allowances to an adequate level, and
estimated losses on contingent
liabilities.
The FDIC is revising the interim final
rule to clarify that state nonmember
banks and state savings associations
remain subject to its long-standing
supervisory procedures regarding the
deduction of identified losses.
Therefore, for purposes of the interim
final rule, such institutions must deduct
identified losses from common equity
tier 1 capital elements.
2. Regulatory Adjustments to Common
Equity Tier 1 Capital
a. Accumulated Net Gains and Losses
on Certain Cash-Flow Hedges
Consistent with Basel III, under the
proposal, a banking organization would
have been required to exclude from
regulatory capital any accumulated net
gains and losses on cash-flow hedges
relating to items that are not recognized
at fair value on the balance sheet.
This proposed regulatory adjustment
was intended to reduce the artificial
volatility that can arise in a situation in
which the accumulated net gain or loss
of the cash-flow hedge is included in
regulatory capital but any change in the
fair value of the hedged item is not. The
agencies received a number of
comments on this proposed regulatory
capital adjustment. In general, the
commenters noted that while the intent
of the adjustment is to remove an
element that gives rise to artificial
volatility in common equity, the
proposed adjustment may actually
increase volatility in the measure of
common equity tier 1 capital. These
commenters indicated that the proposed
adjustment, together with the proposed
treatment of net unrealized gains and
losses on AFS debt securities, would
create incentives for banking
organizations to avoid hedges that
reduce interest rate risk; shorten
maturity of their investments in AFS
securities; or move their investment
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securities portfolio from AFS to HTM.
To address these concerns, commenters
suggested several alternatives, such as
including all accumulated net gains and
losses on cash-flow hedges in common
equity tier 1 capital to match the
proposal to include in common equity
tier 1 capital net unrealized gains and
losses on AFS debt securities; retaining
the provisions in the agencies’ general
risk-based capital rules that exclude
most elements of AOCI from regulatory
capital; or using a principles-based
approach to accommodate variations in
the interest rate management techniques
employed by each banking organization.
Under the interim final rule, the FDIC
has retained the requirement that all
FDIC-supervised institutions subject to
the advanced approaches rule, and
those FDIC-supervised institutions that
elect to include AOCI in common equity
tier 1 capital, must subtract from
common equity tier 1 capital elements
any accumulated net gains and must
add any accumulated net losses on cashflow hedges included in AOCI that
relate to the hedging of items that are
not recognized at fair value on the
balance sheet. The FDIC believes that
this adjustment removes an element that
gives rise to artificial volatility in
common equity tier 1 capital as it would
avoid a situation in which the changes
in the fair value of the cash-flow hedge
are reflected in capital but the changes
in the fair value of the hedged item are
not.
b. Changes in an FDIC-Supervised
Institution’s Own Credit Risk
The proposal provided that a banking
organization would not be permitted to
include in regulatory capital any change
in the fair value of a liability attributable
to changes in the banking organization’s
own credit risk. In addition, the
proposal would have required advanced
approaches banking organizations to
deduct the credit spread premium over
the risk-free rate for derivatives that are
liabilities. Consistent with Basel III,
these provisions were intended to
prevent a banking organization from
recognizing increases in regulatory
capital resulting from any change in the
fair value of a liability attributable to
changes in the banking organization’s
own creditworthiness. Under the
interim final rule, all FDIC-supervised
institutions not subject to the advanced
approaches rule must deduct any
cumulative gain from and add back to
common equity tier 1 capital elements
any cumulative loss attributed to
changes in the value of a liability
measured at fair value arising from
changes in the FDIC-supervised
institution’s own credit risk. This
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requirement would apply to all
liabilities that an FDIC-supervised
institution must measure at fair value
under GAAP, such as derivative
liabilities, or for which the FDICsupervised institution elects to measure
at fair value under the fair value
option.84
Similarly, advanced approaches FDICsupervised institutions must deduct any
cumulative gain from and add back any
cumulative loss to common equity tier
1 capital elements attributable to
changes in the value of a liability that
the FDIC-supervised institution elects to
measure at fair value under GAAP. For
derivative liabilities, advanced
approaches FDIC-supervised
institutions must implement this
requirement by deducting the credit
spread premium over the risk-free rate.
c. Accumulated Other Comprehensive
Income
Under the agencies’ general risk-based
capital rules, most of the components of
AOCI included in a company’s GAAP
equity are not included in an FDICsupervised institution’s regulatory
capital. Under GAAP, AOCI includes
unrealized gains and losses on certain
assets and liabilities that are not
included in net income. Among other
items, AOCI includes unrealized gains
and losses on AFS securities; other than
temporary impairment on securities
reported as HTM that are not creditrelated; cumulative gains and losses on
cash-flow hedges; foreign currency
translation adjustments; and amounts
attributed to defined benefit postretirement plans resulting from the
initial and subsequent application of the
relevant GAAP standards that pertain to
such plans.
Under the agencies’ general risk-based
capital rules, FDIC-supervised
institutions do not include most
amounts reported in AOCI in their
regulatory capital calculations. Instead,
they exclude these amounts by
subtracting unrealized or accumulated
net gains from, and adding back
unrealized or accumulated net losses to,
equity capital. The only amounts of
AOCI included in regulatory capital are
unrealized losses on AFS equity
securities and foreign currency
translation adjustments, which are
included in tier 1 capital. Additionally,
FDIC-supervised institutions may
include up to 45 percent of unrealized
gains on AFS equity securities in their
tier 2 capital.
In contrast, consistent with Basel III,
the proposed rule required banking
84 825–10–25 (former Financial Accounting
Standards Board Statement No. 159).
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55377
organizations to include all AOCI
components in common equity tier 1
capital elements, except gains and
losses on cash-flow hedges where the
hedged item is not recognized on a
banking organization’s balance sheet at
fair value. Unrealized gains and losses
on all AFS securities would flow
through to common equity tier 1 capital
elements, including unrealized gains
and losses on debt securities due to
changes in valuations that result
primarily from fluctuations in
benchmark interest rates (for example,
U.S. Treasuries and U.S. government
agency debt obligations), as opposed to
changes in credit risk.
In the Basel III NPR, the agencies
indicated that the proposed regulatory
capital treatment of AOCI would better
reflect an institution’s actual risk. In
particular, the agencies stated that while
unrealized gains and losses on AFS debt
securities might be temporary in nature
and reverse over a longer time horizon
(especially when those gains and losses
are primarily attributable to changes in
benchmark interest rates), unrealized
losses could materially affect a banking
organization’s capital position at a
particular point in time and associated
risks should therefore be reflected in its
capital ratios. In addition, the agencies
observed that the proposed treatment
would be consistent with the common
market practice of evaluating a firm’s
capital strength by measuring its
tangible common equity, which
generally includes AOCI.
However, the agencies also
acknowledged that including unrealized
gains and losses related to debt
securities (especially those whose
valuations primarily change as a result
of fluctuations in a benchmark interest
rate) could introduce substantial
volatility in a banking organization’s
regulatory capital ratios. Specifically,
the agencies observed that for some
banking organizations, including
unrealized losses on AFS debt securities
in their regulatory capital calculations
could mean that fluctuations in a
benchmark interest rate could lead to
changes in their PCA categories from
quarter to quarter. Recognizing the
potential impact of such fluctuations on
regulatory capital management for some
institutions, the agencies described
possible alternatives to the proposed
treatment of unrealized gains and losses
on AFS debt securities, including an
approach that would exclude from
regulatory capital calculations those
unrealized gains and losses that are
related to AFS debt securities whose
valuations primarily change as a result
of fluctuations in benchmark interest
rates, including U.S. government and
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agency debt obligations, GSE debt
obligations, and other sovereign debt
obligations that would qualify for a zero
percent risk weight under the
standardized approach.
A large proportion of commenters
addressed the proposed treatment of
AOCI in regulatory capital. Banking
organizations of all sizes, banking and
other industry groups, public officials
(including members of the U.S.
Congress), and other individuals
strongly opposed the proposal to
include most AOCI components in
common equity tier 1 capital.
Specifically, commenters asserted that
the agencies should not implement the
proposal and should instead continue to
apply the existing treatment for AOCI
that excludes most AOCI amounts from
regulatory capital. Several commenters
stated that the accounting standards that
require banking organizations to take a
charge against earnings (and thus reduce
capital levels) to reflect credit-related
losses as part of other-than-temporary
impairments already achieve the
agencies’ goal to create regulatory
capital ratios that provide an accurate
picture of a banking organization’s
capital position, without also including
AOCI in regulatory capital. For
unrealized gains and losses on AFS debt
securities that typically result from
changes in benchmark interest rates
rather than changes in credit risk, most
commenters expressed concerns that the
value of such securities on any
particular day might not be a good
indicator of the value of those securities
for a banking organization, given that
the banking organization could hold
them until they mature and realize the
amount due in full. Most commenters
argued that the inclusion of unrealized
gains and losses on AFS debt securities
in regulatory capital could result in
volatile capital levels and adversely
affect other measures tied to regulatory
capital, such as legal lending limits,
especially if and when interest rates rise
from their current historically-low
levels.
Accordingly, several commenters
requested that the agencies permit
banking organizations to remove from
regulatory capital calculations
unrealized gains and losses on AFS debt
securities that have low credit risk but
experience price movements based
primarily on fluctuations in benchmark
interest rates. According to commenters,
these debt securities would include
securities issued by the United States
and other stable sovereign entities, U.S.
agencies and GSEs, as well as some
municipal entities. One commenter
expressed concern that the proposed
treatment of AOCI would lead banking
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organizations to invest excessively in
securities with low volatility. Some
commenters also suggested that
unrealized gains and losses on highquality asset-backed securities and highquality corporate securities should be
excluded from regulatory capital
calculations. The commenters argued
that these adjustments to the proposal
would allow regulatory capital to reflect
unrealized gains or losses related to the
credit quality of a banking
organization’s AFS debt securities.
Additionally, commenters noted that,
under the proposal, offsetting changes
in the value of other items on a banking
organization’s balance sheet would not
be recognized for regulatory capital
purposes when interest rates change.
For example, the commenters observed
that banking organizations often hold
AFS debt securities to hedge interest
rate risk associated with deposit
liabilities, which are not marked to fair
value on the balance sheet. Therefore,
requiring banking organizations to
include AOCI in regulatory capital
would mean that interest rate
fluctuations would be reflected in
regulatory capital only for one aspect of
this hedging strategy, with the result
that the proposed treatment could
greatly overstate the economic impact
that interest rate changes have on the
safety and soundness of the banking
organization.
Several commenters used sample AFS
securities portfolio data to illustrate
how an upward shift in interest rates
could have a substantial impact on a
banking organization’s capital levels
(depending on the composition of its
AFS portfolio and its defined benefit
postretirement obligations). According
to these commenters, the potential
negative impact on capital levels that
could follow a substantial increase in
interest rates would place significant
strains on banking organizations.
To address the potential impact of
incorporating the volatility associated
with AOCI into regulatory capital,
banking organizations also noted that
they could increase their overall capital
levels to create a buffer above regulatory
minimums, hedge or reduce the
maturities of their AFS debt securities,
or shift more debt securities into their
HTM portfolio. However, commenters
asserted that these strategies would be
complicated and costly, especially for
smaller banking organizations, and
could lead to a significant decrease in
lending activity. Many community
banking organization commenters
observed that hedging or raising
additional capital may be especially
difficult for banking organizations with
limited access to capital markets, while
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shifting more debt securities into the
HTM portfolio would impair active
management of interest rate risk
positions and negatively impact a
banking organization’s liquidity
position. These commenters also
expressed concern that this could be
especially problematic given the
increased attention to liquidity by
banking regulators and industry
analysts.
A number of commenters indicated
that in light of the potential impact of
the proposed treatment of AOCI on a
banking organization’s liquidity
position, the agencies should, at the
very least, postpone implementing this
aspect of the proposal until after
implementation of the BCBS’s revised
liquidity standards. Commenters
suggested that postponing the
implementation of the AOCI treatment
would help to ensure that the final
capital rules do not create disincentives
for a banking organization to increase its
holdings of high-quality liquid assets. In
addition, several commenters suggested
that the agencies not require banking
organizations to include in regulatory
capital unrealized gains and losses on
assets that would qualify as ‘‘high
quality liquid assets’’ under the BCBS’s
‘‘liquidity coverage ratio’’ under the
Basel III liquidity framework.
Finally, several commenters
addressed the inclusion in AOCI of
actuarial gains and losses on defined
benefit pension fund obligations.
Commenters stated that many banking
organizations, particularly mutual
banking organizations, offer defined
benefit pension plans to attract
employees because they are unable to
offer stock options to employees. These
commenters noted that actuarial gains
and losses on defined benefit
obligations represent the difference
between benefit assumptions and,
among other things, actual investment
experiences during a given year, which
is influenced predominantly by the
discount rate assumptions used to
determine the value of the plan
obligation. The discount rate is tied to
prevailing long-term interest rates at a
point in time each year, and while
market returns on the underlying assets
of the plan and the discount rates may
fluctuate year to year, the underlying
liabilities typically are longer term—in
some cases 15 to 20 years. Therefore,
changing interest rate environments
could lead to material fluctuations in
the value of a banking organization’s
defined benefit post-retirement fund
assets and liabilities, which in turn
could create material swings in a
banking organization’s regulatory
capital that would not be tied to changes
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in the credit quality of the underlying
assets. Commenters stated that the
added volatility in regulatory capital
could lead some banking organizations
to reconsider offering defined benefit
pension plans.
The FDIC has considered the
comments on the proposal to
incorporate most elements of AOCI in
regulatory capital, and has taken into
account the potential effects that the
proposed AOCI treatment could have on
FDIC-supervised institutions and their
function in the economy. As discussed
in the proposal, the FDIC believes that
the proposed AOCI treatment results in
a regulatory capital measure that better
reflects FDIC-supervised institutions’
actual risk at a specific point in time.
The FDIC also believes that AOCI is an
important indicator that market
observers use to evaluate the capital
strength of an FDIC-supervised
institution.
However, the FDIC recognizes that for
many FDIC-supervised institutions, the
volatility in regulatory capital that could
result from the proposal could lead to
significant difficulties in capital
planning and asset-liability
management. The FDIC also recognizes
that the tools used by advanced
approaches FDIC-supervised
institutions and other larger, more
complex FDIC-supervised institutions
for managing interest rate risk are not
necessarily readily available to all FDICsupervised institutions.
Therefore, in the interim final rule,
the FDIC has decided to permit those
FDIC-supervised institutions that are
not subject to the advanced approaches
risk-based capital rules to elect to
calculate regulatory capital by using the
treatment for AOCI in the FDIC’s general
risk-based capital rules, which excludes
most AOCI amounts. Such FDICsupervised institutions, may make a
one-time, permanent election 85 to
effectively continue using the AOCI
treatment under the general risk-based
capital rules for their regulatory
calculations (‘‘AOCI opt-out election’’)
when filing the Call Report for the first
reporting period after the date upon
which they become subject to the
interim final rule.
Pursuant to a separate notice under
the Paperwork Reduction Act, the
agencies intend to propose revisions to
the Call Report to implement changes in
reporting items that would correspond
85 This one-time, opt-out selection does not cover
a merger, acquisition or purchase transaction
involving all or substantially all of the assets or
voting stock between two banking organizations of
which only one made an AOCI opt-out election.
The resulting organization may make an AOCI
election with prior agency approval.
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to the interim final rule. These revisions
will include a line item for FDICsupervised institutions to indicate their
AOCI opt-out election in their first
regulatory report filed after the date the
FDIC-supervised institution becomes
subject to the interim final rule.
Information regarding the AOCI opt-out
election will be made available to the
public and will be reflected on an
ongoing basis in publicly available
regulatory reports. An FDIC-supervised
institution that does not make an AOCI
opt-out election on the Call Report filed
for the first reporting period after the
effective date of the interim final rule
must include all AOCI components,
except accumulated net gains and losses
on cash-flow hedges related to items
that are not recognized at fair value on
the balance sheet, in regulatory capital
elements starting the first quarter in
which the FDIC-supervised institution
calculates its regulatory capital
requirements under the interim final
rule.
Consistent with regulatory capital
calculations under the FDIC’s general
risk-based capital rules, an FDICsupervised institution that makes an
AOCI opt-out election under the interim
final rule must adjust common equity
tier 1 capital elements by: (1)
Subtracting any net unrealized gains
and adding any net unrealized losses on
AFS securities; (2) subtracting any net
unrealized losses on AFS preferred
stock classified as an equity security
under GAAP and AFS equity exposures;
(3) subtracting any accumulated net
gains and adding back any accumulated
net losses on cash-flow hedges included
in AOCI; (4) subtracting amounts
attributed to defined benefit
postretirement plans resulting from the
initial and subsequent application of the
relevant GAAP standards that pertain to
such plans (excluding, at the FDICsupervised institution’s option, the
portion relating to pension assets
deducted under section 324.22(a)(5));
and (5) subtracting any net unrealized
gains and adding any net unrealized
losses on held-to-maturity securities
that are included in AOCI. In addition,
consistent with the general risk-based
capital rules, the FDIC-supervised
institution must incorporate into
common equity tier 1 capital any foreign
currency translation adjustment. An
FDIC-supervised institution may also
incorporate up to 45 percent of any net
unrealized gains on AFS preferred stock
classified as an equity security under
GAAP and AFS equity exposures into
its tier 2 capital elements. However, the
FDIC may exclude all or a portion of
these unrealized gains from an FDIC-
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supervised institution’s tier 2 capital
under the reservation of authority
provision of the interim final rule if the
FDIC determines that such preferred
stock or equity exposures are not
prudently valued.
The FDIC believes that FDICsupervised institutions that apply the
advanced approaches rule or that have
opted to use the advanced approaches
rule should already have the systems in
place necessary to manage the added
volatility resulting from the new AOCI
treatment. Likewise, pursuant to the
Dodd-Frank Act, these large, complex
FDIC-supervised institutions are subject
to enhanced prudential standards,
including stress-testing requirements,
and therefore should be prepared to
manage their capital levels through the
types of stressed economic
environments, including environments
with shifting interest rates, that could
lead to substantial changes in amounts
reported in AOCI. Accordingly, under
the interim final rule, advanced
approaches FDIC-supervised
institutions will be required to
incorporate all AOCI components,
except accumulated net gains and losses
on cash-flow hedges that relate to items
that are not measured at fair value on
the balance sheet, into their common
equity tier 1 capital elements according
to the transition provisions set forth in
the interim final rule.
The interim final rule additionally
provides that in a merger, acquisition, or
purchase transaction between two FDICsupervised institutions that have each
made an AOCI opt-out election, the
surviving entity will be required to
continue with the AOCI opt-out
election, unless the surviving entity is
an advanced approaches FDICsupervised institution. Similarly, in a
merger, acquisition, or purchase
transaction between two FDICsupervised institutions that have each
not made an AOCI opt-out election, the
surviving entity must continue
implementing such treatment going
forward. If an entity surviving a merger,
acquisition, or purchase transaction
becomes subject to the advanced
approaches rule, it is no longer
permitted to make an AOCI opt-out
election and, therefore, must include
most elements of AOCI in regulatory
capital in accordance with the interim
final rule.
However, following a merger,
acquisition or purchase transaction
involving all or substantially all of the
assets or voting stock between two
banking organizations of which only
one made an AOCI opt-out election (and
the surviving entity is not subject to the
advanced approaches rule), the
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surviving entity must decide whether to
make an AOCI opt-out election by its
first regulatory reporting date following
the consummation of the transaction.86
For example, if all of the equity of a
banking organization that has made an
AOCI opt-out election is acquired by a
banking organization that has not made
such an election, the surviving entity
may make a new AOCI opt-out election
in the Call Report filed for the first
reporting period after the effective date
of the merger. The interim final rule also
provides the FDIC with discretion to
allow a new AOCI opt-out election
where a merger, acquisition or purchase
transaction between two banking
organizations that have made different
AOCI opt-out elections does not involve
all or substantially all of the assets or
voting stock of the purchased or
acquired banking organization. In
making such a determination, the FDIC
may consider the terms of the merger,
acquisition, or purchase transaction, as
well as the extent of any changes to the
risk profile, complexity, and scope of
operations of the banking organization
resulting from the merger, acquisition,
or purchase transaction. The FDIC may
also look to the Bank Merger Act 87 for
guidance on the types of transactions
that would allow the surviving entity to
make a new AOCI opt-out election.
Finally, a de novo FDIC-supervised
institution formed after the effective
date of the interim final rule is required
to make a decision to opt out in the first
Call Report it is required to file.
The interim final rule also provides
that if a top-tier depository institution
holding company makes an AOCI optout election, any subsidiary insured
depository institution that is
consolidated by the depository
institution holding company also must
make an AOCI opt-out election. The
FDIC is concerned that if some FDICsupervised institutions subject to
regulatory capital rules under a common
parent holding company make an AOCI
opt-out election and others do not, there
is a potential for these organizations to
engage in capital arbitrage by choosing
to book exposures or activities in the
86 A merger would involve ‘‘all or substantially
all’’ of the assets or voting stock where, for example:
(1) a banking organization buys all of the voting
stock of a target banking organization, except for the
stock of a dissenting, non-controlling minority
shareholder; or (2) the banking organization buys all
of the assets and major business lines of a target
banking organization, but does not purchase a
minor business line of the target. Circumstances in
which the ‘‘all or substantially all’’ standard likely
would not be met would be, for example: (1) a
banking organization buys less than 80 percent of
another banking organization; or (3) a banking
organization buys only three out of four of another
banking organization’s major business lines.
87 12 U.S.C. 1828(c).
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legal entity for which the relevant
components of AOCI are treated most
favorably.
Notwithstanding the availability of
the AOCI opt-out election under the
interim final rule, the FDIC has reserved
the authority to require an FDICsupervised institution to recognize all or
some components of AOCI in regulatory
capital if an agency determines it would
be appropriate given an FDICsupervised institution’s risks under the
FDIC’s general reservation of authority
under the interim final rule. The FDIC
will continue to expect each FDICsupervised institution to maintain
capital appropriate for its actual risk
profile, regardless of whether it has
made an AOCI opt-out election.
Therefore, the FDIC may determine that
an FDIC-supervised institution with a
large portfolio of AFS debt securities, or
that is otherwise engaged in activities
that expose it to high levels of interestrate or other risks, should raise its
common equity tier 1 capital level
substantially above the regulatory
minimums, regardless of whether that
FDIC-supervised institution has made
an AOCI opt-out election.
d. Investments in Own Regulatory
Capital Instruments
To avoid the double-counting of
regulatory capital, the proposal would
have required a banking organization to
deduct the amount of its investments in
its own capital instruments, including
direct and indirect exposures, to the
extent such instruments are not already
excluded from regulatory capital.
Specifically, the proposal would require
a banking organization to deduct its
investment in its own common equity
tier 1, additional tier 1, and tier 2 capital
instruments from the sum of its
common equity tier 1, additional tier 1,
and tier 2 capital, respectively. In
addition, under the proposal any
common equity tier 1, additional tier 1,
or tier 2 capital instrument issued by a
banking organization that the banking
organization could be contractually
obligated to purchase also would have
been deducted from common equity tier
1, additional tier 1, or tier 2 capital
elements, respectively. The proposal
noted that if a banking organization had
already deducted its investment in its
own capital instruments (for example,
treasury stock) from its common equity
tier 1 capital, it would not need to make
such deductions twice.
The proposed rule would have
required a banking organization to look
through its holdings of an index to
deduct investments in its own capital
instruments. Gross long positions in
investments in its own regulatory
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capital instruments resulting from
holdings of index securities would have
been netted against short positions in
the same underlying index. Short
positions in indexes to hedge long cash
or synthetic positions could have been
decomposed to recognize the hedge.
More specifically, the portion of the
index composed of the same underlying
exposure that is being hedged could
have been used to offset the long
position only if both the exposure being
hedged and the short position in the
index were covered positions under the
market risk rule and the hedge was
deemed effective by the banking
organization’s internal control processes
which would have been assessed by the
primary Federal supervisor of the
banking organization. If the banking
organization found it operationally
burdensome to estimate the investment
amount of an index holding, the
proposal permitted the institution to use
a conservative estimate with prior
approval from its primary Federal
supervisor. In all other cases, gross long
positions would have been allowed to
be deducted net of short positions in the
same underlying instrument only if the
short positions involved no
counterparty risk (for example, the
position was fully collateralized or the
counterparty is a qualifying central
counterparty (QCCP)).
As discussed above, under the
proposal, a banking organization would
be required to look through its holdings
of an index security to deduct
investments in its own capital
instruments. Some commenters asserted
that the burden of the proposed lookthrough approach outweighs its benefits
because it is not likely a banking
organization would re-purchase its own
stock through such indirect means.
These commenters suggested that the
agencies should not require a lookthrough test for index securities on the
grounds that they are not ‘‘covert
buybacks,’’ but rather are incidental
positions held within a banking
organization’s trading book, often
entered into on behalf of clients,
customers or counterparties, and are
economically hedged. However, the
FDIC believes that it is important to
avoid the double-counting of regulatory
capital, whether held directly or
indirectly. Therefore, the interim final
rule implements the look-through
requirements of the proposal without
change. In addition, consistent with the
treatment for indirect investments in an
FDIC-supervised institution’s own
capital instruments, the FDIC has
clarified in the interim final rule that
FDIC-supervised institutions must
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deduct synthetic exposures related to
investments in own capital instruments.
e. Definition of Financial Institution
Under the proposed rule, a banking
organization would have been required
to deduct an investment in the capital
of an unconsolidated financial
institution exceeding certain thresholds,
as described below. The proposed
definition of financial institution was
designed to include entities whose
activities and primary business are
financial in nature and therefore could
contribute to interconnectedness in the
financial system. The proposed
definition covered entities whose
primary business is banking, insurance,
investing, and trading, or a combination
thereof, and included BHCs, SLHCs,
nonbank financial institutions
supervised by the Federal Reserve under
Title I of the Dodd-Frank Act,
depository institutions, foreign banks,
credit unions, insurance companies,
securities firms, commodity pools,
covered funds for purposes of section 13
of the Bank Holding Company Act and
regulations issued thereunder,
companies ‘‘predominantly engaged’’ in
financial activities, non-U.S.-domiciled
entities that would otherwise have been
covered by the definition if they were
U.S.-domiciled, and any other company
that the agencies determined was a
financial institution based on the nature
and scope of its activities. The
definition excluded GSEs and firms that
were ‘‘predominantly engaged’’ in
activities that are financial in nature but
focus on community development,
public welfare projects, and similar
objectives. Under the proposed
definition, a company would have been
‘‘predominantly engaged’’ in financial
activities if (1) 85 percent or more of the
total consolidated annual gross revenues
(as determined in accordance with
applicable accounting standards) of the
company in either of the two most
recent calendar years were derived,
directly or indirectly, by the company
on a consolidated basis from the
activities; or (2) 85 percent or more of
the company’s consolidated total assets
(as determined in accordance with
applicable accounting standards) as of
the end of either of the two most recent
calendar years were related to the
activities.
The proposed definition of ‘‘financial
institution’’ was also relevant for
purposes of the Advanced Approaches
NPR. Specifically, the proposed rule
would have required banking
organizations to apply a multiplier of
1.25 to the correlation factor for
wholesale exposures to unregulated
financial institutions that generate a
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majority of their revenue from financial
activities. The proposed rule also would
have required advanced approaches
banking organizations to apply a
multiplier of 1.25 to wholesale
exposures to regulated financial
institutions with consolidated assets
greater than or equal to $100 billion.88
The agencies received a number of
comments on the proposed definition of
‘‘financial institution.’’ Commenters
expressed concern that the definition of
a financial institution was overly broad
and stated that it should not include
investments in funds, commodity pools,
or ERISA plans. Other commenters
stated that the ‘‘predominantly
engaged’’ test would impose significant
operational burdens on banking
organizations in determining what
companies would be included in the
proposed definition of ‘‘financial
institution.’’ Commenters suggested that
the agencies should risk weight such
exposures, rather than subjecting them
to a deduction from capital based on the
definition of financial institution.
Some of the commenters noted that
many of the exposures captured by the
financial institution definition may be
risk-weighted under certain
circumstances, and expressed concerns
that overlapping regulation would result
in confusion. For similar reasons,
commenters recommended that the
agencies limit the definition of financial
institution to specific enumerated
entities, such as regulated financial
institutions, including insured
depository institutions and holding
companies, nonbank financial
companies designated by the Financial
Stability Oversight Council, insurance
companies, securities holding
companies, foreign banks, securities
firms, futures commission merchants,
swap dealers, and security based swap
dealers. Other commenters stated that
the definition should cover only those
entities subject to consolidated
regulatory capital requirements.
Commenters also encouraged the
agencies to adopt alternatives to the
‘‘predominantly engaged’’ test for
identifying a financial institution, such
as the use of standard industrial
classification codes or legal entity
identifiers. Other commenters suggested
88 The definitions of regulated financial
institutions and unregulated financial institutions
are discussed in further detail in section XII.A of
this preamble. Under the proposal, a ‘‘regulated
financial institution’’ would include a financial
institution subject to consolidated supervision and
regulation comparable to that imposed on U.S.
companies that are depository institutions,
depository institution holding companies, nonbank
financial companies supervised by the Board,
broker dealers, credit unions, insurance companies,
and designated financial market utilities.
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that the agencies should limit the
application of the ‘‘predominantly
engaged’’ test in the definition of
‘‘financial institution’’ to companies
above a specified size threshold.
Similarly, others requested that the
agencies exclude any company with
total assets of less than $50 billion.
Many commenters indicated that the
broad definition proposed by the
agencies was not required by Basel III
and was unnecessary to promote
systemic stability and avoid
interconnectivity. Some commenters
stated that funds covered by Section 13
of the Bank Holding Company Act also
should be excluded. Other commenters
suggested that the agencies should
exclude investment funds registered
with the SEC under the Investment
Company Act of 1940 and their foreign
equivalents, while some commenters
suggested methods of narrowing the
definition to cover only leveraged funds.
Commenters also requested that the
agencies clarify that investment or
financial advisory activities include
providing both discretionary and nondiscretionary investment or financial
advice to customers, and that the
definition would not capture either
registered investment companies or
investment advisers to registered funds.
After considering the comments, the
FDIC has modified the definition of
‘‘financial institution’’ to provide more
clarity around the scope of the
definition as well as reduce operational
burden. Separate definitions are
adopted under the advanced approaches
provisions of the interim final rule for
‘‘regulated financial institution’’ and
‘‘unregulated financial institution’’ for
purposes of calculating the correlation
factor for wholesale exposures, as
discussed in section XII.A of this
preamble.
Under the interim final rule, the first
paragraph of the definition of a financial
institution includes an enumerated list
of regulated institutions similar to the
list that appeared in the first paragraph
of the proposed definition: A BHC;
SLHC; nonbank financial institution
supervised by the Federal Reserve under
Title I of the Dodd-Frank Act;
depository institution; foreign bank;
credit union; industrial loan company,
industrial bank, or other similar
institution described in section 2 of the
Bank Holding Company Act; national
association, state member bank, or state
nonmember bank that is not a
depository institution; insurance
company; securities holding company
as defined in section 618 of the DoddFrank Act; broker or dealer registered
with the SEC; futures commission
merchant and swap dealer, each as
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defined in the Commodity Exchange
Act; or security-based swap dealer; or
any designated financial market utility
(FMU). The definition also includes
foreign companies that would be
covered by the definition if they are
supervised and regulated in a manner
similar to the institutions described
above that are included in the first
paragraph of the definition of ‘‘financial
institution.’’ The FDIC also has retained
in the final definition of ‘‘financial
institution’’ a modified version of the
proposed ‘‘predominantly engaged’’ test
to capture additional entities that
perform certain financial activities that
the FDIC believes appropriately
addresses those relationships among
financial institutions that give rise to
concerns about interconnectedness,
while reducing operational burden.
Consistent with the proposal, a
company is ‘‘predominantly engaged’’
in financial activities for the purposes of
the definition if it meets the test to the
extent the following activities make up
more than 85 percent of the company’s
total assets or gross revenues:
(1) Lending money, securities or other
financial instruments, including
servicing loans;
(2) Insuring, guaranteeing,
indemnifying against loss, harm,
damage, illness, disability, or death, or
issuing annuities;
(3) Underwriting, dealing in, making
a market in, or investing as principal in
securities or other financial instruments;
or
(4) Asset management activities (not
including investment or financial
advisory activities).
In response to comments expressing
concerns regarding operational burden
and potential lack of access to necessary
information in applying the proposed
‘‘predominantly engaged’’ test, the FDIC
has revised that portion of the
definition. Now, the FDIC-supervised
institution would only apply the test if
it has an investment in the GAAP equity
instruments of the company with an
adjusted carrying value or exposure
amount equal to or greater than $10
million, or if it owns more than 10
percent of the company’s issued and
outstanding common shares (or similar
equity interest). The FDIC believes that
this modification would reduce burden
on FDIC-supervised institutions with
small exposures, while those with larger
exposures should have sufficient
information as a shareholder to conduct
the predominantly engaged analysis.89
89 For advanced approaches FDIC-supervised
institutions, for purposes of section 131 of the
interim final rule, the definition of ‘‘unregulated
financial institution’’ does not include the
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In cases when an FDIC-supervised
institution’s investment in the FDICsupervised institution exceeds one of
the thresholds described above, the
FDIC-supervised institution must
determine whether the company is
predominantly engaged in financial
activities, in accordance with the
interim final rule. The FDIC believes
that this modification will substantially
reduce operational burden for FDICsupervised institutions with
investments in multiple institutions.
The FDIC also believes that an
investment of $10 million in or a
holding of 10 percent of the outstanding
common shares (or equivalent
ownership interest) of an entity has the
potential to create a risk of
interconnectedness, and also makes it
reasonable for the FDIC-supervised
institution to gain information necessary
to understand the operations and
activities of the company in which it
has invested and to apply the proposed
‘‘predominantly engaged’’ test under the
definition. The FDIC is clarifying that,
consistent with the proposal,
investment or financial advisers
(whether they provide discretionary or
non-discretionary advisory services) are
not covered under the definition of
financial institution. The revised
definition also specifically excludes
employee benefit plans. The FDIC
believes, upon review of the comments,
that employee benefit plans are heavily
regulated under ERISA and do not
present the same kind of risk of
systemic interconnectedness that the
enumerated financial institutions
present. The revised definition also
explicitly excludes investment funds
registered with the SEC under the
Investment Company Act of 1940, as the
FDIC believes that such funds create
risks of systemic interconnectedness
largely through their investments in the
capital of financial institutions. These
investments are addressed directly by
the interim final rule’s treatment of
indirect investments in financial
institutions. Although the revised
definition does not specifically include
commodities pools, under some
circumstances an FDIC-supervised
institution’s investment in a
commodities pool might meet the
requirements of the modified
‘‘predominantly engaged’’ test.
Some commenters also requested that
the agencies establish an asset threshold
below which an entity would not be
included in the definition of ‘‘financial
institution.’’ The FDIC has not included
such a threshold because they are
ownership limitation in applying the
‘‘predominantly engaged’’ standard.
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concerned that it could create an
incentive for multiple investments and
aggregated exposures in smaller
financial institutions, thereby
undermining the rationale underlying
the treatment of investments in the
capital of unconsolidated financial
institutions. The FDIC believes that the
definition of financial institution
appropriately captures both large and
small entities engaged in the core
financial activities that the FDIC
believes should be addressed by the
definition and associated deductions
from capital. The FDIC believes,
however, that the modification to the
‘‘predominantly engaged’’ test, should
serve to alleviate some of the burdens
with which the commenters who made
this point were concerned.
Consistent with the proposal,
investments in the capital of
unconsolidated financial institutions
that are held indirectly (indirect
exposures) are subject to deduction.
Under the proposal, a banking
organization’s entire investment in, for
example, a registered investment
company would have been subject to
deduction from capital. Although those
entities are excluded from the definition
of financial institution in the interim
final rule unless the ownership
threshold is met, any holdings in the
capital instruments of financial
institutions held indirectly through
investment funds are subject to
deduction from capital. More generally,
and as described later in this section of
the preamble, the interim final rule
provides an explicit mechanism for
calculating the amount of an indirect
investment subject to deduction.
f. The Corresponding Deduction
Approach
The proposals incorporated the Basel
III corresponding deduction approach
for the deductions from regulatory
capital related to reciprocal
crossholdings, non-significant
investments in the capital of
unconsolidated financial institutions,
and non-common stock significant
investments in the capital of
unconsolidated financial institutions.
Under the proposal, a banking
organization would have been required
to make any such deductions from the
same component of capital for which
the underlying instrument would
qualify if it were issued by the banking
organization itself. If a banking
organization did not have a sufficient
amount of a specific regulatory capital
component against which to effect the
deduction, the shortfall would have
been deducted from the next higher
(that is, more subordinated) regulatory
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capital component. For example, if a
banking organization did not have
enough additional tier 1 capital to
satisfy the required deduction, the
shortfall would be deducted from
common equity tier 1 capital elements.
Under the proposal, if the banking
organization invested in an instrument
issued by an financial institution that is
not a regulated financial institution, the
banking organization would have
treated the instrument as common
equity tier 1 capital if the instrument is
common stock (or if it is otherwise the
most subordinated form of capital of the
financial institution) and as additional
tier 1 capital if the instrument is
subordinated to all creditors of the
financial institution except common
shareholders. If the investment is in the
form of an instrument issued by a
regulated financial institution and the
instrument does not meet the criteria for
any of the regulatory capital
components for banking organizations,
the banking organization would treat the
instrument as: (1) Common equity tier 1
capital if the instrument is common
stock included in GAAP equity or
represents the most subordinated claim
in liquidation of the financial
institution; (2) additional tier 1 capital
if the instrument is GAAP equity and is
subordinated to all creditors of the
financial institution and is only senior
in liquidation to common shareholders;
and (3) tier 2 capital if the instrument
is not GAAP equity but it is considered
regulatory capital by the primary
supervisor of the financial institution.
Some commenters sought clarification
on whether, under the corresponding
deduction approach, TruPS would be
deducted from tier 1 or tier 2 capital. In
response to these comments the FDIC
has revised the interim final rule to
clarify the deduction treatment for
investments of non-qualifying capital
instruments, including TruPS, under the
corresponding deduction approach. The
interim final rule includes a new
paragraph section 22(c)(2)(iii) to provide
that if an investment is in the form of
a non-qualifying capital instrument
described in section 300(d) of the
interim final rule, the FDIC-supervised
institution must treat the instrument as
a: (1) tier 1 capital instrument if it was
included in the issuer’s tier 1 capital
prior to May 19, 2010; or (2) tier 2
capital instrument if it was included in
the issuer’s tier 2 capital (but not
eligible for inclusion in the issuer’s tier
1 capital) prior to May 19, 2010.
In addition, to avoid a potential
circularity issue (related to the
combined impact of the treatment of
ALLL and the risk-weight treatment for
threshold items that are not deducted
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from common equity tier 1 capital) in
the calculation of common equity tier 1
capital, the interim final rule clarifies
that FDIC-supervised institutions must
apply any deductions under the
corresponding deduction approach
resulting from insufficient amounts of a
specific regulatory capital component
after applying any deductions from the
items subject to the 10 and 15 percent
common equity tier 1 capital deduction
thresholds discussed further below.
This was accomplished by removing
proposed paragraph 22(c)(2)(i) from the
corresponding deduction approach
section and inserting paragraph 22(f).
Under section 22(f) of the interim final
rule, and as noted above, if an FDICsupervised institution does not have a
sufficient amount of a specific
component of capital to effect the
required deduction under the
corresponding deduction approach, the
shortfall must be deducted from the
next higher (that is, more subordinated)
component of regulatory capital.
g. Reciprocal Crossholdings in the
Capital Instruments of Financial
Institutions
A reciprocal crossholding results from
a formal or informal arrangement
between two financial institutions to
swap, exchange, or otherwise intend to
hold each other’s capital instruments.
The use of reciprocal crossholdings of
capital instruments to artificially inflate
the capital positions of each of the
financial institutions involved would
undermine the purpose of regulatory
capital, potentially affecting the stability
of such financial institutions as well as
the financial system.
Under the agencies’ general risk-based
capital rules, reciprocal crossholdings of
capital instruments of FDIC-supervised
institutions are deducted from
regulatory capital. Consistent with Basel
III, the proposal would have required a
banking organization to deduct
reciprocal crossholdings of capital
instruments of other financial
institutions using the corresponding
deduction approach. The interim final
rule maintains this treatment.
h. Investments in the FDIC-Supervised
Institution’s Own Capital Instruments or
in the Capital of Unconsolidated
Financial Institutions
In the interim final rule, the FDIC
made several non-substantive changes
to the wording in the proposal to clarify
that the amount of an investment in the
FDIC-supervised institution’s own
capital instruments or in the capital of
unconsolidated financial institutions is
the net long position (as calculated
under section 22(h) of the interim final
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55383
rule) of such investments. The interim
final rule also clarifies how to calculate
the net long position of these
investments, especially for the case of
indirect exposures. It is the net long
position that is subject to deduction. In
addition, the interim final rule generally
harmonizes the recognition of hedging
for own capital instruments and for
investments in the capital of
unconsolidated financial institutions.
Under the interim final rule, an
investment in an FDIC-supervised
institution’s own capital instrument is
deducted from regulatory capital and an
investment in the capital of an
unconsolidated financial institution is
subject to deduction from regulatory
capital if such investment exceeds
certain thresholds.
An investment in the capital of an
unconsolidated financial institution
refers to the net long position
(calculated in accordance with section
22(h) of the interim final rule) in an
instrument that is recognized as capital
for regulatory purposes by the primary
supervisor of an unconsolidated
regulated financial institution or in an
instrument that is part of GAAP equity
of an unconsolidated unregulated
financial institution. It includes direct,
indirect, and synthetic exposures to
capital instruments, and excludes
underwriting positions held by an FDICsupervised institution for fewer than
five business days.
An investment in the FDIC-supervised
institution’s own capital instrument
means a net long position calculated in
accordance with section 22(h) of the
interim final rule in the FDICsupervised institution’s own common
stock instrument, own additional tier 1
capital instrument or own tier 2 capital
instrument, including direct, indirect or
synthetic exposures to such capital
instruments. An investment in the
FDIC-supervised institution’s own
capital instrument includes any
contractual obligation to purchase such
capital instrument.
The interim final rule also clarifies
that the gross long position for an
investment in the FDIC-supervised
institution’s own capital instrument or
the capital of an unconsolidated
financial institution that is an equity
exposure refers to the adjusted carrying
value (determined in accordance with
section 51(b) of the interim final rule).
For the case of an investment in the
FDIC-supervised institution’s own
capital instrument or the capital of an
unconsolidated financial institution that
is not an equity exposure, the gross long
position is defined as the exposure
amount (determined in accordance with
section 2 of the interim final rule).
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Under the proposal, the agencies
included the methodology for the
recognition of hedging and for the
calculation of the net long position
regarding investments in the banking
organization’s own capital instruments
and in investments in the capital of
unconsolidated financial institutions in
the definitions section. However, such
methodology appears in section 22 of
the interim final rule as the FDIC
believes it is more appropriate to
include it in the adjustments and
deductions to regulatory capital section.
The interim final rule provides that
the net long position is the gross long
position in the underlying instrument
(including covered positions under the
market risk rule) net of short positions
in the same instrument where the
maturity of the short position either
matches the maturity of the long
position or has a residual maturity of at
least one year. An FDIC-supervised
institution may only net a short position
against a long position in the FDICsupervised institution’s own capital
instrument if the short position involves
no counterparty credit risk. The long
and short positions in the same index
without a maturity date are considered
to have matching maturities. If both the
long position and the short position do
not have contractual maturity dates,
then the positions are considered
maturity-matched. For positions that are
reported on an FDIC-supervised
institution’s regulatory report as trading
assets or trading liabilities, if the FDICsupervised institution has a contractual
right or obligation to sell a long position
at a specific point in time, and the
counterparty to the contract has an
obligation to purchase the long position
if the FDIC-supervised institution
exercises its right to sell, this point in
time may be treated as the maturity of
the long position. Therefore, if these
conditions are met, the maturity of the
long position and the short position
would be deemed to be matched even if
the maturity of the short position is less
than one year.
Gross long positions in own capital
instruments or in the capital
instruments of unconsolidated financial
institutions resulting from positions in
an index may be netted against short
positions in the same underlying index.
Short positions in indexes that are
hedging long cash or synthetic positions
may be decomposed to recognize the
hedge. More specifically, the portion of
the index that is composed of the same
underlying exposure that is being
hedged may be used to offset the long
position, provided both the exposure
being hedged and the short position in
the index are trading assets or trading
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liabilities, and the hedge is deemed
effective by the FDIC-supervised
institution’s internal control processes,
which the FDIC has found not to be
inadequate.
An indirect exposure results from an
FDIC-supervised institution’s
investment in an investment fund that
has an investment in the FDICsupervised institution’s own capital
instrument or the capital of an
unconsolidated financial institution. A
synthetic exposure results from an
FDIC-supervised institution’s
investment in an instrument where the
value of such instrument is linked to the
value of the FDIC-supervised
institution’s own capital instrument or a
capital instrument of a financial
institution. Examples of indirect and
synthetic exposures include: (1) An
investment in the capital of an
investment fund that has an investment
in the capital of an unconsolidated
financial institution; (2) a total return
swap on a capital instrument of the
FDIC-supervised institution or another
financial institution; (3) a guarantee or
credit protection, provided to a third
party, related to the third party’s
investment in the capital of another
financial institution; (4) a purchased
call option or a written put option on
the capital instrument of another
financial institution; (5) a forward
purchase agreement on the capital of
another financial institution; and (6) a
trust preferred security collateralized
debt obligation (TruPS CDO).
Investments, including indirect and
synthetic exposures, in the capital of
unconsolidated financial institutions are
subject to the corresponding deduction
approach if they surpass certain
thresholds described below. With the
prior written approval of the FDIC, for
the period of time stipulated by the
supervisor, an FDIC-supervised
institution is not required to deduct
investments in the capital of
unconsolidated financial institutions
described in this section if the
investment is made in connection with
the FDIC-supervised institution
providing financial support to a
financial institution in distress, as
determined by the supervisor. Likewise,
an FDIC-supervised institution that is an
underwriter of a failed underwriting can
request approval from the FDIC to
exclude underwriting positions related
to such failed underwriting held for
longer than five days.
Some commenters requested
clarification that a long position and
short hedging position are considered
‘‘maturity matched’’ if (1) the maturity
period of the short position extends
beyond the maturity period of the long
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position or (2) both long and short
positions mature or terminate within the
same calendar quarter. The FDIC notes
that they concur with these
commenters’ interpretation of the
maturity matching of long and short
hedging positions.
For purposes of calculating the net
long position in the capital of an
unconsolidated financial institution,
several commenters expressed concern
that allowing banking organizations to
net gross long positions with short
positions only where the maturity of the
short position either matches the
maturity of the long position or has a
maturity of at least one year is not
practical, as some exposures, such as
cash equities, have no maturity. These
commenters expressed concern that
such a maturity requirement could
result in banking organizations
deducting equities held as hedges for
equity swap transactions with a client,
making the latter transactions
uneconomical and resulting in
disruptions to market activity.
Similarly, these commenters argued that
providing customer accommodation
equity swaps could become burdensome
as a strict reading of the proposal could
affect the ability of banking
organizations to offset the equity swap
with the long equity position because
the maturity of the equity swap is
typically less than one year. The FDIC
has considered the comments and have
decided to retain the maturity
requirement as proposed. The FDIC
believes that the proposed maturity
requirements will reduce the possibility
of ‘‘cliff effects’’ resulting from the
deduction of open equity positions
when an FDIC-supervised institution is
unable to replace the hedge or sell the
long equity position.
i. Indirect Exposure Calculations
The proposal provided that an
indirect exposure would result from a
banking organization’s investment in an
unconsolidated entity that has an
exposure to a capital instrument of a
financial institution, while a synthetic
exposure would result from the banking
organization’s investment in an
instrument where the value of such
instrument is linked to the value of a
capital instrument of a financial
institution. With the exception of index
securities, the proposal did not,
however, provide a mechanism for
calculating the amount of the indirect
exposure that is subject to deduction.
The interim final rule clarifies the
methodologies for calculating the net
long position related to an indirect
exposure (which is subject to deduction
under the interim final rule) by
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providing a methodology for calculating
the gross long position of such indirect
exposure. The FDIC believes that the
options provided in the interim final
rule will provide FDIC-supervised
institutions with increased clarity
regarding the treatment of indirect
exposures, as well as increased risksensitivity to the FDIC-supervised
institution’s actual potential exposure.
In order to limit the potential
difficulties in determining whether an
unconsolidated entity in fact holds the
FDIC-supervised institution’s own
capital or the capital of unconsolidated
financial institutions, the interim final
rule also provides that the indirect
exposure requirements only apply when
the FDIC-supervised institution holds
an investment in an investment fund, as
defined in the rule. Accordingly, an
FDIC-supervised institution invested in,
for example, a commercial company is
not required to determine whether the
commercial company has any holdings
of the FDIC-supervised institution’s own
capital or the capital instruments of
financial institutions.
The interim final rule provides that an
FDIC-supervised institution may
determine that its gross long position is
equivalent to its carrying value of its
investment in an investment fund that
holds the FDIC-supervised institution’s
own capital or that holds an investment
in the capital of an unconsolidated
financial institution, which would be
subject to deduction according to
section 324.22(c). Recognizing,
however, that the FDIC-supervised
institution’s exposure to those capital
instruments may be less than its
carrying value of its investment in the
investment fund, the interim final rule
provides two alternatives for calculating
the gross long position of an indirect
exposure. For an indirect exposure
resulting from a position in an index, an
FDIC-supervised institution may, with
the prior approval of the FDIC, use a
conservative estimate of the amount of
its investment in its own capital
instruments or the capital instruments
of other financial institutions. If the
investment is held through an
investment fund, an FDIC-supervised
institution may use a look-through
approach similar to the approach used
for risk weighting equity exposures to
investment funds. Under this approach,
an FDIC-supervised institution may
multiply the carrying value of its
investment in an investment fund by
either the exact percentage of the FDICsupervised institution’s own capital
instrument or capital instruments of
unconsolidated financial institutions
held by the investment fund or by the
highest stated prospectus limit for such
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investments held by the investment
fund. Accordingly, if an FDICsupervised institution with a carrying
value of $10,000 for its investment in an
investment fund knows that the
investment fund has invested 30 percent
of its assets in the capital of financial
institutions, then the FDIC-supervised
institution could subject $3,000 (the
carrying value times the percentage
invested in the capital of financial
institutions) to deduction from
regulatory capital. The FDIC believes
that the approach is flexible and
benefits an FDIC-supervised institution
that obtains and maintains information
about its investments through
investment funds. It also provides a
simpler calculation method for an FDICsupervised institution that either does
not have information about the holdings
of the investment fund or chooses not to
do the more complex calculation.
j. Non-significant Investments in the
Capital of Unconsolidated Financial
Institutions
The proposal provided that nonsignificant investments in the capital of
unconsolidated financial institutions
would be the net long position in
investments where a banking
organization owns 10 percent or less of
the issued and outstanding common
stock of an unconsolidated financial
institution.
Under the proposal, if the aggregate
amount of a banking organization’s nonsignificant investments in the capital of
unconsolidated financial institutions
exceeds 10 percent of the sum of the
banking organization’s own common
equity tier 1 capital, minus certain
applicable deductions and other
regulatory adjustments to common
equity tier 1 capital (the 10 percent
threshold for non-significant
investments), the banking organization
would have been required to deduct the
amount of the non-significant
investments that are above the 10
percent threshold for non-significant
investments, applying the
corresponding deduction approach.90
90 The regulatory adjustments and deductions
applied in the calculation of the 10 percent
threshold for non-significant investments are those
required under sections 22(a) through 22(c)(3) of the
proposal. That is, the required deductions and
adjustments for goodwill and other intangibles
(other than MSAs) net of associated DTLs (when the
banking organization has elected to net DTLs in
accordance with section 22(e)), DTAs that arise
from net operating loss and tax credit carryforwards
net of related valuation allowances and DTLs (in
accordance with section 22(e)), cash-flow hedges
associated with items that are not recognized at fair
value on the balance sheet, excess ECLs (for
advanced approaches banking organizations only),
gains-on-sale on securitization exposures, gains and
losses due to changes in own credit risk on
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Under the proposal, the amount to be
deducted from a specific capital
component would be equal to the
amount of a banking organization’s nonsignificant investments in the capital of
unconsolidated financial institutions
exceeding the 10 percent threshold for
non-significant investments multiplied
by the ratio of: (1) The amount of nonsignificant investments in the capital of
unconsolidated financial institutions in
the form of such capital component to
(2) the amount of the banking
organization’s total non-significant
investments in the capital of
unconsolidated financial institutions.
The amount of a banking organization’s
non-significant investments in the
capital of unconsolidated financial
institutions that does not exceed the 10
percent threshold for non-significant
investments would, under the proposal,
generally be assigned the applicable risk
weight under section 32 or section 131,
as applicable (in the case of noncommon stock instruments), section 52
or section 152, as applicable (in the case
of common stock instruments), or
section 53, section 154, as applicable (in
the case of indirect investments via an
investment fund), or, in the case of a
covered position, in accordance with
subpart F, as applicable.
One commenter requested
clarification that a banking organization
would not have to take a ‘‘double
deduction’’ for an investment made in
unconsolidated financial institutions
held through another unconsolidated
financial institution in which the
banking organization has invested. The
FDIC notes that, under the interim final
rule, where an FDIC-supervised
institution has an investment in an
unconsolidated financial institution
(Institution A) and Institution A has an
investment in another unconsolidated
financial institution (Institution B), the
FDIC-supervised institution would not
be deemed to have an indirect
investment in Institution B for purposes
of the interim final rule’s capital
thresholds and deductions because the
FDIC-supervised institution’s
investment in Institution A is already
subject to capital thresholds and
deductions. However, if an FDICsupervised institution has an
investment in an investment fund that
does not meet the definition of a
financial institution, it must consider
financial liabilities measured at fair value, defined
benefit pension fund net assets for banking
organizations that are not insured by the FDIC (net
of associated DTLs in accordance with section
22(e)), investments in own regulatory capital
instruments (not deducted as treasury stock), and
reciprocal crossholdings.
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the assets of the investment fund to be
indirect holdings.
Some commenters requested
clarification that the deductions for nonsignificant investments in the capital of
unconsolidated financial institutions
may be net of associated DTLs. The
FDIC has clarified in the interim final
rule that an FDIC-supervised institution
must deduct the net long position in
non-significant investments in the
capital of unconsolidated financial
institutions, net of associated DTLs in
accordance with section 324.22(e) of the
interim final rule, that exceeds the 10
percent threshold for non-significant
investments. Under section 324.22(e) of
the interim final rule, the netting of
DTLs against assets that are subject to
deduction or fully deducted under
section 324.22 of the interim final rule
is permitted but not required.
Other commenters asked the agencies
to confirm that the proposal would not
require that investments in TruPS CDOs
be treated as investments in the capital
of unconsolidated financial institutions,
but rather treat the investments as
securitization exposures. The FDIC
believes that investments in TruPS
CDOs are synthetic exposures to the
capital of unconsolidated financial
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institutions and are thus subject to
deduction. Under the interim final rule,
any amounts of TruPS CDOs that are not
deducted are subject to the
securitization treatment.
k. Significant Investments in the Capital
of Unconsolidated Financial Institutions
That Are Not in the Form of Common
Stock
Under the proposal, a significant
investment in the capital of an
unconsolidated financial institution
would be the net long position in an
investment where a banking
organization owns more than 10 percent
of the issued and outstanding common
stock of the unconsolidated financial
institution. Significant investments in
the capital of unconsolidated financial
institutions that are not in the form of
common stock are investments where
the banking organization owns capital of
an unconsolidated financial institution
that is not in the form of common stock
in addition to 10 percent of the issued
and outstanding common stock of that
financial institution. Such a noncommon stock investment would be
deducted by applying the corresponding
deduction approach. Significant
investments in the capital of
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unconsolidated financial institutions
that are in the form of common stock
would be subject to 10 and 15 percent
common equity tier 1 capital threshold
deductions described below in this
section.
A number of commenters sought
clarification as to whether under section
22(c) of the proposal, a banking
organization may deduct any significant
investments in the capital of
unconsolidated financial institutions
that are not in the form of common
stock net of associated DTLs. The
interim final rule clarifies that such
deductions may be net of associated
DTLs in accordance with paragraph
324.22(e) of the interim final rule. Other
than this revision, the interim final rule
adopts the proposed rule.
More generally, commenters also
sought clarification on the treatment of
investments in the capital of
unconsolidated financial institutions
(for example, the distinction between
significant and non-significant
investments). Thus, the chart below
summarizes the treatment of
investments in the capital of
unconsolidated financial institutions.
BILLING CODE 6714–01–P
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l. Items Subject to the 10 and 15 Percent
Common Equity Tier 1 Capital
Threshold Deductions
Under the proposal, a banking
organization would have deducted from
the sum of its common equity tier 1
capital elements the amount of each of
the following items that individually
exceeds the 10 percent common equity
tier 1 capital deduction threshold
described below: (1) DTAs arising from
temporary differences that could not be
realized through net operating loss
carrybacks (net of any related valuation
allowances and net of DTLs, as
described in section 22(e) of the
proposal); (2) MSAs, net of associated
DTLs in accordance with section 22(e)
of the proposal; and (3) significant
investments in the capital of
unconsolidated financial institutions in
the form of common stock (referred to
herein as items subject to the threshold
deductions).
Under the proposal, a banking
organization would have calculated the
10 percent common equity tier 1 capital
deduction threshold by taking 10
percent of the sum of a banking
organization’s common equity tier 1
elements, less adjustments to, and
deductions from common equity tier 1
capital required under sections 22(a)
through (c) of the proposal.
As mentioned above in section V.B,
under the proposal banking
organizations would have been required
to deduct from common equity tier 1
capital any goodwill embedded in the
valuation of significant investments in
the capital of unconsolidated financial
institutions in the form of common
stock. A banking organization would
have been allowed to reduce the
investment amount of such significant
investment by the goodwill embedded
in such investment. For example, if a
banking organization has deducted $10
of goodwill embedded in a $100
significant investment in the capital of
an unconsolidated financial institution
in the form of common stock, the
banking organization would be allowed
to reduce the investment amount of
such significant investment by the
amount of embedded goodwill (that is,
the value of the investment would be
$90 for purposes of the calculation of
the amount that would be subject to
deduction under this part of the
proposal).
In addition, under the proposal the
aggregate amount of the items subject to
the threshold deductions that are not
deducted as a result of the 10 percent
common equity tier 1 capital deduction
threshold described above must not
exceed 15 percent of a banking
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organization’s common equity tier 1
capital, as calculated after applying all
regulatory adjustments and deductions
required under the proposal (the 15
percent common equity tier 1 capital
deduction threshold). That is, a banking
organization would have been required
to deduct in full the amounts of the
items subject to the threshold
deductions on a combined basis that
exceed 17.65 percent (the proportion of
15 percent to 85 percent) of common
equity tier 1 capital elements, less all
regulatory adjustments and deductions
required for the calculation of the 10
percent common equity tier 1 capital
deduction threshold mentioned above,
and less the items subject to the 10 and
15 percent deduction thresholds. As
described below, the proposal required
a banking organization to include the
amounts of these three items that are not
deducted from common equity tier 1
capital in its risk-weighted assets and
assign a 250 percent risk weight to
them.
Some commenters asserted that
subjecting DTAs resulting from net
unrealized losses in an investment
portfolio to the proposed 10 percent
common equity tier 1 capital deduction
threshold under section 22(d) of the
proposal would result in a ‘‘double
deduction’’ in that the net unrealized
losses would have already been
included in common equity tier 1
through the AOCI treatment. Under
GAAP, net unrealized losses recognized
in AOCI are reported net of tax effects
(that is, taxes that give rise to DTAs).
The tax effects related to net unrealized
losses would reduce the amount of net
unrealized losses reflected in common
equity tier 1 capital. Given that the tax
effects reduce the losses that would
otherwise accrue to common equity tier
1 capital, the FDIC is of the view that
subjecting these DTAs to the 10 percent
limitation would not result in a ‘‘double
deduction.’’
More generally, several commenters
noted that the proposed 10 and 15
percent common equity tier 1 capital
deduction thresholds and the proposed
250 percent risk-weight are unduly
punitive. Commenters recommended
several alternatives including, for
example, that the agencies should only
retain the 10 percent limit on each
threshold item but eliminate the 15
percent aggregate limit. The FDIC
believes that the proposed thresholds
are appropriate as they increase the
quality and loss-absorbency of
regulatory capital, and are therefore
adopting the proposed deduction
thresholds as final. The FDIC realizes
that these stricter limits on threshold
items may require FDIC-supervised
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institutions to make appropriate
changes in their capital structure or
business model, and thus have provided
a lengthy transition period to allow
FDIC-supervised institutions to
adequately plan for the new limits.
Under section 475 of the Federal
Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) (12
U.S.C. 1828 note), the amount of readily
marketable purchased mortgage
servicing rights (PMSRs) that a banking
organization may include in regulatory
capital cannot be more than 90 percent
of their fair value. In addition to this
statutory requirement, the general riskbased capital rules require the same
treatment for all MSAs, including
PMSRs. Under the proposed rule, if the
amount of MSAs a banking organization
deducts after applying the 10 percent
and 15 percent common equity tier 1
deduction threshold is less than 10
percent of the fair value of its MSAs,
then the banking organization would
have deducted an additional amount of
MSAs so that the total amount of MSAs
deducted is at least 10 percent of the fair
value of its MSAs.
Some commenters requested removal
of the 90 percent MSA fair value
limitation, including for PMSRs under
FDICIA. These commenters note that
section 475(b) of FDICIA provides the
agencies with authority to remove the
90 percent limitation on PMSRs, subject
to a joint determination by the agencies
that its removal would not have an
adverse effect on the deposit insurance
fund or the safety and soundness of
insured depository institutions. The
commenters asserted that removal of the
90 percent limitation would be
appropriate because other provisions of
the proposal pertaining to MSAs
(including PMSRs) would require more
capital to be retained even if the fair
value limitation were removed.
The FDIC agrees with these
commenters and, pursuant to section
475(b) of FDICIA, has determined that
PMSRs may be valued at not more than
100 percent of their fair value, because
the capital treatment of PMSRs in the
interim final rule (specifically, the
deduction approach for MSAs
(including PMSRs) exceeding the 10 and
15 common equity deduction thresholds
and the 250 percent risk weight applied
to all MSAs not subject to deduction) is
more conservative than the FDICIA fair
value limitation and the 100 percent
risk weight applied to MSAs under
existing rules and such approach will
not have an adverse effect on the
deposit insurance fund or safety and
soundness of insured depository
institutions. For the same reasons, the
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FDIC is also removing the 90 percent
fair value limitation for all other MSAs.
Commenters also provided a variety
of recommendations related to the
proposed limitations on the inclusion of
MSAs in regulatory capital. For
instance, some commenters advocated
removing the proposed deduction
provision for hedged and commercial
and multifamily-related MSAs, as well
as requested an exemption from the
proposed deduction requirement for
community banking organizations with
less than $10 billion.
Other commenters recommended
increasing the amount of MSAs
includable in regulatory capital. For
example, one commenter recommended
that MSAs should be limited to 100
percent of tier l capital if the underlying
loans are prudently underwritten.
Another commenter requested that the
interim final rule permit thrifts and
commercial banking organizations to
include in regulatory capital MSAs
equivalent to 50 and 25 percent of tier
1 capital, respectively.
Several commenters also objected to
the proposed risk weights for MSAs,
asserting that a 250 percent risk weight
for an asset that is marked-to-fair value
quarterly is unreasonably punitive and
that a 100 percent risk weight should
apply; that MSAs allowable in capital
should be increased, at a minimum, to
30 percent of tier 1 capital, with a risk
weight of no greater than 50 percent for
existing MSAs; that commercial MSAs
should continue to be subject to the risk
weighting and deduction methodology
under the general risk-based capital
rules; and that originated MSAs should
retain the same risk weight treatment
under the general risk-based capital
rules given that the ability to originate
new servicing to replace servicing lost
to prepayment in a falling-rate
environment provides for a substantial
hedge. Another commenter
recommended that the agencies
grandfather all existing MSAs that are
being fair valued on banking
organizations’ balance sheets and
exclude MSAs from the proposed 15
percent deduction threshold.
After considering these comments, the
FDIC is adopting the proposed
limitation on MSAs includable in
common equity tier 1 capital without
change in the interim final rule. MSAs,
like other intangible assets, have long
been either fully or partially excluded
from regulatory capital in the United
States because of the high level of
uncertainty regarding the ability of
FDIC-supervised institutions to realize
value from these assets, especially
under adverse financial conditions.
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m. Netting of Deferred Tax Liabilities
Against Deferred Tax Assets and Other
Deductible Assets
Under the proposal, banking
organizations would have been
permitted to net DTLs against assets
(other than DTAs) subject to deduction
under section 22 of the proposal,
provided the DTL is associated with the
asset and the DTL would be
extinguished if the associated asset
becomes impaired or is derecognized
under GAAP. Likewise, banking
organizations would be prohibited from
using the same DTL more than once for
netting purposes. This practice would
be generally consistent with the
approach that the agencies currently
take with respect to the netting of DTLs
against goodwill.
With respect to the netting of DTLs
against DTAs, under the proposal the
amount of DTAs that arise from net
operating loss and tax credit
carryforwards, net of any related
valuation allowances, and the amount of
DTAs arising from temporary
differences that the banking
organization could not realize through
net operating loss carrybacks, net of any
related valuation allowances, could be
netted against DTLs if certain conditions
are met.
The agencies received numerous
comments recommending changes to
and seeking clarification on various
aspects of the proposed treatment of
deferred taxes. Certain commenters
asked whether deductions of significant
and non-significant investments in the
capital of unconsolidated financial
institutions under section 22(c)(4) and
22(c)(5) of the proposed rule may be net
of associated DTLs. A commenter also
recommended that a banking
organization be permitted to net a DTA
against a fair value measurement or
similar adjustment to an asset (for
example, in the case of a certain cashflow hedges) or a liability (for example,
in the case of changes in the fair value
of a banking organization’s liabilities
attributed to changes in the banking
organization’s own credit risk) that is
associated with the adjusted value of the
asset or liability that itself is subject to
a capital adjustment or deduction under
the Basel III NPR. These DTAs would be
derecognized under GAAP if the
adjustment were reversed. Accordingly,
one commenter recommended that
proposed text in section 22(e) be revised
to apply to netting of DTAs as well as
DTLs.
The FDIC agrees that for regulatory
capital purposes, an FDIC-supervised
institution may exclude from the
deduction thresholds DTAs and DTLs
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associated with fair value measurement
or similar adjustments to an asset or
liability that are excluded from common
equity tier 1 capital under the interim
final rule. The FDIC notes that GAAP
requires net unrealized gains and
losses 91 recognized in AOCI to be
recorded net of deferred tax effects.
Moreover, under the FDIC’s general riskbased capital rules and associated
regulatory reporting instructions, FDICsupervised institutions must deduct
certain net unrealized gains, net of
applicable taxes, and add back certain
net unrealized losses, again, net of
applicable taxes. Permitting FDICsupervised institutions to exclude net
unrealized gains and losses included in
AOCI without netting of deferred tax
effects would cause an FDIC-supervised
institution to overstate the amount of
net unrealized gains and losses
excluded from regulatory capital and
potentially overstate or understate
deferred taxes included in regulatory
capital.
Accordingly, under the interim final
rule, FDIC-supervised institutions must
make all adjustments to common equity
tier 1 capital under section 22(b) of the
interim final rule net of any associated
deferred tax effects. In addition, FDICsupervised institutions may make all
deductions from common equity tier 1
capital elements under section 324.22(c)
and (d) of the interim final rule net of
associated DTLs, in accordance with
section 324.22(e) of the interim final
rule.
Commenters also sought clarification
as to whether banking organizations
may change from reporting period to
reporting period their decision to net
DTLs against DTAs as opposed to
netting DTLs against other assets subject
to deduction. Consistent with the FDIC’s
general risk-based capital rules, the
interim final rule permits, but does not
require, an FDIC-supervised institution
to net DTLs associated with items
subject to regulatory deductions from
common equity tier 1 capital under
section 22(a). The FDIC’s general riskbased capital rules do not explicitly
address whether or how often an FDICsupervised institution may change its
DTL netting approach for items subject
to deduction, such as goodwill and
other intangible assets.
If an FDIC-supervised institution
elects to either net DTLs against DTAs
or to net DTLs against other assets
subject to deduction, the interim final
rule requires that it must do so
consistently. For example, an FDIC91 The word ‘‘net’’ in the term ‘‘net unrealized
gains and losses’’ refers to the netting of gains and
losses before tax.
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supervised institution that elects to
deduct goodwill net of associated DTLs
will be required to continue that
practice for all future reporting periods.
Under the interim final rule, an FDICsupervised institution must obtain
approval from the FDIC before changing
its approach for netting DTLs against
DTAs or assets subject to deduction
under section 324.22(a), which would
be permitted, for example, in situations
where an FDIC-supervised institution
merges with or acquires another FDICsupervised institution, or upon a
substantial change in an FDICsupervised institution’s business model.
Commenters also asked whether
banking organizations would be
permitted or required to exclude (from
the amount of DTAs subject to the
threshold deductions under section
22(d) of the proposal) deferred tax assets
and liabilities relating to net unrealized
gains and losses reported in AOCI that
are subject to: (1) regulatory adjustments
to common equity tier 1 capital (section
22(b) of the proposal), (2) deductions
from regulatory capital related to
investments in capital instruments
(section 22(c) of the proposal), and (3)
items subject to the 10 and 15 percent
common equity tier 1 capital deduction
thresholds (section 22(d) of the
proposal).
Under the FDIC’s general risk-based
capital rules, before calculating the
amount of DTAs subject to the DTA
limitations for inclusion in tier 1
capital, an FDIC-supervised institution
may eliminate the deferred tax effects of
any net unrealized gains and losses on
AFS debt securities. An FDICsupervised institution that adopts a
policy to eliminate such deferred tax
effects must apply that approach
consistently in all future calculations of
the amount of disallowed DTAs.
For purposes of the interim final rule,
the FDIC has decided to permit FDICsupervised institutions to eliminate
from the calculation of DTAs subject to
threshold deductions under section
324.22(d) of the interim final rule the
deferred tax effects associated with any
items that are subject to regulatory
adjustment to common equity tier 1
capital under section 324.22(b). An
FDIC-supervised institution that elects
to eliminate such deferred tax effects
must continue that practice consistently
from period to period. An FDICsupervised institution must obtain
approval from the FDIC before changing
its election to exclude or not exclude
these amounts from the calculation of
DTAs. Additionally, the FDIC has
decided to require DTAs associated with
any net unrealized losses or differences
between the tax basis and the
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accounting basis of an asset pertaining
to items (other than those items subject
to adjustment under section 324.22(b))
that are: (1) subject to deduction from
common equity tier 1 capital under
section 324.22(c) or (2) subject to the
threshold deductions under section
324.22(d) to be subject to the threshold
deductions under section 324.22(d) of
the interim final rule.
Commenters also sought clarification
as to whether banking organizations
would be required to compute DTAs
and DTLs quarterly for regulatory
capital purposes. In this regard,
commenters stated that GAAP requires
annual computation of DTAs and DTLs,
and that more frequent computation
requirements for regulatory capital
purposes would be burdensome.
Some DTA and DTL items must be
adjusted at least quarterly, such as DTAs
and DTLs associated with certain gains
and losses included in AOCI. Therefore,
the FDIC expects FDIC-supervised
institutions to use the DTA and DTL
amounts reported in the regulatory
reports for balance sheet purposes to be
used for regulatory capital calculations.
The interim final rule does not require
FDIC-supervised institutions to perform
these calculations more often than
would otherwise be required in order to
meet quarterly regulatory reporting
requirements.
A few commenters also asked whether
the agencies would continue to allow
banking organizations to use DTLs
embedded in the carrying value of a
leveraged lease to reduce the amount of
DTAs subject to the 10 percent and 15
percent common equity tier 1 capital
deduction thresholds contained in
section 22(d) of the proposal. The
valuation of a leveraged lease acquired
in a business combination gives
recognition to the estimated future tax
effect of the remaining cash-flows of the
lease. Therefore, any future tax
liabilities related to an acquired
leveraged lease are included in the
valuation of the leveraged lease, and are
not separately reported under GAAP as
DTLs. This can artificially increase the
amount of net DTAs reported by
banking organizations that acquire a
leveraged lease portfolio under purchase
accounting. Accordingly, the agencies’
currently allow banking organizations to
treat future taxes payable included in
the valuation of a leveraged lease
portfolio as a reversing taxable
temporary difference available to
support the recognition of DTAs.92 The
92 Temporary differences arise when financial
events or transactions are recognized in one period
for financial reporting purposes and in another
period, or periods, for tax purposes. A reversing
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interim final rule amends the proposal
by explicitly permitting an FDICsupervised institution to use the DTLs
embedded in the carrying value of a
leveraged lease to reduce the amount of
DTAs consistent with section 22(e).
In addition, commenters asked the
agencies to clarify whether a banking
organization is required to deduct from
the sum of its common equity tier 1
capital elements net DTAs arising from
timing differences that the banking
organization could realize through net
operating loss carrybacks. The FDIC
confirms that under the interim final
rule, DTAs that arise from temporary
differences that the FDIC-supervised
institution may realize through net
operating loss carrybacks are not subject
to the 10 percent and 15 percent
common equity tier 1 capital deduction
thresholds (deduction thresholds). This
is consistent with the FDIC’s general
risk-based capital rules, which do not
limit DTAs that can potentially be
realized from taxes paid in prior
carryback years. However, consistent
with the proposal, the interim final rule
requires that FDIC-supervised
institutions deduct from common equity
tier 1 capital elements the amount of
DTAs arising from temporary
differences that the FDIC-supervised
institution could not realize through net
operating loss carrybacks that exceed
the deduction thresholds under section
324.22(d) of the interim final rule.
Some commenters recommended that
the agencies retain the provision in the
agencies’ general risk-based capital rules
that permits a banking organization to
measure the amount of DTAs subject to
inclusion in tier 1 capital by the amount
of DTAs that the banking organization
could reasonably be expected to realize
within one year, based on its estimate of
future taxable income.93 In addition,
commenters argued that the full
deduction of net operating loss and tax
credit carryforwards from common
equity tier 1 capital is an inappropriate
reaction to concerns about DTAs as an
element of capital, and that there are
appropriate circumstances where an
taxable temporary difference is a temporary
difference that produces additional taxable income
future periods.
93 Under the FDIC’s general risk-based capital
rules, a banking organization generally must deduct
from tier 1 capital DTAs that are dependent upon
future taxable income, which exceed the lesser of
either: (1) the amount of DTAs that the bank could
reasonably expect to realize within one year of the
quarter-end regulatory report, based on its estimate
of future taxable income for that year, or (2) 10
percent of tier 1 capital, net of goodwill and all
intangible assets other than purchased credit card
relationships, and servicing assets. See 12 CFR part
325, appendix A section I.A.1.iii(a) (state
nonmember banks), and 12 CFR 390.465(a)(2)(vii)
(state savings associations).
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institution should be allowed to include
the value of its DTAs related to net
operating loss carryforwards in
regulatory capital.
The deduction thresholds for DTAs in
the interim final rule are intended to
address the concern that GAAP
standards for DTAs could allow FDICsupervised institutions to include in
regulatory capital excessive amounts of
DTAs that are dependent upon future
taxable income. The concern is
particularly acute when FDICsupervised institutions begin to
experience financial difficulty. In this
regard, the FDIC observed that as the
recent financial crisis began, many
FDIC-supervised institutions that had
included DTAs in regulatory capital
based on future taxable income were no
longer able to do so because they
projected more than one year of losses
for tax purposes.
The FDIC notes that under the
proposal and interim final rule, DTAs
that arise from temporary differences
that the FDIC-supervised institution
may realize through net operating loss
carrybacks are not subject to the
deduction thresholds and will be
subject to a risk weight of 100 percent.
Further, FDIC-supervised institutions
will continue to be permitted to include
some or all of their DTAs that are
associated with timing differences that
are not realizable through net operating
loss carrybacks in regulatory capital. In
this regard, the interim final rule strikes
an appropriate balance between
prudential concerns and practical
considerations about the ability of FDICsupervised institutions to realize DTAs.
The proposal stated: ‘‘A [BANK] is not
required to deduct from the sum of its
common equity tier 1 capital elements
net DTAs arising from timing
differences that the [BANK] could
realize through net operating loss
carrybacks (emphasis added).’’ 94
Commenters requested that the agencies
clarify that the word ‘‘net’’ in this
sentence was intended to refer to DTAs
‘‘net of valuation allowances.’’ The FDIC
has amended section 22(e) of the
interim final rule text to clarify that the
word ‘‘net’’ in this instance was
intended to refer to DTAs ‘‘net of any
related valuation allowances and net of
DTLs.’’
In addition, a commenter requested
that the agencies remove the condition
in section 324.22(e) of the interim final
rule providing that only DTAs and DTLs
that relate to taxes levied by the same
taxing authority may be offset for
purposes of the deduction of DTAs. This
94 See footnote 14, 77 FR 52863 (August 30,
2012).
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commenter notes that under a GAAP, a
company generally calculates its DTAs
and DTLs relating to state income tax in
the aggregate by applying a blended
state rate. Thus, FDIC-supervised
institutions do not typically track DTAs
and DTLs on a state-by-state basis for
financial reporting purposes.
The FDIC recognizes that under
GAAP, if the tax laws of the relevant
state and local jurisdictions do not differ
significantly from federal income tax
laws, then the calculation of deferred
tax expense can be made in the
aggregate considering the combination
of federal, state, and local income tax
rates. The rate used should consider
whether amounts paid in one
jurisdiction are deductible in another
jurisdiction. For example, since state
and local taxes are deductible for federal
purposes, the aggregate combined rate
would generally be (1) the federal tax
rate plus (2) the state and local tax rates,
minus (3) the federal tax effect of the
deductibility of the state and local taxes
at the federal tax rate. Also, for financial
reporting purposes, consistent with
GAAP, the FDIC allows FDICsupervised institutions to offset DTAs
(net of valuation allowance) and DTLs
related to a particular tax jurisdiction.
Moreover, for regulatory reporting
purposes, consistent with GAAP, the
FDIC requires separate calculations of
income taxes, both current and deferred
amounts, for each tax jurisdiction.
Accordingly, FDIC-supervised
institutions must calculate DTAs and
DTLs on a state-by-state basis for
financial reporting purposes under
GAAP and for regulatory reporting
purposes.
3. Investments in Hedge Funds and
Private Equity Funds Pursuant to
Section 13 of the Bank Holding
Company Act
Section 13 of the Bank Holding
Company Act, which was added by
section 619 of the Dodd-Frank Act,
contains a number of restrictions and
other prudential requirements
applicable to any ‘‘banking entity’’ 95
that engages in proprietary trading or
has certain interests in, or relationships
95 See 12 U.S.C. 1851. The term ‘‘banking entity’’
is defined in section 13(h)(1) of the Bank Holding
Company Act, as amended by section 619 of the
Dodd-Frank Act. See 12 U.S.C. 1851(h)(1). The
statutory definition includes any insured depository
institution (other than certain limited purpose trust
institutions), any company that controls an insured
depository institution, any company that is treated
as a bank holding company for purposes of section
8 of the International Banking Act of 1978 (12
U.S.C. 3106), and any affiliate or subsidiary of any
of the foregoing.
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with, a hedge fund or a private equity
fund.96
Section 13(d)(3) of the Bank Holding
Company Act provides that the relevant
agencies ‘‘shall . . . adopt rules
imposing additional capital
requirements and quantitative
limitations, including diversification
requirements, regarding activities
permitted under [Section 13] if the
appropriate Federal banking agencies,
the SEC, and the Commodity Futures
Trading Commission (CFTC) determine
that additional capital and quantitative
limitations are appropriate to protect the
safety and soundness of banking entities
engaged in such activities.’’ The DoddFrank Act also added section
13(d)(4)(B)(iii) to the Bank Holding
Company Act, which pertains to
investments in a hedge fund or private
equity fund organized and offered by a
banking entity and provides for
deductions from the assets and tangible
equity of the banking entity for these
investments in hedge funds or private
equity funds.
On November 7, 2011, the agencies
and the SEC issued a proposal to
implement Section 13 of the Bank
Holding Company Act.97 The proposal
would require a ‘‘banking entity’’ to
deduct from tier 1 capital its
investments in a hedge fund or a private
equity fund that the banking entity
organizes and offers.98 The FDIC intends
to address this capital requirement, as it
applies to FDIC-supervised institutions,
within the context of its entire
regulatory capital framework, so that its
potential interaction with all other
regulatory capital requirements can be
fully assessed.
VI. Denominator Changes Related to the
Regulatory Capital Changes
Consistent with Basel III, the proposal
provided a 250 percent risk weight for
the portion of the following items that
are not otherwise subject to deduction:
(1) MSAs, (2) DTAs arising from
temporary differences that a banking
organization could not realize through
net operating loss carrybacks (net of any
related valuation allowances and net of
DTLs, as described in section 324.22(e)
96 Section 13 of the Bank Holding Company Act
defines the terms ‘‘hedge fund’’ and ‘‘private equity
fund’’ as ‘‘an issuer that would be an investment
company, as defined in the Investment Company
Act of 1940, but for section 3(c)(1) or 3(c)(7) of that
Act, or such similar funds as the [relevant agencies]
may, by rule . . . determine.’’ See 12 U.S.C.
1851(h)(2).
97 See 76 FR 68846 (November 7, 2011). On
February 14, 2012, the CFTC published a
substantively similar proposed rule implementing
section 13 of the Bank Holding Company Act. See
77 FR 8332 (February 14, 2012).
98 See Id., § 324.12(d).
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emcdonald on DSK67QTVN1PROD with RULES2
of the rule), and (3) significant
investments in the capital of
unconsolidated financial institutions in
the form of common stock that are not
deducted from tier 1 capital.
Several commenters objected to the
proposed 250 percent risk weight and
stated that the agencies instead should
apply a 100 percent risk weight to the
amount of these assets below the
deduction thresholds. Commenters
stated that the relatively high risk
weight would drive business,
particularly mortgage servicing, out of
the banking sector and into unregulated
shadow banking entities.
After considering the comments, the
FDIC continues to believe that the 250
percent risk weight is appropriate in
light of the relatively greater risks
inherent in these assets, as described
above. These risks are sufficiently
significant that concentrations in these
assets warrant deductions from capital,
and any exposure to these assets merits
a higher-than 100 percent risk weight.
Therefore, the interim final rule adopts
the proposed treatment without change.
The interim final rule, consistent with
the proposal, requires FDIC-supervised
institutions to apply a 1,250 percent risk
weight to certain exposures that were
subject to deduction under the general
risk-based capital rules. Therefore, for
purposes of calculating total riskweighted assets, the interim final rule
requires an FDIC-supervised institution
to 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.
VII. Transition Provisions
The proposal established transition
provisions for: (i) minimum regulatory
capital ratios; (ii) capital conservation
and countercyclical capital buffers; (iii)
regulatory capital adjustments and
deductions; (iv) non-qualifying capital
instruments; and (v) the supplementary
leverage ratio. Most of the transition
periods in the proposal began on
January 1, 2013, and would have
provided banking organizations between
three and six years to comply with the
requirements in the proposed rule.
Among other provisions, the proposal
would have provided a transition period
for the phase-out of non-qualifying
capital instruments from regulatory
capital under either a three- or ten-year
transition period based on the
organization’s consolidated total assets.
The proposed transition provisions were
designed to give banking organizations
sufficient time to adjust to the revised
capital framework while minimizing the
potential impact that implementation
could have on their ability to lend. The
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transition provisions also were designed
to ensure compliance with the DoddFrank Act. As a result, they would have
been, in certain circumstances, more
stringent than the transition
arrangements set forth in Basel III.
The agencies received multiple
comments on the proposed transition
framework. Most of the commenters
characterized the proposed transition
schedule for the minimum capital ratios
as overly aggressive and expressed
concern that banking organizations
would not be able to meet the increased
capital requirements (in accordance
with the transition schedule) in the
current economic environment.
Commenters representing community
banking organizations argued that such
organizations generally have less access
to the capital markets relative to larger
banking organizations and, therefore,
usually increase capital primarily by
accumulating retained earnings.
Accordingly, these commenters
requested additional time to satisfy the
minimum capital requirements under
the proposed rule, and specifically
asked the agencies to provide banking
organizations until January 1, 2019 to
comply with the proposed minimum
capital requirements. Other commenters
commenting on behalf of community
banking organizations, however,
considered the transition period
reasonable. One commenter requested a
shorter implementation timeframe for
the largest banking organizations,
asserting that these organizations
already comply with the proposed
standards. Another commenter
suggested removing the transition
period and delaying the effective date
until the industry more fully recovers
from the recent crisis. According to this
commenter, the effective date should be
delayed to ensure that implementation
of the rule would not result in a
contraction in aggregate U.S. lending
capacity.
A number of commenters suggested
an effective date based on the
publication date of the interim final rule
in the Federal Register. According to
the commenters, such an approach
would provide banking organizations
with certainty regarding the effective
date of the interim final rule that would
allow them to plan for and implement
any required system and process
changes. One commenter requested
simultaneous implementation of all
three proposals because some elements
of the Standardized Approach NPR
affect the implementation of the Basel
III NPR. A number of commenters also
requested additional time to comply
with the proposed capital conservation
buffer. According to these commenters,
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implementation of the capital
conservation buffer would make the
equity instruments of banking
organizations less attractive to potential
investors and could even encourage
divestment among existing
shareholders. Therefore, the
commenters maintained, the proposed
rule would require banking
organizations to raise capital by
accumulating retained earnings, and
doing so could take considerable time in
the current economic climate. For these
reasons, the commenters asked the
agencies to delay implementation of the
capital conservation buffer for an
additional five years to provide banking
organizations sufficient time to increase
retained earnings without curtailing
lending activity. Other commenters
requested that the agencies fully exempt
banks with total consolidated assets of
$50 billion or less from the capital
conservation buffer, further
recommending that if the agencies
declined to make this accommodation
then the phase-in period for the capital
conservation buffer should be extended
by at least three years to January 1,
2022, to provide community banking
organizations with enough time to meet
the new regulatory minimums.
A number of commenters noted that
Basel III phases in the deduction of
goodwill from 2014 to 2018, and
requested that the agencies adopt this
transition for goodwill in the United
States to prevent U.S. institutions from
being disadvantaged relative to their
global competitors.
Many commenters objected to the
proposed schedule for the phase out of
TruPS from tier 1 capital, particularly
for banking organizations with less than
$15 billion in total consolidated assets.
As discussed in more detail in section
V.A., the commenters requested that the
agencies grandfather existing TruPS
issued by depository institution holding
companies with less than $15 billion
and 2010 MHCs, as permitted by section
171 of the Dodd-Frank Act. In general,
these commenters characterized TruPS
as a relatively safe, low-cost form of
capital issued in full compliance with
regulatory requirements that would be
difficult for smaller institutions to
replace in the current economic
environment. Some commenters
requested that community banking
organizations be exempt from the phaseout of TruPS and from the phase-out of
cumulative preferred stock for these
reasons. Another commenter requested
that the agencies propose that
institutions with under $5 billion in
total consolidated assets be allowed to
continue to include TruPS in regulatory
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capital at full value until the call or
maturity of the TruPS instrument.
Some commenters encouraged the
agencies to adopt the ten-year transition
schedule under Basel III for TruPS of
banking organizations with total
consolidated assets of more than $15
billion. These commenters asserted that
the proposed transition framework for
TruPS would disadvantage U.S. banking
organizations relative to foreign
competitors. One commenter expressed
concern that the transition framework
under the proposed rule also would
disrupt payment schedules for TruPS
CDOs.
Commenters proposed several
additional alternative transition
frameworks for TruPS. For example, one
commenter recommended a 10 percent
annual reduction in the amount of
TruPS banking organizations with $15
billion or more of total consolidated
assets may recognize in tier 1 capital
beginning in 2013, followed by a phaseout of the remaining amount in 2015.
According to the commenter, such a
framework would comply with the
Dodd-Frank Act and allow banking
organizations more time to replace
TruPS. Another commenter suggested
that the interim final rule allow banking
organizations to progressively reduce
the amount of TruPS eligible for
inclusion in tier 1 capital by 1.25 to 2.5
percent per year. One commenter
encouraged the agencies to avoid
penalizing banking organizations that
elect to redeem TruPS during the
transition period. Specifically, the
commenter asked the agencies to revise
the proposed transition framework so
that any TruPS redeemed during the
transition period would not reduce the
total amount of TruPS eligible for
inclusion in tier 1 capital. Under such
an approach, the amount of TruPS
eligible for inclusion in tier 1 capital
during the transition period would
equal the lesser of: (a) the remaining
outstanding balance or (b) the
percentage decline factor times the
balance outstanding at the time the
interim final rule is published in the
Federal Register.
One commenter encouraged the
agencies to allow a banking organization
that grows to more than $15 billion in
total assets as a result of merger and
acquisition activity to remain subject to
the proposed transition framework for
non-qualifying capital instruments
issued by organizations with less than
$15 billion in total assets. According to
the commenter, such an approach
should apply to either the buyer or
seller in the transaction. Other
commenters asked the agencies to allow
banking organizations whose total
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consolidated assets grew to over $15
billion just prior to May 19, 2010, and
whose asset base subsequently declined
below that amount to include all TruPS
in their tier 1 capital during 2013 and
2014 on the same basis as institutions
with less than $15 billion in total
consolidated assets and, thereafter, be
subject to the deductions required by
section 171 of the Dodd-Frank Act.
Commenters representing advanced
approaches banking organizations
generally objected to the proposed
transition framework for the
supplementary leverage ratio, and
requested a delay in its implementation.
For example, one commenter
recommended the agencies defer
implementation of the supplementary
leverage ratio until the agencies have
had an opportunity to consider whether
it is likely to result in regulatory
arbitrage and international competitive
inequality as a result of differences in
national accounting frameworks and
standards. Another commenter asked
the agencies to delay implementation of
the supplementary leverage ratio until
no earlier than January 1, 2018, as
provided in Basel III, or until the BCBS
completes its assessment and reaches
international agreement on any further
adjustments. A few commenters,
however, supported the proposed
transition framework for the
supplementary leverage ratio because it
could be used as an important
regulatory tool to ensure there is
sufficient capital in the financial
system.
After considering the comments and
the potential challenges some banking
organizations may face in complying
with the interim final rule, the FDIC has
agreed to delay the compliance date for
FDIC-supervised institutions that are
not advanced approaches FDICsupervised institutions until January 1,
2015. Therefore, such entities are not
required to calculate their regulatory
capital requirements under the interim
final rule until January 1, 2015.
Thereafter, these FDIC-supervised
institutions must calculate their
regulatory capital requirements in
accordance with the interim final rule,
subject to the transition provisions set
forth in subpart G of the interim final
rule.
The interim final rule also establishes
the effective date of the interim final
rule for advanced approaches FDICsupervised institutions as January 1,
2014. In accordance with Tables 5–17
below, the transition provisions for the
regulatory capital adjustments and
deductions in the interim final rule
commence either one or two years later
than in the proposal, depending on
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whether the FDIC-supervised institution
is or is not an advanced approaches
FDIC-supervised institution. The
December 31, 2018, end-date for the
transition period for regulatory capital
adjustments and deductions is the same
under the interim final rule as under the
proposal.
A. Transitions Provisions for Minimum
Regulatory Capital Ratios
In response to the commenters’
concerns, the interim final rule modifies
the proposed transition provisions for
the minimum capital requirements.
FDIC-supervised institutions that are
not advanced approaches FDICsupervised institutions are not required
to comply with the minimum capital
requirements until January 1, 2015. This
is a delay of two years from the
beginning of the proposed transition
period. Because the FDIC is not
requiring compliance with the interim
final rule until January 1, 2015 for these
entities, there is no additional transition
period for the minimum regulatory
capital ratios. This approach should
give FDIC-supervised institutions
sufficient time to raise or accumulate
any additional capital needed to satisfy
the new minimum requirements and
upgrade internal systems without
adversely affecting their lending
capacity.
Under the interim final rule, an
advanced approaches FDIC-supervised
institution must comply with minimum
common equity tier 1, tier 1, and total
capital ratio requirements of 4.0 percent,
5.5 percent, and 8.0 percent during
calendar year 2014, and 4.5 percent, 6.0
percent, 8.0 percent, respectively,
beginning January 1, 2015. These
transition provisions are consistent with
those under Basel III for internationallyactive FDIC-supervised institutions.
During calendar year 2014, advanced
approaches FDIC-supervised
institutions must calculate their
minimum common equity tier 1, tier 1,
and total capital ratios using the
definitions for the respective capital
components in section 20 of the interim
final rule (adjusted in accordance with
the transition provisions for regulatory
adjustments and deductions and for the
non-qualifying capital instruments for
advanced approaches FDIC-supervised
institutions described in this section).
B. Transition Provisions for Capital
Conservation and Countercyclical
Capital Buffers
The FDIC has finalized transitions for
the capital conservation and
countercyclical capital buffers as
proposed. The capital conservation
buffer transition period begins in 2016,
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a full year after FDIC-supervised
institutions that are not advanced
approaches FDIC-supervised
institutions are required to comply with
the interim final rule, and two years
after advanced approaches FDICsupervised institutions are required to
comply with the interim final rule. The
FDIC believes that this is an adequate
time frame to meet the buffer level
necessary to avoid restrictions on
capital distributions. Table 5 shows the
regulatory capital levels advanced
approaches FDIC-supervised
institutions generally must satisfy to
avoid limitations on capital
distributions and discretionary bonus
payments during the applicable
transition period, from January 1, 2016
until January 1, 2019.
TABLE 5—REGULATORY CAPITAL LEVELS FOR ADVANCED APPROACHES FDIC-SUPERVISED INSTITUTIONS
Capital conservation buffer ......................
Minimum common equity tier 1 capital
ratio + capital conservation buffer ........
Minimum tier 1 capital ratio + capital conservation buffer .....................................
Minimum total capital ratio + capital conservation buffer .....................................
Maximum potential countercyclical capital
buffer ....................................................
Jan. 1, 2014
(percent)
Jan. 1, 2015
(percent)
........................
........................
0.625
1.25
1.875
2.5
4.0
4.5
5.125
5.75
6.375
7.0
5.5
6.0
6.625
7.25
7.875
8.5
8.0
8.0
8.625
9.25
9.875
10.5
........................
........................
0.625
1.25
1.875
2.5
Table 6 shows the regulatory capital
levels FDIC-supervised institutions that
are not advanced approaches FDIC-
Jan. 1, 2016
(percent)
supervised institutions generally must
satisfy to avoid limitations on capital
distributions and discretionary bonus
Jan. 1, 2017
(percent)
Jan. 1, 2018
(percent)
Jan. 1, 2019
(percent)
payments during the applicable
transition period, from January 1, 2016
until January 1, 2019.
TABLE 6—REGULATORY CAPITAL LEVELS FOR NON-ADVANCED APPROACHES FDIC-SUPERVISED INSTITUTIONS
Jan. 1, 2015
(percent)
Capital conservation buffer ..................................................
Minimum common equity tier 1 capital ratio + capital conservation buffer .................................................................
Minimum tier 1 capital ratio + capital conservation buffer ..
Minimum total capital ratio + capital conservation buffer ....
As provided in Table 5 and Table 6,
the transition period for the capital
conservation and countercyclical capital
buffers does not begin until January 1,
2016. During this transition period, from
January 1, 2016 through December 31,
Jan. 1, 2016
(percent)
Jan. 1, 2017
(percent)
Jan. 1, 2018
(percent)
Jan. 1, 2019
(percent)
........................
0.625
1.25
1.875
2.5
4.5
6.0
8.0
5.125
6.625
8.625
5.75
7.25
9.25
6.375
7.875
9.875
7.0
8.5
10.5
2018, all FDIC-supervised institutions
are subject to transition arrangements
with respect to the capital conservation
buffer as outlined in more detail in
Table 7. For advanced approaches FDICsupervised institutions, the
countercyclical capital buffer will be
phased in according to the transition
schedule set forth in Table 7 by
proportionately expanding each of the
quartiles of the capital conservation
buffer.
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TABLE 7—TRANSITION PROVISION FOR THE CAPITAL CONSERVATION AND COUNTERCYCLICAL CAPITAL BUFFER
Maximum payout ratio
(as a percentage of
eligible retained income)
Transition period
Capital conservation buffer
Calendar year 2016 .....................
Greater than 0.625 percent (plus 25 percent of any applicable countercyclical capital buffer amount).
Less than or equal to 0.625 percent (plus 25 percent of any applicable
countercyclical capital buffer amount), and greater than 0.469 percent
(plus 18.75 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 0.469 percent (plus 18.75 percent of any applicable countercyclical capital buffer amount), and greater than 0.313 percent (plus 12.5 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 0.313 percent (plus 12.5 percent of any applicable
countercyclical capital buffer amount), and greater than 0.156 percent
(plus 6.25 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 0.156 percent (plus 6.25 percent of any applicable
countercyclical capital buffer amount).
No payout ratio limitation applies
Greater than 1.25 percent (plus 50 percent of any applicable countercyclical capital buffer amount).
No payout ratio limitation applies
Calendar year 2017 .....................
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60 percent
40 percent
20 percent
0 percent
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55395
TABLE 7—TRANSITION PROVISION FOR THE CAPITAL CONSERVATION AND COUNTERCYCLICAL CAPITAL BUFFER—
Continued
Transition period
Calendar year 2018 .....................
Less than or equal to 1.25 percent (plus 50 percent of any applicable
countercyclical capital buffer amount), and greater than 0.938 percent
(plus 37.5 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 0.938 percent (plus 37.5 percent of any applicable
countercyclical capital buffer amount), and greater than 0.625 percent
(plus 25 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 0.625 percent (plus 25 percent of any applicable
countercyclical capital buffer amount), and greater than 0.313 percent
(plus 12.5 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 0.313 percent (plus 12.5 percent of any applicable
countercyclical capital buffer amount).
60 percent
Greater than 1.875 percent (plus 75 percent of any applicable countercyclical capital buffer amount).
Less than or equal to 1.875 percent (plus 75 percent of any applicable
countercyclical capital buffer amount), and greater than 1.406 percent
(plus 56.25 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 1.406 percent (plus 56.25 percent of any applicable countercyclical capital buffer amount), and greater than 0.938 percent (plus 37.5 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 0.938 percent (plus 37.5 percent of any applicable
countercyclical capital buffer amount), and greater than 0.469 percent
(plus 18.75 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 0.469 percent (plus 18.75 percent of any applicable countercyclical capital buffer amount).
No payout ratio limitation applies
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C. Transition Provisions for Regulatory
Capital Adjustments and Deductions
To give sufficient time to FDICsupervised institutions to adapt to the
new regulatory capital adjustments and
deductions, the interim final rule
incorporates transition provisions for
such adjustments and deductions that
commence at the time at which the
FDIC-supervised institution becomes
subject to the interim final rule. As
explained above, the interim final rule
maintains the proposed transition
periods, except for non-qualifying
capital instruments as described below.
FDIC-supervised institutions that are
not advanced approaches FDICsupervised institutions will begin the
transitions for regulatory capital
adjustments and deductions on January
1, 2015. From January 1, 2015, through
December 31, 2017, these FDICsupervised institutions will be required
to make the regulatory capital
adjustments to and deductions from
regulatory capital in section 324.22 of
the interim final rule in accordance with
the proposed transition provisions for
such adjustments and deductions
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Maximum payout ratio
(as a percentage of
eligible retained income)
Capital conservation buffer
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outlined below. Starting on January 1,
2018, these FDIC-supervised institutions
will apply all regulatory capital
adjustments and deductions as set forth
in section 324.22 of the interim final
rule.
For an advanced approaches FDICsupervised institution, the first year of
transition for adjustments and
deductions begins on January 1, 2014.
From January 1, 2014, through
December 31, 2017, such FDICsupervised institutions will be required
to make the regulatory capital
adjustments to and deductions from
regulatory capital in section 22 of the
interim final rule in accordance with the
proposed transition provisions for such
adjustments and deductions outlined
below. Starting on January 1, 2018,
advanced approaches FDIC-supervised
institutions will be subject to all
regulatory capital adjustments and
deductions as described in section 22 of
the interim final rule.
1. Deductions for Certain Items Under
Section 22(a) of the Interim Final Rule
The interim final rule provides that
FDIC-supervised institutions will
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40 percent
20 percent
0 percent
60 percent
40 percent
20 percent
0 percent
deduct from common equity tier 1
capital or tier 1 capital in accordance
with Table 8 below: (1) goodwill
(section 324.22(a)(1)), (2) DTAs that
arise from operating loss and tax credit
carryforwards (section 22(a)(3)), (3)
gain-on-sale associated with a
securitization exposure (section
324.22(a)(4)), (4) defined benefit
pension fund assets (section
324.22(a)(5)), (5) for an advanced
approaches FDIC-supervised institution
that has completed the parallel run
process and that has received
notification from the FDIC pursuant to
section 121(d) of subpart E of the
interim final rule, expected credit loss
that exceeds eligible credit reserves
(section 324.22(a)(6)), and (6) financial
subsidiaries (section 324.22(a)(7)).
During the transition period, the
percentage of these items that is not
deducted from common equity tier 1
capital must be deducted from tier 1
capital.
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TABLE 8—TRANSITION DEDUCTIONS UNDER SECTION 324.22(a)(1) AND SECTIONS 324.22(a)(3)–(a)(7) OF THE INTERIM
FINAL RULE
Transition deductions
under section
324.22(a)(1) and (7)
Transition period
Percentage of the
deductions from common equity tier 1 capital
Percentage of the
deductions from common equity tier 1 capital
100
100
100
100
100
20
40
60
80
100
January 1, 2014 to December 31, 2014 (advanced approaches
FDIC-supervised institutions only) ...........................................
January 1, 2015 to December 31, 2015 .....................................
January 1, 2016 to December 31, 2016 .....................................
January 1, 2017 to December 31, 2017 .....................................
January 1, 2018 and thereafter ...................................................
Beginning on January 1, 2014,
advanced approaches FDIC-supervised
institutions will be required to deduct
the full amount of goodwill (which may
be net of any associated DTLs),
including any goodwill embedded in
the valuation of significant investments
in the capital of unconsolidated
financial institutions, from common
equity tier 1 capital. All other FDICsupervised institutions will begin
deducting goodwill (which may be net
of any associated DTLs), including any
goodwill embedded in the valuation of
significant investments in the capital of
unconsolidated financial institutions
from common equity tier 1 capital, on
January 1, 2015. This approach is
stricter than the Basel III approach,
which transitions the goodwill
deduction from common equity tier 1
capital through 2017. However, as
discussed in section V.B of this
preamble, under U.S. law, goodwill
cannot be included in an FDICsupervised institution’s regulatory
capital and has not been included in
FDIC-supervised institutions’ regulatory
capital under the general risk-based
capital rules.99 Additionally, the FDIC
believes that fully deducting goodwill
from common equity tier 1 capital from
Transition deductions under sections 324.22(a)(3)–
(a)(6)
the date an FDIC-supervised institution
must comply with the interim final rule
will result in a more appropriate
measure of common equity tier 1
capital.
Beginning on January 1, 2014, a
national bank or insured state bank
subject to the advanced approaches rule
will be required to deduct 100 percent
of the aggregate amount of its
outstanding equity investment,
including the retained earnings, in any
financial subsidiary from common
equity tier 1 capital. All other national
and insured state banks will begin
deducting 100 percent of the aggregate
amount of their outstanding equity
investment, including the retained
earnings, in a financial subsidiary from
common equity tier 1 capital on January
1, 2015. The deduction from common
equity tier 1 capital represents a change
from the general risk-based capital rules,
which require the deduction to be made
from total capital. As explained in
section V.B of this preamble, similar to
goodwill, this deduction is required by
statute and is consistent with the
general risk-based capital rules.
Accordingly, the deduction is not
subject to a transition period.
Percentage of the
deductions from tier 1
capital
80
60
40
20
0
The interim final rule also retains the
existing deduction for state savings
associations’ investments in, and
extensions of credit to, non-includable
subsidiaries at 12 CFR 324.22(a)(8).100
This deduction is required by statute 101
and is consistent with the general riskbased capital rules. Accordingly, the
deduction is not subject to a transition
period and must be fully deducted in
the first year that the state savings
association becomes subject to the
interim final rule.
2. Deductions for Intangibles Other
Than Goodwill and Mortgage Servicing
Assets
For deductions of intangibles other
than goodwill and MSAs, including
purchased credit-card relationships
(PCCRs) (see section 324.22(a)(2) of the
interim final rule), the applicable
transition period in the interim final
rule is set forth in Table 9. During the
transition period, any of these items that
are not deducted will be subject to a risk
weight of 100 percent. Advanced
approaches FDIC-supervised
institutions will begin the transition on
January 1, 2014, and other FDICsupervised institutions will begin the
transition on January 1, 2015.
TABLE 9—TRANSITION DEDUCTIONS UNDER SECTION 22(a)(2) OF THE PROPOSAL
Transition deductions
under section
22(a)(2)—Percentage of
the deductions
from common equity tier
1 capital
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Transition period
January
January
January
January
January
1,
1,
1,
1,
1,
2014
2015
2016
2017
2018
to December 31, 2014 (advanced approaches FDIC-supervised institutions only) ................................
to December 31, 2015 .............................................................................................................................
to December 31, 2016 .............................................................................................................................
to December 31, 2017 .............................................................................................................................
and thereafter ...........................................................................................................................................
99 See 12 U.S.C. 1464(t)(9)(A) and 12 U.S.C.
1828(n).
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100 For additional information on this deduction,
see section V.B ‘‘Activities by savings association
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20
40
60
80
100
subsidiaries that are impermissible for national
banks’’ of this preamble.
101 See 12 U.S.C. 1464(t)(5).
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3. Regulatory Adjustments Under
Section 22(b)(1) of the Interim Final
Rule
During the transition period, any of
the adjustments required under section
324.22(b)(1) that are not applied to
common equity tier 1 capital must be
applied to tier 1 capital instead, in
accordance with Table 10. Advanced
approaches FDIC-supervised
55397
institutions will begin the transition on
January 1, 2014, and other FDICsupervised institutions will begin the
transition on January 1, 2015.
TABLE 10—TRANSITION ADJUSTMENTS UNDER SECTION 324.22(b)(1)
Transition adjustments
under section 324.22(b)(1)
Transition period
January
January
January
January
January
1,
1,
1,
1,
1,
Percentage of the
adjustment
applied to
common equity
tier 1 capital
Percentage of the
adjustment
applied to tier 1
capital
20
40
60
80
100
80
60
40
20
0
2014, to December 31, 2014 (advanced approaches FDIC-supervised institutions only) .......
2015, to December 31, 2015 ....................................................................................................
2016, to December 31, 2016 ....................................................................................................
2017, to December 31, 2017 ....................................................................................................
2018 and thereafter ...................................................................................................................
4. Phase-Out of Current Accumulated
Other Comprehensive Income
Regulatory Capital Adjustments
Under the interim final rule, the
transition period for the inclusion of the
aggregate amount of: (1) Unrealized
gains on available-for-sale equity
securities; (2) net unrealized gains or
losses on available-for-sale debt
securities; (3) any amounts recorded in
AOCI attributed to defined benefit
postretirement plans resulting from the
initial and subsequent application of the
relevant GAAP standards that pertain to
such plans (excluding, at the FDICsupervised institution’s option, the
portion relating to pension assets
deducted under section 324.22(a)(5)); (4)
accumulated net gains or losses on cashflow hedges related to items that are
reported on the balance sheet at fair
value included in AOCI; and (5) net
unrealized gains or losses on held-tomaturity securities that are included in
AOCI (transition AOCI adjustment
amount) only applies to advanced
approaches FDIC-supervised
institutions and other FDIC-supervised
institutions that have not made an AOCI
opt-out election under section
324.22(b)(2) of the rule and described in
section V.B of this preamble. Advanced
approaches FDIC-supervised
institutions will begin the phase out of
the current AOCI regulatory capital
adjustments on January 1, 2014; other
FDIC-supervised institutions that have
not made the AOCI opt-out election will
begin making these adjustments on
January 1, 2015. Specifically, if an FDIC-
supervised institution’s transition AOCI
adjustment amount is positive, it will
adjust its common equity tier 1 capital
by deducting the appropriate percentage
of such aggregate amount in accordance
with Table 11 below. If such amount is
negative, it will adjust its common
equity tier 1 capital by adding back the
appropriate percentage of such aggregate
amount in accordance with Table 11
below. The agencies did not include net
unrealized gains or losses on held-tomaturity securities that are included in
AOCI as part of the transition AOCI
adjustment amount in the proposal.
However, the FDIC has decided to add
such an adjustment as it reflects the
FDIC’s approach towards AOCI
adjustments in the general risk-based
capital rules.
TABLE 11—PERCENTAGE OF THE TRANSITION AOCI ADJUSTMENT AMOUNT
Percentage of the
transition AOCI
adjustment amount to be
applied to common
equity tier 1 capital
Transition period
emcdonald on DSK67QTVN1PROD with RULES2
January 1, 2014, to December 31, 2014 (advanced approaches FDIC-supervised institutions only) ...............................
January 1, 2015, to December 31, 2015 (advanced approaches FDIC-supervised institutions and FDIC-supervised institutions that have not made an opt-out election) ..........................................................................................................
January 1, 2016, to December 31, 2016 (advanced approaches FDIC-supervised institutions and FDIC-supervised institutions that have not made an opt-out election) ..........................................................................................................
January 1, 2017, to December 31, 2017 (advanced approaches FDIC-supervised institutions and FDIC-supervised institutions that have not made an opt-out election) ..........................................................................................................
January 1, 2018 and thereafter (advanced approaches FDIC-supervised institutions and FDIC-supervised institutions
that have not made an opt-out election) ..........................................................................................................................
Beginning on January 1, 2018,
advanced approaches FDIC-supervised
institutions and other FDIC-supervised
institutions that have not made an AOCI
opt-out election must include AOCI in
common equity tier 1 capital, with the
exception of accumulated net gains and
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losses on cash-flow hedges related to
items that are not measured at fair value
on the balance sheet, which must be
excluded from common equity tier 1
capital.
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80
60
40
20
0
5. Phase-Out of Unrealized Gains on
Available for Sale Equity Securities in
Tier 2 Capital
Advanced approaches FDICsupervised institutions and FDICsupervised institutions not subject to
the advanced approaches rule that have
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not made an AOCI opt-out election will
decrease the amount of unrealized gains
on AFS preferred stock classified as an
equity security under GAAP and AFS
equity exposures currently held in tier
2 capital during the transition period in
accordance with Table 12. An advanced
approaches FDIC-supervised institution
will begin the adjustments on January 1,
2014; all other FDIC-supervised
institutions that have not made an AOCI
opt-out election will begin the
adjustments on January 1, 2015.
TABLE 12—PERCENTAGE OF UNREALIZED GAINS ON AFS PREFERRED STOCK CLASSIFIED AS AN EQUITY SECURITY
UNDER GAAP AND AFS EQUITY EXPOSURES THAT MAY BE INCLUDED IN TIER 2 CAPITAL
Percentage of unrealized gains on AFS
preferred stock classified as an equity security under GAAP and AFS equity exposures
that may be included in tier 2 capital
Transition period
January 1, 2014, to December 31, 2014 (advanced approaches FDIC-supervised institutions only)
January 1, 2015, to December 31, 2015 (advanced approaches FDIC-supervised institutions and
FDIC-supervised institutions that have not made an opt-out election) ...........................................
January 1, 2016, to December 31, 2016 (advanced approaches FDIC-supervised institutions and
FDIC-supervised institutions that have not made an opt-out election) ...........................................
January 1, 2017, to December 31, 2017 (advanced approaches FDIC-supervised institutions and
FDIC-supervised institutions that have not made an opt-out election) ...........................................
January 1, 2018 and thereafter (advanced approaches FDIC-supervised institutions and FDIC-supervised institutions that have not made an opt-out election) .........................................................
6. Phase-in of Deductions Related to
Investments in Capital Instruments and
to the Items Subject to the 10 and 15
Percent Common Equity Tier 1 Capital
Deduction Thresholds (Sections 22(c)
and 22(d)) of the Interim final rule
Under the interim final rule, an FDICsupervised institution must calculate
the appropriate deductions under
sections 324.22(c) and 324.22(d) of the
rule related to investments in the capital
of unconsolidated financial institutions
and to the items subject to the 10 and
15 percent common equity tier 1 capital
deduction thresholds (that is, MSAs,
DTAs arising from temporary
differences that the FDIC-supervised
institution could not realize through net
operating loss carrybacks, and
significant investments in the capital of
unconsolidated financial institutions in
the form of common stock) as set forth
in Table 13. Advanced approaches
FDIC-supervised institutions will apply
the transition framework beginning
January 1, 2014. All other FDICsupervised institutions will begin
applying the transition framework on
January 1, 2015. During the transition
period, an FDIC-supervised institution
36
27
18
9
0
will make the aggregate common equity
tier 1 capital deductions related to these
items in accordance with the
percentages outlined in Table 13 and
must apply a 100 percent risk-weight to
the aggregate amount of such items that
is not deducted. On January 1, 2018,
and thereafter, each FDIC-supervised
institution will be required to apply a
250 percent risk weight to the aggregate
amount of the items subject to the 10
and 15 percent common equity tier 1
capital deduction thresholds that are not
deducted from common equity tier 1
capital.
TABLE 13—TRANSITION DEDUCTIONS UNDER SECTIONS 22(c) AND 22(d) OF THE PROPOSAL
Transition deductions under sections
22(c) and 22(d)—Percentage of the
deductions from common equity
tier 1 capital
Transition period
emcdonald on DSK67QTVN1PROD with RULES2
January
January
January
January
January
1,
1,
1,
1,
1,
2014, to December 31, 2014 (advanced approaches FDIC-supervised institutions only)
2015, to December 31, 2015 ............................................................................................
2016, to December 31, 2016 ............................................................................................
2017, to December 31, 2017 ............................................................................................
2018 and thereafter ...........................................................................................................
During the transition period, FDICsupervised institutions will phase in the
deduction requirement for the amounts
of DTAs arising from temporary
differences that could not be realized
through net operating loss carryback,
MSAs, and significant investments in
the capital of unconsolidated financial
institutions in the form of common
stock that exceed the 10 percent
threshold in section 22(d) according to
Table 13.
During the transition period, FDICsupervised institutions will not be
subject to the methodology to calculate
the 15 percent common equity
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deduction threshold for DTAs arising
from temporary differences that could
not be realized through net operating
loss carrybacks, MSAs, and significant
investments in the capital of
unconsolidated financial institutions in
the form of common stock described in
section 324.22(d) of the interim final
rule. During the transition period, an
FDIC-supervised institution will be
required to deduct from its common
equity tier 1 capital the percentage as set
forth in Table 13 of the amount by
which the aggregate sum of the items
subject to the 10 and 15 percent
common equity tier 1 capital deduction
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20
40
60
80
100
thresholds exceeds 15 percent of the
sum of the FDIC-supervised institution’s
common equity tier 1 capital after
making the deductions and adjustments
required under sections 324.22(a)
through (c).
D. Transition Provisions for NonQualifying Capital Instruments
Under the interim final rule,
beginning on January 1, 2014, an
advanced approaches depository
institution and beginning on January 1,
2015, a depository institution that is not
a depository institution subject to the
advanced approaches rule may include
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in regulatory capital debt or equity
instruments issued prior to September
12, 2010 that do not meet the criteria for
additional tier 1 or tier 2 capital
instruments in section 324.20 of the
interim final rule, but that were
included in tier 1 or tier 2 capital,
respectively, as of September 12, 2010
(non-qualifying capital instruments
issued prior to September 12, 2010).
These instruments may be included up
to the percentage of the outstanding
principal amount of such non-qualifying
capital instruments as of the effective
date of the interim final rule in
accordance with the phase-out schedule
in Table 14.
As of January 1, 2014 for advanced
approaches FDIC-supervised
55399
institutions, and January 1, 2015 for all
other FDIC-supervised institutions, debt
or equity instruments issued after
September 12, 2010, that do not meet
the criteria for additional tier 1 or tier
2 capital instruments in section 20 of
the interim final rule may not be
included in additional tier 1 or tier 2
capital.
TABLE 14—PERCENTAGE OF NON-QUALIFYING CAPITAL INSTRUMENTS ISSUED PRIOR TO SEPTEMBER 12, 2010
INCLUDABLE IN ADDITIONAL TIER 1 OR TIER 2 CAPITAL
Percentage of non-qualifying capital
instruments issued prior to September 2010
includable in additional tier 1 or tier 2 capital
for FDIC-supervised institutions
Transition period (calendar year)
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
year
year
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
(advanced approaches FDIC-supervised institutions only) ................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
and thereafter .....................................................................................................
Under the transition provisions in the
interim final rule, an FDIC-supervised
institution is allowed to include in
regulatory capital a portion of the
common equity tier 1, tier 1, or total
capital minority interest that is
disqualified from regulatory capital as a
result of the requirements and
limitations outlined in section 21
(surplus minority interest). If an FDICsupervised institution has surplus
minority interest outstanding when the
interim final rule becomes effective, that
surplus minority interest will be subject
to the phase-out schedule outlined in
Table 16. Advanced approaches FDICsupervised institutions must begin to
phase out surplus minority interest in
accordance with Table 16 beginning on
January 1, 2014. All other FDICsupervised institutions will begin the
phase out for surplus minority interest
on January 1, 2015.
80
70
60
50
40
30
20
10
0
During the transition period, an FDICsupervised institution will also be able
to include in tier 1 or total capital a
portion of the instruments issued by a
consolidated subsidiary that qualified as
tier 1 or total capital of the FDICsupervised institution on the date the
rule becomes effective, but that do not
qualify as tier 1 or total capital under
section 324.20 of the interim final rule
(non-qualifying minority interest) in
accordance with Table 16.
TABLE 16—PERCENTAGE OF THE AMOUNT OF SURPLUS OR NON-QUALIFYING MINORITY INTEREST INCLUDABLE IN
REGULATORY CAPITAL DURING TRANSITION PERIOD
Percentage of the amount of surplus or nonqualifying minority interest that can be included in regulatory capital during the
transition period
Transition period
January
January
January
January
January
1,
1,
1,
1,
1,
2014, to December 31, 2014 (advanced approaches FDIC-supervised institutions only)
2015, to December 31, 2015 ............................................................................................
2016, to December 31, 2016 ............................................................................................
2017, to December 31, 2017 ............................................................................................
2018 and thereafter ...........................................................................................................
emcdonald on DSK67QTVN1PROD with RULES2
VIII. Standardized Approach for RiskWeighted Assets
In the Standardized Approach NPR,
the agencies proposed to revise
methodologies for calculating riskweighted assets. As discussed above and
in the proposal, these revisions were
intended to harmonize the agencies’
rules for calculating risk-weighted assets
and to enhance risk sensitivity and
remediate weaknesses identified over
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recent years.102 The proposed revisions
incorporated elements of the Basel II
standardized approach 103 as modified
by the 2009 Enhancements, certain
aspects of Basel III, and other proposals
in recent consultative papers published
102 77
FR 52888 (August 30, 2012).
BCBS, ‘‘International Convergence of
Capital Measurement and Capital Standards: A
Revised Framework,’’ (June 2006), available at
http://www.bis.org/publ/bcbs128.htm.
103 See
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80
60
40
20
0
by the BCBS.104 Consistent with section
939A of the Dodd-Frank Act, the
agencies also proposed alternatives to
credit ratings for calculating risk
weights for certain assets.
104 See, e.g., ‘‘Basel III FAQs answered by the
Basel Committee’’ (July, October, December 2011),
available at http://www.bis.org/list/press_releases/
index.htm; ‘‘Capitalization of Banking Organization
Exposures to Central Counterparties’’ (December
2010, revised November 2011) (CCP consultative
release), available at http://www.bis.org/publ/
bcbs206.pdf.
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The proposal also included potential
revisions for the recognition of credit
risk mitigation that would allow for
greater recognition of financial collateral
and a wider range of eligible guarantors.
In addition, the proposal set forth more
risk-sensitive treatments for residential
mortgages, equity exposures and past
due loans, derivatives and repo-style
transactions cleared through CCPs, and
certain commercial real estate exposures
that typically have higher credit risk, as
well as operational requirements for
securitization exposures. The agencies
also proposed to apply disclosure
requirements to banking organizations
with $50 billion or more in total assets
that are not subject to the advanced
approaches rule.
The agencies received a significant
number of comments regarding the
proposed standardized approach for
risk-weighted assets. Although a few
commenters observed that the proposals
would provide a sound framework for
determining risk-weighted assets for all
banking organizations that would
generally benefit U.S. banking
organizations, a significant number of
other commenters asserted that the
proposals were too complex and
burdensome, especially for smaller
banking organizations, and some argued
that it was inappropriate to apply the
proposed requirements to such banking
organizations because such institutions
did not cause the recent financial crisis.
Other commenters expressed concern
that the new calculation for riskweighted assets would adversely affect
banking organizations’ regulatory
capital ratios and that smaller banking
organizations would have difficulties
obtaining the data and performing the
calculations required by the proposals.
A number of commenters also expressed
concern about the burden of the
proposals in the context of multiple new
regulations, including new standards for
mortgages and increased regulatory
capital requirements generally. One
commenter urged the agencies to
maintain key aspects of the proposed
risk-weighted asset treatment for
community banking organizations, but
generally requested that the agencies
reduce the perceived complexity. The
FDIC has considered these comments
and, where applicable, have focused on
simplicity, comparability, and broad
applicability of methodologies for U.S.
banking organizations under the
standardized approach.
Some commenters asked that the
proposed requirements be optional for
community banking organizations until
the effects of the proposals have been
studied, or that the proposed
standardized approach be withdrawn
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entirely. A number of the commenters
requested specific modifications to the
proposals. For example, some requested
an exemption for community banking
organizations from the proposed due
diligence requirements for securitization
exposures. Other commenters requested
that the agencies grandfather the risk
weighting of existing loans, arguing that
doing so would lessen the proposed
rule’s implementation burden.
To address commenters’ concerns
about the standardized approach’s
burden and the accessibility of credit,
the FDIC has revised elements of the
proposed rule, as described in further
detail below. In particular, the FDIC has
modified the proposed approach to risk
weighting residential mortgage loans to
reflect the approach in the FDIC’s
general risk-based capital rules. The
FDIC believes the standardized
approach more accurately captures the
risk of banking organizations’ assets
and, therefore, is applying this aspect of
the interim final rule to all banking
organizations subject to the rule.
This section of the preamble describes
in detail the specific proposals for the
standardized treatment of risk-weighted
assets, comments received on those
proposals, and the provisions of the
interim final rule in subpart D as
adopted by the FDIC. These sections of
the preamble discuss how subpart D of
the interim final rule differs from the
general risk-based capital rules, and
provides examples for how an FDICsupervised institution must calculate
risk-weighted asset amounts under the
interim final rule.
Beginning on January 1, 2015, all
FDIC-supervised institutions will be
required to calculate risk-weighted
assets under subpart D of the interim
final rule. Until then, FDIC-supervised
institutions must calculate riskweighted assets using the methodologies
set forth in the general risk-based capital
rules. Advanced approaches FDICsupervised institutions are subject to
additional requirements, as described in
section III. D of this preamble, regarding
the timeframe for implementation.
A. Calculation of Standardized Total
Risk-Weighted Assets
Consistent with the Standardized
Approach NPR, the interim final rule
requires an FDIC-supervised institution
to calculate its risk-weighted asset
amounts for its on- and off-balance sheet
exposures and, for market risk banks
only, standardized market risk-weighted
assets as determined under subpart F.105
105 This interim final rule incorporates the market
risk rule into the integrated regulatory framework
as subpart F of part 324.
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Risk-weighted asset amounts generally
are 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 are
calculated using a two-step process: (1)
Multiplying the amount of the offbalance 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.
An FDIC-supervised institution must
determine its standardized total riskweighted 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 (2) market risk-weighted
assets, if applicable, minus (3) the
amount of the FDIC-supervised
institution’s ALLL that is not included
in tier 2 capital, and any amounts of
allocated transfer risk reserves.
B. Risk-Weighted Assets for General
Credit Risk
Consistent with the proposal, under
the interim final rule total risk-weighted
assets for general credit risk equals the
sum of the risk-weighted asset amounts
as calculated under section 324.31(a) of
the interim final rule. General credit risk
exposures include an FDIC-supervised
institution’s on-balance sheet exposures
(other than cleared transactions, default
fund contributions to CCPs,
securitization exposures, and equity
exposures, each as defined in section 2
of the interim final rule), exposures to
over-the-counter (OTC) derivative
contracts, off-balance sheet
commitments, trade and transactionrelated contingencies, guarantees, repostyle transactions, financial standby
letters of credit, forward agreements, or
other similar transactions.
Under the interim final rule, the
exposure amount for the on-balance
sheet component of an exposure is
generally the FDIC-supervised
institution’s carrying value for the
exposure as determined under GAAP.
The FDIC believes that using GAAP to
determine the amount and nature of an
exposure provides a consistent
framework that can be easily applied
across all FDIC-supervised institutions.
Generally, FDIC-supervised institutions
already use GAAP to prepare their
financial statements and regulatory
reports, and this treatment reduces
potential burden that could otherwise
result from requiring FDIC-supervised
institutions to comply with a separate
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emcdonald on DSK67QTVN1PROD with RULES2
set of accounting and measurement
standards for risk-based capital
calculation purposes under non-GAAP
standards, such as regulatory accounting
practices or legal classification
standards.
For purposes of the definition of
exposure amount for AFS or held-tomaturity debt securities and AFS
preferred stock not classified as equity
under GAAP that are held by an FDICsupervised institution that has made an
AOCI opt-out election, the exposure
amount is the FDIC-supervised
institution’s carrying value (including
net accrued but unpaid interest and
fees) for the exposure, less any net
unrealized gains, and plus any net
unrealized losses. For purposes of the
definition of exposure amount for AFS
preferred stock classified as an equity
security under GAAP that is held by a
banking organization that has made an
AOCI opt-out election, the exposure
amount is the banking organization’s
carrying value (including net accrued
but unpaid interest and fees) for the
exposure, less any net unrealized gains
that are reflected in such carrying value
but excluded from the banking
organization’s regulatory capital.
In most cases, the exposure amount
for an off-balance sheet component of an
exposure is determined by multiplying
the notional amount of the off-balance
sheet component by the appropriate
CCF as determined under section 324.33
of the interim final rule. The exposure
amount for an OTC derivative contract
or cleared transaction is determined
under sections 34 and 35, respectively,
of the interim final rule, whereas
exposure amounts for collateralized
OTC derivative contracts, collateralized
cleared transactions, repo-style
transactions, and eligible margin loans
are determined under section 324.37 of
the interim final rule.
1. Exposures to Sovereigns
Consistent with the proposal, the
interim final rule defines a sovereign as
a central government (including the U.S.
government) or an agency, department,
ministry, or central bank of a central
government. In the Standardized
Approach NPR, the agencies proposed
to retain the general risk-based capital
rules’ risk weights for exposures to and
claims directly and unconditionally
guaranteed by the U.S. government or
its agencies. The interim final rule
adopts the proposed treatment and
provides that 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
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U.S. government agency receive a zero
percent risk weight.106 Consistent with
the general risk-based capital rules, the
portion of a deposit or other exposure
insured or otherwise unconditionally
guaranteed by the FDIC or the National
Credit Union Administration also is
assigned a zero percent risk weight. An
exposure conditionally guaranteed by
the U.S. government, its central bank, or
a U.S. government agency receives a 20
percent risk weight.107 This includes an
exposure that is conditionally
guaranteed by the FDIC or the National
Credit Union Administration.
The agencies proposed in the
Standardized Approach NPR to revise
the risk weights for exposures to foreign
sovereigns. The agencies’ general riskbased 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 Cooperation and Development (OECD)
and, as applicable, whether the
exposure is unconditionally or
conditionally guaranteed by the
sovereign.108
Under the proposed rule, the risk
weight for a foreign sovereign exposure
would have been determined using
OECD Country Risk Classifications
(CRCs) (the CRC methodology).109 The
CRCs reflect an assessment of country
risk, used to set interest rate charges for
transactions covered by the OECD
arrangement on export credits. The CRC
methodology classifies countries into
one of eight risk categories (0–7), with
countries assigned to the zero category
having the lowest possible risk
106 Similar to the 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, for
example, asset servicing requirements. See 12 CFR
part 325, appendix A, section II.C. (footnote 35)
(state nonmember banks) and 12 CFR 390.466 (state
savings associations).
107 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 losssharing 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, FDIC-supervised
institutions should consult with the FDIC to
determine the appropriate risk-based capital
treatment for specific loss-sharing agreements.
108 12 CFR part 325, appendix A, section II.C
(state nonmember banks) and 12 CFR 390.466 (state
savings associations).
109 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.
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assessment and countries assigned to
the 7 category having the highest
possible risk assessment. Using CRCs to
risk weight sovereign exposures is an
option that is included in the Basel II
standardized framework. The agencies
proposed to map risk weights ranging
from 0 percent to 150 percent 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 agencies also proposed to assign
a 150 percent risk weight to foreign
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. The proposal
defined sovereign default as
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 or
interest fully and on a timely basis,
arrearages, or restructuring.
Restructuring 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 received several
comments on the proposed risk weights
for foreign sovereign exposures. Some
commenters criticized the proposal,
arguing that CRCs are not sufficiently
risk sensitive and basing risk weights on
CRCs unduly benefits certain
jurisdictions with unstable fiscal
positions. A few commenters asserted
that the increased burden associated
with tracking CRCs to determine risk
weights outweighs any increased risk
sensitivity gained by using CRCs
relative to the general risk-based capital
rules. Some commenters also requested
that the CRC methodology be disclosed
so that banking organizations could
perform their own due diligence. One
commenter also indicated that
community banking organizations
should be permitted to maintain the
treatment under the general risk-based
capital rules.
Following the publication of the
proposed rule, the OECD determined
that certain high-income countries that
received a CRC of 0 in 2012 will no
longer receive any CRC.110
110 See http://www.oecd.or/tad/xcred/cat0.htm;
Participants to the Arrangement on Officially
Supported Export Credits agreed that the automatic
classification of High Income OECD and High
Income Euro Area countries in Country Risk
Category Zero should be terminated. In the future,
these countries will no longer be classified but will
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Despite the limitations associated
with risk weighting foreign sovereign
exposures using CRCs, the FDIC has
decided to retain this methodology,
modified as described below to take into
account that some countries will no
longer receive a CRC. Although the
FDIC recognizes that the risk sensitivity
provided by the CRCs is limited, it
considers CRCs to be a reasonable
alternative to credit ratings for sovereign
exposures and the CRC methodology to
be more granular and risk sensitive than
the current risk-weighting methodology
based solely on OECD membership.
Furthermore, the OECD regularly
updates CRCs and makes the
assessments publicly available on its
Web site.111 Accordingly, the FDIC
believes that risk weighting foreign
sovereign exposures with reference to
CRCs (as applicable) should not unduly
burden FDIC-supervised institutions.
Additionally, the 150 percent risk
weight assigned to defaulted sovereign
exposures should mitigate the concerns
raised by some commenters that the use
of CRCs assigns inappropriate risk
weights to exposures to countries
experiencing fiscal stress.
The interim final rule assigns risk
weights to foreign sovereign exposures
as set forth in Table 17 below. The FDIC
modified the interim final rule to reflect
a change in OECD practice for assigning
CRCs for certain member countries so
that those member countries that no
longer receive a CRC are assigned a zero
percent risk weight. Applying a zero
percent risk weight to exposures to
these countries is appropriate because
they will remain subject to the same
market credit risk pricing formulas of
the OECD’s rating methodologies that
are applied to all OECD countries with
a CRC of 0. In other words, OECD
member countries that are no longer
assigned a CRC exhibit a similar degree
of country risk as that of a jurisdiction
with a CRC of zero. The interim final
rule, therefore, provides a zero percent
risk weight in these cases. Additionally,
a zero percent risk weight for these
countries is generally consistent with
the risk weight they would receive
under the FDIC’s general risk-based
capital rules.
remain subject to the same market credit risk
pricing disciplines that are applied to all Category
Zero countries. This means that the change will
have no practical impact on the rules that apply to
the provision of official export credits.
111 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.
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TABLE 17—RISK WEIGHTS FOR
SOVEREIGN EXPOSURES
Risk weight
(in percent)
CRC ..........................
0–1
2
3
4–6
7
OECD Member with No CRC
Non-OECD Member with No
CRC ..................................
Sovereign Default .................
0
20
50
100
150
0
100
150
Consistent with the proposal, the
interim final rule provides that if a
banking supervisor in a sovereign
jurisdiction allows banking
organizations in that jurisdiction to
apply a lower risk weight to an exposure
to the sovereign than Table 17 provides,
a U.S. FDIC-supervised institution may
assign the lower risk weight to an
exposure to the sovereign, provided the
exposure is denominated in the
sovereign’s currency and the U.S. FDICsupervised institution has at least an
equivalent amount of liabilities in that
foreign currency.
2. Exposures to Certain Supranational
Entities and Multilateral Development
Banks
Under the general risk-based capital
rules, exposures to certain supranational
entities and MDBs receive a 20 percent
risk weight. Consistent with the Basel II
standardized framework, the agencies
proposed 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. The agencies also
proposed to apply a zero percent risk
weight to exposures to an MDB in
accordance with the Basel framework.
The proposal defined 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
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primary Federal supervisor determines
poses comparable credit risk.
As explained in the proposal, 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. The FDIC has
adopted this aspect of the proposal
without change. Exposures to regional
development banks and multilateral
lending institutions that are not covered
under the definition of MDB generally
are treated as corporate exposures
assigned to the 100 percent risk weight
category.
3. Exposures to Government-Sponsored
Enterprises
The general risk-based capital rules
assign a 20 percent risk weight to
exposures to GSEs that are not equity
exposures and a 100 percent risk weight
to GSE preferred stock in the case of the
Federal Reserve and the FDIC (the OCC
has assigned a 20 percent risk weight to
GSE preferred stock).
The agencies proposed to continue to
assign a 20 percent risk weight to
exposures to GSEs that are not equity
exposures and to also assign a 100
percent risk weight to preferred stock
issued by a GSE. As explained in the
proposal, the agencies believe these risk
weights remain appropriate for the GSEs
under their current circumstances,
including those in the conservatorship
of the Federal Housing Finance Agency
and receiving capital support from the
U.S. Treasury. The FDIC maintains that
the obligations of the GSEs, as private
corporations whose obligations are not
explicitly guaranteed by the full faith
and credit of the United States, should
not receive the same treatment as
obligations that have such an explicit
guarantee.
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.
Under the general risk-based capital
rules, 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 proposed rule would assign a 20
percent risk weight to exposures to U.S.
depository institutions and credit
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unions.112 Consistent with the Basel II
standardized framework, under the
proposed rule, 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
foreign bank’s home country, based on
the assignment of risk weights by CRC,
as discussed above.113 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
foreign 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.
A few commenters asserted that the
proposed 20 percent risk weight for
exposures to U.S. banking
organizations—when compared to
corporate exposures that are assigned a
100 percent risk weight—would
continue to encourage banking
organizations to become overly
concentrated in the financial sector. The
FDIC has concluded that the proposed
20 percent risk weight is an appropriate
reflection of risk for this exposure type
when taking into consideration the
extensive regulatory and supervisory
frameworks under which these
institutions operate. In addition, the
FDIC notes that exposures to the capital
of other financial institutions, including
depository institutions and credit
unions, are subject to deduction from
capital if they exceed certain limits as
set forth in section 324.22 of the interim
final rule (discussed above in section
V.B of this preamble). Therefore, the
interim final rule retains, as proposed,
the 20 percent risk weight for exposures
to U.S. FDIC-supervised institutions.
The FDIC has adopted the proposal
with modifications to take into account
the OECD’s decision to withdraw CRCs
for certain OECD member countries.
Accordingly, exposures to a foreign
bank in a country that does not have a
CRC, but that is a member of the OECD,
are assigned a 20 percent risk weight
and exposures to a foreign bank in a
non-OECD member country that does
not have a CRC continue to receive a
100 percent risk weight.
112 A depository institution is defined in section
3 of the Federal Deposit Insurance Act (12 U.S.C.
1813(c)(1)). Under this interim final rule, a credit
union refers to an insured credit union as defined
under the Federal Credit Union Act (12 U.S.C.
1752(7)).
113 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 the proposal,
home country meant the country where an entity
is incorporated, chartered, or similarly established.
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Additionally, the FDIC has adopted
the proposed requirement that
exposures to a financial institution that
are included in the regulatory capital of
such financial institution receive a risk
weight of 100 percent, unless the
exposure is (1) an equity exposure, (2)
a significant investment in the capital of
an unconsolidated financial institution
in the form of common stock under
section 22 of the interim final rule, (3)
an exposure that is deducted from
regulatory capital under section 324.22
of the interim final rule, or (4) an
exposure that is subject to the 150
percent risk weight under Table 2 of
section 324.32 of the interim final rule.
As described in the Standardized
Approach NPR, 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.114 In particular, the
framework was revised to remove the
sovereign floor for trade finance-related
claims on banking organizations under
the Basel II standardized approach.115
The proposal incorporated this revision
and would have permitted 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.116
Consistent with the proposal, the
interim final rule permits an FDICsupervised institution 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.
As discussed in the proposal,
although the Basel capital framework
permits exposures to securities firms
that meet certain requirements to be
assigned the same risk weight as
exposures to depository institutions, the
agencies do not believe that the risk
profile of securities firms is sufficiently
114 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).
115 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.
116 One commenter requested that the agencies
confirm whether short-term self-liquidating trade
finance instruments are considered exempt from the
one-year maturity floor in the advances approaches
rule. Section 324.131(d)(7) of the interim final rule
provides that a trade-related letter of credit is
exempt from the one-year maturity floor.
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similar to depository institutions to
justify assigning the same risk weight to
both exposure types. Therefore, the
agencies proposed that banking
organizations assign a 100 percent risk
weight to exposures to securities firms,
which is the same risk weight applied
to BHCs, SLHCs, and other financial
institutions that are not insured
depository institutions or credit unions,
as described in section VIII.B of this
preamble.
Several commenters asserted that the
interim final rule should be consistent
with the Basel framework and permit
lower risk weights for exposures to
securities firms, particularly for
securities firms in a sovereign
jurisdiction with a CRC of 0 or 1. The
FDIC considered these comments and
has concluded that that exposures to
securities firms exhibit a similar degree
of risk as exposures to other financial
institutions that are assigned a 100
percent risk weight, because of the
nature and risk profile of their activities,
which are more expansive and exhibit
more varied risk profiles than the
activities permissible for depository
institutions and credit unions.
Accordingly, the FDIC has adopted the
100 percent risk weight for securities
firms without change.
5. Exposures to Public-Sector Entities
The proposal defined a PSE as a state,
local authority, or other governmental
subdivision below the level of a
sovereign, which includes U.S. states
and municipalities. The proposed
definition did not include governmentowned commercial companies that
engage in activities involving trade,
commerce, or profit that are generally
conducted or performed in the private
sector. The agencies proposed to define
a general obligation as a bond or similar
obligation that is backed by the full faith
and credit of a PSE, whereas a revenue
obligation would be defined as a bond
or similar obligation that is an
obligation of a PSE, but which the PSE
has committed to repay with revenues
from a specific project rather than
general tax funds. In the interim final
rule, the FDIC is adopting these
definitions as proposed.
The agencies proposed to 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. These are the
risk weights assigned to U.S. states and
municipalities under the general riskbased capital rules.
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Some commenters asserted that
available default data does not support
a differentiated treatment between
revenue obligations and general
obligations. In addition, some
commenters contended that higher risk
weights for revenue obligation bonds
would needlessly and adversely affect
state and local agencies’ ability to meet
the needs of underprivileged
constituents. One commenter
specifically recommended assigning a
20 percent risk weight to investmentgrade revenue obligations. Another
commenter recommended that
exposures to U.S. PSEs should receive
the same treatment as exposures to the
U.S. government.
The FDIC considered these comments,
including with respect to burden on
state and local programs, but concluded
that the higher regulatory capital
requirement for revenue obligations is
appropriate because those obligations
are dependent on revenue from specific
projects and generally a PSE is not
legally obligated to repay these
obligations from other revenue sources.
Although some evidence may suggest
that there are not substantial differences
in credit quality between general and
revenue obligation exposures, the FDIC
believes that such dependence on
project revenue presents more credit
risk relative to a general repayment
obligation of a state or political
subdivision of a sovereign. Therefore,
the proposed differentiation of risk
weights between general obligation and
revenue exposures is retained in the
interim final rule. The FDIC also
continues to believe that PSEs
collectively pose a greater credit risk
than U.S. sovereign debt and, therefore,
are appropriately assigned a higher risk
weight under the interim final rule.
Consistent with the Basel II
standardized framework, the agencies
proposed to require banking
organizations to risk weight exposures
to a non-U.S. PSE based on (1) the CRC
assigned to the PSE’s home country and
(2) whether the exposure is a general
obligation or a revenue obligation. The
risk weights assigned to revenue
obligations were proposed to be higher
than the risk weights assigned to a
general obligation issued by the same
PSE.
For purposes of the interim final rule,
the FDIC has adopted the proposed risk
weights for non-U.S. PSEs with
modifications to take into account the
OECD’s decision to withdraw CRCs for
certain OECD member countries
(discussed above), as set forth in Table
18 below. Under the interim final rule,
exposures to a non-U.S. PSE in a
country that does not have a CRC and
is not an OECD member receive a 100
percent risk weight. Exposures to a nonU.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
receive a 150 percent risk weight.
TABLE 18—RISK WEIGHTS FOR EXPOSURES TO NON-U.S. PSE GENERAL OBLIGATIONS AND REVENUE OBLIGATIONS
[In percent]
CRC .....................................................................................................................................
Risk Weight for
Exposures to NonU.S. PSE General
Obligations
Risk Weight for
Exposures to NonU.S. PSE Revenue
Obligations
20
50
100
150
50
100
100
150
20
100
150
50
100
150
0–1
2
3
4–7
OECD Member with No CRC ..........................................................................................................
Non-OECD member with No CRC ..................................................................................................
Sovereign Default ............................................................................................................................
Consistent with the general risk-based
capital rules as well as the proposed
rule, an FDIC-supervised institution
may apply a different risk weight to an
exposure to a non-U.S. PSE if the
banking organization supervisor in that
PSE’s home country allows supervised
institutions to assign the alternative risk
weight to exposures to that PSE. 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 the sovereign of that PSE’s
home country.
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6. Corporate Exposures
Generally consistent with the general
risk-based capital rules, the agencies
proposed to require banking
organizations to assign a 100 percent
risk weight to all corporate exposures,
including bonds and loans. The
proposal defined a corporate exposure
as an exposure to a company that is not
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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, a credit union, a PSE, a
GSE, a residential mortgage exposure, a
pre-sold construction loan, a statutory
multifamily mortgage, a high-volatility
commercial real estate (HVCRE)
exposure, a cleared transaction, a
default fund contribution, a
securitization exposure, an equity
exposure, or an unsettled transaction.
The definition also captured all
exposures that are not otherwise
included in another specific exposure
category.
Several commenters recommended
differentiating the proposed risk weights
for corporate bonds based on a bond’s
credit quality. Other commenters
requested the agencies align the interim
final rule with the Basel international
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standard that aligns risk weights with
credit ratings. Another commenter
contended that corporate bonds should
receive a 50 percent risk weight, arguing
that other exposures included in the
corporate exposure category (such as
commercial and industrial bank loans)
are empirically of greater risk than
corporate bonds.
One commenter requested that the
standardized approach provide a
distinct capital treatment of a 75 percent
risk weight for retail exposures,
consistent with the international
standard under Basel II. The FDIC has
concluded that the proposed 100
percent risk weight assigned to retail
exposures is appropriate given their risk
profile in the United States and has
retained the proposed treatment in the
interim final rule. Consistent with the
proposal, the interim final rule neither
defines nor provides a separate
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treatment for retail exposures in the
standardized approach.
As described in the proposal, the
agencies removed the use of ratings
from the regulatory capital framework,
consistent with section 939A of the
Dodd-Frank Act. The agencies therefore
evaluated a number of alternatives to
credit ratings to provide a more granular
risk weight treatment for corporate
exposures.117 For example, the agencies
considered market-based alternatives,
such as the use of credit default and
bond spreads, and use of particular
indicators or parameters to differentiate
between relative levels of credit risk.
However, the agencies viewed each of
the possible alternatives as having
significant drawbacks, including their
operational complexity, or insufficient
development. For instance, the agencies
were concerned that bond markets may
sometimes misprice risk and bond
spreads may reflect factors other than
credit risk. The agencies also were
concerned that such approaches could
introduce undue volatility into the riskbased capital requirements.
The FDIC considered suggestions
offered by commenters and understands
that a 100 percent risk weight may
overstate the credit risk associated with
some high-quality bonds. However, the
FDIC believes that a single risk weight
of less than 100 percent would
understate the risk of many corporate
exposures and, as explained, has not yet
identified an alternative methodology to
credit ratings that would provide a
sufficiently rigorous basis for
differentiating the risk of various
corporate exposures. In addition, the
FDIC believes that, on balance, a 100
percent risk weight is generally
representative of a well-diversified
corporate exposure portfolio. The
interim final rule retains without change
the 100 percent risk weight for all
corporate exposures as well as the
proposed definition of corporate
exposure.
A few commenters requested
clarification on the treatment for
general-account insurance products.
Under the final rule, consistent with the
proposal, if a general-account exposure
is to an organization that is not a
banking organization, such as an
insurance company, the exposure must
receive a risk weight of 100 percent.
Exposures to securities firms are subject
to the corporate exposure treatment
under the final rule, as described in
section VIII.B of this preamble.
117 See, for example, 76 FR 73526 (Nov. 29, 2011)
and 76 FR 73777 (Nov. 29, 2011).
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7. Residential Mortgage Exposures
Under the general risk-based capital
requirements, first-lien residential
mortgages made in accordance with
prudent underwriting standards on
properties that are owner-occupied or
rented typically are assigned to the 50
percent risk-weight category. Otherwise,
residential mortgage exposures are
assigned to the 100 percent risk weight
category.
The proposal would have
substantially modified the risk-weight
framework applicable to residential
mortgage exposures and differed
materially from both the general riskbased capital rules and the Basel capital
framework. The agencies proposed to
divide residential mortgage exposures
into two categories. The proposal
applied relatively low risk weights to
residential mortgage exposures that did
not have product features associated
with higher credit risk, or ‘‘category 1’’
residential mortgages as defined in the
proposal. The proposal defined all other
residential mortgage exposures as
‘‘category 2’’ mortgages, which would
receive relatively high risk weights. For
both category 1 and category 2
mortgages, the proposed risk weight
assigned also would have depended on
the mortgage exposure’s LTV ratio.
Under the proposal, a banking
organization would not be able to
recognize private mortgage insurance
(PMI) when calculating the LTV ratio of
a residential mortgage exposure. Due to
the varying degree of financial strength
of mortgage insurance providers, the
agencies stated that they did not believe
that it would be prudent to consider
PMI in the determination of LTV ratios
under the proposal.
The agencies received a significant
number of comments in opposition to
the proposed risk weights for residential
mortgages and in favor of retaining the
risk-weight framework for residential
mortgages in the general risk-based
capital rules. Many commenters
asserted that the increased risk weights
for certain mortgages would inhibit
lending to creditworthy borrowers,
particularly when combined with the
other proposed statutory and regulatory
requirements being implemented under
the authority of the Dodd-Frank Act,
and could ultimately jeopardize the
recovery of a still-fragile residential real
estate market. Various commenters
asserted that the agencies did not
provide sufficient empirical support for
the proposal and stated the proposal
was overly complex and would not
contribute meaningfully to the risk
sensitivity of the regulatory capital
requirements. They also asserted that
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the proposal would require some
banking organizations to raise revenue
through other, more risky activities to
compensate for the potential increased
costs.
Commenters also indicated that the
distinction between category 1 and
category 2 residential mortgages would
adversely impact certain loan products
that performed relatively well even
during the recent crisis, such as balloon
loans originated by community banking
organizations. Other commenters
criticized the proposed increased capital
requirements for various loan products,
including balloon and interest-only
mortgages. Community banking
organization commenters in particular
asserted that such mortgage products are
offered to hedge interest-rate risk and
are frequently the only option for a
significant segment of potential
borrowers in their regions.
A number of commenters argued that
the proposal would place U.S. banking
organizations at a competitive
disadvantage relative to foreign banking
organizations subject to the Basel II
standardized framework, which
generally assigns a 35 percent risk
weight to residential mortgage
exposures. Several commenters
indicated that the proposed treatment
would potentially undermine
government programs encouraging
residential mortgage lending to lowerincome individuals and underserved
regions. Commenters also asserted that
PMI should receive explicit recognition
in the interim final rule through a
reduction in risk weights, given the
potential negative impact on mortgage
availability (particularly to first-time
borrowers) of the proposed risk weights.
In addition to comments on the
specific elements of the proposal, a
significant number of commenters
alleged that the agencies did not
sufficiently consider the potential
impact of other regulatory actions on the
mortgage industry. For instance,
commenters expressed considerable
concern regarding the new requirements
associated with the Dodd-Frank Act’s
qualified mortgage definition under the
Truth in Lending Act.118 Many of these
commenters asserted that when
combined with this proposal, the
cumulative effect of the new regulatory
requirements could adversely impact
the residential mortgage industry.
The agencies also received specific
comments concerning potential
logistical difficulties they would face
118 The proposal was issued prior to publication
of the Consumer Financial Protection Bureau’s final
rule regarding qualified mortgage standards. See 78
FR 6407 (January 30, 2013).
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implementing the proposal. Many
commenters argued that tracking loans
by LTV and category would be
administratively burdensome, requiring
the development or purchase of new
systems. These commenters requested
that, at a minimum, existing mortgages
continue to be assigned the risk weights
they would receive under the general
risk-based capital rules and exempted
from the proposed rules. Many
commenters also requested clarification
regarding the method for calculating the
LTV for first and subordinate liens, as
well as how and whether a loan could
be reclassified between the two
residential mortgage categories. For
instance, commenters raised various
technical questions on how to calculate
the LTV of a restructured mortgage and
under what conditions a restructured
loan could qualify as a category 1
residential mortgage exposure.
The FDIC considered the comments
pertaining to the residential mortgage
proposal, particularly comments
regarding the issuance of new
regulations designed to improve the
quality of mortgage underwriting and to
generally reduce the associated credit
risk, including the final definition of
‘‘qualified mortgage’’ as implemented by
the Consumer Financial Protection
Bureau (CFPB) pursuant to the DoddFrank Act.119 Additionally, the FDIC is
mindful of the uncertain implications
that the proposal, along with other
mortgage-related rulemakings, could
have had on the residential mortgage
market, particularly regarding
underwriting and credit availability.
The FDIC also considered the
commenters’ observations about the
burden of calculating the risk weights
for FDIC-supervised institutions’
existing mortgage portfolios, and have
taken into account the commenters’
concerns about the availability of
different mortgage products across
different types of markets.
In light of these considerations, the
FDIC has decided to retain in the
interim final rule the treatment for
residential mortgage exposures that is
currently set forth in its general riskbased capital rules. The FDIC may
develop and propose changes in the
treatment of residential mortgage
exposures in the future, and in that
process, it intends to take into
consideration structural and product
market developments, other relevant
regulations, and potential issues with
implementation across various product
types.
Accordingly, as under the general
risk-based capital rules, the interim final
119 See
id.
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rule assigns exposures secured by oneto-four family residential properties to
either the 50 percent or the 100 percent
risk-weight category. Exposures secured
by a first-lien on an owner-occupied or
rented one-to-four family residential
property that meet prudential
underwriting standards, including
standards relating to the loan amount as
a percentage of the appraised value of
the property, are not 90 days or more
past due or carried on non-accrual
status, and that are not restructured or
modified receive a 50 percent risk
weight. If an FDIC-supervised
institution holds the first and junior
lien(s) on a residential property and no
other party holds an intervening lien,
the FDIC-supervised institution must
treat the combined exposure as a single
loan secured by a first lien for purposes
of determining the loan-to-value ratio
and assigning a risk weight. An FDICsupervised institution must assign a 100
percent risk weight to all other
residential mortgage exposures. Under
the interim final rule, a residential
mortgage guaranteed by the federal
government through the Federal
Housing Administration (FHA) or the
Department of Veterans Affairs (VA)
generally will be risk-weighted at 20
percent.
Consistent with the general risk-based
capital rules, under the interim final
rule, a residential mortgage exposure
may be assigned to the 50 percent riskweight category only if it is not
restructured or modified. Under the
interim final rule, consistent with the
proposal, 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) is not
considered to be restructured or
modified. Several commenters from
community banking organizations
encouraged the agencies to broaden this
exemption and not penalize banking
organizations for participating in other
successful loan modification programs.
As described in greater detail in the
proposal, the FDIC believes 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.
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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-tofour family residential pre-sold
construction loans and to multifamily
residential loans, consistent with
provisions of the Resolution Trust
Corporation Refinancing, Restructuring,
and Improvement Act of 1991 (RTCRRI
Act).120 The proposal maintained the
same general treatment as the general
risk-based capital rules and clarified
and updated the manner in which the
general risk-based capital rules define
these exposures. Under the proposal, a
pre-sold construction loan would be
subject to a 50 percent risk weight
unless the purchase contract is
cancelled.
The FDIC is adopting this aspect of
the proposal without change. The
interim final rule defines a pre-sold
construction loan, in part, as any oneto-four family residential construction
loan to a builder that meets the
requirements of section 618(a)(1) or (2)
of the RTCRRI Act, and also harmonizes
the FDIC’s prior regulations. Under the
interim final rule, a multifamily
mortgage that does not meet the
definition of a statutory multifamily
mortgage is treated as a corporate
exposure.
9. High-Volatility Commercial Real
Estate
Supervisory experience has
demonstrated that certain acquisition,
development, and construction loans
(which are a subset of commercial real
estate exposures) present particular
risks for which the FDIC believes FDICsupervised institutions should hold
additional capital. Accordingly, the
agencies proposed to require banking
organizations to assign a 150 percent
risk weight to any HVCRE exposure,
which is higher than the 100 percent
risk weight applied to such loans under
the general risk-based capital rules. The
proposal defined an HVCRE exposure to
include any credit facility that finances
or has financed the acquisition,
development, or construction of real
property, unless the facility finances
one- to four-family residential mortgage
120 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.
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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.
Commenters criticized the proposed
HVCRE definition as overly broad and
suggested an exclusion for certain
acquisition, development, or
construction (ADC) loans, including: (1)
ADC loans that are less than a specific
dollar amount or have a debt service
coverage ratio of 100 percent (rather
than 80 percent, under the agencies’
lending standards); (2) community
development projects or projects
financed by low-income housing tax
credits; and (3) certain loans secured by
agricultural property for the sole
purpose of acquiring land. Several
commenters asserted that the proposed
150 percent risk weight was too high for
secured loans and would hamper local
commercial development. Another
commenter recommended the agencies
increase the number of HVCRE riskweight categories to reflect LTV ratios.
The FDIC has considered the
comments and has decided to retain the
150 percent risk weight for HVCRE
exposures (modified as described
below), given the increased risk of these
activities when compared to other
commercial real estate loans.121 The
FDIC believes that segmenting HVCRE
by LTV ratio would introduce undue
complexity without providing a
sufficient improvement in risk
sensitivity. The FDIC has also
determined not to exclude from the
HVCRE definition ADC loans that are
characterized by a specified dollar
amount or loans with a debt service
coverage ratio greater than 80 percent
because an arbitrary threshold would
likely not capture certain ADC loans
with elevated risks. Consistent with the
proposal, a commercial real estate loan
that is not an HVCRE exposure is treated
as a corporate exposure.
Many commenters requested
clarification as to whether all
commercial real estate or ADC loans are
considered HVCRE exposures.
Consistent with the proposal, the
interim final rule’s HVCRE definition
only applies to a specific subset of ADC
loans and is, therefore, not applicable to
all commercial real estate loans.
Specifically, some commenters sought
clarification on whether a facility would
remain an HVCRE exposure for the life
of the loan and whether owner-occupied
commercial real estate loans are
included in the HVCRE definition. The
121 See the definition of ‘‘high-volatility
commercial real estate exposure’’ in section 2 of the
interim final rule.
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FDIC notes that when the life of the
ADC project concludes and the credit
facility is converted to permanent
financing in accordance with the FDICsupervised institution’s normal lending
terms, the permanent financing is not an
HVCRE exposure. Thus, a loan
permanently financing owner-occupied
commercial real estate is not an HVCRE
exposure. Given these clarifications, the
FDIC believes that many concerns
regarding the potential adverse impact
on commercial development were, in
part, driven by a lack of clarity
regarding the definition of the HVCRE,
and believes that the treatment of
HVCRE exposures in the interim final
rule appropriately reflects their risk
relative to other commercial real estate
exposures.
Commenters also sought clarification
as to whether cash or securities used to
purchase land counts as borrowercontributed capital. In addition, a few
commenters requested further
clarification on what constitutes
contributed capital for purposes of the
interim final rule. Consistent with
existing guidance, cash used to
purchase land is a form of borrower
contributed capital under the HVCRE
definition.
In response to the comments, the
interim final rule amends the proposed
HVCRE definition to exclude loans that
finance the acquisition, development, or
construction of real property that would
qualify as community development
investments. The interim final rule does
not require an FDIC-supervised
institution to have an investment in the
real property for it to qualify for the
exemption: Rather, if the real property
is such that an investment in that
property would qualify as a community
development investment, then a facility
financing acquisition, development, or
construction of that property would
meet the terms of the exemption. The
FDIC has, however, determined not to
give an automatic exemption from the
HVCRE definition to all ADC loans to
businesses or farms that have gross
annual revenues of $1 million or less,
although they could qualify for another
exemption from the definition. For
example, an ADC loan to a small
business with annual revenues of under
$1 million that meets the LTV ratio and
contribution requirements set forth in
paragraph (3) of the definition would
qualify for that exemption from the
definition as would a loan that finances
real property that: Provides affordable
housing (including multi-family rental
housing) for low to moderate income
individuals; is used in the provision of
community services for low to moderate
income individuals; or revitalizes or
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55407
stabilizes low to moderate income
geographies, designated disaster areas,
or underserved areas specifically
determined by the federal banking
agencies based on the needs of low- and
moderate-income individuals in those
areas. The final definition also exempts
ADC loans for the purchase or
development of agricultural land, which
is defined as all land known to be used
or usable for agricultural purposes (such
as crop and livestock production),
provided that the valuation of the
agricultural land is based on its value
for agricultural purposes and the
valuation does not consider any
potential use of the land for nonagricultural commercial development or
residential development.
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 exposures, except sovereign
exposures and residential mortgage
exposures, that are more than 90 days
past due to reflect the increased risk of
loss. Accordingly, to reflect the
impaired credit quality of such
exposures, the agencies proposed to
require a banking organization to assign
a 150 percent risk weight 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 number of commenters maintained
that the proposed 150 percent risk
weight is too high for various reasons.
Specifically, several commenters
asserted that ALLL is already reflected
in the risk-based capital numerator, and
therefore an increased risk weight
double-counts the risk of a past-due
exposure. Other commenters
characterized the increased risk weight
as procyclical and burdensome
(particularly for community banking
organizations), and maintained that it
would unnecessarily discourage lending
and loan modifications or workouts.
The FDIC has considered the
comments and have decided to retain
the proposed 150 percent risk weight for
past-due exposures in the interim final
rule. The FDIC notes that the ALLL is
intended to cover estimated, incurred
losses as of the balance sheet date,
rather than unexpected losses. The
higher risk weight on past due
exposures ensures sufficient regulatory
capital for the increased probability of
unexpected losses on these exposures.
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The FDIC believes that any increased
capital burden, potential rise in
procyclicality, or impact on lending
associated with the 150 percent risk
weight is justified given the overall
objective of better capturing the risk
associated with the impaired credit
quality of these exposures.
One commenter requested
clarification as to whether a banking
organization could reduce the risk
weight for past-due exposures from 150
percent when the carrying value is
charged down to the amount expected
to be recovered. For the purposes of the
interim final rule, an FDIC-supervised
institution must apply a 150 percent
risk weight to all past-due exposures,
including any amount remaining on the
balance sheet following a charge-off, to
reflect the increased uncertainty as to
the recovery of the remaining carrying
value.
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11. Other Assets
Generally consistent with the general
risk-based capital rules, the FDIC has
decided to adopt, as proposed, the risk
weights described below for exposures
not otherwise assigned to a specific risk
weight category. Specifically, an FDICsupervised institution must assign:
(1) A zero percent risk weight to cash
owned and held in all of an FDICsupervised institution’s offices or in
transit; gold bullion held in the FDICsupervised institution’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 CCP where there is
no assumption of ongoing counterparty
credit risk by the CCP 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 the interim
final rule (other than exposures that
would be deducted from tier 1 or tier 2
capital), including deferred acquisition
costs (DAC) and value of business
acquired (VOBA).
In addition, subject to the proposed
transition arrangements under section
300 of the interim final rule, an FDICsupervised institution must assign:
(1) A 100 percent risk weight to DTAs
arising from temporary differences that
the FDIC-supervised institution could
realize through net operating loss
carrybacks; and
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(2) A 250 percent risk weight to the
portion of MSAs and DTAs arising from
temporary differences that the FDICsupervised institution could not realize
through net operating loss carrybacks
that are not deducted from common
equity tier 1 capital pursuant to section
324.22(d).
The agencies received a few
comments on the treatment of DAC and
VOBA. DAC represents certain costs
incurred in the acquisition of a new
contract or renewal insurance contract
that are capitalized pursuant to GAAP.
VOBA refers to assets that reflect
revenue streams from insurance policies
purchased by an insurance company.
One commenter asked for clarification
on risk weights for other types of
exposures that are not assigned a
specific risk weight under the proposal.
Consistent with the proposal, under the
interim final rule these assets receive a
100 percent risk weight, together with
other assets not specifically assigned a
different risk weight under the NPR.
Consistent with the general risk-based
capital rules, the interim final rule
retains the limited flexibility to address
situations where exposures of an FDICsupervised institution that are not
exposures typically held by depository
institutions do not fit wholly within the
terms of another risk-weight category.
Under the interim final rule, an FDICsupervised institution may assign such
exposures to the risk-weight category
applicable under the capital rules for
BHCs or covered SLHCs, provided that
(1) the FDIC-supervised institution 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
interim final rule.
C. Off-Balance Sheet Items
1. Credit Conversion Factors
Under the proposed rule, 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 offbalance sheet component, which is
usually the contractual amount, by the
applicable CCF. This treatment would
apply to all off-balance sheet items,
such as commitments, contingent items,
guarantees, certain repo-style
transactions, financial standby letters of
credit, and forward agreements. The
proposed rule, however, introduced
new CCFs applicable to certain
exposures, such as a higher CCF for
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commitments with an original maturity
of one year or less that are not
unconditionally cancelable.
Commenters offered a number of
suggestions for revising the proposed
CCFs that would be applied to offbalance sheet exposures. Commenters
generally asked for lower CCFs that,
according to the commenters, are more
directly aligned with a particular offbalance sheet exposure’s loss history. In
addition, some commenters asked the
agencies to conduct a calibration study
to show that the proposed CCFs were
appropriate.
The FDIC has decided to retain the
proposed CCFs for off-balance sheet
exposures without change for purposes
of the interim final rule. The FDIC
believes that the proposed CCFs meet its
goals of improving risk sensitivity and
implementing higher capital
requirements for certain exposures
through a simple methodology.
Furthermore, alternatives proposed by
commenters, such as exposure measures
tied directly to a particular exposure’s
loss history, would create significant
operational burdens for many smalland mid-sized banking organizations, by
requiring them to keep accurate
historical records of losses and
continuously adjust their capital
requirements for certain exposures to
account for new loss data. Such a
system would be difficult for the FDIC
to monitor, as the FDIC would need to
verify the accuracy of historical loss
data and ensure that capital
requirements are properly applied
across institutions. Incorporation of
additional factors, such as loss history
or increasing the number of CCF
categories, would detract from the
FDIC’s stated goal of simplicity in its
capital treatment of off-balance sheet
exposures. Additionally, the FDIC
believes that the CCFs, as proposed,
were properly calibrated to reflect the
risk profiles of the exposures to which
they are applied and do not believe a
calibration study is required.
Accordingly, under the interim final
rule, as proposed, an FDIC-supervised
institution may apply a zero percent
CCF to the unused portion of
commitments that are unconditionally
cancelable by the FDIC-supervised
institution. For purposes of the interim
final rule, a commitment means any
legally binding arrangement that
obligates an FDIC-supervised institution
to extend credit or to purchase assets.
Unconditionally cancelable means a
commitment for which an FDICsupervised institution may, at any time,
with or without cause, refuse to extend
credit (to the extent permitted under
applicable law). In the case of a
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residential mortgage exposure that is a
line of credit, an FDIC-supervised
institution can unconditionally cancel
the commitment if it, at its option, may
prohibit additional extensions of credit,
reduce the credit line, and terminate the
commitment to the full extent permitted
by applicable law. If an FDIC-supervised
institution provides a commitment that
is structured as a syndication, the FDICsupervised institution is only required
to calculate the exposure amount for its
pro rata share of the commitment.
The proposed rule provided a 20
percent CCF for commitments with an
original maturity of one year or less that
are not unconditionally cancelable by a
banking organization, and for selfliquidating, trade-related contingent
items that arise from the movement of
goods with an original maturity of one
year or less.
Some commenters argued that the
proposed designation of a 20 percent
CCF for certain exposures was too high.
For example, they requested that the
interim final rule continue the current
practice of applying a zero percent CCF
to all unfunded lines of credit with less
than one year maturity, regardless of the
lender’s ability to unconditionally
cancel the line of credit. They also
requested a CCF lower than 20 percent
for the unused portions of letters of
credit extended to a small, mid-market,
or trade finance company with
durations of less than one year or less.
These commenters asserted that current
market practice for these lines have
covenants based on financial ratios, and
any increase in riskiness that violates
the contractual minimum ratios would
prevent the borrower from drawing
down the unused portion.
For purposes of the interim final rule,
the FDIC is retaining the 20 percent
CCF, as it accounts for the elevated level
of risk FDIC-supervised institutions face
when extending short-term
commitments that are not
unconditionally cancelable. Although
the FDIC understands certain
contractual provisions are common in
the market, these practices are not static,
and it is more appropriate from a
regulatory standpoint to base a CCF on
whether a commitment is
unconditionally cancellable. An FDICsupervised institution must apply a 20
percent CCF to a commitment with an
original maturity of one year or less that
is not unconditionally cancellable by
the FDIC-supervised institution. The
interim final rule also maintains the 20
percent CCF for self-liquidating, traderelated contingent items that arise from
the movement of goods with an original
maturity of one year or less. The interim
final rule also requires an FDIC-
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supervised institution to apply a 50
percent CCF to commitments with an
original maturity of more than one year
that are not unconditionally cancelable
by the FDIC-supervised institution, and
to transaction-related contingent items,
including performance bonds, bid
bonds, warranties, and performance
standby letters of credit.
Some commenters requested
clarification regarding the treatment of
commitments to extend letters of credit.
They argued that these commitments are
no more risky than commitments to
extend loans and should receive similar
treatment (20 percent or 50 percent
CCF). For purposes of the interim final
rule, the FDIC notes that section 33(a)(2)
allows FDIC-supervised institutions to
apply the lower of the two applicable
CCFs to the exposures related to
commitments to extend letters of credit.
FDIC-supervised institutions will need
to make this determination based upon
the individual characteristics of each
letter of credit.
Under the interim final rule, an FDICsupervised institution must apply a 100
percent CCF to off-balance sheet
guarantees, repurchase agreements,
credit-enhancing representations and
warranties that are not securitization
exposures, securities lending or
borrowing transactions, financial
standby letters of credit, and forward
agreements, and other similar
exposures. The off-balance sheet
component of a repurchase agreement
equals the sum of the current fair values
of all positions the FDIC-supervised
institution has sold subject to
repurchase. The off-balance sheet
component of a securities lending
transaction is the sum of the current fair
values of all positions the FDICsupervised institution has lent under
the transaction. For securities borrowing
transactions, the off-balance sheet
component is the sum of the current fair
values of all non-cash positions the
FDIC-supervised institution has posted
as collateral under the transaction. In
certain circumstances, an FDICsupervised institution may instead
determine the exposure amount of the
transaction as described in section 37 of
the interim final rule.
In contrast to the general risk-based
capital rules, which require capital for
securities lending and borrowing
transactions and repurchase agreements
that generate an on-balance sheet
exposure, the interim final rule requires
an FDIC-supervised institution to hold
risk-based capital against all repo-style
transactions, regardless of whether they
generate on-balance sheet exposures, as
described in section 324.37 of the
interim final rule. One commenter
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55409
disagreed with this treatment and
requested an exemption from the capital
treatment for off-balance sheet repostyle exposures. However, the FDIC
adopted this approach because banking
organizations face counterparty credit
risk when engaging in repo-style
transactions, even if those transactions
do not generate on-balance sheet
exposures, and thus should not be
exempt from risk-based capital
requirements.
2. Credit-Enhancing Representations
and Warranties
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.122 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 (1)
contain early default clauses or similar
warranties that permit the return of, or
premium refund clauses covering, oneto-four family first-lien residential
mortgage loans for a period not to
exceed 120 days from the date of
transfer; and (2) contain 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, provided the
premium refund clauses are for a period
not to exceed 120 days; or (3) permit the
return of assets in instances of fraud,
misrepresentation, or incomplete
documentation.123
In contrast, under the proposal, if a
banking organization provides a creditenhancing representation or warranty
on assets it sold or otherwise transferred
to third parties, including early default
clauses that permit the return of, or
premium refund clauses covering, oneto-four family residential first mortgage
loans, the banking organization would
treat such an arrangement as an offbalance sheet guarantee and apply a 100
percent CCF to determine the exposure
amount, provided the exposure does not
meet the definition of a securitization
exposure. The agencies proposed a
different treatment than the one under
the general risk-based capital rules
because of the risk to which banking
organizations are exposed while creditenhancing representations and
122 12 CFR part 325, appendix A, section II.B.5(a)
(state nonmember banks) and 12 CFR 390.466(b)
(state savings associations).
123 12 CFR part 325, appendix A, section II.B.5(a)
(state nonmember banks) and 12 CFR 390.466(b)
(state savings associations).
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warranties are in effect. Some
commenters asked for clarification on
what qualifies as a credit-enhancing
representation and warranty, and
commenters made numerous
suggestions for revising the proposed
definition. In particular, they disagreed
with the agencies’ proposal to remove
the exemptions related to early default
clauses and premium refund clauses
since these representations and
warranties generally are considered to
be low risk exposures and banking
organizations are not currently required
to hold capital against these
representations and warranties.
Some commenters encouraged the
agencies to retain the 120-day safe
harbor from the general risk-based
capital rules, which would not require
holding capital against assets sold with
certain early default clauses of 120 days
or less. These commenters argued that
the proposal to remove the 120-day safe
harbor would impede the ability of
banking organizations to make loans
and would increase the cost of credit to
borrowers. Furthermore, certain
commenters asserted that removal of the
120-day safe harbor was not necessary
for loan portfolios that are well
underwritten, those for which put-backs
are rare, and where the banking
organization maintains robust buyback
reserves.
After reviewing the comments, the
FDIC decided to retain in the interim
final rule the 120-day safe harbor in the
definition of credit-enhancing
representations and warranties for early
default and premium refund clauses on
one-to-four family residential mortgages
that qualify for the 50 percent risk
weight as well as for 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. The FDIC determined
that retaining the safe harbor would
help to address commenters’ confusion
about what qualifies as a creditenhancing representation and warranty.
Therefore, consistent with the general
risk-based capital rules, under the
interim final rule, credit-enhancing
representations and warranties will not
include (1) early default clauses and
similar warranties that permit the return
of, or premium refund clauses covering,
one-to-four family first-lien residential
mortgage loans that qualify for a 50
percent risk weight for a period not to
exceed 120 days from the date of
transfer; 124 (2) premium refund clauses
that cover assets guaranteed by the U.S.
124 These warranties may cover only those loans
that were originated within 1 year of the date of
transfer.
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government, a U.S. Government agency,
or a GSE, provided the premium refund
clauses are for a period not to exceed
120 days from the date of transfer; or (3)
warranties that permit the return of
underlying exposures in instances of
misrepresentation, fraud, or incomplete
documentation.
Some commenters requested
clarification from the agencies regarding
representations made about the value of
the underlying collateral of a sold loan.
For example, many purchasers of
mortgage loans originated by banking
organizations require that the banking
organization repurchase the loan if the
value of the collateral is other than as
stated in the documentation provided to
the purchaser or if there were any
material misrepresentations in the
appraisal process. The FDIC confirms
that such representations meets the
‘‘misrepresentation, fraud, or
incomplete documentation’’ exclusion
in the definition of credit-enhancing
representations and warranties and is
not subject to capital treatment.
A few commenters also requested
clarification regarding how the
definition of credit-enhancing
representations and warranties in the
proposal interacts with Federal Home
Loan Mortgage Corporation (FHLMC),
Federal National Mortgage Association
(FNMA), and Government National
Mortgage Association (GNMA) sales
conventions. These same commenters
also requested verification in the
interim final rule that mortgages sold
with representations and warranties
would all receive a 100 percent risk
weight, regardless of the characteristics
of the mortgage exposure. First, the
definition of credit-enhancing
representations and warranties
described in this interim final rule is
separate from the sales conventions
required by FLHMA, FNMA, and
GNMA. Those entities will continue to
set their own requirements for
secondary sales, including
representation and warranty
requirements. Second, the risk weights
applied to mortgage exposures
themselves are not affected by the
inclusion of representations and
warranties. Mortgage exposures will
continue to receive either a 50 or 100
percent risk weight, as outlined in
section 32(g) of this interim final rule,
regardless of the inclusion of
representations and warranties when
they are sold in the secondary market.
If such representations and warranties
meet the rule’s definition of creditenhancing representations and
warranties, then the institution must
maintain regulatory capital against the
associated credit risk.
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Some commenters disagreed with the
proposed methodology for determining
the capital requirement for
representations and warranties, and
offered alternatives that they argued
would conform to existing market
practices and better incentivize highquality underwriting. Some commenters
indicated that many originators already
hold robust buyback reserves and
argued that the agencies should require
originators to hold adequate liquidity in
their buyback reserves, instead of
requiring a duplicative capital
requirement. Other commenters asked
that any capital requirement be directly
aligned to that originator’s history of
honoring representation and warranty
claims. These commenters stated that
originators who underwrite high-quality
loans should not be required to hold as
much capital against their
representations and warranties as
originators who exhibit what the
commenters referred to as ‘‘poor
underwriting standards.’’ Finally, a few
commenters requested that the agencies
completely remove, or significantly
reduce, capital requirements for
representations and warranties. They
argue that the market is able to regulate
itself, as a banking organization will not
be able to sell its loans in the secondary
market if they are frequently put back by
the buyers.
The FDIC considered these
alternatives and has decided to finalize
the proposed methodology for
determining the capital requirement
applied to representations and
warranties without change. The FDIC is
concerned that buyback reserves could
be inadequate, especially if the housing
market enters another prolonged
downturn. Robust and clear capital
requirements, in addition to separate
buyback reserves held by originators,
better ensure that representation and
warranty claims will be fulfilled in
times of stress. Furthermore, capital
requirements based upon originators’
historical representation and warranty
claims are not only operationally
difficult to implement and monitor, but
they can also be misleading.
Underwriting standards at firms are not
static and can change over time. The
FDIC believes that capital requirements
based on past performance of a
particular underwriter do not always
adequately capture the current risks
faced by that firm. The FDIC believes
that the incorporation of the 120-day
safe harbor in the interim final rule as
discussed above addresses many of the
commenters’ concerns.
Some commenters requested
clarification on the duration of the
capital treatment for credit-enhancing
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representations and warranties. For
instance, some commenters questioned
whether capital is required for creditenhancing representations and
warranties after the contractual life of
the representations and warranties has
expired or whether capital has to be
held for the life of the asset. Banking
organizations are not required to hold
capital for any credit-enhancing
representation and warranty after the
expiration of the representation or
warranty, regardless of the maturity of
the underlying loan.
Additionally, commenters indicated
that market practice for some
representations and warranties for sold
mortgages stipulates that originators
only need to refund the buyer any
servicing premiums and other earned
fees in cases of early default, rather than
requiring putback of the underlying loan
to the seller. These commenters sought
clarification as to whether the proposal
would have required them to hold
capital against the value of the
underlying loan or only for the premium
or fees that could be subject to a refund,
as agreed upon in their contract with the
buyer. For purposes of the interim final
rule, an FDIC-supervised institution
must hold capital only for the maximum
contractual amount of the FDICsupervised institution’s exposure under
the representations and warranties. In
the case described by the commenters,
the FDIC-supervised institution would
hold capital against the value of the
servicing premium and other earned
fees, rather than the value of the
underlying loan, for the duration
specified in the representations and
warranties agreement.
Some commenters also requested
exemptions from the proposed
treatment of representations and
warranties for particular originators,
types of transactions, or asset categories.
In particular, many commenters asked
for an exemption for community
banking organizations, claiming that the
proposed treatment would lessen credit
availability and increase the costs of
lending. One commenter argued that
bona fide mortgage sale agreements
should be exempt from capital
requirements. Other commenters
requested an exemption for the portion
of any off-balance sheet asset that is
subject to a risk retention requirement
under section 941 of the Dodd-Frank
Act and any regulations promulgated
thereunder.125 Some commenters also
requested that the agencies delay action
on the proposal until the risk retention
rule is finalized. Other commenters also
requested exemptions for qualified
125 See
15 U.S.C. 78o–11, et seq.
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mortgages (QM) and ‘‘prime’’ mortgage
loans.
The FDIC has decided not to adopt
any of the specific exemptions
suggested by the commenters. Although
community banking organizations are
critical to ensure the flow of credit to
small businesses and individual
borrowers, providing them with an
exemption from the proposed treatment
of credit-enhancing representations and
warranties would be inconsistent with
safety and soundness because the risks
from these exposures to community
banking organizations are no different
than those to other banking
organizations. The FDIC also has not
provided exemptions in this rulemaking
to portions of off-balance sheet assets
subject to risk retention, QM, and
‘‘prime loans.’’ The relevant agencies
have not yet adopted a final rule
implementing the risk retention
provisions of section 941 of the DoddFrank Act, and the FDIC, therefore, does
not believe it is appropriate to provide
an exemption relating to risk retention
in this interim final rule. In addition,
while the QM rulemaking is now
final,126 the FDIC believes it is
appropriate to first evaluate how the
QM designation affects the mortgage
market before requiring less capital to be
held against off-balance sheet assets that
cover these loans. As noted above, the
incorporation in the interim final rule of
the 120-day safe harbor addresses many
of the concerns about burden.
The risk-based capital treatment for
off-balance sheet items in this interim
final rule is consistent with section
165(k) of the Dodd-Frank Act which
provides that, in the case of a BHC 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.127 The interim final rule
complies with the requirements of
section 165(k) of the Dodd-Frank Act by
requiring a BHC to hold risk-based
capital for its off-balance sheet
exposures, as described in sections
126 See
12 CFR Part 1026.
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.
127 Section
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55411
324.31, 324.33, 324.34 and 324.35 of the
interim final rule.
D. Over-the-Counter Derivative
Contracts
In the Standardized Approach NPR,
the agencies proposed generally to
retain the treatment of OTC derivatives
provided under the general risk-based
capital rules, which is similar to the
current exposure method (CEM) for
determining the exposure amount for
OTC derivative contracts contained in
the Basel II standardized framework.128
Proposed revisions to the treatment of
the OTC derivative contracts included
an updated definition of an OTC
derivative contract, a revised conversion
factor matrix for calculating the 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 cap for OTC
derivative contracts.
The agencies received a number of
comments on the proposed CEM
relating to OTC derivatives. These
comments generally focused on the
revised conversion factor matrix, the
proposed removal of the 50 percent cap
on risk weights for OTC derivative
transactions in the general risk-based
capital rules, and commenters’ view that
there is a lack of risk sensitivity in the
calculation of the exposure amount of
OTC derivatives and netting benefits. A
specific discussion of the comments on
particular aspects of the proposal
follows.
One commenter asserted that the
proposed conversion factors for
common interest rate and foreign
exchange contracts, and risk
participation agreements (a simplified
form of credit default swaps) (set forth
in Table 19 below), combined with the
removal of the 50 percent risk weight
cap, would drive up banking
organizations’ capital requirements
associated with these routine
transactions and result in much higher
transaction costs for small businesses.
Another commenter asserted that the
zero percent conversion factor assigned
to interest rate derivatives with a
remaining maturity of one year or less
is not appropriate as the PFE incorrectly
assumes all interest rate derivatives
128 The general risk-based capital rules for state
savings associations regarding the calculation of
credit equivalent amounts for derivative contracts
differ from the rules for other banking
organizations. (See 12 CFR 390.466(a)(2)). The state
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 banks.
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always can be covered by taking a
position in a liquid market.
The FDIC acknowledges that the
standardized matrix of conversion
factors may be too simplified for some
FDIC-supervised institutions. The FDIC
believes, however, that the matrix
approach appropriately balances the
policy goals of simplicity and risksensitivity, and that the conversion
factors themselves have been
appropriately calibrated for the products
to which they relate.
Some commenters supported
retention of the 50 percent risk weight
cap for derivative exposures under the
general risk-based capital rules.
Specifically, one commenter argued that
the methodology for calculating the
exposure amount without the 50 percent
risk weight cap would result in
inappropriately high capital charge
unless the methodology were amended
to recognize the use of netting and
collateral. Accordingly, the commenter
encouraged the agencies to retain the 50
percent risk weight cap until the BCBS
enhances the CEM to improve risksensitivity.
The FDIC believes 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. In addition, the
FDIC is aware of the ongoing work of
the BCBS to improve the current
exposure method and expect to consider
any necessary changes to update the
exposure amount calculation when the
BCBS work is completed.
Some commenters suggested that the
agencies allow the use of internal
models approved by the primary
Federal supervisor as an alternative to
the proposal, consistent with Basel III.
The FDIC chose not to incorporate all of
the methodologies included in the Basel
II standardized framework in the
interim final rule. The FDIC believes
that, given the range of FDIC-supervised
institutions that are subject to the
interim final rule in the United States,
it is more appropriate to permit only the
proposed non-models based
methodology for calculating OTC
derivatives exposure amounts under the
standardized approach. For larger and
more complex FDIC-supervised
institutions, the use of the internal
model methodology and other modelsbased methodologies is permitted under
the advanced approaches rule. One
commenter asked the agencies to
provide a definition for ‘‘netting,’’ as the
meaning of this term differs widely
under various master netting agreements
used in industry practice. Another
commenter asserted that net exposures
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are likely to understate actual exposures
and the risk of early close-out posed to
banking organizations facing financial
difficulties, that the conversion factors
for PFE are inappropriate, and that a
better measure of risk tied to gross
exposure is needed. With respect to the
definition of netting, the FDIC notes that
the definition of ‘‘qualifying master
netting agreement’’ provides a
functional definition of netting. With
respect to the use of net exposure for
purposes of determining PFE, the FDIC
believes that, in light of the existing
international framework to enforce
netting arrangements together with the
conditions for recognizing netting that
are included in this interim final rule,
the use of net exposure is appropriate in
the context of a risk-based counterparty
credit risk charge that is specifically
intended to address default risk. The
interim final rule also continues to limit
full recognition of netting for purposes
of calculating PFE for counterparty
credit risk under the standardized
approach.129
Other commenters suggested adopting
broader recognition of netting under the
PFE calculation for netting sets, using a
factor of 85 percent rather than 60
percent in the formula for recognizing
netting effects to be consistent with the
BCBS CCP interim framework (which is
defined and discussed in section VIII.E
of this preamble, below). Another
commenter suggested implementing a
15 percent haircut on the calculated
exposure amount for failure to recognize
risk mitigants and portfolio
diversification. With respect to the
commenters’ request for greater
recognition of netting in the calculation
of PFE, the FDIC notes that the BCBS
CCP interim framework’s use of 85
percent recognition of netting was
limited to the calculation of the
hypothetical capital requirement of the
QCCP for purposes of determining a
clearing member banking organization’s
risk-weighted asset amount for its
default fund contribution. As such, the
interim final rule retains the proposed
formula for recognizing netting effects
for OTC derivative contracts that was set
out in the proposal. The FDIC expects
to consider whether it would be
necessary to propose any changes to the
CEM once BCBS discussions on this
topic are complete.
The proposed rule placed a cap on the
PFE of sold credit protection, equal to
the net present value of the amount of
unpaid premiums. One commenter
questioned the appropriateness of the
proposed cap, and suggested that a
129 See
section 324.34(a)(2) of the interim final
rule.
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seller’s exposure be measured as the
gross exposure amount of the credit
protection provided on the name
referenced in the credit derivative
contract. The FDIC believes that the
proposed approach is appropriate for
measuring counterparty credit risk
because it reflects the amount an FDICsupervised institution may lose on its
exposure to the counterparty that
purchased protection. The exposure
amount on a sold credit derivative
would be calculated separately under
section 34(a).
Another commenter asserted that
current credit exposure (netted and
unnetted) understates or ignores the risk
that the mark is inaccurate. Generally,
the FDIC expects an FDIC-supervised
institution to have in place policies and
procedures regarding the valuation of
positions, and that those processes
would be reviewed in connection with
routine and periodic supervisory
examinations of an FDIC-supervised
institution.
The interim final rule generally
adopts the proposed treatment for OTC
derivatives without change. Under the
interim final rule, as under the general
risk-based capital rules, an FDICsupervised institution is required to
hold risk-based capital for counterparty
credit risk for an OTC derivative
contract. As defined in the rule, 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 includes an interest rate,
exchange rate, equity, or a commodity
derivative contract, a credit derivative,
and any other instrument that poses
similar counterparty credit risks.
Derivative contracts also include
unsettled securities, commodities, and
foreign exchange transactions with a
contractual settlement or delivery lag
that is longer than the lesser of the
market standard for the particular
instrument or five business days. This
applies, for example, to mortgagebacked securities (MBS) transactions
that the GSEs conduct in the To-BeAnnounced market.
Under the interim final rule, an OTC
derivative contract does not include a
derivative contract that is a cleared
transaction, which is subject to a
specific treatment as described in
section VIII.E of this preamble.
However, an OTC derivative contract
includes an exposure of a banking
organization that is a clearing member
banking organization to its clearing
member client where the clearing
member banking organization is either
acting as a financial intermediary and
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enters into an offsetting transaction with
a CCP or where the clearing member
banking organization provides a
guarantee to the CCP on the
performance of the client. The rationale
for this treatment is the banking
organization’s continued exposure
directly to the risk of the clearing
member client. In recognition of the
shorter close-out period for these
transactions, however, the interim final
rule permits an FDIC-supervised
institution to apply a scaling factor to
recognize the shorter holding period as
discussed in section VIII.E of this
preamble.
To determine the risk-weighted asset
amount for an OTC derivative contract
under the interim final rule, an FDICsupervised institution must 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 rule requires
the exposure amount to be the sum of
(1) the FDIC-supervised institution’s
current credit exposure, which is the
55413
greater of the fair value or zero, and (2)
PFE, which is calculated by multiplying
the notional principal amount of the
OTC derivative contract by the
appropriate conversion factor, in
accordance with Table 19 below.
Under the interim final rule, the
conversion factor matrix includes the
additional categories of OTC derivative
contracts as illustrated in Table 19. For
an OTC derivative contract that does not
fall within one of the specified
categories in Table 19, the interim final
rule requires PFE to be calculated using
the ‘‘other’’ conversion factor.
TABLE 19—CONVERSION FACTOR MATRIX FOR OTC DERIVATIVE CONTRACTS 130
Remaining
maturity 131
Foreign
exchange rate
and gold
Credit (investment-grade
reference
asset) 132
Credit (non-investmentgrade reference asset)
0.00
0.01
0.05
0.10
0.06
0.07
0.10
0.005
0.05
0.05
0.10
0.08
0.07
0.12
0.015
0.075
0.05
0.10
0.10
0.08
0.15
Interest rate
One year or less ......
Greater than one
year and less than
or equal to five
years .....................
Greater than five
years .....................
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For multiple OTC derivative contracts
subject to a qualifying master netting
agreement, an FDIC-supervised
institution must calculate the exposure
amount 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. Under the
interim final rule, the net current credit
exposure is the greater of zero and the
net sum of all positive and negative fair
values of the individual OTC derivative
contracts subject to the qualifying
master netting agreement. The adjusted
sum of the PFE amounts must be
calculated as described in section
34(a)(2)(ii) of the interim final rule.
130 For a derivative contract with multiple
exchanges of principal, the conversion factor is
multiplied by the number of remaining payments in
the derivative contract.
131 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.
132 A FDIC-supervised institution 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 FDIC-supervised institution must use the
column labeled ‘‘Credit (non-investment-grade
reference asset)’’ for all other credit derivatives.
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Under the interim final rule, to
recognize the netting benefit of multiple
OTC derivative contracts, the contracts
must be subject to a qualifying master
netting agreement; however, unlike
under the general risk-based capital
rules, under the interim final rule for
most transactions, an FDIC-supervised
institution may rely on sufficient legal
review instead of an opinion on the
enforceability of the netting agreement
as described below.133 The interim final
rule defines a qualifying master netting
agreement as any written, legally
enforceable netting agreement that
creates a single legal obligation for all
individual transactions covered by the
agreement upon an event of default
(including receivership, insolvency,
liquidation, or similar proceeding)
provided that certain conditions set
forth in section 3 of the interim final
rule are met.134 These conditions
133 Under the general risk-based capital rules, to
recognize netting benefits an FDIC-supervised
institution 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.
134 The interim final rule adds a new section 3:
Operational requirements for counterparty credit
risk. This section organizes substantive
requirements related to cleared transactions,
eligible margin loans, qualifying cross-product
master netting agreements, qualifying master
netting agreements, and repo-style transactions in a
central place to assist FDIC-supervised institutions
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Precious
metals
(except gold)
Equity
Other
include requirements with respect to the
FDIC-supervised institution’s right to
terminate the contract and liquidate
collateral and meeting certain standards
with respect to legal review of the
agreement to ensure its meets the
criteria in the definition.
The legal review must be sufficient so
that the FDIC-supervised institution
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 an FDICsupervised institution has little
experience, the FDIC-supervised
institution would be expected to obtain
an explicit, written legal opinion from
external or internal legal counsel
addressing the particular situation.
Under the interim final rule, if an
OTC derivative contract is collateralized
by financial collateral, an FDICsupervised institution must first
in determining their legal responsibilities. These
substantive requirements are consistent with those
included in the proposal.
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determine the exposure amount of the
OTC derivative contract as described in
this section of the preamble. Next, to
recognize the credit risk mitigation
benefits of the financial collateral, an
FDIC-supervised institution could use
the simple approach for collateralized
transactions as described in section
324.37(b) of the interim final rule.
Alternatively, if the financial collateral
is marked-to-market on a daily basis and
subject to a daily margin maintenance
requirement, an FDIC-supervised
institution could adjust the exposure
amount of the contract using the
collateral haircut approach described in
section 324.37(c) of the interim final
rule.
Similarly, if an FDIC-supervised
institution purchases a credit derivative
that is recognized under section 324.36
of the interim final rule as a credit risk
mitigant for an exposure that is not a
covered position under subpart F, it is
not 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 FDICsupervised institution must 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.
Under the interim final rule, an FDICsupervised institution must treat an
equity derivative contract as an equity
exposure and compute its risk-weighted
asset amount according to the simple
risk-weight approach (SRWA) described
in section 324.52 (unless the contract is
a covered position under the market risk
rule). If the FDIC-supervised institution
risk weights a contract under the SRWA
described in section 324.52, 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, an
FDIC-supervised institution either
includes or excludes all of the contracts
from any measure used to determine
counterparty credit risk exposures. If the
FDIC-supervised institution is treating
an OTC equity derivative contract as a
covered position under subpart F, it also
must calculate a risk-based capital
requirement for counterparty credit risk
of the contract under this section.
In addition, if an FDIC-supervised
institution provides protection through
a credit derivative that is not a covered
position under subpart F of the interim
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final rule, it must 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 324.32 of
the interim final rule. The FDICsupervised institution is not required to
compute a counterparty credit risk
capital requirement for the credit
derivative, as long as it does so
consistently for all such OTC credit
derivative contracts. Further, where
these credit derivative contracts are
subject to a qualifying master netting
agreement, the FDIC-supervised
institution must either include all or
exclude all such credit derivatives from
any measure used to determine
counterparty credit risk exposure to all
relevant counterparties for risk-based
capital purposes.
Where the FDIC-supervised
institution provides protection through
a credit derivative treated as a covered
position under subpart F, it must
compute a supplemental counterparty
credit risk capital requirement using an
amount determined under section
324.34 for OTC credit derivative
contracts 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 interim final rule, the risk
weight for OTC derivative transactions
is not subject to any specific ceiling,
consistent with the Basel capital
framework.
Although the FDIC generally adopted
the proposal without change, the
interim final rule has been revised to
add a provision regarding the treatment
of a clearing member FDIC-supervised
institution’s exposure to a clearing
member client (as described below
under ‘‘Cleared Transactions,’’ a
transaction between a clearing member
FDIC-supervised institution and a client
is treated as an OTC derivative
exposure). However, the interim final
rule recognizes the shorter close-out
period for cleared transactions that are
derivative contracts, such that a clearing
member FDIC-supervised institution can
reduce its exposure amount to its client
by multiplying the exposure amount by
a scaling factor of no less than 0.71. See
section VIII.E of this preamble, below,
for additional discussion.
E. Cleared Transactions
The BCBS and the FDIC support
incentives designed to encourage
clearing of derivative and repo-style
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transactions 135 through a CCP wherever
possible in order to promote
transparency, multilateral netting, and
robust risk-management practices.
Although there are some risks
associated with CCPs, as discussed
below, the FDIC believes that CCPs
generally help improve the safety and
soundness of the derivatives and repostyle transactions markets through the
multilateral netting of exposures,
establishment and enforcement of
collateral requirements, and the
promotion of market transparency.
As discussed in the proposal, 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, in
the period preceding the proposal, the
BCBS sought comment on a more risksensitive approach for determining
capital requirements for banking
organizations’ exposures to CCPs.136 In
addition, to encourage CCPs to maintain
strong risk-management procedures, the
BCBS sought comment on a proposal for
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).137
Exposures to such entities, termed
QCCPs in the interim final rule, would
be subject to lower risk weights than
exposures to CCPs that did not meet
those criteria.
Consistent with the BCBS proposals
and the CPSS–IOSCO standards, the
agencies sought comment on specific
risk-based capital requirements for
cleared derivative and repo-style
transactions that are 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 proposal would have
required a banking organization to hold
risk-based capital for an outstanding
derivative contract or a repo-style
135 See section 324.2 of the interim final rule for
the definition of a repo-style transaction.
136 See ‘‘Capitalisation of Banking Organization
Exposures to Central Counterparties’’ (November
2011) (CCP consultative release), available at http://
www.bis.org/publ/bcbs206.pdf.
137 See CPSS–IOSCO, ‘‘Recommendations for
Central Counterparties’’ (November 2004), available
at http://www.bis.org/publ/cpss64.pdf?noframes=1.
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transaction that has been cleared
through a CCP, including an exchange.
The proposal also included a capital
requirement for default fund
contributions to CCPs. In the case of
non-qualifying CCPs (that is, CCPs that
do not meet the risk-management,
supervision, and other standards for
QCCPs outlined in the proposal), the
risk-weighted asset amount for default
fund contributions to such CCPs would
be equal to the sum of the banking
organization’s default fund
contributions to the CCPs multiplied by
1,250 percent. In the case of QCCPs, the
risk-weighted asset amount would be
calculated according to a formula based
on the hypothetical capital requirement
for a QCCP, consistent with the Basel
capital framework. The proposal
included a formula with inputs
including the exposure amount of
transactions cleared through the QCCP,
collateral amounts, the number of
members of the QCCP, and default fund
contributions.
Following issuance of the proposal,
the BCBS issued an interim framework
for the capital treatment of bank
exposures to CCPs (BCBS CCP interim
framework).138 The BCBS CCP interim
framework reflects several key changes
from the CCP consultative release,
including: (1) A provision to allow a
clearing member banking organization
to apply a scalar when using the CEM
(as described below) in the calculation
of its exposure amount to a client (or
use a reduced margin period of risk
when using the internal models
methodology (IMM) to calculate
exposure at default (EAD) under the
advanced approaches rule); (2) revisions
to the risk weights applicable to a
clearing member banking organization’s
exposures when such clearing member
banking organization guarantees QCCP
performance; (3) a provision to permit
clearing member banking organizations
to choose from one of two formulaic
methodologies for determining the
capital requirement for default fund
contributions; and (4) revisions to the
CEM formula to recognize netting to a
greater extent for purposes of
calculating the capital requirement for
default fund contributions.
The agencies received a number of
comments on the proposal relating to
cleared transactions. Commenters also
encouraged the agencies to revise
certain aspects of the proposal in a
manner consistent with the BCBS CCP
interim framework.
138 See ‘‘Capital requirements for bank exposures
to central counterparties’’ (July 2012), available at
http://www.bis.org/publ/bcbs227.pdf.
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Some commenters asserted that the
definition of QCCP should be revised,
specifically by including a definitive list
of QCCPs rather than requiring each
banking organization to demonstrate
that a CCP meets certain qualifying
criteria. The FDIC believes that a static
list of QCCPs would not reflect the
potentially dynamic nature of a CCP,
and that FDIC-supervised institutions
are situated to make this determination
on an ongoing basis.
Some commenters recommended
explicitly including derivatives clearing
organizations (DCOs) and securitiesbased swap clearing agencies in the
definition of a QCCP. Commenters also
suggested including in the definition of
QCCP any CCP that the CFTC or SEC
exempts from registration because it is
deemed by the CFTC or SEC to be
subject to ‘‘comparable, comprehensive
supervision’’ by another regulator. The
FDIC notes that such registration (or
exemption from registration based on
being subject to ‘‘comparable,
comprehensive supervision’’) does not
necessarily mean that the CCP is subject
to, or in compliance with, the standards
established by the CPSS and IOSCO. In
contrast, a designated FMU, which is
included in the definition of QCCP, is
subject to regulation that corresponds to
such standards.
Another commenter asserted that,
consistent with the BCBS CCP interim
framework, the interim final rule should
provide for the designation of a QCCP
by the agencies in the absence of a
national regime for authorization and
licensing of CCPs. The interim final rule
has not been amended to include this
aspect of the BCBS CCP interim
framework because the FDIC believes a
national regime for authorizing and
licensing CCPs is a critical mechanism
to ensure the compliance and ongoing
monitoring of a CCP’s adherence to
internationally recognized riskmanagement standards. Another
commenter requested that a three-month
grace period apply for CCPs that cease
to be QCCPs. The FDIC notes that such
a grace period was included in the
proposed rule, and the interim final rule
retains the proposed definition without
substantive change.139
With respect to the proposed
definition of cleared transaction, some
commenters asserted that the definition
should recognize omnibus accounts
because their collateral is bankruptcyremote. The FDIC agrees with these
commenters and has revised the
operational requirements for cleared
139 This provision is located in sections 324.35
and 324.133 of the interim final rule.
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55415
transactions to include an explicit
reference to such accounts.
The BCBS CCP interim framework
requires trade portability to be ‘‘highly
likely,’’ as a condition of whether a
trade satisfies the definition of cleared
transaction. One commenter who
encouraged the agencies to adopt the
standards set forth in the BCBS CCP
interim framework sought clarification
of the meaning of ‘‘highly likely’’ in this
context. The FDIC clarifies that,
consistent with the BCBS CCP interim
framework, if there is clear precedent
for transactions to be transferred to a
non-defaulting clearing member upon
the default of another clearing member
(commonly referred to as ‘‘portability’’)
and there are no indications that such
practice will not continue, then these
factors should be considered, when
assessing whether client positions are
portable. The definition of ‘‘cleared
transaction’’ in the interim final rule is
discussed in further detail below.
Another commenter sought
clarification on whether reasonable
reliance on a commissioned legal
opinion for foreign financial
jurisdictions could satisfy the
‘‘sufficient legal review’’ requirement
for bankruptcy remoteness of client
positions. The FDIC believes that
reasonable reliance on a commissioned
legal opinion could satisfy this
requirement. Another commenter
expressed concern that the proposed
framework for cleared transactions
would capture securities
clearinghouses, and encouraged the
agencies to clarify their intent with
respect to such entities for purposes of
the interim final rule. The FDIC notes
that the definition of ‘‘cleared
transaction’’ refers only to OTC
derivatives and repo-style transactions.
As a result, securities clearinghouses are
not within the scope of the cleared
transactions framework.
One commenter asserted that the
agencies should recognize varying closeout period conventions for specific
cleared products, specifically exchangetraded derivatives. This commenter also
asserted that the agencies should adjust
the holding period assumptions or allow
CCPs to use alternative methods to
compute the appropriate haircut for
cleared transactions. For purposes of
this interim final rule, the FDIC retained
a standard close-out period in the
interest of avoiding unnecessary
complexity, and note that cleared
transactions with QCCPs attract
extremely low risk weights (generally, 2
or 4 percent), which, in part, is in
recognition of the shorter close-out
period involved in cleared transactions.
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Another commenter requested
confirmation that the risk weight
applicable to the trade exposure amount
for a cleared credit default swap (CDS)
could be substituted for the risk weight
assigned to an exposure that was hedged
by the cleared CDS, that is, the
substitution treatment described in
sections 324.36 and 324.134 would
apply. The FDIC confirms that under the
interim final rule, an FDIC-supervised
institution may apply the substitution
treatment of sections 324.36 or 324.134
to recognize the credit risk mitigation
benefits of a cleared CDS as long as the
CDS is an eligible credit derivative and
meets the other criteria for recognition.
Thus, if an FDIC-supervised institution
purchases an eligible credit derivative
as a hedge of an exposure and the
eligible credit derivative qualifies as a
cleared transaction, the FDIC-supervised
institution may substitute the risk
weight applicable to the cleared
transaction under sections 324.35 or
324.133 of the interim final rule (instead
of using the risk weight associated with
the protection provider).140
Furthermore, the FDIC has modified the
definition of eligible guarantor to
include a QCCP.
Another commenter asserted that the
interim final rule should decouple the
risk weights applied to collateral
exposure and those assigned to other
components of trade exposure to
recognize the separate components of
risk. The FDIC notes that, if collateral is
bankruptcy remote, then it would not be
included in the trade exposure amount
calculation (see sections 324.35(b)(2)
and 324.133(b)(2) of the interim final
rule). The FDIC also notes that such
collateral must be risk weighted in
accordance with other sections of the
interim final rule as appropriate, to the
extent that the posted collateral remains
an asset on an FDIC-supervised
institution’s balance sheet.
A number of commenters addressed
the use of the CEM for purposes of
calculating a capital requirement for a
default fund contribution to a CCP
(Kccp).141 Some commenters asserted
that the CEM is not appropriate for
determining the hypothetical capital
requirement for a QCCP (Kccp) under the
proposed formula because it lacks risk
sensitivity and sophistication, and was
not developed for centrally-cleared
transactions. Another commenter
asserted that the use of CEM should be
140 See ‘‘Basel III counterparty credit risk and
exposures to central counterparties—Frequently
asked questions’’ (December 2012 (update of FAQs
published in November 2012)), available at http://
www.bis.org/publ/bcbs237.pdf.
141 See section VIII.D of this preamble for a
description of the CEM.
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clarified in the clearing context,
specifically, whether the modified CEM
approach would permit the netting of
offsetting positions booked under
different ‘‘desk IDs’’ or ‘‘hub accounts’’
for a given clearing member banking
organization. Another commenter
encouraged the agencies to allow
banking organizations to use the IMM to
calculate Kccp. Another commenter
encouraged the agencies to continue to
work with the BCBS to harmonize
international and domestic capital rules
for cleared transactions.
Although the FDIC recognizes that the
CEM has certain limitations, it considers
the CEM, as modified for cleared
transactions, to be a reasonable
approach that would produce consistent
results across banking organizations.
Regarding the commenter’s request for
clarification of netting positions across
‘‘desk IDs’’ or ‘‘hub accounts,’’ the CEM
would recognize netting across such
transactions if such netting is legally
enforceable upon a CCP’s default.
Moreover, the FDIC believes that the use
of models either by the CCP, whose
model would not be subject to review
and approval by the FDIC, or by the
banking organizations, whose models
may vary significantly, likely would
produce inconsistent results that would
not serve as a basis for comparison
across banking organizations. The FDIC
recognizes that additional work is being
performed by the BCBS to revise the
CCP capital framework and the CEM.
The FDIC expects to modify the interim
final rule to incorporate the BCBS
improvements to the CCP capital
framework and CEM through the normal
rulemaking process.
Other commenters suggested that the
agencies not allow preferential
treatment for clearinghouses, which
they asserted are systemically critical
institutions. In addition, some of these
commenters argued that the agency
clearing model should receive a more
favorable capital requirement because
the agency relationship facilitates
protection and portability of client
positions in the event of a clearing
member default, compared to the backto-back principal model. As noted
above, the FDIC acknowledges that as
more transactions move to central
clearing, the potential for risk
concentration and systemic risk
increases. As noted in the proposal, the
risk weights applicable to cleared
transactions with QCCPs (generally 2 or
4 percent) represent an increase for
many cleared transactions as compared
to the general risk-based capital rules
(which exclude from the risk-based ratio
calculations exchange rate contracts
with an original maturity of fourteen or
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fewer calendar days and derivative
contracts traded on exchanges that
require daily receipt and payment of
cash variation margin),142 in part to
reflect the increased concentration and
systemic risk inherent in such
transactions. In regards to the agency
clearing model, the FDIC notes that a
clearing member banking organization
that acts as an agent for a client and that
guarantees the client’s performance to
the QCCP would have no exposure to
the QCCP to risk weight. The exposure
arising from the guarantee would be
treated as an OTC derivative with a
reduced holding period, as discussed
below.
Another commenter suggested that
the interim final rule address the
treatment of unfunded default fund
contribution amounts and potential
future contributions to QCCPs, noting
that the treatment of these potential
exposures is not addressed in the BCBS
CCP interim framework. The FDIC has
clarified in the interim final rule that if
an FDIC-supervised institution’s
unfunded default fund contribution to a
CCP is unlimited, the FDIC will
determine the risk-weighted asset
amount for such default fund
contribution based on factors such as
the size, structure, and membership of
the CCP and the riskiness of its
transactions. The interim final rule does
not contemplate unlimited default fund
contributions to QCCPs because defined
default fund contribution amounts are a
prerequisite to being a QCCP.
Another commenter asserted that it is
unworkable to require securities lending
transactions to be conducted through a
CCP, and that it would be easier and
more sensible to make the appropriate
adjustments in the interim final rule to
ensure a capital treatment for securities
lending transactions that is proportional
to their actual risks. The FDIC notes that
the proposed rule would not have
required securities lending transactions
to be cleared. The FDIC also
acknowledges that clearing may not be
widely available for securities lending
transactions, and believes that the
collateral haircut approach (sections
324.37(c) and 324.132(b) of the interim
final rule) and for advanced approaches
FDIC-supervised institutions, the simple
value-at-risk (VaR) and internal models
methodologies (sections 324.132(b)(3)
and (d) of the interim final rule) are an
appropriately risk-sensitive exposure
measure for non-cleared securities
lending exposures.
One commenter asserted that end
users and client-cleared trades would be
142 See 12 CFR part 325, appendix A, section
II.E.2.
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disadvantaged by the proposal.
Although there may be increased
transaction costs associated with the
introduction of the CCP framework, the
FDIC believes that the overall risk
mitigation that should result from the
capital requirements generated by the
framework will help promote financial
stability, and that the measures the FDIC
has taken in the interim final rule to
incentivize client clearing are aimed at
addressing the commenters’ concerns.
Several commenters suggested that the
proposed rule created a disincentive for
client clearing because of the clearing
member banking organization’s
exposure to the client. The FDIC agrees
with the need to mitigate disincentives
for client clearing in the methodology,
and has amended the interim final rule
to reflect a lower margin period of risk,
or holding period, as applicable, as
discussed further below.
Commenters suggested delaying
implementation of a cleared
transactions framework in the interim
final rule until the BCBS CCP interim
framework is finalized, implementing
the BCBS CCP interim framework in the
interim final rule pending finalization of
the BCBS interim framework, or
providing a transition period for
banking organizations to be able to
comply with some of the requirements.
A number of commenters urged the
agencies to incorporate all substantive
changes of the BCBS CCP interim
framework, ranging from minor
adjustments to more material
modifications.
After considering the comments and
reviewing the standards in the BCBS
CCP interim framework, the FDIC
believes that the modifications to capital
standards for cleared transactions in the
BCBS CCP interim framework are
appropriate and believes that they
would result in modifications that
address many commenters’ concerns.
Furthermore, the FDIC believes that it is
prudent to implement the BCBS CCP
interim framework, rather than wait for
the final framework, because the
changes in the BCBS CCP interim
framework represent a sound approach
to mitigating the risks associated with
cleared transactions. Accordingly, the
FDIC has incorporated the material
elements of the BCBS CCP interim
framework into the interim final rule. In
addition, given the delayed effective
date of the interim final rule, the FDIC
believes that an additional transition
period, as suggested by some
commenters, is not necessary.
The material changes to the proposed
rule to incorporate the CCP interim rule
are described below. Other than these
changes, the interim final rule retains
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the capital requirements for cleared
transaction exposures generally as
proposed by the agencies. As noted in
the proposal, the international
discussions are ongoing on these issues,
and the FDIC will revisit this issue once
the Basel capital framework is revised.
1. Definition of Cleared Transaction
The interim final rule defines a
cleared transaction as an exposure
associated with an outstanding
derivative contract or repo-style
transaction that an FDIC-supervised
institution or clearing member has
entered into with a CCP (that is, a
transaction that a CCP has accepted).143
Cleared transactions include the
following: (1) A transaction between a
CCP and a clearing member FDICsupervised institution for the FDICsupervised institution’s own account;
(2) a transaction between a CCP and a
clearing member FDIC-supervised
institution acting as a financial
intermediary on behalf of its clearing
member client; (3) a transaction between
a client FDIC-supervised institution and
a clearing member where the clearing
member acts on behalf of the client
FDIC-supervised institution and enters
into an offsetting transaction with a
CCP; and (4) a transaction between a
clearing member client and a CCP where
a clearing member FDIC-supervised
institution guarantees the performance
of the clearing member client to the
CCP. Such transactions must also satisfy
additional criteria provided in section 3
of the interim final rule, including
bankruptcy remoteness of collateral,
transferability criteria, and portability of
the clearing member client’s position.
As explained above, the FDIC has
modified the definition in the interim
final rule to specify that regulated
omnibus accounts meet the requirement
for bankruptcy remoteness.
An FDIC-supervised institution is
required to calculate risk-weighted
assets for all of its cleared transactions,
whether the FDIC-supervised institution
acts as a clearing member (defined as a
member of, or direct participant in, a
CCP that is entitled to enter into
143 For example, the FDIC expects that a
transaction with a derivatives clearing organization
(DCO) would meet the 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.
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55417
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).
Derivative transactions that are not
cleared transactions because they do not
meet all the criteria are OTC derivative
transactions. For example, if a
transaction submitted to the CCP is not
accepted by the CCP because the terms
of the transaction submitted by the
clearing members do not match or
because other operational issues are
identified by the CCP, the transaction
does not meet the definition of a cleared
transaction and is an OTC derivative
transaction. If the counterparties to the
transaction resolve the issues and
resubmit the transaction and it is
accepted, the transaction would then be
a cleared transaction. A cleared
transaction does not include an
exposure of an FDIC-supervised
institution that is a clearing member to
its clearing member client where the
FDIC-supervised institution is either
acting as a financial intermediary and
enters into an offsetting transaction with
a CCP or where the FDIC-supervised
institution provides a guarantee to the
CCP on the performance of the client.
Under the standardized approach, as
discussed below, such a transaction is
an OTC derivative transaction with the
exposure amount calculated according
to section 324.34(e) of the interim final
rule or a repo-style transaction with the
exposure amount calculated according
to section 324.37(c) of the interim final
rule. Under the advanced approaches
rule, such a transaction is treated as
either an OTC derivative transaction
with the exposure amount calculated
according to sections 324.132(c)(8) or
(d)(5)(iii)(C) of the interim final rule or
a repo-style transaction with the
exposure amount calculated according
to sections 324.132(b) or (d) of the
interim final rule.
2. Exposure Amount Scalar for
Calculating for Client Exposures
Under the proposal, a transaction
between a clearing member FDICsupervised institution and a client was
treated as an OTC derivative exposure,
with the exposure amount calculated
according to sections 324.34 or 324.132
of the proposal. The agencies
acknowledged in the proposal that this
treatment could have created
disincentives for banking organizations
to facilitate client clearing. Commenters’
feedback and the BCBS CCP interim
framework’s treatment on this subject
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provided alternatives to address the
incentive concern.
Consistent with comments and the
BCBS CCP interim framework, under
the interim final rule, a clearing member
FDIC-supervised institution must treat
its counterparty credit risk exposure to
clients as an OTC derivative contract,
irrespective of whether the clearing
member FDIC-supervised institution
guarantees the transaction or acts as an
intermediary between the client and the
QCCP. Consistent with the BCBS CCP
interim framework, to recognize the
shorter close-out period for cleared
transactions, under the standardized
approach a clearing member FDICsupervised institution may calculate its
exposure amount to a client by
multiplying the exposure amount,
calculated using the CEM, by a scaling
factor of no less than 0.71, which
represents a five-day holding period. A
clearing member FDIC-supervised
institution must use a longer holding
period and apply a larger scaling factor
to its exposure amount in accordance
with Table 20 if it determines that a
holding period longer than five days is
appropriate. The FDIC may require a
clearing member FDIC-supervised
institution to set a longer holding period
if it determines that a longer period is
commensurate with the risks associated
with the transaction. The FDIC believes
that the recognition of a shorter closeout period appropriately captures the
risk associated with such transactions
while furthering the policy goal of
promoting central clearing.
TABLE 20—HOLDING PERIODS AND
SCALING FACTORS
Holding period (days)
Scaling factor
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5 ......................................
6 ......................................
7 ......................................
8 ......................................
9 ......................................
10 ....................................
0.71
0.77
0.84
0.89
0.95
1.00
3. Risk Weighting for Cleared
Transactions
Under the interim final rule, to
determine the risk-weighted asset
amount for a cleared transaction, a
clearing member client FDIC-supervised
institution or a clearing member FDICsupervised institution must multiply the
trade exposure amount for the cleared
transaction by the appropriate risk
weight, determined as described below.
The trade exposure amount is calculated
as follows:
(1) For a cleared transaction that is a
derivative contract or a netting set of
derivatives contracts, the trade exposure
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amount is equal to the exposure amount
for the derivative contract or netting set
of derivative contracts, calculated using
the CEM for OTC derivative contracts
(described in sections 324.34 or
324.132(c) of the interim final rule) or
for advanced approaches FDICsupervised institutions that use the
IMM, under section 324.132(d) of the
interim final rule), plus the fair value of
the collateral posted by the clearing
member client FDIC-supervised
institution and held by the CCP or
clearing member in a manner that is not
bankruptcy remote; and
(2) For a cleared transaction that is a
repo-style transaction or a netting set of
repo-style transactions, the trade
exposure amount is equal to the
exposure amount calculated under the
collateral haircut approach used for
financial collateral (described in
sections 324.37(c) and 324.132(b) of the
interim final rule) (or for advanced
approaches FDIC-supervised
institutions the IMM under section
324.132(d) of the interim final rule) plus
the fair value of the collateral posted by
the clearing member client FDICsupervised institution that is held by the
CCP or clearing member in a manner
that is not bankruptcy remote.
The trade exposure amount does not
include any collateral posted by a
clearing member client FDIC-supervised
institution or clearing member FDICsupervised institution that is held by a
custodian in a manner that is
bankruptcy remote 144 from the CCP,
clearing member, other counterparties of
the clearing member, and the custodian
itself. In addition to the capital
requirement for the cleared transaction,
the FDIC-supervised institution remains
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 324.32 or 324.131 of the
interim final rule. Consistent with the
BCBS CCP interim framework, the risk
weight for a cleared transaction depends
on whether the CCP is a QCCP. Central
counterparties that are designated FMUs
and foreign entities regulated and
supervised in a manner equivalent to
designated FMUs are QCCPs. In
addition, a CCP could be a QCCP under
the interim final rule if it is in sound
financial condition and meets certain
standards that are consistent with BCBS
expectations for QCCPs, as set forth in
the QCCP definition.
144 Under the interim final rule, bankruptcy
remote, with respect to an entity or asset, means
that the entity or asset would be excluded from an
insolvent entity’s estate in a receivership,
insolvency or similar proceeding.
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A clearing member FDIC-supervised
institution must apply a 2 percent risk
weight to its trade exposure amount to
a QCCP. An FDIC-supervised institution
that is a clearing member client may
apply a 2 percent risk weight to the
trade exposure amount only if:
(1) The collateral posted by the
clearing member client FDIC-supervised
institution 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
(2) The clearing member client FDICsupervised institution 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.
If the criteria above are not met, a
clearing member client FDIC-supervised
institution must apply a risk weight of
4 percent to the trade exposure amount.
Under the interim final rule, as under
the proposal, for a cleared transaction
with a CCP that is not a QCCP, a
clearing member FDIC-supervised
institution and a clearing member client
FDIC-supervised institution must risk
weight the trade exposure amount to the
CCP according to the risk weight
applicable to the CCP under section
324.32 of the interim final rule
(generally, 100 percent). Collateral
posted by a clearing member FDICsupervised institution that is held by a
custodian in a manner that is
bankruptcy remote from the CCP is not
subject to a capital requirement for
counterparty credit risk. Similarly,
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 is not be subject to a capital
requirement for counterparty credit risk.
The proposed rule was silent on the
risk weight that would apply where a
clearing member banking organization
acts for its own account or guarantees a
QCCP’s performance to a client.
Consistent with the BCBS CCP interim
framework, the interim final rule
provides additional specificity regarding
the risk-weighting methodologies for
certain exposures of clearing member
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banking organizations. The interim final
rule provides that a clearing member
FDIC-supervised institution that (i) acts
for its own account, (ii) is acting as a
financial intermediary (with an
offsetting transaction or a guarantee of
the client’s performance to a QCCP), or
(iii) guarantees a QCCP’s performance to
a client would apply a two percent risk
weight to the FDIC-supervised
institution’s exposure to the QCCP. The
diagrams below demonstrate the various
potential transactions and exposure
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treatment in the interim final rule. Table
21 sets out how the transactions
illustrated in the diagrams below are
risk-weighted under the interim final
rule.
In the diagram, ‘‘T’’ refers to a
transaction, and the arrow indicates the
direction of the exposure. The diagram
describes the appropriate risk weight
treatment for exposures from the
perspective of a clearing member FDICsupervised institution entering into
cleared transactions for its own account
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(T1), a clearing member FDIC-supervised
institution entering into cleared
transactions on behalf of a client (T2
through T7), and an FDIC-supervised
institution entering into cleared
transactions as a client of a clearing
member (T8 and T9). Table 21 shows for
each trade whom the exposure is to, a
description of the type of trade, and the
risk weight that would apply based on
the risk of the counterparty.
BILLING CODE 6714–01–P
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BILLING CODE 6714–01–C
TABLE 21—RISK WEIGHTS FOR VARIOUS CLEARED TRANSACTIONS
Description
......................
......................
......................
......................
......................
......................
......................
......................
QCCP ...............
Client ................
QCCP ...............
Client ................
QCCP ...............
Client ................
QCCP ...............
CM ....................
T9 ......................
QCCP ...............
Own account .............................................................
Financial intermediary with offsetting trade to QCCP
Financial intermediary with offsetting trade to QCCP
Agent with guarantee of client performance .............
Agent with guarantee of client performance .............
Guarantee of QCCP performance ............................
Guarantee of QCCP performance ............................
CM financial intermediary with offsetting trade to
QCCP.
CM agent with guarantee of client performance .......
T1
T2
T3
T4
T5
T6
T7
T8
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4. Default Fund Contribution Exposures
There are several risk mitigants
available when a party clears a
transaction through a CCP rather than
on a bilateral basis: The protection
provided to the CCP clearing members
by the margin requirements imposed by
the CCP; the CCP members’ default fund
contributions; and the CCP’s own
capital and contribution to the default
fund, which are an important source of
collateral in case of counterparty
default.145 CCPs independently
determine default fund contributions
that are required from members. The
BCBS therefore established, and the
interim final rule adopts, a risk-sensitive
approach for risk weighting an FDICsupervised institution’s exposure to a
default fund.
Under the proposed rule, there was
only one method that a clearing member
banking organization could use to
calculate its risk-weighted asset amount
for default fund contributions. The
BCBS CCP interim framework added a
second method to better reflect the
lower risks associated with exposures to
those clearinghouses that have relatively
large default funds with a significant
amount unfunded. Commenters
requested that the interim final rule
adopt both methods contained in the
BCBS CCP interim framework.
145 Default funds are also known as clearing
deposits or guaranty funds.
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Risk-weighting treatment under the interim final rule
2% risk weight on trade exposure amount.
OTC derivative with CEM scalar.**
2% risk weight on trade exposure amount.
OTC derivative with CEM scalar.**
No exposure.
OTC derivative with CEM scalar.**
2% risk weight on trade exposure amount.
2% or 4%* risk weight on trade exposure amount.
2% or 4%* risk weight on trade exposure amount.
Accordingly, under the interim final
rule, an FDIC-supervised institution that
is a clearing member of a CCP must
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
FDIC-supervised institution or FDIC, in
the financial condition of the CCP. A
default fund contribution means the
funds contributed or commitments
made by a clearing member to a CCP’s
mutualized loss-sharing arrangement. If
the CCP is not a QCCP, the FDICsupervised institution’s risk-weighted
asset amount for its default fund
contribution is either the sum of the
default fund contributions multiplied by
1,250 percent, or in cases where the
default fund contributions may be
unlimited, an amount as determined by
the FDIC based on factors described
above.
Consistent with the BCBS CCP
interim framework, the interim final
rule requires an FDIC-supervised
institution to calculate a risk-weighted
asset amount for its default fund
contribution using one of two methods.
Method one requires a clearing member
FDIC-supervised institution to use a
three-step process. The first step is for
the clearing member FDIC-supervised
institution to calculate the QCCP’s
hypothetical capital requirement (KCCP),
unless the QCCP has already disclosed
it, in which case the FDIC-supervised
institution must rely on that disclosed
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figure, unless the FDIC-supervised
institution determines that a higher
figure is appropriate based on the
nature, structure, or characteristics of
the QCCP. KCCP is defined as the capital
that a QCCP is required to hold if it
were an FDIC-supervised institution,
and is calculated using the CEM for
OTC derivatives or the collateral haircut
approach for repo-style transactions,
recognizing the risk-mitigating effects of
collateral posted by and default fund
contributions received from the QCCP
clearing members.
The interim final rule provides
several modifications to the calculation
of KCCP to adjust for certain features that
are unique to QCCPs. Namely, the
modifications permit: (1) A clearing
member to offset its exposure to a QCCP
with actual default fund contributions,
and (2) greater recognition of netting
when using the CEM to calculate KCCP
described below. Additionally, the risk
weight of all clearing members is set at
20 percent, except when the FDIC has
determined that a higher risk weight is
appropriate based on the specific
characteristics of the QCCP and its
clearing members. Finally, for derivative
contracts that are options, the PFE
amount calculation is 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
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corresponding change in the price of the
underlying asset).
In the second step of method one, the
interim final rule requires an FDICsupervised institution to compare KCCP
to the funded portion of the default fund
of a QCCP, and to calculate the total of
all the clearing members’ capital
requirements (K*cm). If the total funded
default fund of a QCCP is less than
KCCP, the interim final rule requires
additional capital to 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
are risk-weighted at 100 percent and a
decreasing capital factor, between 1.6
percent and 0.16 percent, is 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 is applied to
the clearing members’ default fund
contributions.
In the third step of method one, the
interim final rule requires (K*cm) to be
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 exposures among
clearing members. A clearing member
FDIC-supervised institution multiplies
its allocated capital requirement by 12.5
to determine its risk-weighted asset
amount for its default fund contribution
to the QCCP.
As the alternative, an FDICsupervised institution is permitted to
use method two, which is a simplified
method under which the risk-weighted
asset amount for its default fund
contribution to a QCCP equals 1,250
percent multiplied by the default fund
contribution, subject to an overall cap.
The cap is based on an FDIC-supervised
institution’s trade exposure amount for
all of its transactions with a QCCP. An
FDIC-supervised institution’s riskweighted asset amount for its default
fund contribution to a QCCP is either a
1,250 percent risk weight applied to its
default fund contribution to that QCCP
or 18 percent of its trade exposure
amount to that QCCP. Method two
subjects an FDIC-supervised institution
to an overall cap on the risk-weighted
assets from all its exposures to the CCP
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equal to 20 percent times the trade
exposures to the CCP. This 20 percent
cap is arrived at as the sum of the 2
percent capital requirement for trade
exposure plus 18 percent for the default
fund portion of an FDIC-supervised
institution’s exposure to a QCCP.
To address commenter concerns that
the CEM underestimates the multilateral
netting benefits arising from a QCCP,
the interim final rule recognizes the
larger diversification benefits inherent
in a multilateral netting arrangement for
purposes of measuring the QCCP’s
potential future exposure associated
with derivative contracts. Consistent
with the BCBS CCP interim framework,
and as mentioned above, the interim
final rule replaces the proposed factors
(0.3 and 0.7) in the formula to calculate
Anet with 0.15 and 0.85, in sections
324.35(d)(3)(i)(A)(1) and
324.133(d)(3)(i)(A)(1) of the interim
final rule, respectively.
F. Credit Risk Mitigation
Banking organizations use a number
of techniques to mitigate credit risks.
For example, a banking organization
may collateralize exposures with cash or
securities; a third party may guarantee
an 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 of the preamble
describes how the interim final rule
allows FDIC-supervised institutions to
recognize the risk-mitigation effects of
guarantees, credit derivatives, and
collateral for risk-based capital
purposes. In general, the interim final
rule provides for a greater variety of
credit risk mitigation techniques than
the general risk-based capital rules.
Similar to the general risk-based
capital rules, under the interim final
rule an FDIC-supervised institution
generally may 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 FDIC-supervised
institutions must 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. An FDIC-supervised
institution should conduct sufficient
legal review to reach a well-founded
conclusion that the documentation
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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,
an FDIC-supervised institution should
employ robust procedures and processes
to control risks, including roll-off and
concentration risks, and monitor and
manage the implications of using credit
risk mitigants for the FDIC-supervised
institution’s overall credit risk profile.
1. Guarantees and Credit Derivatives
a. Eligibility Requirements
Consistent with the Basel capital
framework, the agencies proposed to
recognize a wider range of eligible
guarantors than permitted under the
general risk-based capital rules,
including sovereigns, the Bank for
International Settlements, the
International Monetary Fund, the
European Central Bank, the European
Commission, Federal Home Loan Banks
(FHLB), Federal Agricultural Mortgage
Corporation (Farmer Mac), MDBs,
depository institutions, BHCs, SLHCs,
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.146
Some commenters suggested
modifying the proposed definition of
eligible guarantor to remove the
investment-grade requirement.
Commenters also suggested that the
agencies potentially include as eligible
guarantors other entities, such as
financial guaranty and private mortgage
insurers. The FDIC believes that
guarantees issued by these types of
entities can exhibit significant wrongway risk and modifying the definition of
eligible guarantor to accommodate these
entities or entities that are not
investment grade would be contrary to
one of the key objectives of the capital
framework, which is to mitigate
interconnectedness and systemic
vulnerabilities within the financial
146 Under the proposed and interim final rule, an
exposure is ‘‘investment grade’’ if the entity to
which the FDIC-supervised institution 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.
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system. Therefore, the FDIC has not
included the recommended entities in
the interim final rule’s definition of
‘‘eligible guarantor.’’ The FDIC has,
however, amended the definition of
eligible guarantor in the interim final
rule to include QCCPs to accommodate
use of the substitution approach for
credit derivatives that are cleared
transactions. The FDIC believes that
QCCPs, as supervised entities subject to
specific risk-management standards, are
appropriately included as eligible
guarantors under the interim final
rule.147 In addition, the FDIC clarifies
one commenter’s concern and confirms
that re-insurers that are engaged
predominantly in the business of
providing credit protection do not
qualify as an eligible guarantor under
the interim final rule.
Under the interim final rule,
guarantees and credit derivatives are
required to meet specific eligibility
requirements to be recognized for credit
risk mitigation purposes. Consistent
with the proposal, under the interim
final rule, an eligible guarantee is
defined as a guarantee from an eligible
guarantor that is written and meets
certain standards and conditions,
including with respect to its
enforceability. An eligible credit
derivative is defined as a credit
derivative in the form of a CDS, nth-todefault swap, total return swap, or any
other form of credit derivative approved
by the FDIC, provided that the
instrument meets the standards and
conditions set forth in the definition.
See the definitions of ‘‘eligible
guarantee’’ and ‘‘eligible credit
derivative’’ in section 324.2 of the
interim final rule.
Under the proposal, a banking
organization would have been 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;
(2) the reference exposure and the
hedged exposure are to the same legal
entity; and (3) legally-enforceable crossdefault 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.
In addition to these two exceptions,
one commenter encouraged the agencies
147 See the definition of ‘‘eligible guarantor’’ in
section 2 of the interim final rule.
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to revise the interim final rule to
recognize a proxy hedge as an eligible
credit derivative even though such a
transaction hedges an exposure that
differs from the credit derivative’s
reference exposure. A proxy hedge was
characterized by the commenter as a
hedge of an exposure supported by a
sovereign using a credit derivative on
that sovereign. The FDIC does not
believe there is sufficient justification to
include proxy hedges in the definition
of eligible credit derivative because it
has concerns regarding the ability of the
hedge to sufficiently mitigate the risk of
the underlying exposure. The FDIC has,
therefore, adopted the definition of
eligible credit derivative as proposed.
In addition, under the interim final
rule, consistent with the proposal, when
an FDIC-supervised institution has a
group of hedged exposures with
different residual maturities that are
covered by a single eligible guarantee or
eligible credit derivative, it must treat
each hedged exposure as if it were fully
covered by a separate eligible guarantee
or eligible credit derivative.
b. Substitution Approach
The FDIC is adopting the substitution
approach for eligible guarantees and
eligible credit derivatives in the interim
final rule without change. Under the
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, an
FDIC-supervised institution substitutes
the risk weight applicable to the
guarantor or credit derivative protection
provider for the risk weight applicable
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, an
FDIC-supervised institution must 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, an FDICsupervised institution calculates the
risk-weighted asset amount for the
protected exposure under section 36 of
the interim final rule (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 FDIC-supervised
institution calculates its risk-weighted
asset amount for the unprotected
exposure under section 32 of the interim
final rule (using the risk weight assigned
to the exposure and an exposure amount
equal to the exposure amount of the
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original hedged exposure minus the
protection amount of the guarantee or
credit derivative).
Under the interim final rule, the
protection amount of an eligible
guarantee or eligible credit derivative
means the effective notional amount of
the guarantee or credit derivative
reduced to reflect any, maturity
mismatch, lack of restructuring
coverage, or currency mismatch as
described below. The effective notional
amount for an eligible guarantee or
eligible credit derivative is 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 is $40.
c. Maturity Mismatch Haircut
The FDIC is adopting the proposed
haircut for maturity mismatch in the
interim final rule without change.
Under the interim final rule, the FDIC
has adopted the requirement that an
FDIC-supervised institution that
recognizes an eligible guarantee or
eligible credit derivative 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. A maturity
mismatch occurs when the residual
maturity of a credit risk mitigant is less
than that of the hedged exposure(s).148
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. An FDIC-supervised
institution is 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 is 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 is at the first call
date. If the call is at the discretion of the
148 As noted above, when an FDIC-supervised
institution has a group of hedged exposures with
different residual maturities that are covered by a
single eligible guarantee or eligible credit
derivative, an FDIC-supervised institution treats
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 FDIC-supervised
institution assesses whether the residual maturity of
the eligible guarantee or eligible credit derivative is
less than that of the hedged exposure.
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FDIC-supervised institution purchasing
the protection, but the terms of the
arrangement at origination of the credit
risk mitigant contain a positive
incentive for the FDIC-supervised
institution to call the transaction before
contractual maturity, the remaining time
to the first call date is the residual
maturity of the credit risk mitigant. An
FDIC-supervised institution is
permitted, under the interim final rule,
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, an FDIC-supervised
institution is required to apply the
following adjustment to reduce the
effective notional amount of the credit
risk mitigant to recognize the maturity
mismatch: Pm = E × [(t¥0.25)/
(T¥0.25)], where:
(1) Pm equals effective notional
amount of the credit risk mitigant,
adjusted for maturity mismatch;
(2) E equals effective notional amount
of the credit risk mitigant;
(3) t equals the lesser of T or residual
maturity of the credit risk mitigant,
expressed in years; and
(4) T equals 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
The FDIC is adopting in the interim
final rule the proposed adjustment for
credit derivatives without restructuring
as a credit event. Consistent with the
proposal, under the interim final rule,
an FDIC-supervised institution that
seeks to recognize an eligible credit
derivative that does not include a
restructuring of the hedged exposure as
a credit event under the derivative must
reduce the effective notional amount of
the credit derivative recognized for
credit risk mitigation purposes by 40
percent. For purposes of the credit risk
mitigation framework, a restructuring
may 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
FDIC-supervised institution is required
to apply the following adjustment to
reduce the effective notional amount of
the credit derivative: Pr equals Pm x
0.60, where:
(1) Pr equals effective notional
amount of the credit risk mitigant,
adjusted for lack of a restructuring event
(and maturity mismatch, if applicable);
and
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(2) Pm equals effective notional
amount of the credit risk mitigant
(adjusted for maturity mismatch, if
applicable).
e. Currency Mismatch Adjustment
Consistent with the proposal, under
the interim final rule, if an FDICsupervised institution 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 FDIC-supervised institution must
apply the following formula to the
effective notional amount of the
guarantee or credit derivative: PC equals
Pr × (1–HFX), where:
(1) PC equals effective notional
amount of the credit risk mitigant,
adjusted for currency mismatch (and
maturity mismatch and lack of
restructuring event, if applicable);
(2) Pr equals effective notional
amount of the credit risk mitigant
(adjusted for maturity mismatch and
lack of restructuring event, if
applicable); and
(3) HFX equals haircut appropriate for
the currency mismatch between the
credit risk mitigant and the hedged
exposure.
An FDIC-supervised institution is
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, an FDICsupervised institution has the option to
use internally estimated haircuts of HFX
based on a ten-business-day holding
period and daily marking-to-market if
the FDIC-supervised institution
qualifies to use the own-estimates of
haircuts in section 324.37(c)(4) of the
interim final rule. In either case, the
FDIC-supervised institution is required
to scale the haircuts up using the square
root of time formula if the FDICsupervised institution 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:
where TM equals the greater of 10 or the
number of days between
revaluation.
f. Multiple Credit Risk Mitigants
Consistent with the proposal, under
the interim final rule, if multiple credit
risk mitigants cover a single exposure,
an FDIC-supervised institution may
disaggregate the exposure into portions
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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 a
single credit risk mitigant covers
multiple exposures, an FDIC-supervised
institution must treat each hedged
exposure as covered by a single credit
risk mitigant and must calculate
separate risk-weighted asset amounts for
each exposure using the substitution
approach described in section 324.36(c)
of the interim final rule.
2. Collateralized Transactions
a. Eligible Collateral
Under the proposal, the agencies
would recognize an expanded range of
financial collateral as credit risk
mitigants that may reduce the risk-based
capital requirements associated with a
collateralized transaction, consistent
with the Basel capital framework. The
agencies proposed that a banking
organization could recognize the riskmitigating effects of financial collateral
using the ‘‘simple approach’’ for any
exposure provided that the collateral
meets certain requirements. For repostyle 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. The proposal required
a banking organization to use the same
approach for similar exposures or
transactions.
The commenters generally agreed
with this aspect of the proposal;
however, a few commenters encouraged
the agencies to expand the definition of
financial collateral to include precious
metals and certain residential mortgages
that collateralize warehouse lines of
credit. Several commenters asserted that
the interim final rule should recognize
as financial collateral conforming
residential mortgages (or at least those
collateralizing warehouse lines of
credit) and/or those insured by the FHA
or VA. They noted that by not including
conforming residential mortgages in the
definition of financial collateral, the
proposed rule would require banking
organizations providing warehouse lines
to treat warehouse facilities as
commercial loan exposures, thus
preventing such entities from looking
through to the underlying collateral in
calculating the appropriate risk
weighting. Others argued that a ‘‘look
through’’ approach for a repo-style
structure to the financial collateral held
therein should be allowed. Another
commenter argued that the interim final
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rule should allow recognition of
intangible assets as financial collateral
because they have real value. The FDIC
believes that the collateral types
suggested by the commenters are not
appropriate forms of financial collateral
because they exhibit increased variation
and credit risk, and are relatively more
speculative than the recognized forms of
financial collateral under the proposal.
For example, residential mortgages can
be highly idiosyncratic in regards to
payment features, interest rate
provisions, lien seniority, and
maturities. The FDIC believes that the
proposed definition of financial
collateral, which is broader than the
collateral recognized under the general
risk-based capital rules, included those
collateral types of sufficient liquidity
and asset quality to recognize as credit
risk mitigants for risk-based capital
purposes. As a result, the FDIC has
retained the definition of financial
collateral as proposed. Therefore,
consistent with the proposal, the
interim final rule defines financial
collateral as collateral in the form of: (1)
Cash on deposit with the FDICsupervised institution (including cash
held for the FDIC-supervised institution
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 FDICsupervised institution is also 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. Even if
an FDIC-supervised institution has the
legal right, it still must ensure it
monitors or has a freeze on the account
to prevent a customer from withdrawing
cash on deposit prior to defaulting. An
FDIC-supervised institution is permitted
to recognize partial collateralization of
an exposure.
Under the interim final rule, the FDIC
requires that an FDIC-supervised
institution to recognize the riskmitigating effects of financial collateral
using the simple approach described
below, where: the collateral is subject to
a collateral agreement for at least the life
of the exposure; the collateral is
revalued at least every six months; and
the collateral (other than gold) and the
exposure is denominated in the same
currency. For repo-style transactions,
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eligible margin loans, collateralized
derivative contracts, and single-product
netting sets of such transactions, an
FDIC-supervised institution could
alternatively use the collateral haircut
approach described below. The interim
final rule, like the proposal, requires an
FDIC-supervised institution to use the
same approach for similar exposures or
transactions.
b. Risk-Management Guidance for
Recognizing Collateral
Before an FDIC-supervised institution
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 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.
An FDIC-supervised institution also
should ensure that the legal mechanism
under which the collateral is pledged or
transferred ensures that the FDICsupervised institution 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, an FDIC-supervised
institution 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 satisfaction of any
legal conditions required for declaring
the default of the borrower and prompt
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.
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c. Simple Approach
The FDIC is adopting the simple
approach without change for purposes
of the interim final rule. Under the
interim final rule, the collateralized
portion of the exposure receives the risk
weight applicable to the collateral. The
collateral is required to meet the
definition of financial collateral. For
repurchase agreements, reverse
repurchase agreements, and securities
lending and borrowing transactions, the
collateral would be the instruments,
gold, and cash that an FDIC-supervised
institution has borrowed, purchased
subject to resale, or taken as collateral
from the counterparty under the
transaction. As noted above, in all cases,
(1) the collateral must be subject to a
collateral agreement for at least the life
of the exposure; (2) the FDIC-supervised
institution must revalue the collateral at
least every six months; and (3) the
collateral (other than gold) and the
exposure must be denominated in the
same currency.
Generally, the risk weight assigned to
the collateralized portion of the
exposure must be no less than 20
percent. However, the collateralized
portion of an exposure may be assigned
a risk weight of less than 20 percent for
the following exposures. OTC derivative
contracts that are marked to fair value
on a daily basis and subject to a daily
margin maintenance agreement, may
receive (1) a zero percent risk weight to
the extent that contracts 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 that qualifies
for a zero percent risk weight under
section 32 of the interim final rule. In
addition, an FDIC-supervised institution
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 interim final rule, and the
FDIC-supervised institution has
discounted the fair value of the
collateral by 20 percent.
d. Collateral Haircut Approach
Consistent with the proposal, in the
interim final rule, an FDIC-supervised
institution may use the collateral
haircut approach to 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. In addition, the FDICsupervised institution may use the
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collateral haircut approach with respect
to any collateral that secures a repostyle transaction that is included in the
FDIC-supervised institution’s VaR-based
measure under subpart F of the interim
final rule, even if the collateral does not
meet the definition of financial
collateral.
To apply the collateral haircut
approach, an FDIC-supervised
institution must determine the exposure
amount and the relevant risk weight for
the counterparty or guarantor.
The exposure amount for an eligible
margin loan, repo-style transaction,
collateralized derivative contract, or a
netting set of such transactions is 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 FDIC-supervised
institution 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 interim final
rule. The value of the collateral equals
the sum of the current market values of
all instruments, gold and cash the FDICsupervised institution 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 FDIC-supervised
institution 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 FDICsupervised institution 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 value of the net
position of instruments and cash in a
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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
FDIC-supervised institution 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
FDIC-supervised institution 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 includes,
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
When determining the exposure
amount, the FDIC-supervised institution
must apply a haircut for price market
volatility and foreign exchange rates,
determined either using standard
supervisory market price volatility
haircuts and a standard haircut for
exchange rates or, with prior approval of
the agency, an FDIC-supervised
institution’s own estimates of
volatilities of market prices and foreign
exchange rates.
The standard supervisory market
price volatility haircuts set a specified
market price volatility haircut for
various categories of financial collateral.
These standard haircuts are based on
the ten-business-day holding period for
eligible margin loans and derivative
contracts. For repo-style transactions, an
FDIC-supervised institution may
multiply the standard supervisory
haircuts by the square root of 1⁄2 to scale
them for a holding period of five
business days. Several commenters
argued that the proposed haircuts were
too conservative and insufficiently risksensitive, and that FDIC-supervised
institutions should be allowed to
compute their own haircuts. Some
commenters proposed limiting the
maximum haircut for non-sovereign
issuers that receive a 100 percent risk
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weight to 12 percent and, more
specifically, assigning a lower haircut
than 25 percent for financial collateral
in the form of an investment-grade
corporate debt security that has a
shorter residual maturity. The
commenters asserted that these haircuts
conservatively correspond to the
existing rating categories and result in
greater alignment with the Basel
framework.
In the interim final rule, the FDIC has
revised from 25.0 percent the standard
supervisory market price volatility
haircuts for financial collateral issued
by non-sovereign issuers with a risk
weight of 100 percent to 4.0 percent for
maturities of less than one year, 8.0
percent for maturities greater than one
year but less than or equal to five years,
and 16.0 percent for maturities greater
than five years, consistent with Table 22
below. The FDIC believes that the
revised haircuts better reflect the
collateral’s credit quality and an
appropriate differentiation based on the
collateral’s residual maturity.
An FDIC-supervised institution using
the standard currency mismatch haircut
is required to use an 8 percent haircut
for each currency mismatch for
transactions subject to a 10 day holding
period, as adjusted for different required
holding periods. One commenter
asserted that the proposed adjustment
for currency mismatch was unwarranted
because in securities lending
transactions, the parties typically
require a higher collateral margin than
in transactions where there is no
mismatch. In the alternative, the
commenter argued that the agencies
should align the currency mismatch
haircut more closely with a given
currency combination and suggested
those currencies of countries with a
more favorable CRC from the OECD
should receive a smaller haircut. The
FDIC has decided to adopt this aspect of
the proposal without change in the
interim final rule. The FDIC believes
that the own internal estimates for
haircuts methodology described below
allows FDIC-supervised institutions
appropriate flexibility to more
granularly reflect individual currency
combinations, provided they meet
certain criteria.
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TABLE 22—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1
Haircut (in percent) assigned based on:
Sovereign issuers risk weight under
§ 324.32 2
Residual maturity
Zero
Less than or equal to 1 year .....................
Greater than 1 year and less than or
equal to 5 years .....................................
Greater than 5 years ..................................
20 or 50
100
20
50
Investment-grade
securitization
exposures
(in percent)
100
0.5
1.0
15.0
1.0
2.0
4.0
4.0
2.0
4.0
3.0
6.0
15.0
15.0
4.0
8.0
6.0
12.0
8.0
16.0
12.0
24.0
Main index equities (including convertible bonds) and gold .......................................
Other publicly-traded equities (including convertible bonds) .......................................
Mutual funds ................................................................................................................
Cash collateral held .....................................................................................................
Other exposure types ..................................................................................................
1 The
Non-sovereign issuers risk weight
under § 324.32
15.0
25.0
Highest haircut applicable to any security in which the fund
can invest
Zero
25.0
market price volatility haircuts in Table 22 are based on a 10 business-day holding period.
a foreign PSE that receives a zero percent risk weight.
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2 Includes
The interim final rule requires that an
FDIC-supervised institution increase the
standard supervisory haircut for
transactions involving large netting sets.
As noted in the proposed rule, during
the recent financial crisis, many
financial institutions experienced
significant delays in settling or closingout 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.
Thus, consistent with the proposed
rule, 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, the interim
final rule requires an FDIC-supervised
institution to assume a holding period
of 20 business days for the collateral
under the collateral haircut approach.
The formula and methodology for
increasing the haircut to reflect the
longer holding period is described in
section 37(c) of the interim final rule.
Consistent with the Basel capital
framework, an FDIC-supervised
institution is not required to adjust the
holding period upward for cleared
transactions. When determining
whether collateral is illiquid or whether
an OTC derivative cannot be easily
replaced for these purposes, an FDICsupervised institution should assess
whether, during a period of stressed
market conditions, it could obtain
multiple price quotes within two days
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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).
One commenter requested the
agencies clarify whether the 5,000-trade
threshold applies on a counterparty-bycounterparty (rather than aggregate)
basis, and only will be triggered in the
event there are 5,000 open trades with
a single counterparty within a single
netting set in a given quarter.
Commenters also asked whether the
threshold would be calculated on an
average basis or whether a de minimis
number of breaches could be permitted
without triggering the increased holding
period or margin period of risk. One
commenter suggested eliminating the
threshold because it is ineffective as a
measure of risk, and combined with
other features of the proposals (for
example, collateral haircuts, margin
disputes), could create a disincentive for
FDIC-supervised institutions to apply
sound practices such as risk
diversification.
The FDIC notes that the 5,000-trade
threshold applies to a netting set, which
by definition means a group of
transactions with a single counterparty
that are subject to a qualifying master
netting agreement. The 5,000 trade
calculation threshold was proposed as
an indicator that a set of transactions
may be more complex, or require a
lengthy period, to close out in the event
of a default of a counterparty. The FDIC
continues to believe that the threshold
of 5,000 is a reasonable indicator of the
complexity of a close-out. Therefore, the
interim final rule retains the 5,000 trade
threshold as proposed, without any de
minimis exception.
One commenter asked the agencies to
clarify how trades would be counted in
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the context of an indemnified agency
securities lending relationship. In such
transactions, an agent banking
organization acts as an intermediary for,
potentially, multiple borrowers and
lenders. The banking organization is
acting as an agent with no exposure to
either the securities lenders or
borrowers except for an indemnification
to the securities lenders in the event of
a borrower default. The indemnification
creates an exposure to the securities
borrower, as the agent banking
organization could suffer a loss upon
the default of a borrower. In these cases,
each transaction between the agent and
a borrower would count as a trade. The
FDIC notes that a trade in this instance
consists of an order by the borrower,
and not the number of securities lenders
providing shares to fulfil the order or
the number of shares underlying such
order.149
The commenters also addressed the
longer holding period for trades
involving illiquid collateral posted by
the counterparty. Some commenters
asserted that one illiquid exposure or
one illiquid piece of collateral should
not taint the entire netting set. Other
commenters recommended applying a
materiality threshold (for example, 1
percent) below which one or more
illiquid exposures would not trigger the
longer holding period, or allowing
banking organizations to define
‘‘materiality’’ based on experience.
Regarding the potential for an illiquid
exposure to ‘‘taint’’ an entire netting set,
the interim final rule does not require
149 In the event that the agent FDIC-supervised
institution reinvests the cash collateral proceeds on
behalf of the lender and provides an explicit or
implicit guarantee of the value of the collateral in
such pool, the FDIC-supervised institution should
hold capital, as appropriate, against the risk of loss
of value of the collateral pool.
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an FDIC-supervised institution to
recognize any piece of collateral as a
risk mitigant. Accordingly, if an FDICsupervised institution elects to exclude
the illiquid collateral from the netting
set for purposes of calculating riskweighted assets, then such illiquid
collateral does not result in an increased
holding period for the netting set. With
respect to a derivative that may not be
easily replaced, an FDIC-supervised
institution could create a separate
netting set that would preserve the
holding period for the original netting
set of easily replaced transactions.
Accordingly, the interim final rule
adopts this aspect of the proposal
without change.
One commenter asserted that the
interim final rule should not require a
banking organization to determine
whether an instrument is liquid on a
daily basis, but rather should base the
timing of such determination by product
category and on long-term liquidity
data. According to the commenter, such
an approach would avoid potential
confusion, volatility and destabilization
of the funding markets. For purposes of
determining whether collateral is
illiquid or an OTC derivative contract is
easily replaceable under the interim
final rule, an FDIC-supervised
institution may 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). An FDIC-supervised
institution is not required to make a
daily determination of liquidity under
the interim final rule; rather, FDICsupervised institutions should have
policies and procedures in place to
evaluate the liquidity of their collateral
as frequently as warranted.
Under the proposed rule, a banking
organization would increase the holding
period for a netting set if over the two
previous quarters more than two margin
disputes on a netting set have occurred
that lasted longer than the holding
period. However, consistent with the
Basel capital framework, a banking
organization would not be required to
adjust the holding period upward for
cleared transactions. Several
commenters requested further
clarification on the meaning of ‘‘margin
disputes.’’ Some of these commenters
suggested restricting ‘‘margin disputes’’
to formal legal action. Commenters also
suggested restricting ‘‘margin disputes’’
to disputes resulting in the creation of
an exposure that exceeded any available
overcollateralization, or establishing a
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materiality threshold. One commenter
suggested that margin disputes were not
an indicator of an increased risk and,
therefore, should not trigger a longer
holding period.
The FDIC continues to believe that an
increased holding period is appropriate
regardless of whether the dispute
exceeds applicable collateral
requirements and regardless of whether
the disputes exceed a materiality
threshold. The FDIC expects that the
determination as to whether a dispute
constitutes a margin dispute for
purposes of the interim final rule will
depend solely on the timing of the
resolution. That is to say, if collateral is
not delivered within the time period
required under an agreement, and such
failure to deliver is not resolved in a
timely manner, then such failure would
count toward the two-margin-dispute
limit. For the purpose of the interim
final rule, where a dispute is subject to
a recognized industry dispute resolution
protocol, the FDIC expects to consider
the dispute period to begin after a thirdparty dispute resolution mechanism has
failed.
For comments and concerns that are
specific to the parallel provisions in the
advanced approaches rule, reference
section XII.A of this preamble.
f. Own Estimates of Haircuts
Under the interim final rule,
consistent with the proposal, FDICsupervised institutions may calculate
market price volatility and foreign
exchange volatility using own internal
estimates with prior written approval of
the FDIC. To receive approval to
calculate haircuts using its own internal
estimates, an FDIC-supervised
institution must meet certain minimum
qualitative and quantitative standards
set forth in the interim final rule,
including the requirements that an
FDIC-supervised institution: (1) uses a
99th percentile one-tailed confidence
interval and a minimum five-businessday holding period for repo-style
transactions and a minimum tenbusiness-day holding period for all
other transactions; (2) adjusts holding
periods upward where and as
appropriate to take into account the
illiquidity of an instrument; (3) selects
a historical observation period that
reflects a continuous 12-month period
of significant financial stress
appropriate to the FDIC-supervised
institution’s current portfolio; and (4)
updates its data sets and compute
haircuts no less frequently than
quarterly, as well as any time market
prices change materially. An FDICsupervised institution estimates the
volatilities of exposures, the collateral,
and foreign exchange rates and should
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not take into account the correlations
between them.
The interim final rule provides a
formula for converting own-estimates of
haircuts based on a holding period
different from the minimum holding
period under the rule to haircuts
consistent with the rule’s minimum
holding periods. The minimum holding
periods for netting sets with more than
5,000 trades, netting sets involving
illiquid collateral or an OTC derivative
that cannot easily be replaced, and
netting sets involving more than two
margin disputes over the previous two
quarters described above also apply for
own-estimates of haircuts.
Under the interim final rule, an FDICsupervised institution is required to
have policies and procedures that
describe how it determines the period of
significant financial stress used to
calculate the FDIC-supervised
institution’s own internal estimates, and
to be able to provide empirical support
for the period used. These policies and
procedures must address (1) how the
FDIC-supervised institution links the
period of significant financial stress
used to calculate the own internal
estimates to the composition and
directional bias of the FDIC-supervised
institution’s current portfolio; and (2)
the FDIC-supervised institution’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 FDICsupervised institution’s current
portfolio. The FDIC-supervised
institution is required to obtain the prior
approval of the FDIC for these policies
and procedures and notify the FDIC if
it makes any material changes to them.
The FDIC may require it to use a
different period of significant financial
stress in the calculation of its own
internal estimates.
Under the interim final rule, an FDICsupervised institution is allowed to
calculate internally estimated haircuts
for categories of debt securities that are
investment-grade exposures. The
haircut for a category of securities must
be representative of the internal
volatility estimates for securities in that
category that the FDIC-supervised
institution has lent, sold subject to
repurchase, posted as collateral,
borrowed, purchased subject to resale,
or taken as collateral. In determining
relevant categories, the FDIC-supervised
institution must, at a minimum, take
into account (1) the type of issuer of the
security; (2) the credit quality of the
security; (3) the maturity of the security;
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and (4) the interest rate sensitivity of the
security.
An FDIC-supervised institution must
calculate a separate internally estimated
haircut for each individual noninvestment-grade debt security and for
each individual equity security. In
addition, an FDIC-supervised institution
must 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.
emcdonald on DSK67QTVN1PROD with RULES2
g. Simple Value-at-Risk and Internal
Models Methodology
In the NPR, the agencies did not
propose a simple VaR approach to
calculate exposure amounts for eligible
margin loans and repo-style transactions
or IMM to calculate the exposure
amount for the counterparty credit
exposure for OTC derivatives, eligible
margin loans, and repo-style
transactions. These methodologies are
included in the advanced approaches
rule. The agencies sought comment on
whether to implement the simple VaR
approach and IMM in the standardized
approach. Several commenters asserted
that the IMM and simple VaR approach
should be implemented in the interim
final rule to better capture the risk of
counterparty credit exposures. The FDIC
has considered these comments and has
concluded that the increased
complexity and limited applicability of
these models-based approaches is
inconsistent with the FDIC’s overall
focus in the standardized approach on
simplicity, comparability, and broad
applicability of methodologies for U.S.
FDIC-supervised institutions. Therefore,
consistent with the proposal, the
interim final rule does not include the
simple VaR approach or the IMM in the
standardized approach.
G. Unsettled Transactions
Under the proposed rule, a banking
organization would be required to hold
capital against the risk of certain
unsettled transactions. One commenter
expressed opposition to assigning a risk
weight to unsettled transactions where
previously none existed, because it
would require a significant and
burdensome tracking process without
commensurate benefit. The FDIC
believes that it is important for an FDICsupervised institution to have
procedures to identify and track a
delayed or unsettled transaction of the
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types specified in the rule. Such
procedures capture the resulting risks
associated with such delay. As a result,
the FDIC is adopting the risk-weighting
requirements as proposed.
Consistent with the proposal, the
interim final rule 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. Under the interim final rule,
the capital requirement does 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) repostyle 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 defined as the lesser of the
market standard for the particular
instrument or five business days).150 In
the case of a system-wide failure of a
settlement, clearing system, or central
counterparty, the FDIC may waive riskbased capital requirements for unsettled
and failed transactions until the
situation is rectified.
The interim final rule provides
separate treatments for delivery-versuspayment (DvP) and payment-versuspayment (PvP) transactions with a
normal settlement period, and non-DvP/
non-PvP transactions with a normal
settlement period. A DvP transaction
refers 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 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. A transaction is 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.
Consistent with the proposal, under
the interim final rule, an FDICsupervised institution is required to
hold risk-based capital against a DvP or
PvP transaction with a normal
150 Such transactions are treated as derivative
contracts as provided in section 34 or section 35 of
the interim final rule.
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settlement period if the FDIC-supervised
institution’s counterparty has not made
delivery or payment within five
business days after the settlement date.
The FDIC-supervised institution
determines its risk-weighted asset
amount for such a transaction by
multiplying the positive current
exposure of the transaction for the FDICsupervised institution by the
appropriate risk weight in Table 23. The
positive current exposure from an
unsettled transaction of an FDICsupervised institution 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 FDIC-supervised institution to the
counterparty.
TABLE 23—RISK WEIGHTS FOR UNSETTLED DVP AND PVP TRANSACTIONS
Number of business
days after contractual
settlement date
From
From
From
46 or
5 to 15 ...................
16 to 30 .................
31 to 45 .................
more ......................
Risk weight
to be applied
to positive
current exposure
(in percent)
100.0
625.0
937.5
1,250.0
An FDIC-supervised institution must
hold risk-based capital against any nonDvP/non-PvP transaction with a normal
settlement period if the FDIC-supervised
institution 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 FDICsupervised institution must continue to
hold risk-based capital against the
transaction until it has received the
corresponding deliverables. From the
business day after the FDIC-supervised
institution has made its delivery until
five business days after the counterparty
delivery is due, the FDIC-supervised
institution must calculate the riskweighted asset amount for the
transaction by risk weighting the current
fair value of the deliverables owed to
the FDIC-supervised institution, using
the risk weight appropriate for an
exposure to the counterparty in
accordance with section 32. If an FDICsupervised institution has not received
its deliverables by the fifth business day
after the counterparty delivery due date,
the FDIC-supervised institution must
assign a 1,250 percent risk weight to the
current market value of the deliverables
owed.
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H. Risk-Weighted Assets for
Securitization Exposures
In the proposal, the agencies proposed
to significantly revise the risk-based
capital framework for securitization
exposures. These proposed revisions
included removing references to and
reliance on credit ratings to determine
risk weights for these exposures and
using alternative standards of
creditworthiness, as required by section
939A of the Dodd-Frank Act. These
alternative standards were designed to
produce capital requirements that
generally would be consistent with
those under the BCBS securitization
framework and were consistent with
those incorporated into the agencies’
market risk rule.151 They would have
replaced both the ratings-based
approach and an approach that permits
banking organizations to use supervisorapproved internal systems to replicate
external ratings processes for certain
unrated exposures in the general riskbased capital rules.
In addition, the agencies proposed to
update the terminology for the
securitization framework, include a
definition of securitization exposure
that encompasses a wider range of
exposures with similar risk
characteristics, and implement new due
diligence requirements for securitization
exposures.
emcdonald on DSK67QTVN1PROD with RULES2
1. Overview of the Securitization
Framework and Definitions
The proposed securitization
framework was designed to address the
credit risk of exposures that involve the
tranching of credit risk of one or more
underlying financial exposures.
Consistent with the proposal, the
interim final rule defines a
securitization exposure as an on- or offbalance 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. Commenters
expressed concerns that the proposed
scope of the securitization framework
was overly broad and requested that the
definition of securitizations be
narrowed to exposures that tranche the
credit risk associated with a pool of
assets. However, the FDIC believes that
limiting the securitization framework to
exposures backed by a pool of assets
would exclude tranched credit risk
exposures that are appropriately
captured under the securitization
framework, such as certain first loss or
151 77
FR 53060 (August 30, 2012).
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other tranched guarantees provided to a
single underlying exposure.
In the proposal a traditional
securitization was defined, in part, as a
transaction in which credit risk of one
or more underlying exposures has been
transferred to one or more third parties
(other than through the use of credit
derivatives or guarantees), where the
credit risk associated with the
underlying exposures has been
separated into at least two tranches
reflecting different levels of seniority.
The definition included certain other
conditions, such as requiring all or
substantially all of the underlying
exposures to be financial exposures. The
FDIC has decided to finalize the
definition of traditional securitization
largely as proposed, with some revisions
(as discussed below), that reflect certain
comments regarding exclusions under
the framework and other modifications
to the interim final rule.
Both the designation of exposures as
securitization exposures (or
resecuritization exposures, as described
below) and the calculation of risk-based
capital requirements for securitization
exposures under the interim final rule
are guided by the economic substance of
a transaction rather than its legal form.
Provided there is tranching of credit
risk, securitization exposures could
include, among other things, ABS and
MBS, 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 credit-enhancing
interest-only strips (CEIOs).
Securitization exposures also include
assets sold with retained tranches.
The FDIC believes that requiring all or
substantially all of the underlying
exposures of a securitization to 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, the FDIC
also considers asset classes such as lease
residuals and entertainment royalties to
be financial assets. The securitization
framework is not designed, however, to
apply to tranched credit exposures to
commercial or industrial companies or
nonfinancial assets or to amounts
deducted from capital under section 22
of the interim final rule. Accordingly, a
specialized loan to finance the
construction or acquisition of large-scale
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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).
Consistent with the proposal, under
the interim final rule, an operating
company does not fall under the
definition of a traditional securitization
(even if substantially all of its assets are
financial exposures). Operating
companies generally refer to companies
that are established 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 generally would be an equity
exposure. Under the interim final rule,
FDIC-supervised institutions are
operating companies and do not fall
under the definition of a traditional
securitization. However, 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
under the interim final rule and would
not qualify for this general exclusion
from the definition of traditional
securitization.
Under the proposed rule, paragraph
(10) of the definition of traditional
securitization specifically excluded
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 served 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 registered
with the SEC under the Investment
Company Act of 1940 and their foreign
equivalents would be exempted from
the definition because these entities and
transactions are regulated and subject to
strict leverage requirements. The
proposal defined an investment fund as
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
explained in the proposal that the
capital requirements for an extension of
credit to, or an equity holding in, these
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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.
Commenters generally agreed with the
proposed exemptions from the
definition of traditional securitization
and requested that the agencies provide
exemptions for exposures to a broader
set of investment firms, such as pension
funds operated by state and local
governments. In view of the comments
regarding pension funds, the interim
final rule provides an additional
exclusion from the definition of
traditional securitization for a
‘‘governmental plan’’ (as defined in 29
U.S.C. 1002(32)) that complies with the
tax deferral qualification requirements
provided in the Internal Revenue Code.
The FDIC believes that an exemption for
such government plans is appropriate
because they are subject to substantial
regulation. Commenters also requested
that the agencies provide exclusions for
certain products provided to investment
firms, such as extensions of short-term
credit that support day-to-day
investment-related activities. The FDIC
believes that exposures that meet the
definition of traditional securitization,
regardless of product type or maturity,
would fall under the securitization
framework. Accordingly, the FDIC has
not provided for any such exemptions
under the interim final rule.152
To address the treatment of
investment firms that are not
specifically excluded from the
securitization framework, the proposed
rule provided discretion to the primary
Federal supervisor of a banking
organization to exclude from the
definition of a traditional securitization
those transactions in which the
underlying exposures are owned by an
investment firm that exercises
substantially unfettered control over the
size and composition of its assets,
liabilities, and off-balance sheet
exposures. While the commenters
supported the agencies’ recognition that
certain investment firms may warrant an
exemption from the securitization
framework, some expressed concern
that the process for making such a
determination may present significant
implementation burden.
To maintain sufficient flexibility to
provide an exclusion for certain
investment firms from the securitization
framework, the FDIC has retained this
discretionary provision in the interim
152 The interim final rule also clarifies that the
portion of a synthetic exposure to the capital of a
financial institution that is deducted from capital is
not a traditional securitization.
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final rule without change. In
determining whether to exclude an
investment firm from the securitization
framework, the FDIC will consider a
number of factors, including the
assessment of the transaction’s leverage,
risk profile, and economic substance.
This supervisory exclusion gives the
FDIC discretion to distinguish
structured finance transactions, to
which the securitization framework is
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 offbalance sheet exposures, are eligible for
the exclusion from the definition of
traditional securitization under this
provision. The FDIC does 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 meet the definition of
traditional securitization under the
interim final rule.
The line between securitization
exposures and non-securitization
exposures may be difficult to identify in
some circumstances. In addition to the
supervisory exclusion from the
definition of traditional securitization
described above, FDIC may expand the
scope of the securitization framework to
include other transactions if doing so is
justified by the economics of the
transaction. Similar to the analysis for
excluding an investment firm from
treatment as a traditional securitization,
the FDIC will consider the economic
substance, leverage, and risk profile of
a transaction to ensure that an
appropriate risk-based capital treatment
is applied. The FDIC will 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.
Under the proposal, a synthetic
securitization was defined as 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
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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). The FDIC has decided to
finalize the definition of synthetic
securitization largely as proposed, but
has also clarified in the interim final
rule that transactions in which a portion
of credit risk has been retained, not just
transferred, through the use of credit
derivatives is subject to the
securitization framework.
In response to the proposal,
commenters requested that the agencies
provide an exemption for guarantees
that tranche credit risk under certain
mortgage partnership finance programs,
such as certain programs provided by
the FHLBs, whereby participating
member banking organizations provide
credit enhancement to a pool of
residential mortgage loans that have
been delivered to the FHLB. The FDIC
believes that these exposures that
tranche credit risk meet the definition of
a synthetic securitization and that the
risk of such exposures would be
appropriately captured under the
securitization framework. In contrast,
mortgage-backed pass-through securities
(for example, those guaranteed by
FHLMC or FNMA) that feature various
maturities but do not involve tranching
of credit risk do not meet the definition
of a securitization exposure. Only those
MBS that involve tranching of credit
risk are considered to be securitization
exposures.
Consistent with the 2009
Enhancements, the proposed rule
defined 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. A
resecuritization would have meant a
securitization in which one or more of
the underlying exposures is a
securitization exposure. An exposure to
an asset-backed commercial paper
(ABCP) program would not have been 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
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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.
Commenters asked the agencies to
narrow the definition of resecuritization
by exempting resecuritizations in which
a minimal amount of underlying assets
are securitization exposures. According
to commenters, the proposed definition
would have a detrimental effect on
certain collateralized loan obligation
exposures, which typically include a
small amount of securitization
exposures as part of the underlying pool
of assets in a securitization. Specifically,
the commenters requested that
resecuritizations be defined as a
securitization in which five percent or
more of the underlying exposures are
securitizations. Commenters also asked
the agencies to consider employing a
pro rata treatment by only applying a
higher capital surcharge to the portion
of a securitization exposure that is
backed by underlying securitization
exposures. The FDIC believes that the
introduction of securitization exposures
into a pool of securitized exposures
significantly increases the complexity
and correlation risk of the exposures
backing the securities issued in the
transaction, and that the resecuritization
framework is appropriate for applying
risk-based capital requirements to
exposures to pools that contain
securitization exposures.
Commenters sought clarification as to
whether the proposed definition of
resecuritization would include a single
exposure that has been retranched, such
as a resecuritization of a real estate
mortgage investment conduit (ReREMIC). The FDIC believes that the
increased capital surcharge, or p factor,
for resecuritizations was meant to
address the increased correlation risk
and complexity resulting from
retranching of multiple underlying
exposures and was not intended to
apply to the retranching of a single
underlying exposure. As a result, the
definition of resecuritization in the
interim final rule has been refined to
clarify that resecuritizations do not
include exposures comprised of a single
asset that has been retranched. The
FDIC notes that for purposes of the
interim final rule, a resecuritization
does not include pass-through securities
that have been pooled together and
effectively re-issued as tranched
securities. This is because the passthrough securities do not tranche credit
protection and, as a result, are not
considered securitization exposures
under the interim final rule.
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Under the interim final rule, if a
transaction involves a traditional multiseller ABCP conduit, an FDICsupervised institution must 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 loans. To ensure that the
commercial paper issued by each
conduit is highly-rated, an FDICsupervised institution 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 is not a resecuritization
exposure under the interim final rule
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 constitutes tranching of risk of
a pool of multiple assets containing at
least one securitization exposure, and,
therefore, is 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 is not a
resecuritization exposure if, as noted
above, either (1) the program-wide
credit enhancement does not meet the
definition of a resecuritization exposure
or (2) the commercial paper is fully
supported by the sponsoring FDICsupervised institution. When the
sponsoring FDIC-supervised institution
fully supports the commercial paper,
the commercial paper holders
effectively are exposed to default risk of
the sponsor instead of the underlying
exposures, and the external rating of the
commercial paper is expected to be
based primarily on the credit quality of
the FDIC-supervised institution 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
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ratings issued by Nationally Recognized
Statistical Rating Organizations
(NRSROs) and did not perform internal
credit analysis of their securitization
exposures. Consistent with the Basel
capital framework and the agencies’
general expectations for investment
analysis, the proposal required banking
organizations to satisfy specific due
diligence requirements for securitization
exposures. Specifically, under the
proposal 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 its performance. The
banking organization’s analysis would
have to be commensurate with the
complexity of the exposure and the
materiality of the exposure in relation to
capital of the banking organization. On
an ongoing basis (no less frequently
than quarterly), the banking
organization must evaluate, review, and
update as appropriate the analysis
required under section 41(c)(1) of the
proposed rule for each securitization
exposure. The analysis of the risk
characteristics of the exposure prior to
acquisition, and periodically thereafter,
would have to consider:
(1) Structural features of the
securitization that 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 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.
Commenters expressed concern that
many banking organizations would be
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unable to perform the due diligence
necessary to meet the requirements and,
as a result, would no longer purchase
privately-issued securitization
exposures and would increase their
holdings of GSE-guaranteed securities,
thereby increasing the size of the GSEs.
Commenters also expressed concerns
regarding banking organizations’ ability
to obtain relevant market data for
certain exposures, such as foreign
exposures and exposures that are traded
in markets that are typically illiquid, as
well as their ability to obtain market
data during periods of general market
illiquidity. Commenters also stated
concerns that uneven application of the
requirements by supervisors may result
in disparate treatment for the same
exposure held at different banking
organizations due to perceived
management deficiencies. For these
reasons, many commenters requested
that the agencies consider removing the
market data requirement from the due
diligence requirements. In addition,
some commenters suggested that the
due diligence requirements be waived
provided that all of the underlying loans
meet certain underwriting standards.
The FDIC notes that the proposed due
diligence requirements are generally
consistent with the goal of the its
investment permissibility requirements,
which provide that FDIC-supervised
institutions must be able to determine
the risk of loss is low, even under
adverse economic conditions. The FDIC
acknowledges potential restrictions on
data availability and believes that the
standards provide sufficient flexibility
so that the due diligence requirements,
such as relevant market data
requirements, would be implemented as
applicable. In addition, the FDIC notes
that, where appropriate, pool-level data
could be used to meet certain of the due
diligence requirements. As a result, the
FDIC is finalizing the due diligence
requirements as proposed.
Under the proposal, if a banking
organization is not able to meet these
due diligence requirements and
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. Commenters requested
that the agencies adopt a more flexible
approach to due diligence requirements
rather than requiring a banking
organization to assign a risk weight of
1,250 percent for violation of those
requirements. For example, some
commenters recommended that the
agencies assign progressively increasing
risk weights based on the severity and
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duration of infringements of due
diligence requirements, to allow the
agencies to differentiate between minor
gaps in due diligence requirements and
more serious violations.
The FDIC believes that the
requirement to assign a 1,250 percent
risk weight, rather than applying a
lower risk weight, to exposures for
violation of these requirements is
appropriate given that such information
is required to monitor appropriately the
risk of the underlying assets. The FDIC
recognizes the importance of consistent
and uniform application of the
standards across FDIC-supervised
institutions and will endeavor to ensure
that the FDIC consistently reviews
FDIC-supervised institutions’ due
diligence on securitization exposures.
The FDIC believes that these efforts will
mitigate concerns that the 1,250 percent
risk weight will be applied
inappropriately to FDIC-supervised
institutions’ failure to meet the due
diligence requirements. At the same
time, the FDIC believes that the
requirement that an FDIC-supervised
institution’s analysis be commensurate
with the complexity and materiality of
the securitization exposure provides the
FDIC-supervised institution with
sufficient flexibility to mitigate the
potential for undue burden. As a result,
the FDIC is finalizing the risk weight
requirements related to due diligence
requirements as proposed.
b. Operational Requirements for
Traditional Securitizations
The proposal outlined certain
operational requirements for traditional
securitizations that had to be met in
order to apply the securitization
framework. The FDIC is finalizing these
operational requirements as proposed.
In a traditional securitization, an
originating FDIC-supervised institution
typically transfers a portion of the credit
risk of exposures to third parties by
selling them to a securitization special
purpose entity (SPE).153 Consistent with
the proposal, the interim final rule
defines an FDIC-supervised institution
to be an originating FDIC-supervised
institution with respect to a
securitization if it (1) directly or
indirectly originated or securitized the
underlying exposures included in the
153 The interim final rule defines 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.
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securitization; or (2) serves as an ABCP
program sponsor to the securitization.
Under the interim final rule,
consistent with the proposal, an FDICsupervised institution that transfers
exposures it has originated or purchased
to a securitization SPE or other third
party in connection with a traditional
securitization can 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 FDIC-supervised institution’s
consolidated balance sheet under
GAAP; (2) the FDIC-supervised
institution 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).154
An originating FDIC-supervised
institution that meets these conditions
must hold risk-based capital against any
credit risk it retains or acquires in
connection with the securitization. An
originating FDIC-supervised institution
that fails to meet these conditions is
required to 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.
In addition, if a securitization (1)
includes one or more underlying
exposures in which the borrower is
permitted to vary the drawn amount
within an agreed limit under a line of
credit, and (2) contains an early
amortization provision, the originating
FDIC-supervised institution is 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 aftertax gain-on-sale resulting from the
transaction.155 The FDIC believes that
154 Commenters asked the agencies to consider
the interaction between the proposed nonconsolidation condition and the agencies’ proposed
rules implementing section 941 of the Dodd-Frank
Act regarding risk retention, given concerns that
satisfaction of certain of the proposed risk retention
requirements would affect the accounting treatment
for certain transactions. The FDIC acknowledges
these concerns and will take into consideration any
effects on the securitization framework as they
continue to develop the risk retention rules.
155 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 an FDIC-supervised institution capital
needs if new draws on the revolving credit facilities
need to be financed by the FDIC-supervised
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this treatment is appropriate given the
lack of risk transference in
securitizations of revolving underlying
exposures with early amortization
provisions.
c. Operational Requirements for
Synthetic Securitizations
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In general, the proposed operational
requirements for synthetic
securitizations were similar to those
proposed for traditional securitizations.
The operational requirements for
synthetic securitizations, however, were
more detailed to ensure that the
originating banking organization has
truly transferred credit risk of the
underlying exposures to one or more
third parties. Under the proposal, an
originating banking organization would
have been able to recognize for riskbased 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’’ was satisfied. The FDIC
is finalizing the operational
requirements largely as proposed.
However, to ensure that synthetic
securitizations created through tranched
guarantees and credit derivatives are
properly included in the framework, in
the interim final rule the FDIC has
amended the operational requirements
to recognize guarantees that meet all of
the criteria set forth in the definition of
eligible guarantee except the criterion
under paragraph (3) of the definition.
Additionally, the operational criteria
recognize a credit derivative provided
that the credit derivative meets all of the
criteria set forth in the definition of
eligible credit derivative except for
paragraph 3 of the definition of eligible
guarantee. As a result, a guarantee or
credit derivative that provides a
tranched guarantee would not be
excluded by the operational
requirements for synthetic
securitizations.
Failure to meet these operational
requirements for a synthetic
institution 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 the FDIC-supervised institution to a greater
risk of loss than in other securitization transactions.
The interim final rule defines an early amortization
provision 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 (1) is
solely triggered by events not related to the
performance of the underlying exposures or the
originating FDIC-supervised institution (such as
material changes in tax laws or regulations), or (2)
leaves investors fully exposed to future draws by
borrowers on the underlying exposures even after
the provision is triggered.
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securitization prevents an FDICsupervised institution that has
purchased tranched credit protection
referencing one or more of its exposures
from using the securitization framework
with respect to the reference exposures
and requires the FDIC-supervised
institution to hold risk-based capital
against the underlying exposures as if
they had not been synthetically
securitized. An FDIC-supervised
institution that holds a synthetic
securitization as a result of purchasing
credit protection may use the
securitization framework to determine
the risk-based capital requirement for its
exposure. Alternatively, it may instead
choose to disregard the credit protection
and use the general credit risk
framework. An FDIC-supervised
institution that provides tranched credit
protection in the form of a synthetic
securitization or credit protection to a
synthetic securitization must use the
securitization framework to compute
risk-based capital requirements for its
exposures to the synthetic securitization
even if the originating FDIC-supervised
institution fails to meet one or more of
the operational requirements for a
synthetic securitization.
d. Clean-Up Calls
Under the proposal, 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
proposed rule defined 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 cleanup 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.
The interim final rule retains the
proposed treatment for clean-up calls,
and defines an eligible clean-up call as
a clean-up call that (1) is exercisable
solely at the discretion of the originating
FDIC-supervised institution or servicer;
(2) is not structured to avoid allocating
losses to securitization exposures held
by investors or otherwise structured to
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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 cleanup call with respect to a particular
series or tranche issued by the master
trust meets criteria (3) of the definition
of ‘‘eligible clean-up call’’ as long as the
outstanding principal amount in that
series or tranche was 10 percent or less
of its original amount at the inception
of the series.
3. Risk-Weighted Asset Amounts for
Securitization Exposures
The proposed framework for assigning
risk-based capital requirements to
securitization exposures required
banking organizations generally to
calculate a risk-weighted asset amount
for a securitization exposure by
applying either (i) the simplified
supervisory formula approach (SSFA),
described in section VIII.H of the
preamble, or (ii) if the banking
organization is 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 SSFA or the gross-up
approach consistently across all of its
securitization exposures. However, a
banking organization could choose to
assign a 1,250 percent risk weight to any
securitization exposure.
Commenters expressed concerns
regarding the potential differences in
risk weights for similar exposures when
using the gross-up approach compared
to the SSFA, and the potential for
capital arbitrage depending on the
outcome of capital treatment under the
framework. The FDIC acknowledges
these concerns and, to reduce arbitrage
opportunities, has required that a
banking organization apply either the
gross-up approach or the SSFA
consistently across all of its
securitization exposures. Commenters
also asked the agencies to clarify how
often and under what circumstances a
banking organization is allowed to
switch between the SSFA and the grossup approach. While the FDIC is not
placing restrictions on the ability of
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FDIC-supervised institutions to switch
from the SSFA to the gross-up approach,
the FDIC does not anticipate there
should be a need for frequent changes
in methodology by an FDIC-supervised
institution absent significant change in
the nature of the FDIC-supervised
institution’s securitization activities,
and expect FDIC-supervised institutions
to be able to provide a rationale for
changing methodologies to the FDIC if
requested.
Citing potential disadvantages of the
proposed securitization framework as
compared to standards to be applied to
international competitors that rely on
the use of credit ratings, some
commenters requested that banking
organizations be able to continue to
implement a ratings-based approach to
allow the agencies more time to
calibrate the SSFA in accordance with
international standards that rely on
ratings. The FDIC again observes that
the use of ratings in FDIC regulations is
inconsistent with section 939A of the
Dodd-Frank Act. Accordingly, the
interim final rule does not include any
references to, or reliance on, credit
ratings. The FDIC has determined that
the SSFA is an appropriate substitute
standard to credit ratings that can be
used to measure risk-based capital
requirements and may be implemented
uniformly across institutions.
Under the proposed securitization
framework, banking organizations
would have been required or could
choose to assign a risk weight of 1,250
percent to certain securitization
exposures. Commenters stated that the
1,250 percent risk weight required
under certain circumstances in the
securitization framework would
penalize banking organizations that
hold capital above the total risk-based
capital minimum and could require a
banking organization to hold more
capital against the exposure than the
actual exposure amount at risk. As a
result, commenters requested that the
amount of risk-based capital required to
be held against a banking organization’s
exposure be capped at the exposure
amount. The FDIC has decided to retain
the proposed 1,250 percent risk weight
in the interim final rule, consistent with
their overall goals of simplicity and
comparability, to provide for
comparability in risk-weighted asset
amounts for the same exposure across
institutions.
Consistent with the proposal, the
interim final rule provides for
alternative treatment of securitization
exposures to ABCP programs and
certain gains-on-sale and CEIO
exposures. Specifically, similar to the
general risk-based capital rules, the
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interim final rule includes a minimum
100 percent risk weight for interest-only
mortgage-backed securities and
exceptions to the securitization
framework for certain small-business
loans and certain derivatives as
described below. An FDIC-supervised
institution may use the securitization
credit risk mitigation rules to adjust the
capital requirement under the
securitization framework for an
exposure to reflect certain collateral,
credit derivatives, and guarantees, as
described in more detail below.
a. Exposure Amount of a Securitization
Exposure
Under the interim final rule, 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 is
generally the FDIC-supervised
institution’s carrying value of the
exposure. The interim final rule
modifies the proposed treatment for
determining exposure amounts under
the securitization framework to reflect
the ability of an FDIC-supervised
institution not subject to the advanced
approaches rule to make an AOCI optout election. As a result, the exposure
amount of an on-balance sheet
securitization exposure that is an
available-for-sale debt security or an
available-for-sale debt security
transferred to held-to-maturity held by
an FDIC-supervised institution that has
made an AOCI opt-out election is the
FDIC-supervised institution’s carrying
value (including net accrued but unpaid
interest and fees), less any net
unrealized gains on the exposure and
plus any net unrealized losses on the
exposure.
The exposure amount of an offbalance sheet securitization exposure
that is not an eligible ABCP liquidity
facility, a repo-style transaction, eligible
margin loan, an OTC derivative contract
(other than a credit derivative), or a
derivative that is a cleared transaction
(other than a credit derivative) is the
notional amount of the exposure. The
treatment for OTC credit derivatives is
described in more detail below.
For purposes of calculating the
exposure amount of an off-balance sheet
exposure to an ABCP securitization
exposure, such as a liquidity facility,
consistent with the proposed rule, the
notional amount may be reduced to the
maximum potential amount that the
FDIC-supervised institution 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
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$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
improve, then the exposure amount is
$200. An ABCP program is defined 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 is defined as a liquidity
facility supporting ABCP, in form or in
substance, which 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 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.
Commenters, citing accounting
changes that require certain ABCP
securitization exposures to be
consolidated on banking organizations
balance sheets, asked the agencies to
consider capping the amount of an offbalance sheet securitization exposure to
the maximum potential amount that the
banking organization could be required
to fund given the securitization SPE’s
current underlying assets. These
commenters stated that the downward
adjustment of the notional amount of a
banking organization’s off-balance sheet
securitization exposure to the amount of
the available asset pool generally should
be permitted regardless of whether the
exposure to a customer SPE is made
directly through a credit commitment by
the banking organization to the SPE or
indirectly through a funding
commitment that the banking
organization makes to an ABCP conduit.
The FDIC believes that the requirement
to hold risk-based capital against the
full amount that may be drawn more
accurately reflects the risks of potential
draws under these exposures and have
decided not to provide a separate
provision for off-balance sheet
exposures to customer-sponsored SPEs
that are not ABCP conduits.
Under the interim final rule,
consistent with the proposal, the
exposure amount of an eligible ABCP
liquidity facility that is subject to the
SSFA equals 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 is the notional
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amount of the exposure multiplied by a
50 percent CCF. The exposure amount
of a securitization exposure that is a
repo-style transaction, eligible margin
loan, an OTC derivative contract (other
than a purchased credit derivative), or
derivative that is a cleared transaction
(other than a purchased credit
derivative) is the exposure amount of
the transaction as calculated under
section 324.34 or section 324.37 of the
interim final rule, as applicable.
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b. Gains-on-Sale and Credit-Enhancing
Interest-Only Strips
Consistent with the proposal, under
the interim final rule an FDICsupervised institution must deduct from
common equity tier 1 capital any aftertax gain-on-sale resulting from a
securitization and must apply a 1,250
percent risk weight to the portion of a
CEIO that does not constitute an aftertax gain-on-sale. The FDIC believes this
treatment is appropriate given historical
supervisory concerns with the
subjectivity involved in valuations of
gains-on-sale and CEIOs. Furthermore,
although the treatments for gains-onsale and CEIOs can increase an
originating FDIC-supervised
institution’s risk-based capital
requirement following a securitization,
the FDIC believes that such anomalies
are rare where a securitization transfers
significant credit risk from the
originating FDIC-supervised institution
to third parties.
c. Exceptions Under the Securitization
Framework
Commenters stated concerns that the
proposal would inhibit demand for
private label securitization by making it
more difficult for banking organizations,
especially community banking
organizations, to purchase private label
mortgage-backed securities. Instead of
implementing the SSFA and the grossup approach, commenters suggested
allowing banking organizations to assign
a 20 percent risk weight to
securitization exposures that are backed
by mortgage exposures that would be
‘‘qualified mortgages’’ under the Truth
in Lending Act and implementing
regulations issued by the CFPB.156 The
FDIC believes that the proposed
securitization approaches would be
more appropriate in capturing the risks
provided by structured transactions,
including those backed by QM. The
interim final rule does not provide an
exclusion for such exposures.
Under the interim final rule,
consistent with the proposal, there are
several exceptions to the general
156 78
FR 6408 (Jan. 30, 2013).
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provisions in the securitization
framework that parallel the general riskbased capital rules. First, an FDICsupervised institution is required to
assign a risk weight of at least 100
percent to an interest-only MBS. The
FDIC believes 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
continues to apply to securitizations of
small-business loans and leases on
personal property transferred with
retained contractual exposure by wellcapitalized depository institutions.157
Finally, 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), an FDIC-supervised
institution may choose to set the riskweighted asset amount of the exposure
equal to the amount of the exposure.
d. Overlapping Exposures
Consistent with the proposal, the
interim final rule includes provisions to
limit the double counting of risks in
situations involving overlapping
securitization exposures. If an FDICsupervised institution has multiple
securitization exposures that provide
duplicative coverage to the underlying
exposures of a securitization (such as
when an FDIC-supervised institution
provides a program-wide credit
enhancement and multiple pool-specific
liquidity facilities to an ABCP program),
the FDIC-supervised institution is not
required to hold duplicative risk-based
capital against the overlapping position.
Instead, the FDIC-supervised institution
must 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,
157 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. The interim final rule does not expressly
provide that the FDIC may permit adequatelycapitalized FDIC-supervised institutions to use the
small business recourse rule on a case-by-case basis
because the FDIC may make such a determination
under the general reservation of authority in section
1 of the interim final rule.
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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.
Consistent with the proposal, under
the interim final rule an FDICsupervised institution must apply the
SSFA or the gross-up approach, as
described below, or a 1,250 percent risk
weight to a servicer cash advance
facility. The treatment of the undrawn
portion of the facility depends on
whether the facility is an eligible
servicer cash advance facility. An
eligible servicer cash advance facility is
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.
Under the proposal, a banking
organization that is a servicer under an
eligible servicer cash advance facility is
not required to hold risk-based capital
against potential future cash advanced
payments that it may be required to
provide under the contract governing
the 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
other off-balance sheet securitization
exposures. The FDIC is clarifying the
terminology in the interim final rule to
specify that an FDIC-supervised
institution that is a servicer under a
non-eligible servicer cash advance
facility must hold risk-based capital
against the amount of all potential
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future cash advance payments that it
may be contractually required to
provide during the subsequent 12month period under the contract
governing the facility.
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f. Implicit Support
Consistent with the proposed rule, the
interim final rule requires an FDICsupervised institution that provides
support to a securitization in excess of
its predetermined contractual obligation
(implicit support) to include in riskweighted 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 aftertax gain-on-sale resulting from the
securitization.158 In addition, the FDICsupervised institution must disclose
publicly (i) that it has provided implicit
support to the securitization, and (ii) the
risk-based capital impact to the FDICsupervised institution of providing such
implicit support. The FDIC notes that
under the reservations of authority set
forth in the interim final rule, the FDIC
also could require the FDIC-supervised
institution to hold risk-based capital
against all the underlying exposures
associated with some or all the FDICsupervised institution’s other
securitizations as if the underlying
exposures had not been securitized, and
to deduct from common equity tier 1
capital any after-tax gain-on-sale
resulting from such securitizations.
4. Simplified Supervisory Formula
Approach
The proposed rule incorporated the
SSFA, a simplified version of the
supervisory formula approach (SFA) in
the advanced approaches rule, to assign
risk weights to securitization exposures.
Many of the commenters focused on the
burden of implementing the SSFA given
the complexity of the approach in
relation to the proposed treatment of
mortgages exposures. Commenters also
stated concerns that implementation of
the SSFA would generally restrict credit
growth and create competitive equity
concerns with other jurisdictions
implementing ratings-based approaches.
The FDIC acknowledges that there may
be differences in capital requirements
under the SSFA and the ratings-based
approach in the Basel capital
framework. As explained previously,
the use of alternative standards of
creditworthiness in FDIC regulations is
consistent with section 939A of the
158 The interim final rule is consistent with
longstanding guidance on the treatment of implicit
support, entitled, ‘‘Interagency Guidance on
Implicit Recourse in Asset Securitizations,’’ (May
23, 2002). See FIL–52–2002.
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Dodd-Frank Act. Any alternative
standard developed by the FDIC may
not generate the same result as a ratingsbased capital framework under every
circumstance. However, the FDIC,
together with the other agencies, has
designed the SSFA to result in generally
comparable capital requirements to
those that would be required under the
Basel ratings-based approach without
undue complexity. The FDIC will
monitor implementation of the SSFA
and, based on supervisory experience,
consider what modifications, if any,
may be necessary to improve the SSFA
in the future.
The FDIC has adopted the proposed
SSFA largely as proposed, with a
revision to the delinquency parameter
(parameter W) that will increase the risk
sensitivity of the approach and clarify
the operation of the formula when the
contractual terms of the exposures
underlying a securitization permit
borrowers to defer payments of
principal and interest, as described
below. To limit potential burden of
implementing the SSFA, FDICsupervised institutions that are not
subject to the market risk rule may also
choose to use as an alternative the grossup approach described in section
VIII.H.5 below, provided that they apply
the gross-up approach to all of their
securitization exposures.
Similar to the SFA under the
advanced approaches rule, the SSFA is
a formula that starts with a baseline
derived from the capital requirements
that apply to all exposures underlying
the securitization and then assigns risk
weights based on the subordination
level of an exposure. The FDIC designed
the SSFA 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 applies a 1,250 percent risk
weight to securitization exposures that
absorb losses up to the amount of
capital that is required for the
underlying exposures under subpart D
of the interim final rule had those
exposures been held directly by an
FDIC-supervised institution. In
addition, the FDIC is implementing a
supervisory risk-weight floor or
minimum risk weight for a given
securitization of 20 percent. While some
commenters requested that the floor be
lowered for certain low-risk
securitization exposures, the FDIC
believes that a 20 percent floor is
prudent given the performance of many
securitization exposures during the
recent crisis.
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At the inception of a securitization,
the SSFA requires more capital on a
transaction-wide basis than would be
required if the underlying assets had not
been securitized. That is, if the FDICsupervised institution held every
tranche of a securitization, its overall
capital requirement would be greater
than if the FDIC-supervised institution
held the underlying assets in portfolio.
The FDIC believes this overall outcome
is important in reducing the likelihood
of regulatory capital arbitrage through
securitizations.
The proposed rule required banking
organizations to use data to assign the
SSFA parameters that are not more than
91 days old. Commenters requested that
the data requirement be amended to
account for securitizations of underlying
assets with longer payment periods,
such as transactions featuring annual or
biannual payments. In response, the
FDIC amended this requirement in the
interim final rule so that data used to
determine SSFA parameters must be the
most currently available data. However,
for exposures that feature payments on
a monthly or quarterly basis, the interim
final rule requires the data to be no
more than 91 calendar days old.
Under the interim final rule, to use
the SSFA, an FDIC-supervised
institution must obtain or determine the
weighted-average risk weight of the
underlying exposures (KG), as well as
the attachment and detachment points
for the FDIC-supervised institution’s
position within the securitization
structure. ‘‘KG,’’ is calculated using the
risk-weighted asset amounts in the
standardized approach and is expressed
as a decimal value between zero and 1
(that is, an average risk weight of 100
percent means that KG would equal
0.08). The FDIC-supervised institution
may recognize the relative seniority of
the exposure, as well as all cash funded
enhancements, in determining
attachment and detachment points. In
addition, an FDIC-supervised institution
must be able to determine the credit
performance of the underlying
exposures.
The commenters expressed concerns
that certain types of data that would be
required to calculate KG may not be
readily available, particularly data
necessary to calculate the weightedaverage capital requirement of
residential mortgages according to the
proposed rule’s standardized approach
for residential mortgages. Some
commenters therefore asked to be able
to use the risk weights under the general
risk-based capital rules for residential
mortgages in the calculation of KG.
Commenters also requested the use of
alternative estimates or conservative
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To make the SSFA more risk-sensitive
and forward-looking, the parameter KG
is modified based on delinquencies
among the underlying assets of the
securitization. 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.
KA ¥ C1 ¥ W) · KG + (0.5 · W)
Under the proposal, the W parameter
equaled the ratio of the sum of the
dollar amounts of any underlying
exposures of the securitization that are
90 days or more past due, subject to a
bankruptcy or insolvency proceeding, in
the process of foreclosure, held as real
estate owned, in default, or have
contractually deferred interest for 90
days or more divided by the ending
balance, measured in dollars, of the
underlying exposures. Commenters
expressed concern that the proposal
would require additional capital for
payment deferrals that are unrelated to
the creditworthiness of the borrower,
and encouraged the agencies to amend
the proposal so that the numerator of
the W parameter would not include
deferrals of interest that are unrelated to
the performance of the loan or the
borrower, as is the case for certain
federally-guaranteed student loans or
certain consumer credit facilities that
allow the borrower to defer principal
and interest payments for the first 12
months following the purchase of a
product or service. Some commenters
also asserted that the proposed SSFA
would not accurately calibrate capital
requirements for those student loans
with a partial government guarantee.
Another commenter also asked for
clarification on which exposures are in
the securitized pool.
In response to these concerns, the
FDIC has decided to explicitly exclude
from the numerator of parameter W
KSSFA is the risk-based capital
requirement for the securitization
exposure and is a function of three
variables, labeled a, u, and l. The
constant e is the base of the natural
logarithms (which equals 2.71828). The
variables a, u, and l have the following
definitions:
The values of A and D denote the
attachment and detachment points,
respectively, for the tranche.
Specifically, A is the attachment point
for the tranche that contains the
securitization exposure and represents
the threshold at which credit losses will
first be allocated to the exposure. This
input is the ratio, as expressed as a
decimal value between zero and one, of
the dollar amount of the securitization
exposures that are subordinated to the
tranche that contains the securitization
exposure held by the FDIC-supervised
institution to the current dollar amount
of all underlying exposures.
Commenters requested that the
agencies recognize unfunded forms of
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loans with deferral of principal or
interest for (1) federally-guaranteed
student loans, in accordance with the
terms of those programs, or (2) for
consumer loans, including nonfederally-guaranteed student loans,
provided that such payments are
deferred pursuant to provisions
included in the contract at the time
funds are disbursed that provide for
period(s) of deferral that are not
initiated based on changes in the
creditworthiness of the borrower. The
FDIC believes that the SSFA
appropriately reflects partial
government guarantees because such
guarantees are reflected in KG in the
same manner that they are reflected in
capital requirements for loans held on
balance sheet. For clarity, the FDIC has
eliminated the term ‘‘securitized pool’’
from the interim final rule. The
calculation of parameter W includes all
underlying exposures of a securitization
transaction.
The FDIC believes that, with the
parameter W calibration set equal to 0.5,
the overall capital requirement
produced by the SSFA is sufficiently
responsive and prudent to ensure
sufficient capital for pools that
demonstrate credit weakness. The entire
specification of the SSFA in the interim
final rule is as follows:
proxy data to implement the SSFA
when a parameter is not readily
available, especially for securitizations
of mortgage exposures. As previously
discussed, the FDIC is retaining in the
interim final rule the existing mortgage
treatment under the general risk-based
capital rules. Accordingly, the FDIC
believes that FDIC-supervised
institutions should generally have
access to the data necessary to calculate
the SSFA parameters for mortgage
exposures.
Commenters characterized the KG
parameter as not sufficiently risk
sensitive and asked the agencies to
provide more recognition under the
SSFA with respect to the credit quality
of the underlying assets. Some
commenters observed that the SSFA did
not take into account sequential pay
structures. As a result, some
commenters requested that banking
organizations be allowed to implement
cash-flow models to increase risk
sensitivity, especially given that the
SSFA does not recognize the various
types of cash-flow waterfalls for
different transactions.
In developing the interim final rule,
the FDIC considered the trade-offs
between added risk sensitivity,
increased complexity that would result
from reliance on cash-flow models, and
consistency with standardized approach
risk weights. The FDIC believes it is
important to calibrate capital
requirements under the securitization
framework in a manner that is
consistent with the calibration used for
the underlying assets of the
securitization to reduce complexity and
best align capital requirements under
the securitization framework with
requirements for credit exposures under
the standardized approach. As a result,
the FDIC has decided to finalize the KG
parameter as proposed.
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credit support, such as excess spread, in
the calculation of A. Commenters also
stated that where the carrying value of
an exposure is less than its par value,
the discount to par for a particular
exposure should be recognized as
additional credit protection. However,
the FDIC believes it is prudent to
recognize only funded credit
enhancements, such as
overcollateralization or reserve accounts
funded by accumulated cash flows, in
the calculation of parameter A.
Discounts and write-downs can be
related to credit risk or due to other
factors such as interest rate movements
or liquidity. As a result, the FDIC does
not believe that discounts or writedowns should be factored into the SSFA
as credit enhancement.
Parameter D is the detachment point
for the tranche that contains the
securitization exposure and represents
the threshold at which credit losses
allocated to the securitization exposure
would result in a total loss of principal.
This input, which is a decimal value
between zero and one, equals the value
of parameter A plus the ratio of the
current dollar amount of the
securitization exposures that are pari
passu with the FDIC-supervised
institution’s securitization exposure
(that is, have equal seniority with
respect to credit risk) to the current
dollar amount of all underlying
exposures. The SSFA specification is
completed by the constant term p,
which is set equal to 0.5 for
securitization exposures that are not
resecuritizations, or 1.5 for
resecuritization exposures, and the
variable KA, which is described above.
When 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. When A for a
securitization exposure is greater than
or equal to KA, the risk weight of the
exposure, expressed as a percent, would
equal KSSFA times 1,250. When A is less
than KA and D is greater than KA, the
applicable risk weight is a weighted
average of 1,250 percent and 1,250
percent times KSSFA. As suggested by
commenters, in order to make the
description of the SSFA formula clearer,
the term ‘‘l’’ has been redefined to be the
maximum of 0 and A-KA, instead of the
proposed A-KA. The risk weight would
be determined according to the
following formula:
For resecuritizations, FDIC-supervised
institutions must use the SSFA to
measure the underlying securitization
exposure’s contribution to KG. For
example, consider a hypothetical
securitization tranche that has an
attachment point at 0.06 and a
detachment point at 0.07. Then assume
that 90 percent of the underlying pool
of assets were mortgage loans that
qualified for a 50 percent risk weight
and that the remaining 10 percent of the
pool was a tranche of a separate
securitization (where the underlying
exposures consisted of mortgages that
also qualified for a 50 percent weight).
An exposure to this hypothetical
tranche would meet the definition of a
resecuritization exposure. Next, assume
that the attachment point A of the
underlying securitization that is the 10
percent share of the pool is 0.06 and the
detachment point D is 0.08. Finally,
assume that none of the underlying
mortgage exposures of either the
hypothetical tranche or the underlying
securitization exposure meet the interim
final rule definition of ‘‘delinquent.’’
The value of KG for the
resecuritization exposure equals the
weighted average of the two distinct KG
values. For the mortgages that qualify
for the 50 percent risk weight and
represent 90 percent of the
resecuritization, KG equals 0.04 (that is,
50 percent of the 8 percent risk-based
capital standard). KG,re-securitization = (0.9 ·
0.04) + (0.1 · KG,securitization)
To calculate the value of KG,securitization,
an FDIC-supervised institution would
use the attachment and detachment
points of 0.06 and 0.08, respectively.
Applying those input parameters to the
SSFA (together with p = 0.5 and KG =
0.04) results in a KG,securitization equal to
0.2325.
Substituting this value into the
equation yields:
KG,re-securitization = (0.9 · 0.04) + (0.1 ·
0.2325) = 0.05925
This value of 0.05925 for
KG,re-securitization, would then be used in
the calculation of the risk-based capital
requirement for the tranche of the
resecuritization (where A = 0.06, B =
0.07, and p = 1.5). The result is a risk
weight of 1,172 percent for the tranche
that runs from 0.06 to 0.07. Given that
the attachment point is very close to the
value of KG,re-securitization the capital
charge is nearly equal to the maximum
risk weight of 1,250 percent.
To apply the securitization framework
to a single tranched exposure that has
been re-tranched, such as some ReREMICs, an FDIC-supervised institution
must apply the SSFA or gross-up
approach to the retranched exposure as
if it were still part of the structure of the
original securitization transaction.
Therefore, an FDIC-supervised
institution implementing the SSFA or
the gross-up approach would calculate
parameters for those approaches that
would treat the retranched exposure as
if it were still embedded in the original
structure of the transaction while still
recognizing any added credit
enhancement provided by retranching.
For example, under the SSFA an FDICsupervised institution would calculate
the approach using hypothetical
attachment and detachment points that
reflect the seniority of the retranched
exposure within the original deal
structure, as well as any additional
credit enhancement provided by
retranching of the exposure. Parameters
that depend on pool-level
characteristics, such as the W parameter
under the SSFA, would be calculated
based on the characteristics of the total
underlying exposures of the initial
securitization transaction, not just the
retranched exposure.
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5. Gross-Up Approach
Under the interim final rule,
consistent with the proposal, FDICsupervised institutions that are not
subject to the market risk rule may
assign risk-weighted asset amounts to
securitization exposures by
implementing the gross-up approach
described in section 43 of the interim
final rule, which is similar to an existing
approach provided under the general
risk-based capital rules. If the FDICsupervised institution chooses to apply
the gross-up approach, it is required to
apply this approach to all of its
securitization exposures, except as
otherwise provided for certain
securitization exposures under sections
324.44 and 324.45 of the interim final
rule.
The gross-up approach assigns riskweighted asset amounts based on the
full amount of the credit-enhanced
assets for which the FDIC-supervised
institution directly or indirectly
assumes credit risk. To calculate riskweighted assets under the gross-up
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approach, an FDIC-supervised
institution determines 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 FDIC-supervised
institution’s exposure as a percentage of
the par value of the tranche in which
the securitization exposure resides. The
enhanced amount is the par 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 as calculated under the
standardized approach.
Under the gross-up approach, an
FDIC-supervised institution is required
to calculate the credit equivalent
amount, which equals the sum of (1) the
exposure of the FDIC-supervised
institution’s securitization exposure and
(2) the pro rata share multiplied by the
enhanced amount. To calculate riskweighted assets for a securitization
exposure under the gross-up approach,
an FDIC-supervised institution is
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 is 20 percent.
As discussed above, the FDIC
recognizes that different capital
requirements are likely to result from
the application of the gross-up approach
as compared to the SSFA. However, the
FDIC believes allowing smaller, less
complex FDIC-supervised institutions
not subject to the market risk rule to use
the gross up approach (consistent with
past practice under the existing general
risk-based capital rules) is appropriate
and should reduce operational burden
for many FDIC-supervised institutions.
6. Alternative Treatments for Certain
Types of Securitization Exposures
Under the proposal, a banking
organization generally would assign a
1,250 percent risk weight to any
securitization exposure to which the
banking organization does not apply the
SSFA or the gross-up approach.
However, the proposal provided
alternative treatments for certain types
of securitization exposures described
below, provided that the banking
organization knows the composition of
the underlying exposures at all times.
a. Eligible Asset-Backed Commercial
Paper Liquidity Facilities
Under the interim final rule,
consistent with the proposal and the
Basel capital framework, an FDICsupervised institution is permitted to
determine the risk-weighted asset
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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.
b. A Securitization Exposure in a
Second-Loss Position or Better to an
Asset-Backed Commercial Paper
Program
Under the interim final rule and
consistent with the proposal, an FDICsupervised institution 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, provided the exposure meets
the following criteria:
(1) The exposure is not 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 FDIC-supervised institution
holding the exposure does not retain or
provide protection for the first-loss
position.
The FDIC believes 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. The FDIC is adopting this
aspect of the proposal, without change,
for purposes of the interim final rule.
7. Credit Risk Mitigation for
Securitization Exposures
Under the interim final rule, and
consistent with the proposal, the
treatment of credit risk mitigation for
securitization exposures would differ
slightly from the treatment for other
exposures. To recognize the risk
mitigating effects of financial collateral
or an eligible guarantee or an eligible
credit derivative from an eligible
guarantor, an FDIC-supervised
institution that purchases credit
protection uses the approaches for
collateralized transactions under section
324.37 of the interim final rule or the
substitution treatment for guarantees
and credit derivatives described in
section 3324.6 of the interim final rule.
In cases of maturity or currency
mismatches, or, if applicable, lack of a
restructuring event trigger, the FDICsupervised institution must make any
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applicable adjustments to the protection
amount of an eligible guarantee or credit
derivative as required by section 324.36
for any hedged securitization exposure.
In addition, for synthetic
securitizations, when an eligible
guarantee or eligible credit derivative
covers multiple hedged exposures that
have different residual maturities, the
FDIC-supervised institution is required
to use the longest residual maturity of
any of the hedged exposures as the
residual maturity of all the hedged
exposures. In the interim final rule, the
FDIC is clarifying that an FDICsupervised institution is not required to
compute a counterparty credit risk
capital requirement for the credit
derivative provided that this treatment
is applied consistently for all of its OTC
credit derivatives. However, an FDICsupervised institution must calculate
counterparty credit risk if the OTC
credit derivative is a covered position
under the market risk rule.
Consistent with the proposal, an
FDIC-supervised institution that
purchases an OTC credit derivative
(other than an nth-to-default credit
derivative) that is recognized as a credit
risk mitigant for a securitization
exposure that is not a covered position
under the market risk rule is not
required to compute a separate
counterparty credit risk capital
requirement provided that the FDICsupervised institution does so
consistently for all such credit
derivatives. The FDIC-supervised
institution 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. If an
FDIC-supervised institution cannot, or
chooses not to, recognize a credit
derivative that is a securitization
exposure as a credit risk mitigant, the
FDIC-supervised institution must
determine the exposure amount of the
credit derivative under the treatment for
OTC derivatives in section 34. In the
interim final rule, the FDIC is clarifying
that if the FDIC-supervised institution
purchases the credit protection from a
counterparty that is a securitization, the
FDIC-supervised institution must
determine the risk weight for
counterparty credit risk according to the
securitization framework. If the FDICsupervised institution purchases credit
protection from a counterparty that is
not a securitization, the FDICsupervised institution must determine
the risk weight for counterparty credit
risk according to general risk weights
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under section 32. An FDIC-supervised
institution that provides protection in
the form of a guarantee or credit
derivative (other than an nth-to-default
credit derivative) that covers the full
amount or a pro rata share of a
securitization exposure’s principal and
interest 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.
8. Nth-to-Default Credit Derivatives
Under the interim final rule and
consistent with the proposal, the capital
requirement for credit protection
provided through an nth-to-default
credit derivative is determined either by
using the SSFA, or applying a 1,250
percent risk weight.
An FDIC-supervised institution
providing credit protection must
determine its exposure to an nth-todefault 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 FDICsupervised institution’s exposure to the
total notional amount of all underlying
exposures. In the case of a first-todefault credit derivative, there are no
underlying exposures that are
subordinated to the FDIC-supervised
institution’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
FDIC-supervised institution’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 FDIC-supervised
institution’s exposure to the total
notional amount of the underlying
exposures. An FDIC-supervised
institution that does not use the SSFA
to calculate a risk weight for an nth-todefault credit derivative would assign a
risk weight of 1,250 percent to the
exposure.
For protection purchased through a
first-to-default derivative, an FDICsupervised institution that obtains
credit protection on a group of
underlying exposures through a first-todefault credit derivative that meets the
rules of recognition for guarantees and
credit derivatives under section
324.36(b) of the interim final rule must
determine its risk-based capital
requirement for the underlying
exposures as if the FDIC-supervised
institution synthetically securitized the
underlying exposure with the smallest
risk-weighted asset amount and had
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obtained no credit risk mitigant on the
other underlying exposures. An FDICsupervised institution must calculate a
risk-based capital requirement for
counterparty credit risk according to
section 324.34 of the interim final rule
for a first-to-default credit derivative
that does not meet the rules of
recognition of section 324.36(b).
For second-or-subsequent-to-default
credit derivatives, an FDIC-supervised
institution 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 324.36(b) of the interim final
rule (other than a first-to-default credit
derivative) may recognize the credit risk
mitigation benefits of the derivative
only if the FDIC-supervised institution
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 an FDIC-supervised
institution satisfies these requirements,
the FDIC-supervised institution
determines its risk-based capital
requirement for the underlying
exposures as if the FDIC-supervised
institution had only synthetically
securitized the underlying exposure
with the nth smallest risk-weighted asset
amount and had obtained no credit risk
mitigant on the other underlying
exposures. For a nth-to-default credit
derivative that does not meet the rules
of recognition of section 324.36(b), an
FDIC-supervised institution must
calculate a risk-based capital
requirement for counterparty credit risk
according to the treatment of OTC
derivatives under section 324.34 of the
interim final rule. The FDIC is adopting
this aspect of the proposal without
change for purposes of the interim final
rule.
IX. Equity Exposures
The proposal significantly revised the
general risk-based capital rules’
treatment for equity exposures. To
improve risk sensitivity, the interim
final rule generally follows the same
approach to equity exposures as the
proposal, while providing clarification
on investments in a separate account as
detailed below. In particular, the
interim final rule requires an FDICsupervised institution to apply the
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.
These approaches are discussed in
greater detail below.
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A. Definition of Equity Exposure and
Exposure Measurement
The FDIC is adopting the proposed
definition of equity exposures, without
change, for purposes of the interim final
rule.159 Under the interim final rule, an
FDIC-supervised institution is required
to determine the adjusted carrying value
for each equity exposure based on the
approaches described below. For the onbalance sheet component of an equity
exposure, other than an equity exposure
that is classified as AFS where the
FDIC-supervised institution has made
an AOCI opt-out election under section
324.22(b)(2) of the interim final rule, the
adjusted carrying value is an FDICsupervised institution’s carrying value
of the exposure. For the on-balance
sheet component of an equity exposure
that is classified as AFS where the
FDIC-supervised institution has made
an AOCI opt-out election under section
324.22(b)(2) of the interim final rule, the
adjusted carrying value of the exposure
is the FDIC-supervised institution’s
carrying value of the exposure less any
net gains on the exposure that are
reflected in the carrying value but
excluded from the FDIC-supervised
institution’s regulatory capital
components. For a commitment to
acquire an equity exposure that is
unconditional, the adjusted carrying
value is 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 is 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 is 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 on159 See the definition of ‘‘equity exposure’’ in
section 324.2 of the interim final rule. However, as
described above in section VIII.A of this preamble,
the FDIC has adjusted the definition of ‘‘exposure
amount’’ in line with certain requirements
necessary for FDIC-supervised institutions that
make an AOCI opt-out election.
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balance sheet component of the
exposure.
The FDIC included the concept of the
effective notional principal amount of
the off-balance sheet portion of an
equity exposure to provide a uniform
method for FDIC-supervised institutions
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.
B. Equity Exposure Risk Weights
The proposal set forth a SRWA for
equity exposures, which the FDIC has
adopted without change in the interim
final rule. Therefore, under the interim
final rule, an FDIC-supervised
institution determines 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 section 324.52
of the interim final rule. An FDICsupervised institution determines the
risk-weighted asset amount for an equity
exposure to an investment fund under
section 324.53 of the interim final rule.
An FDIC-supervised institution sums
risk-weighted asset amounts for all of its
equity exposures to calculate its
aggregate risk-weighted asset amount for
its equity exposures.
Some commenters asserted that
mutual banking organizations, which
are more highly exposed to equity
exposures than traditional depository
institutions, should be permitted to
assign a 100 percent risk weight to their
equity exposures rather than the
proposed 300 percent risk weight for
publicly-traded equity exposures or 400
percent risk weight for non-publicly
traded equity exposures. Some
commenters also argued that a banking
organization’s equity investment in a
banker’s bank should get special
treatment, for instance, exemption from
the 400 percent risk weight or deduction
as an investment in the capital of an
unconsolidated financial institution.
The FDIC has decided to retain the
proposed risk weights in the interim
final rule because it does not believe
there is sufficient justification for a
lower risk weight solely based on the
nature of the institution (for example,
mutual banking organization) holding
the exposure. In addition, the FDIC
believes that a 100 percent risk weight
does not reflect the inherent risk for
equity exposures that fall under the
proposed 300 percent and 400 percent
risk-weight categories or that are subject
to deduction as investments in
unconsolidated financial institutions.
The FDIC has agreed to finalize the
SRWA risk weights as proposed, which
are summarized below in Table 24.
TABLE 24—SIMPLE RISK-WEIGHT APPROACH
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 324.32 of the interim final rule.
An equity exposure to a PSE, Federal Home Loan Bank or Farmer Mac.
• Community development equity exposures.160
• 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.
A significant investment in the capital of an unconsolidated financial institution in the form of common stock that is not deducted under section 324.22 of the interim final rule.
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).
An equity exposure that is not publicly-traded (other than an equity exposure that receives a 600 percent risk weight).
An equity exposure to an investment firm that (i) would meet the definition of a traditional securitization were it not for the
FDIC’s application of paragraph (8) of that definition and (ii) has greater than immaterial leverage.
20 ......................
100 ....................
250 ....................
300 ....................
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400 ....................
600 ....................
160 The interim final rule generally defines these
exposures as exposures that 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). Under the proposal, a
savings association’s community development
equity exposure investments was defined to mean
an equity exposure 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
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Consistent with the proposal, the
interim final rule 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
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). The FDIC has determined that a
separate definition for a savings association’s
community development equity exposure is not
necessary and, therefore, the interim final rule
applies one definition of community development
equity exposure to all types of covered FDICsupervised institutions.
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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 refers 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.
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C. Non-Significant Equity Exposures
Under the interim final rule, and as
proposed, an FDIC-supervised
institution may apply a 100 percent risk
weight to certain equity exposures
deemed non-significant. Non-significant
equity exposures means an equity
exposure to the extent that the aggregate
adjusted carrying value of the exposures
does not exceed 10 percent of the FDICsupervised institution’s total capital.161
To compute the aggregate adjusted
carrying value of an FDIC-supervised
institution’s equity exposures for
determining their non-significance, the
FDIC-supervised institution may
exclude (1) equity exposures that
receive less than a 300 percent risk
weight under the SRWA (other than
equity exposures determined to be nonsignificant); (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. If an FDICsupervised institution does not know
the actual holdings of the investment
fund, the FDIC-supervised institution
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 FDIC-supervised institution
must assume that the investment fund
invests to the maximum extent possible
in equity exposures.
To determine which of an FDICsupervised institution’s equity
exposures qualify for a 100 percent risk
weight based on non-significance, the
FDIC-supervised institution first must
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 must
include publicly-traded equity
exposures (including those held
indirectly through investment funds),
and then it must include non-publiclytraded equity exposures (including
those held indirectly through
investment funds).162
161 The definition excludes exposures to an
investment firm that (1) meet the definition of
traditional securitization were it not for the primary
Federal regulator’s application of paragraph (8) of
the definition of a traditional securitization and (2)
has greater than immaterial leverage.
162 See 15 U.S.C. 682.
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One commenter proposed that certain
exposures, including those to smallbusiness investment companies, should
not be subject to the 10 percent capital
limitation for non-significant equity
exposures and should receive a 100
percent risk weight, consistent with the
treatment of community development
investments. The FDIC reflected upon
this comment and determined to retain
the proposed 10 percent limit on an
FDIC-supervised institution’s total
capital in the interim final rule given
the inherent credit and concentration
risks associated with these exposures.
D. Hedged Transactions
Under the proposal, to determine riskweighted assets under the SRWA, a
banking organization could identify
hedge pairs, which 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. A
banking organization would 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. A few
commenters requested that non-publicly
traded equities be recognized in a
hedged transaction under the rule.
Equities that are not publicly traded are
subject to considerable valuation
uncertainty due to a lack of
transparency and are generally far less
liquid than publicly traded equities. The
FDIC has therefore determined that
given the potential increased risk
associated with equities that are not
publicly traded, recognition of these
instruments as hedges under the rule is
not appropriate. One commenter
indicated that the test of hedge
effectiveness used in the calculation of
publicly traded equities should be more
risk sensitive in evaluating all
components of the transaction to better
determine the appropriate risk weight.
The examples the commenter
highlighted indicated dissatisfaction
with the assignment of a 100 percent
risk weight to the effective portion of all
hedge pairs. As described further below,
the proposed rule contained three
methodologies for identifying the
measure of effectiveness of an equity
hedge relationship, methodologies
which recognize less-than-perfect
hedges. The proposal assigns a 100
percent risk weight to the effective
portion of a hedge pair because some
hedge pairs involve residual risks. In
developing the standardized approach
the agencies sought to balance
complexity and risk sensitivity, which
limits the degree of granularity in hedge
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55443
recognition. On balance, the FDIC
believes that it is more reflective of an
FDIC-supervised institutions risk profile
to recognize a broader range of hedge
pairs and assign all hedge pairs a 100
percent risk weight than to recognize
only perfect hedges and assign a lower
risk weight. Accordingly, the FDIC is
finalizing the proposed treatment
without change.
Under the interim final rule, 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 FDICsupervised institution acquires at least
one of the equity exposures); the
documentation specifies the measure of
effectiveness (E) the FDIC-supervised
institution uses for the hedge
relationship throughout the life of the
transaction; and the hedge relationship
has an E greater than or equal to 0.8. An
FDIC-supervised institution measures E
at least quarterly and uses 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 an
FDIC-supervised institution’s exposure
to a particular equity instrument is part
of a hedge pair. For example, assume an
FDIC-supervised institution 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 FDIC-supervised institution treats
$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 is 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 is 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 is 0.8 × $100 = $80, and
the ineffective portion of the hedge pair
is (1¥0.8) × $100 = $20.
E. Measures of Hedge Effectiveness
As stated above, an FDIC-supervised
institution could determine
effectiveness using any one of three
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methods: the dollar-offset method, the
variability-reduction method, or the
regression method. Under the dollaroffset method, an FDIC-supervised
institution determines 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 is ¥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 equals the
absolute value of RVC. If RVC is
negative and less than ¥1, then E
equals 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 timeseries 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 is computed as:
The value of t ranges 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
equals 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. Accordingly, E is higher when
the relationship between the values of
the two exposures is closer.
treatment for these exposures is
commensurate with the risk. Thus, the
risk-based capital requirement for equity
exposures to investment funds that hold
only low-risk assets would be relatively
low, whereas high-risk exposures held
through investment funds would be
subject to a higher capital requirement.
The interim final rule implements these
three approaches as proposed and
clarifies that the risk-weight for any
equity exposure to an investment fund
must be no less than 20 percent.
In addition, the interim final rule
clarifies, generally consistent with prior
agency guidance, that an FDICsupervised institution must treat an
investment in a separate account, such
as bank-owned life insurance, as if it
were an equity exposure to an
investment fund.163 An FDICsupervised institution must use one of
the look-through approaches provided
in section 53 and, if applicable, section
154 of the interim final rule to
determine the risk-weighted asset
amount for such investments. An FDICsupervised institution that purchases
stable value protection on its investment
in a separate account must treat the
portion of the carrying value of its
investment in the separate account
attributable to the stable value
protection as an exposure to the
provider of the protection and the
remaining portion as an equity exposure
to an investment fund. Stable value
protection means a contract where the
provider of the contract pays to the
policy owner of the separate account an
amount equal to the shortfall between
the fair value and cost basis of the
separate account when the policy owner
of the separate account surrenders the
policy. It also includes a contract where
the provider of the contract pays to the
beneficiary an amount equal to the
shortfall between the fair value and
book value of a specified portfolio of
assets.
An FDIC-supervised institution that
provides stable value protection, such as
through a stable value wrap that has
provisions and conditions that
minimize the wrap’s exposure to credit
risk of the underlying assets in the fund,
must treat the exposure as if it were an
equity derivative on an investment fund
and determine the adjusted carrying
value of the exposure as the sum of the
adjusted carrying values of any onbalance sheet asset component
determined according to section
324.51(b)(1), and the off-balance sheet
component determined according to
section 324.51(b)(3). That is, the
adjusted carrying value is 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
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F. 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 lookthrough approach described below. The
proposal included an additional option,
referred to in the NPR as the full lookthrough approach. The agencies
proposed this separate treatment for
equity exposures to an investment fund
to ensure that the regulatory capital
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163 Interagency Statement on the Purchase and
Risk Management of Life Insurance, pp. 19–20,
http://www.federalreserve.gov/boarddocs/srletters/
2004/SR0419a1.pdf.
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same change in fair value (measured in
dollars) given a small change in the
price of the underlying equity
instrument without subtracting the
adjusted carrying value of the onbalance sheet component of the
exposure as calculated under the same
paragraph. Risk-weighted assets for such
an exposure is determined by applying
one of the three look-through
approaches as provided in section
324.53 and, if applicable, section
324.154 of the interim final rule.
As discussed further below, under the
interim final rule, an FDIC-supervised
institution determines the risk-weighted
asset amount for equity exposures to
investment funds using one of three
approaches: the full look-through
approach, the simple modified lookthrough approach, or the alternative
modified look-through approach, unless
the equity exposure to an investment
fund is a community development
equity exposure. The risk-weighted
asset amount for such community
development equity exposures is the
exposure’s adjusted carrying value. If an
FDIC-supervised institution does not
use the full look-through approach, and
an equity exposure to an investment
fund is part of a hedge pair, an FDICsupervised institution must 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 is
equal to its adjusted carrying value. An
FDIC-supervised institution could
choose which approach to apply for
each equity exposure to an investment
fund.
1. Full Look-Through Approach
An FDIC-supervised institution may
use the full look-through approach only
if the FDIC-supervised institution is able
to calculate a risk-weighted asset
amount for each of the exposures held
by the investment fund. Under the
interim final rule, an FDIC-supervised
institution using the full look-through
approach is required to calculate the
risk-weighted asset amount for its
proportionate ownership share of each
of the exposures held by the investment
fund (as calculated under subpart D of
the interim final rule) as if the
proportionate ownership share of the
adjusted carrying value of each
exposures were held directly by the
FDIC-supervised institution. The FDICsupervised institution’s risk-weighted
asset amount for the exposure to the
fund is equal to (1) the aggregate riskweighted asset amount of the exposures
held by the fund as if they were held
directly by the FDIC-supervised
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institution multiplied by (2) the FDICsupervised institution’s proportional
ownership share of the fund.
2. Simple Modified Look-Through
Approach
Under the simple modified lookthrough approach, an FDIC-supervised
institution sets 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 applicable risk
weight under subpart D of the interim
final rule 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 FDICsupervised institution 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.
3. Alternative Modified Look-Through
Approach
Under the alternative modified lookthrough approach, an FDIC-supervised
institution 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 interim final rule 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 FDIC-supervised institution’s equity
exposure to the investment fund is
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 permissible
investments within the fund exceeds
100 percent, the FDIC-supervised
institution 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 subpart D
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
FDIC-supervised institution must use
the highest applicable risk weight. An
FDIC-supervised institution 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.
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Commenters expressed concerns
regarding the application of the lookthrough approaches where an
investment fund holds securitization
exposures. Specifically, the commenters
indicated a banking organization would
be forced to apply a 1,250 percent risk
weight to investment funds that hold
securitization exposures if the banking
organization does not have the
information required to use one of the
two applicable methods under subpart
D to calculate the risk weight applicable
to a securitization exposure: gross-up
treatment or the SSFA. According to the
commenters, such an outcome would be
overly punitive and inconsistent with
the generally diversified composition of
investment funds. The FDIC
acknowledges that an FDIC-supervised
institution may have some difficulty
obtaining all the information needed to
use the gross-up treatment or SSFA, but
believes that the proposed approach
provides strong incentives for FDICsupervised institutions to obtain such
information. As a result, the FDIC is
finalizing the treatment as proposed.
X. Market Discipline and Disclosure
Requirements
A. Proposed Disclosure Requirements
The FDIC has long supported
meaningful public disclosure by FDICsupervised institutions with the
objective of improving market discipline
and encouraging sound riskmanagement practices. 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.164 The BCBS introduced
additional disclosure requirements in
Basel III, which, under the interim final
rule, apply to banking organizations as
discussed herein.165
The agencies received a limited
number of comments on the proposed
disclosure requirements. The
commenters expressed some concern
that the proposed requirements would
be extended to apply to smaller banking
organizations. As discussed further
below, the agencies proposed the
164 The agencies incorporated the BCBS
disclosure requirements into the advanced
approaches rule in 2007. See 72 FR 69288, 69432
(December 7, 2007).
165 In June 2012, the BCBS adopted Pillar 3
disclosure requirements in a paper titled
‘‘Composition of Capital Disclosure Requirements,’’
available at http://www.bis.org/publ/bcbs221.pdf.
The FDIC anticipates incorporating these disclosure
requirements through a separate notice and
comment period.
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disclosure requirements for banking
organizations with $50 billion or more
in assets and believe they are most
appropriate for these companies. The
FDIC believes that the proposed
disclosure requirements strike the
appropriate balance between the market
benefits of disclosure and the additional
burden to an FDIC-supervised
institution that provides the disclosures,
and therefore has adopted the
requirements as proposed, with minor
clarification with regard to timing of
disclosures as discussed further below.
The public disclosure requirements
under section 62 of the interim final
rule apply only to FDIC-supervised
institutions with total consolidated
assets of $50 billion or more that are not
a consolidated subsidiary of a BHC,
covered SLHC, or depository institution
that is subject to these disclosure
requirements or a subsidiary of a nonU.S. FDIC-supervised institution that is
subject to comparable public disclosure
requirements in its home jurisdiction or
an advanced approaches FDICsupervised institution making public
disclosures pursuant to section 172 of
the interim final rule. An advanced
approaches FDIC-supervised institution
that meets the $50 billion asset
threshold, but that has not received
approval from the FDIC to exit parallel
run, must make the disclosures
described in sections 324.62 and 324.63
of the interim final rule. The FDIC notes
that the asset threshold of $50 billion is
consistent with the threshold
established by section 165 of the DoddFrank Act relating to enhanced
supervision and prudential standards
for certain FDIC-supervised
institutions.166 An FDIC-supervised
institution may be able to fulfill some of
the disclosure requirements by relying
on similar disclosures made in
accordance with federal securities law
requirements. In addition, an FDICsupervised institution may use
information provided in regulatory
reports to fulfill certain disclosure
requirements. In these situations, an
FDIC-supervised institution is required
to explain any material differences
between the accounting or other
disclosures and the disclosures required
under the interim final rule.
An FDIC-supervised institution’s
exposure to risks and the techniques
that it uses to identify, measure,
166 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).
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monitor, and control those risks are
important factors that market
participants consider in their
assessment of the FDIC-supervised
institution. Accordingly, an FDICsupervised institution must have a
formal disclosure policy approved by its
board of directors that addresses the
FDIC-supervised institution’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 should 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 FDIC-supervised institution must
attest that the disclosures meet the
requirements of this interim final rule.
An FDIC-supervised institution must
decide the relevant disclosures based on
a materiality concept. Information is
regarded as material for purposes of the
disclosure requirements in the interim
final rule if the information’s 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 FDIC’s
longstanding requirements for robust
quarterly disclosures in regulatory
reports, and considering the potential
for rapid changes in risk profiles, the
interim final rule requires that an FDICsupervised institution provide timely
public disclosures after each calendar
quarter. However, qualitative
disclosures that provide a general
summary of an FDIC-supervised
institution’s risk-management objectives
and policies, reporting system, and
definitions may be disclosed annually
after the end of the fourth calendar
quarter, provided any significant
changes are disclosed in the interim.
The FDIC acknowledges 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
FDIC considers those disclosures that
are made within 45 days of the end of
the calendar quarter (or within 60 days
for the limited purpose of the FDICsupervised institution’s first reporting
period in which it is subject to the rule’s
disclosure requirements) as timely. In
general, where an FDIC-supervised
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institution’s fiscal year-end coincides
with the end of a calendar quarter, the
FDIC considers qualitative and
quantitative 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 FDIC
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 FDICsupervised institution’s capital
adequacy and risk profile. In those
cases, an FDIC-supervised institution
needs to disclose the general nature of
these changes and briefly describe how
they are likely to affect public
disclosures going forward. An FDICsupervised institution should 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 under the
interim final rule must 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 FDIC-supervised
institution became subject to the
disclosure requirements. For example,
an FDIC-supervised institution that
begins to make public disclosures in the
first quarter of 2015 must make all of its
required disclosures publicly available
until the first quarter of 2018, after
which it must make its required
disclosures for the previous three years
publicly available. Except as discussed
below, management has some discretion
to determine the appropriate medium
and location of the disclosure.
Furthermore, an FDIC-supervised
institution has flexibility in formatting
its public disclosures.
The FDIC encourages management to
provide all of the required disclosures
in one place on the entity’s public Web
site and the FDIC anticipates that the
public Web site address would be
reported in an FDIC-supervised
institution’s regulatory report. However,
an FDIC-supervised institution may
provide the disclosures in more than
one public financial report or other
regulatory reports (for example, in
Management’s Discussion and Analysis
included in SEC filings), provided that
the FDIC-supervised institution publicly
provides a summary table specifically
indicating the location(s) of all such
disclosures (for example, regulatory
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report schedules, page numbers in
annual reports). The FDIC expects that
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.
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D. Proprietary and Confidential
Information
The FDIC believes that the disclosure
requirements strike an appropriate
balance between the need for
meaningful disclosure and the
protection of proprietary and
confidential information.167
Accordingly, the FDIC believes that
FDIC-supervised institutions 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 interim final rule compel an FDICsupervised institution to reveal
confidential and proprietary
information. In these unusual situations,
if an FDIC-supervised institution
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
FDIC-supervised institution will not be
required to disclose those specific items
under the rule’s periodic disclosure
requirement. Instead, the FDICsupervised institution 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 applies only to those
disclosures included in this interim
final rule and does not apply to
disclosure requirements imposed by
accounting standards, other regulatory
agencies, or under other requirements of
the FDIC.
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 FDIC notes that the
substantive content of the tables is the
focus of the disclosure requirements,
167 Proprietary information encompasses
information that, if shared with competitors, would
render an FDIC-supervised institution’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.
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not the tables themselves. The table
numbers below refer to the table
numbers in section 63 of the interim
final rule. An FDIC-supervised
institution must make the disclosures
described in Tables 1 through 10.168
Table 1 disclosures, ‘‘Scope of
Application,’’ name the top corporate
entity in the group to which subpart D
of the interim final rule applies and
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 2 disclosures, ‘‘Capital
Structure,’’ provide summary
information on the terms and conditions
of the main features of regulatory capital
instruments, which allow for an
evaluation of the quality of the capital
available to absorb losses within an
FDIC-supervised institution. An FDICsupervised institution also must
disclose the total amount of common
equity tier 1, tier 1 and total capital,
with separate disclosures for deductions
and adjustments to capital. The FDIC
expects that many of these disclosure
requirements would be captured in
revised regulatory reports.
Table 3 disclosures, ‘‘Capital
Adequacy,’’ provide information on an
FDIC-supervised institution’s approach
for categorizing and risk weighting its
exposures, as well as the amount of total
risk-weighted assets. The Table also
includes 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 4 disclosures, ‘‘Capital
Conservation Buffer,’’ require an FDICsupervised institution to disclose the
capital conservation buffer, the eligible
retained income and any limitations on
capital distributions and certain
discretionary bonus payments, as
applicable.
Disclosures in Tables 5, ‘‘Credit Risk:
General Disclosures,’’ 6, ‘‘General
Disclosure for Counterparty Credit RiskRelated Exposures,’’ and 7, ‘‘Credit Risk
Mitigation,’’ relate to credit risk,
counterparty credit risk and credit risk
mitigation, respectively, and provide
market participants with insight into
different types and concentrations of
credit risk to which an FDIC-supervised
168 Other public disclosure requirements would
continue to apply, such as federal securities law,
and regulatory reporting requirements for FDICsupervised institutions.
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institution 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 FDIC-supervised
institution without revealing proprietary
information.
Table 8 disclosures, ‘‘Securitization,’’
provide information to market
participants on the amount of credit risk
transferred and retained by an FDICsupervised institution 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 provide a better
understanding of how securitization
transactions impact the credit risk of an
FDIC-supervised institution. For
purposes of these disclosures,
‘‘exposures securitized’’ include
underlying exposures transferred into a
securitization by an FDIC-supervised
institution, whether originated by the
FDIC-supervised institution or
purchased from third parties, and thirdparty exposures included in sponsored
programs. Securitization transactions in
which the originating FDIC-supervised
institution does not retain any
securitization exposure are shown
separately and are only reported for the
year of inception of the transaction.
Table 9 disclosures, ‘‘Equities Not
Subject to Subpart F of this Part,’’
provide market participants with an
understanding of the types of equity
securities held by the FDIC-supervised
institution and how they are valued.
These disclosures also provide
information on the capital allocated to
different equity products and the
amount of unrealized gains and losses.
Table 10 disclosures, ‘‘Interest Rate
Risk for Non-trading Activities,’’ require
an FDIC-supervised institution to
provide certain quantitative and
qualitative disclosures regarding the
FDIC-supervised institution’s
management of interest rate risks.
XI. Risk-Weighted Assets—
Modifications to the Advanced
Approaches
In the Advanced Approaches NPR,
the agencies proposed revisions to the
advanced approaches rule to
incorporate certain aspects of Basel III,
as well as the requirements introduced
by the BCBS in the 2009
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Enhancements 169 and subsequent
consultative papers. In accordance with
Basel III, the proposal sought to require
advanced approaches banking
organizations to hold more appropriate
levels of capital for counterparty credit
risk, CVA, and wrong-way risk.
Consistent with the 2009
Enhancements, the agencies proposed to
strengthen the risk-based capital
requirements for certain securitization
exposures by requiring banking
organizations that are subject to the
advanced approaches rule to conduct
more rigorous credit analysis of
securitization exposures and to enhance
the disclosure requirements related to
those exposures.
The agencies also proposed revisions
to the advanced approaches rule that are
consistent with the requirements of
section 939A of the Dodd-Frank Act.170
The agencies proposed to remove
references to ratings from certain
defined terms under the advanced
approaches rule, as well as the ratingsbased approach for securitization
exposures, and replace these provisions
with alternative standards of
creditworthiness. The proposed rule
also contained a number of proposed
technical amendments to clarify or
adjust existing requirements under the
advanced approaches rule.
This section of the preamble describes
the proposals in the Advanced
Approaches NPR, comments received
on those proposals, and the revisions to
the advanced approaches rule reflected
in the interim final rule.
In many cases, the comments received
on the Standardized Approach NPR
were also relevant to the proposed
changes to the advanced approaches
framework. The FDIC generally took a
consistent approach towards addressing
the comments with respect to the
standardized approach and the
advanced approaches rule. Banking
organizations that are or would be
subject to the advanced approaches rule
should refer to the relevant sections of
the discussion of the standardized
approach for further discussion of these
comments.
One commenter raised concerns about
the use of models in determining
regulatory capital requirements and
encouraged the agencies to conduct
periodic validation of banking
organizations’ models for capital
adequacy and require modification if
necessary. Consistent with the current
advanced approaches rule, the interim
final rule requires an FDIC-supervised
institution to validate its models used to
determine regulatory capital
requirements on an ongoing basis. This
validation must include an evaluation of
conceptual soundness; an ongoing
monitoring process that includes
verification of processes and
benchmarking; and an outcomes
analysis process that includes
backtesting. Under section 324.123 of
the interim final rule, the FDIC may
require the FDIC-supervised institution
to calculate its advanced approaches
risk-weighted assets according to
modifications provided by the FDIC if
the FDIC determines that the FDICsupervised institution’s advanced
approaches total risk-weighted assets
are not commensurate with its credit,
market, operational or other risks.
Other commenters suggested that the
agencies interpret section 171 of the
Dodd-Frank Act narrowly with regard to
the advanced approaches framework.
The FDIC has adopted the approach
taken in the proposed rule because it
believes that the approach provides
clear, consistent minimum requirements
across institutions that comply with the
requirements of section 171.
169 See ‘‘Enhancements to the Basel II framework’’
(July 2009), available at http://www.bis.org/publ/
bcbs157.htm.
170 See section 939A of Dodd-Frank Act (15
U.S.C. 78o–7 note).
The EAD adjustment approach under
section 132 of the proposed rules
permitted a banking organization to
recognize the credit risk mitigation
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A. Counterparty Credit Risk
The recent financial crisis highlighted
certain aspects of the treatment of
counterparty credit risk under the Basel
II framework that were inadequate, and
of banking organizations’ risk
management of counterparty credit risk
that were insufficient. The Basel III
revisions were intended to address both
areas of weakness by ensuring that all
material on- and off-balance sheet
counterparty risks, including those
associated with derivative-related
exposures, are appropriately
incorporated into banking organizations’
risk-based capital ratios. In addition,
new risk-management requirements in
Basel III strengthen the oversight of
counterparty credit risk exposures. The
proposed rule included counterparty
credit risk revisions in a manner
generally consistent with the Basel III
revisions to international standards,
modified to incorporate alternative
standards to the use of credit ratings.
The discussion below highlights the
proposed revisions, industry comments,
and outcome of the interim final rule.
1. Recognition of Financial Collateral
a. Financial Collateral
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benefits of financial collateral by
adjusting the EAD rather than the loss
given default (LGD) of the exposure for
repo-style transactions, eligible margin
loans and OTC derivative contracts. The
permitted methodologies for recognizing
such benefits included the collateral
haircut approach, simple VaR approach
and the IMM.
Consistent with Basel III, the
Advanced Approaches NPR proposed
certain modifications to the definition of
financial collateral. For example, the
definition of financial collateral was
modified so that resecuritizations would
no longer qualify as financial
collateral.171 Thus, resecuritization
collateral could not be used to adjust the
EAD of an exposure. The FDIC believes
that this treatment is appropriate
because resecuritizations have been
shown to have more market value
volatility than other types of financial
collateral.
The proposed rule also removed
conforming residential mortgages from
the definition of financial collateral. As
a result, a banking organization would
no longer be able to recognize the credit
risk mitigation benefit of such
instruments through an adjustment to
EAD. Consistent with the Basel III
framework, the agencies proposed to
exclude all debt securities that are not
investment grade from the definition of
financial collateral. As discussed in
section VII.F of this preamble, the
proposed rule revised the definition of
‘‘investment grade’’ for the advanced
approaches rule and proposed
conforming changes to the market risk
rule.
As discussed in section VIII.F of the
preamble, the FDIC believes that the
additional collateral types suggested by
commenters are not appropriate forms
of financial collateral because they
exhibit increased variation and credit
risk, and are relatively more speculative
than the recognized forms of financial
collateral under the proposal. In some
cases, the assets suggested by
commenters for eligibility as financial
collateral were precisely the types of
assets that became illiquid during the
recent financial crisis. As a result, the
FDIC has retained the definition of
financial collateral as proposed.
171 Under the proposed rule, a securitization in
which one or more of the underlying exposures is
a securitization position would be a
resecuritization. A resecuritization position under
the proposal meant an on- or off-balance sheet
exposure to a resecuritization, or an exposure that
directly or indirectly references a securitization
exposure.
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b. Revised Supervisory Haircuts
Securitization exposures have
increased levels of volatility relative to
other types of financial collateral. To
address this issue, consistent with Basel
III, the proposal incorporated new
standardized supervisory haircuts for
securitization exposures in the EAD
adjustment approach based on the credit
quality of the exposure. Consistent with
section 939A of the Dodd-Frank Act, the
proposed rule set out an alternative
approach to assigning standard
supervisory haircuts for securitization
exposures, and amended the standard
supervisory haircuts for other types of
financial collateral to remove the
references to credit ratings.
Some commenters proposed limiting
the maximum haircut for non-sovereign
issuers that receive a 100 percent risk
weight to 12 percent, and more
specifically assigning a lower haircut
than 25 percent for financial collateral
in the form of an investment-grade
corporate debt security that has a
shorter residual maturity. The
commenters asserted that these haircuts
conservatively correspond to the
existing rating categories and result in
greater alignment with the Basel
framework. As discussed in section
VIII.F of the preamble, in the interim
final rule, the FDIC has revised the
standard supervisory market price
volatility haircuts for financial collateral
issued by non-sovereign issuers with a
risk weight of 100 percent from 25.0
percent to 4.0 percent for maturities of
less than one year, 8.0 percent for
maturities greater than one year but less
than or equal to five years, and 16.0
percent for maturities greater than five
years, consistent with Table 25 below.
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The FDIC believes that the revised
haircuts better reflect the collateral’s
credit quality and an appropriate
differentiation based on the collateral’s
residual maturity.
Consistent with the proposal, under
the interim final rule, supervisory
haircuts for exposures to sovereigns,
GSEs, public sector entities, depository
institutions, foreign banks, credit
unions, and corporate issuers are
calculated based upon the risk weights
for such exposures described under
section 324.32 of the interim final rule.
The interim final rule also clarifies that
if an FDIC-supervised institution lends
instruments that do not meet the
definition of financial collateral, such as
non-investment-grade corporate debt
securities or resecuritization exposures,
the haircut applied to the exposure must
be 25 percent.
TABLE 25—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1
Haircut (in percent) assigned based on:
Sovereign issuers risk weight under section
32 2
(in percent)
Residual maturity
Zero
Less than or equal to 1 year .....
Greater than 1 year and less
than or equal to 5 years .........
Greater than 5 years ..................
1 The
20 or 50
100
Non-sovereign issuers risk weight under section 32
(in percent)
20
50
Investmentgrade
securitization
exposures
(in percent)
100
0.5
1.0
15.0
1.0
2.0
4.0
4.0
2.0
4.0
3.0
6.0
15.0
15.0
4.0
8.0
6.0
12.0
8.0
16.0
12.0
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
Other exposure types
25.0
market price volatility haircuts in Table 25 are based on a 10 business-day holding period.
a foreign PSE that receives a zero percent risk weight.
emcdonald on DSK67QTVN1PROD with RULES2
2 Includes
2. Holding Periods and the Margin
Period of Risk
As noted in the proposal, during the
recent financial crisis, many financial
institutions experienced significant
delays in settling or closing out
collateralized transactions, such as repostyle transactions and collateralized
OTC derivative contracts. The assumed
holding period for collateral in the
collateral haircut and simple VaR
approaches and the margin period of
risk in the IMM proved to be inadequate
for certain transactions and netting
sets.172 It also did not reflect the
172 Under the advanced approaches rule, the
margin period of risk means, with respect to a
netting set subject to a collateral agreement, the
time period from the most recent exchange of
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difficulties and delays experienced by
institutions when settling or liquidating
collateral during a period of financial
stress.
Consistent with Basel III, the
proposed rule would have amended the
advanced approaches rule to
incorporate adjustments to the holding
period in the collateral haircut and
simple VaR approaches, and to the
margin period of risk in the IMM that a
banking organization may use to
collateral with a counterparty until the next
required exchange of collateral plus the period of
time required to sell and realize the proceeds of the
least liquid collateral that can be delivered under
the terms of the collateral agreement and, where
applicable, the period of time required to re-hedge
the resulting market risk, upon the default of the
counterparty.
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determine its capital requirement for
repo-style transactions, OTC derivative
transactions, and eligible margin loans,
with respect to large netting sets, netting
sets involving illiquid collateral or
including OTC derivatives that could
not easily be replaced, or two margin
disputes within a netting set over the
previous two quarters that last for a
certain length of time. For cleared
transactions, which are discussed
below, the agencies proposed not to
require a banking organization to adjust
the holding period or margin period of
risk upward when determining the
capital requirement for its counterparty
credit risk exposures to the CCP, which
is also consistent with Basel III.
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One commenter asserted that the
proposed triggers for the increased
margin period of risk were not in the
spirit of the advanced approaches rule,
which is intended to be more risk
sensitive than the general risk-based
capital rules. Another commenter
asserted that banking organizations
should be permitted to increase the
holding period or margin period of risk
by one or more business days, but not
be required to increase it to the full
period required under the proposal (20
business days or at least double the
margin period of risk).
The FDIC believes the triggers set
forth in the proposed rule, as well as the
increased holding period or margin
period of risk are empirical indicators of
increased risk of delay or failure of
close-out on the default of a
counterparty. The goal of risk sensitivity
would suggest that modifying these
indicators is not warranted and could
lead to increased risks to the banking
system. Accordingly, the interim final
rule adopts these features as proposed.
emcdonald on DSK67QTVN1PROD with RULES2
3. Internal Models Methodology
Consistent with Basel III, the
proposed rule would have amended the
advanced approaches rule so that the
capital requirement for IMM exposures
is equal to the larger of the capital
requirement for those exposures
calculated using data from the most
recent three-year period and data from
a three-year period that contains a
period of stress reflected in the credit
default spreads of the banking
organization’s counterparties. The
proposed rule defined an IMM exposure
as a repo-style transaction, eligible
margin loan, or OTC derivative contract
for which a banking organization
calculates EAD using the IMM.
The proposed rule would have
required a banking organization to
demonstrate to the satisfaction of the
banking organization’s primary Federal
supervisor at least quarterly that the
stress period it uses for the IMM
coincides with increased CDS or other
credit spreads of its counterparties and
to have procedures in place to evaluate
the effectiveness of its stress calibration.
These procedures would have been
required to include a process for using
benchmark portfolios that are
vulnerable to the same risk factors as the
banking organization’s portfolio. In
addition, under the proposal, the
primary Federal supervisor could
require a banking organization to
modify its stress calibration if the
primary Federal supervisor believes that
another calibration better reflects the
actual historic losses of the portfolio.
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Consistent with Basel III and the
current advanced approaches rule, the
proposed rule would have required a
banking organization to establish a
process for initial validation and annual
review of its internal models. As part of
the process, the proposed rule would
have required a banking organization to
have a backtesting program for its model
that includes a process by which
unacceptable model performance is
identified and remedied. In addition, a
banking organization would have been
required to multiply the expected
positive exposure (EPE) of a netting set
by the default scaling factor alpha (set
equal to 1.4) in calculating EAD. The
primary Federal supervisor could
require the banking organization to set
a higher default scaling factor based on
the past performance of the banking
organization’s internal model.
The proposed rule would have
required a banking organization to have
policies for the measurement,
management, and control of collateral,
including the reuse of collateral and
margin amounts, as a condition of using
the IMM. Under the proposal, a banking
organization would have been required
to have a comprehensive stress testing
program for the IMM that captures all
credit exposures to counterparties and
incorporates stress testing of principal
market risk factors and the
creditworthiness of its counterparties.
Basel III provided that a banking
organization could capture within its
internal model the effect on EAD of a
collateral agreement that requires
receipt of collateral when the exposure
to the counterparty increases. Basel II
also contained a ‘‘shortcut’’ method to
provide a banking organization whose
internal model did not capture the
effects of collateral agreements with a
method to recognize some benefit from
the collateral agreement. Basel III
modifies the ‘‘shortcut’’ method for
capturing the effects of collateral
agreements by setting effective EPE to a
counterparty as the lesser of the
following two exposure calculations: (1)
The exposure without any held or
posted margining collateral, plus any
collateral posted to the counterparty
independent of the daily valuation and
margining process or current exposure,
or (2) an add-on that reflects the
potential increase of exposure over the
margin period of risk plus the larger of
(i) the current exposure of the netting
set reflecting all collateral received or
posted by the banking organization
excluding any collateral called or in
dispute; or (ii) the largest net exposure
(including all collateral held or posted
under the margin agreement) that would
not trigger a collateral call. The add-on
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would be computed as the largest
expected increase in the netting set’s
exposure over any margin period of risk
in the next year. The proposed rule
included the Basel III modification of
the ‘‘shortcut’’ method.
The interim final rule adopts all the
proposed requirements discussed above
with two modifications. With respect to
the proposed requirement that an FDICsupervised institution must demonstrate
on a quarterly basis to the FDIC the
appropriateness of its stress period,
under the interim final rule, the FDICsupervised institution must instead
demonstrate at least quarterly that the
stress period coincides with increased
CDS or other credit spreads of the FDICsupervised institution’s counterparties,
and must maintain documentation of
such demonstration. In addition, the
formula for the ‘‘shortcut’’ method has
been modified to clarify that the add-on
is computed as the expected increase in
the netting set’s exposure over the
margin period of risk.
a. Recognition of Wrong-Way Risk
The recent financial crisis highlighted
the interconnectedness of large financial
institutions through an array of complex
transactions. In recognition of this
interconnectedness and to mitigate the
risk of contagion from the banking
sector to the broader financial system
and the general economy, Basel III
includes enhanced requirements for the
recognition and treatment of wrong-way
risk in the IMM. The proposed rule
defined wrong-way risk as the risk that
arises when an exposure to a particular
counterparty is positively correlated
with the probability of default of that
counterparty.
The proposed rule provided
enhancements to the advanced
approaches rule that require banking
organizations’ risk-management
procedures to identify, monitor, and
control wrong-way risk throughout the
life of an exposure. The proposed rule
required these risk-management
procedures to include the use of stress
testing and scenario analysis. In
addition, where a banking organization
has identified an IMM exposure with
specific wrong-way risk, the banking
organization would be required to treat
that transaction as its own netting set.
The proposed rule defined specific
wrong-way risk as a type of wrong-way
risk that arises when either the
counterparty and issuer of the collateral
supporting the transaction, or the
counterparty and the reference asset of
the transaction, are affiliates or are the
same entity.
In addition, under the proposal,
where a banking organization has
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identified an OTC derivative
transaction, repo-style transaction, or
eligible margin loan with specific
wrong-way risk for which the banking
organization otherwise applies the IMM,
the banking organization would set the
probability of default (PD) of the
counterparty and a LGD equal to 100
percent. The banking organization
would then enter these parameters into
the appropriate risk-based capital
formula specified in Table 1 of section
131 of the proposed rule, and multiply
the output of the formula (K) by an
alternative EAD based on the
transaction type, as follows:
(1) For a purchased credit derivative,
EAD would be the fair value of the
underlying reference asset of the credit
derivative contract;
(2) For an OTC equity derivative,173
EAD would be the maximum amount
that the banking organization could lose
if the fair value of the underlying
reference asset decreased to zero;
(3) For an OTC bond derivative (that
is, a bond option, bond future, or any
other instrument linked to a bond that
gives rise to similar counterparty credit
risks), EAD would be the smaller of the
notional amount of the underlying
reference asset and the maximum
amount that the banking organization
could lose if the fair value of the
underlying reference asset decreased to
zero; and
(4) For repo-style transactions and
eligible margin loans, EAD would be
calculated using the formula in the
collateral haircut approach of section
132 of the interim final rule and with
the estimated value of the collateral
substituted for the parameter C in the
equation.
The interim final rule adopts the
proposed requirements regarding
wrong-way risk discussed above.
emcdonald on DSK67QTVN1PROD with RULES2
b. Increased Asset Value Correlation
Factor
To recognize the correlation of
financial institutions’ creditworthiness
attributable to similar sensitivities to
common risk factors, the agencies
proposed to incorporate the Basel III
increase in the correlation factor used in
the formulas provided in Table 1 of
section 131 of the proposed rule for
certain wholesale exposures. Under the
proposed rule, banking organizations
would apply a multiplier of 1.25 to the
correlation factor for wholesale
exposures to unregulated financial
institutions that generate a majority of
173 Under the interim final rule, equity derivatives
that are call options are not subject to a
counterparty credit risk capital requirement for
specific wrong-way risk.
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their revenue from financial activities,
regardless of asset size. This category
would include highly leveraged entities,
such as hedge funds and financial
guarantors. The proposal also included
a definition of ‘‘regulated financial
institution,’’ meaning a financial
institution subject to consolidated
supervision and regulation comparable
to that imposed on certain U.S. financial
institutions, namely depository
institutions, depository institution
holding companies, nonbank financial
companies supervised by the Federal
Reserve, designated FMUs, securities
broker-dealers, credit unions, or
insurance companies. Banking
organizations would apply a multiplier
of 1.25 to the correlation factor for
wholesale exposures to regulated
financial institutions with consolidated
assets of greater than or equal to $100
billion.
Several commenters pointed out that
in the proposed formulas for wholesale
exposures to unregulated and regulated
financial institutions, the 0.18
multiplier should be revised to 0.12 in
order to be consistent with Basel III. The
FDIC has corrected this aspect of both
formulas in the interim final rule.
Another comment asserted that the
1.25 multiplier for the correlation factor
for wholesale exposures to unregulated
financial institutions or regulated
financial institutions with more than
$100 billion in assets is an overly blunt
tool and is not necessary as single
counterparty credit limits already
address interconnectivity risk.
Consistent with the concerns about
systemic risk and interconnectedness
surrounding these classes of
institutions, the FDIC continues to
believe that the 1.25 multiplier
appropriately reflects the associated
additional risk. Therefore, the interim
final rule retains the 1.25 multiplier. In
addition, the interim final rule also
adopts the definition of ‘‘regulated
financial institution’’ without change
from the proposal. As discussed in
section V.B, above, the FDIC received
significant comment on the definition of
‘‘financial institution’’ in the context of
deductions of investments in the capital
of unconsolidated financial institutions.
That definition also, under the proposal,
defined the universe of ‘‘unregulated’’
financial institutions as companies
meeting the definition of ‘‘financial
institution’’ that were not regulated
financial institutions. For the reasons
discussed in section V.B of the
preamble, the FDIC has modified the
definition of ‘‘financial institution,’’
including by introducing an ownership
interest threshold to the ‘‘predominantly
engaged’’ test to determine if an FDIC-
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55451
supervised institution must subject a
particular unconsolidated investment in
a company that may be a financial
institution to the relevant deduction
thresholds under subpart C of the
interim final rule. While commenters
stated that it would be burdensome to
determine whether an entity falls within
the definition of financial institution
using the predominantly engaged test,
the FDIC believes that advanced
approaches FDIC-supervised
institutions should have the systems
and resources to identify the activities
of their wholesale counterparties.
Accordingly, under the interim final
rule, the FDIC has adopted a definition
of ‘‘unregulated financial institution’’
that does not include the ownership
interest threshold test but otherwise
incorporates revisions to the definition
of ‘‘financial institution.’’ Under the
interim final rule, an ‘‘unregulated
financial institution’’ is a financial
institution that is not a regulated
financial institution and that meets the
definition of ‘‘financial institution’’
under the interim final rule without
regard to the ownership interest
thresholds set forth in paragraph (4)(i) of
that definition. The FDIC believes the
‘‘unregulated financial institution’’
definition is necessary to maintain an
appropriate scope for the 1.25 multiplier
consistent with the proposal and Basel
III.
4. Credit Valuation Adjustments
After the recent financial crisis, the
BCBS reviewed the treatment of
counterparty credit risk and found that
roughly two-thirds of counterparty
credit risk losses during the crisis were
due to fair value losses from CVA (that
is, the fair value adjustment to reflect
counterparty credit risk in the valuation
of an OTC derivative contract), whereas
one-third of counterparty credit risk
losses resulted from actual defaults. The
internal ratings-based approach in Basel
II addressed counterparty credit risk as
a combination of default risk and credit
migration risk. Credit migration risk
accounts for fair value losses resulting
from deterioration of counterparties’
credit quality short of default and is
addressed in Basel II via the maturity
adjustment multiplier. However, the
maturity adjustment multiplier in Basel
II was calibrated for loan portfolios and
may not be suitable for addressing CVA
risk. Basel III therefore includes an
explicit capital requirement for CVA
risk. Accordingly, consistent with Basel
III and the proposal, the interim final
rule requires FDIC-supervised
institutions to calculate risk-weighted
assets for CVA risk.
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Consistent with the Basel III CVA
capital requirement and the proposal,
the interim final rule reflects in riskweighted assets a potential increase of
the firm-wide CVA due to changes in
counterparties’ credit spreads, assuming
fixed expected exposure (EE) profiles.
The proposed and interim final rules
provide two approaches for calculating
the CVA capital requirement: the simple
approach and the advanced CVA
approach. However, unlike Basel III,
they do not include references to credit
ratings.
Consistent with the proposal and
Basel III, the simple CVA approach in
the interim final rule permits
calculation of the CVA capital
requirement (KCVA) based on a formula
described in more detail below, with a
modification consistent with section
939A of the Dodd-Frank Act. Under the
advanced CVA approach in the interim
final rule, consistent with the proposal,
an FDIC-supervised institution would
use the VaR model that it uses to
calculate specific risk under section
324.207(b) of subpart F or another
model that meets the quantitative
requirements of sections 324.205(b) and
324.207(b)(1) of subpart F to calculate
its CVA capital requirement for its
entire portfolio of OTC derivatives that
are subject to the CVA capital
requirement 174 by modeling the impact
of changes in the counterparties’ credit
spreads, together with any recognized
CVA hedges on the CVA for the
counterparties. To convert the CVA
capital requirement to a risk-weighted
asset amount, an FDIC-supervised
institution must multiply its CVA
capital requirement by 12.5. The CVA
risk-weighted asset amount is not a
component of credit risk-weighted
assets and therefore is not subject to the
1.06 multiplier for credit risk-weighted
assets under the interim final rule.
Consistent with the proposal, the
interim final rule provides that only an
FDIC-supervised institution that is
subject to the market risk rule and had
obtained prior approval from the FDIC
to calculate (1) the EAD for OTC
derivative contracts using the IMM
described in section 324.132, and (2) the
specific risk add-on for debt positions
using a specific risk model described in
section 324.207(b) of subpart F is
eligible to use the advanced CVA
approach. An FDIC-supervised
174 Certain CDS may be exempt from inclusion in
the portfolio of OTC derivatives that are subject to
the CVA capital requirement. For example, a CDS
on a loan that is recognized as a credit risk mitigant
and receives substitution treatment under section
134 would not be included in the portfolio of OTC
derivatives that are subject to the CVA capital
requirement.
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institution that receives such approval
would be able to continue to use the
advanced CVA approach until it notifies
the FDIC in writing that it expects to
begin calculating its CVA capital
requirement using the simple CVA
approach. Such notice must include an
explanation from the FDIC-supervised
institution as to why it is choosing to
use the simple CVA approach and the
date when the FDIC-supervised
institution would begin to calculate its
CVA capital requirement using the
simple CVA approach.
Consistent with the proposal, under
the interim final rule, when calculating
a CVA capital requirement, an FDICsupervised institution may recognize
the hedging benefits of single name
CDS, single name contingent CDS, any
other equivalent hedging instrument
that references the counterparty
directly, and index CDS (CDSind),
provided that the equivalent hedging
instrument is managed as a CVA hedge
in accordance with the FDIC-supervised
institution’s hedging policies. A
tranched or nth-to-default CDS would
not qualify as a CVA hedge. In addition,
any position that is recognized as a CVA
hedge would not be a covered position
under the market risk rule, except in the
case where the FDIC-supervised
institution is using the advanced CVA
approach, the hedge is a CDSind, and the
VaR model does not capture the basis
between the spreads of the index that is
used as the hedging instrument and the
hedged counterparty exposure over
various time periods, as discussed in
further detail below. The agencies
received several comments on the
proposed CVA capital requirement. One
commenter asserted that there was
ambiguity in the ‘‘total CVA riskweighted assets’’ definition which could
be read as indicating that KCVA is
calculated for each counterparty and
then summed. The FDIC agrees that
KCVA relates to an FDIC-supervised
institution’s entire portfolio of OTC
derivatives contracts, and the interim
final rule reflects this clarification.
A commenter asserted that the
proposed CVA treatment should not
apply to central banks, MDBs and other
similar counterparties that have very
low credit risk, such as the Bank for
International Settlements and the
European Central Bank, as well as U.S.
PSEs. Another commenter pointed out
that the proposal in the European Union
to implement Basel III excludes
sovereign, pension fund, and corporate
counterparties from the proposed CVA
treatment. Another commenter argued
that the proposed CVA treatment should
not apply to transactions executed with
end-users when hedging business risk
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because the resulting increase in pricing
will disproportionately impact smalland medium-sized businesses.
The interim final rule does not
exempt the entities suggested by
commenters. However, the FDIC
anticipates that a counterparty that is
exempt from the 0.03 percent PD floor
under § 324.131(d)(2) and receives a
zero percent risk weight under § 324.32
(that is, central banks, MDBs, the Bank
for International Settlements and
European Central Bank) likely would
attract a minimal CVA requirement
because the credit spreads associated
with these counterparties have very
little variability. Regarding the other
entities mentioned by commenters (U.S.
public sector entities, pension funds
and corporate end-users), the FDIC
believes it is appropriate for CVA to
apply as these counterparty types
exhibit varying degrees of credit risk.
Some commenters asked that the
agencies clarify that interest rate hedges
of CVA are not covered positions as
defined in subpart F and, therefore, not
subject to a market risk capital
requirement. In addition, some
commenters asserted that the overall
capital requirements for CVA are more
appropriately addressed as a trading
book issue in the context of the BCBS
Fundamental Review of the Trading
Book.175 Another commenter asserted
that CVA rates hedges (to the extent
they might be covered positions) should
be excluded from the market-risk rule
capital requirements until supervisors
are ready to approve allowing CVA rates
sensitivities to be incorporated into a
banking organization’s general market
risk VaR.
The FDIC recognizes that CVA is not
a covered position under the market risk
rule. Hence, as elaborated in the market
risk rule, hedges of non-covered
positions that are not themselves trading
positions also are not eligible to be a
covered position under the market risk
rule. Therefore, the FDIC clarifies that
non-credit risk hedges (market risk
hedges or exposure hedges) of CVA
generally are not covered positions
under the market risk rule, but rather
are assigned risk-weighted asset
amounts under subparts D and E of the
interim final rule.176 Once the BCBS
Fundamental Review of the Trading
175 See ‘‘Fundamental review of the trading book’’
(May 2012) available at http://www.bis.org/publ/
bcbs219.pdf.
176 The FDIC believes that an FDIC-supervised
institution needs to demonstrate rigorous risk
management and the efficacy of its CVA hedges and
should follow the risk management principles of
the Interagency Supervisory Guidance on
Counterparty Credit Risk Management (2011) and
identification of covered positions as in the FDIC’s
market risk rule, see 77 FR 53060 (August 30, 2012).
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55453
Book is complete, the agencies will
review the BCBS findings and consider
whether they are appropriate for U.S.
banking organizations.
One commenter asserted that
observable LGDs for credit derivatives
do not represent the best estimation of
LGD for calculating CVA under the
advanced CVA approach, and that a
final rule should instead consider a
number of parameters, including market
observable recovery rates on unsecured
bonds and structural components of the
derivative. Another commenter argued
that banking organizations should be
permitted greater flexibility in
determining market-implied loss given
default (LGDMKT) and credit spread
factors for VaR.
Consistent with the BCBS’s frequently
asked question (BCBS FAQ) on this
topic,177 the FDIC recognizes that while
there is often limited market
information of LGDMKT (or equivalently
the market implied recovery rate), the
FDIC considers the use of LGDMKT to be
the most appropriate approach to
quantify CVA. It is also the market
convention to use a fixed recovery rate
for CDS pricing purposes; FDICsupervised institutions may use that
information for purposes of the CVA
capital requirement in the absence of
other information. In cases where a
netting set of OTC derivative contracts
has a different seniority than those
derivative contracts that trade in the
market from which LGDMKT is inferred,
an FDIC-supervised institution may
adjust LGDMKT to reflect this difference
in seniority. Where no market
information is available to determine
LGDMKT, an FDIC-supervised institution
may propose a method for determining
LGDMKT based upon data collected by
the FDIC-supervised institution that
would be subject to approval by the
FDIC. The interim final rule has been
amended to include this alternative.
Regarding the proposed CVA EAD
calculation assumptions in the
advanced CVA approach, one
commenter asserted that EE constant
treatment is inappropriate, and that it is
more appropriate to use the weighted
average maturity of the portfolio rather
than the netting set. Another commenter
asserted that maturity should equal the
weighted average maturity of all
transactions in the netting set, rather
than the greater of the notional weighted
average maturity and the maximum of
half of the longest maturity occurring in
the netting set. The FDIC notes that this
issue is relevant only where an FDICsupervised institution utilized the
current exposure method or the
‘‘shortcut’’ method, rather than IMM, for
any immaterial portfolios of OTC
derivatives contracts. As a result, the
interim final rule retains the
requirement to use the greater of the
notional weighted average maturity
(WAM) and the maximum of half of the
longest maturity in the netting set when
calculating EE constant treatment in the
advanced CVA approach.
One commenter asked the agencies to
clarify that section 132(c)(3) would
exempt the purchased CDS from the
proposed CVA capital requirements in
section 132(e) of a final rule. Consistent
with the BCBS FAQ on this topic, the
FDIC agrees that purchased credit
derivative protection against a
wholesale exposure that is subject to the
double default framework or the PD
substitution approach and where the
wholesale exposure itself is not subject
to the CVA capital requirement, will not
be subject to the CVA capital
requirement in the interim final rule.
Also consistent with the BCBS FAQ, the
purchased credit derivative protection
may not be recognized as a hedge for
any other exposure under the interim
final rule.
Another commenter asserted that
single-name proxy CDS trades should be
allowed as hedges in the advanced CVA
approach CVA VaR calculation. Under
the interim final rule, an FDICsupervised institution is permitted to
recognize the hedging benefits of single
name CDS, single name contingent CDS,
any other equivalent hedging
instrument that references the
counterparty directly, and CDSind,
provided that the hedging instrument is
managed as a CVA hedge in accordance
with the FDIC-supervised institution’s
hedging policies. The interim final rule
does not permit the use of single-name
proxy CDS. The FDIC believes this is an
important limitation because of the
significant basis risk that could arise
from the use of a single-name proxy.
Additionally, the interim final rule
reflects several clarifying amendments
to the proposed rule. First, the interim
final rule divides the Advanced CVA
formulas in the proposed rule into two
parts: Formula 3 and Formula 3a. The
FDIC believes that this clarification is
important to reflect the different
purposes of the two formulas: the first
formula (Formula 3) is for the CVA VaR
calculation, whereas the second formula
(Formula 3a) is for calculating CVA for
each credit spread simulation scenario.
The interim final rule includes a
description that clarifies each formula’s
purpose. In addition, the notations in
proposed Formula 3 have been changed
from CVAstressedVaR and CVAunstressedVaR
to VaRCVAstressed and VaRCVAunstressed. The
definitions of these terms have not
changed in the interim final rule.
Finally, the subscript ‘‘j’’ in Formula 3a
has been defined as referring either to
stressed or unstressed calibrations.
These formulas are discussed in the
interim final rule description below.
177 See ‘‘Basel III counterparty credit risk and
exposures to central counterparties—Frequently
asked questions (December 2012 (update of FAQs
published November 2012)) at http://www.bis.org/
publ/bcbs237.pdf.
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a. Simple Credit Valuation Adjustment
approach
Under the interim final rule, an FDICsupervised institution without approval
to use the advanced CVA approach must
use formula 1 to calculate its CVA
capital requirement for its entire
portfolio of OTC derivative contracts.
The simple CVA approach is based on
an analytical approximation derived
from a general CVA VaR formulation
under a set of simplifying assumptions:
(1) All credit spreads have a flat term
structure;
(2) All credit spreads at the time
horizon have a lognormal distribution;
(3) Each single name credit spread is
driven by the combination of a single
systematic factor and an idiosyncratic
factor;
(4) The correlation between any single
name credit spread and the systematic
factor is equal to 0.5;
(5) All credit indices are driven by the
single systematic factor; and
(6) The time horizon is short (the
square root of time scaling to 1 year is
applied). The approximation is based on
the linearization of the dependence of
both CVA and CDS hedges on credit
spreads. Given the assumptions listed
above, a measure of CVA VaR has a
closed-form analytical solution. The
formula of the simple CVA approach is
obtained by applying certain
standardizations, conservative
adjustments, and scaling to the
analytical CVA VaR result.
An FDIC-supervised institution
calculates KCVA, where:
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In Formula 1, wi refers to the weight
applicable to counterparty i assigned
according to Table 26 below.178 In Basel
III, the BCBS assigned wi based on the
external rating of the counterparty.
However, consistent with the proposal
and section 939A of the Dodd-Frank
Act, the interim final rule assigns wi
based on the relevant PD of the
counterparty, as assigned by the FDICsupervised institution. Quantity wind in
Formula 1 refers to the weight
applicable to the CDSind based on the
average weight under Table 26 of the
underlying reference names that
comprise the index.
b. Advanced Credit Valuation
Adjustment approach
ER10SE13.010
178 These weights represent the assumed values of
the product of a counterparties’ current credit
spread and the volatility of that credit spread.
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The term ‘‘exp’’ is the exponential
function. Quantity Mi in Formulas 1 and
2 refers to the EAD-weighted average of
the effective maturity of each netting set
with counterparty i (where each netting
set’s M cannot be smaller than one).
Quantity Mi hedge in Formula 1 refers to
the notional weighted average maturity
of the hedge instrument. Quantity Mind
in Formula 1 equals the maturity of the
CDSind or the notional weighted average
maturity of any CDSind purchased to
TABLE 26—ASSIGNMENT OF
COUNTERPARTY WEIGHT UNDER THE hedge CVA risk of counterparty i.
SIMPLE CVA
Quantity Bi in Formula 1 refers to the
sum of the notional amounts of any
Internal PD
Weight wi
purchased single name CDS referencing
(in percent)
(in percent)
counterparty i that is used to hedge CVA
0.00–0.07 ..............................
0.70 risk to counterparty i multiplied by (1hedge))/(0.05 × M hedge).
i
>0.07–0.15 ............................
0.80 exp(¥0.05 × Mi
in
Formula 1 refers to the
Quantity
B
ind
>0.15–0.40 ............................
1.00
>0.4–2.00 ..............................
2.00 notional amount of one or more CDSind
>2.0–6.00 ..............................
3.00 purchased as protection to hedge CVA
>6.0 .......................................
10.00 risk for counterparty i multiplied by (1exp(¥0.05 × Mind))/(0.05 × Mind). If
counterparty i is part of an index used
EADi total in Formula 1 refers to the
for hedging, an FDIC-supervised
sum of the EAD for all netting sets of
institution is allowed to treat the
OTC derivative contracts with
notional amount in an index attributable
counterparty i calculated using the
to that counterparty as a single name
current exposure methodology
hedge of counterparty i (Bi,) when
described in section 132(c) of the
calculating
KCVA and subtract the
interim final rule, as adjusted by
notional amount of Bi from the notional
Formula 2 or the IMM described in
amount of the CDSind. The CDSind hedge
section 132(d) of the interim final rule.
with
the notional amount reduced by Bi
When the FDIC-supervised institution
calculates EAD using the IMM, EADi total can still be treated as a CVA index
hedge.
equals EADunstressed.
The interim final rule requires that
the VaR model incorporate only changes
in the counterparties’ credit spreads, not
changes in other risk factors; it does not
require an FDIC-supervised institution
to capture jump-to-default risk in its
VaR model.
In order for an FDIC-supervised
institution to receive approval to use the
advanced CVA approach under the
interim final rule, the FDIC-supervised
institution needs to have the systems
capability to calculate the CVA capital
requirement on a daily basis but is not
expected or required to calculate the
CVA capital requirement on a daily
basis.
The CVA capital requirement under
the advanced CVA approach is equal to
the general market risk capital
requirement of the CVA exposure using
the ten-business-day time horizon of the
market risk rule. The capital
requirement does not include the
incremental risk requirement of subpart
F. If an FDIC-supervised institution uses
the current exposure methodology to
calculate the EAD of any immaterial
OTC derivative portfolio, under the
interim final rule the FDIC-supervised
institution must use this EAD as a
constant EE in the formula for the
calculation of CVA. Also, the FDICsupervised institution must set the
maturity equal to the greater of half of
the longest maturity occurring in the
netting set and the notional weighted
average maturity of all transactions in
the netting set.
The interim final rule requires an
FDIC-supervised institution to use the
formula for the advanced CVA approach
to calculate KCVA as follows:
55455
counterparties and eligible hedges)
resulting from simulated changes of
credit spreads over a ten-day time
horizon.179 CVAj for a given
counterparty must be calculated
according to
In Formula 3a:
(A) ti equals the time of the i-th
revaluation time bucket starting from t0
= 0.
(B) tT equals the longest contractual
maturity across the OTC derivative
contracts with the counterparty.
(C) si equals the CDS spread for the
counterparty at tenor ti used to calculate
the CVA for the counterparty. If a CDS
spread is not available, the FDICsupervised institution must use a proxy
spread based on the credit quality,
industry and region of the counterparty.
(D) LGDMKT equals the loss given
default of the counterparty based on the
spread of a publicly traded debt
instrument of the counterparty, or,
where a publicly traded debt instrument
spread is not available, a proxy spread
based on the credit quality, industry and
region of the counterparty.
(E) EEi equals the sum of the expected
exposures for all netting sets with the
counterparty at revaluation time ti
calculated using the IMM.
(F) Di equals the risk-free discount
factor at time ti, where D0 = 1.
(G) The function exp is the
exponential function.
(H) The subscript j refers either to a
stressed or an unstressed calibration as
described in section 324.132(e)(6)(iv)
and (v) of the interim final rule.
Under the interim final rule, if an
FDIC-supervised institution’s VaR
model is not based on full repricing, the
FDIC-supervised institution must use
either Formula 4 or Formula 5 to
calculate credit spread sensitivities. If
the VaR model is based on credit spread
sensitivities for specific tenors, the
FDIC-supervised institution must
calculate each credit spread sensitivity
according to Formula 4:
179 For purposes of this formula, the subscript ‘‘ ’’
j
refers either to a stressed or unstressed calibration
as described in section 133(e)(6)(iv) and (v) of the
interim final rule.
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VaRj is the 99 percent VaR reflecting
changes of CVAj and fair value of
eligible hedges (aggregated across all
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Under the interim final rule, an FDICsupervised institution must calculate
VaRCVAunstressed using CVAUnstressed and
VaRCVAstressed using CVAStressed. To
calculate the CVAUnstressed measure in
Formula 3a, an FDIC-supervised
institution must use the EE for a
counterparty calculated using current
market data to compute current
exposures and estimate model
parameters using the historical
observation period required under
section 205(b)(2) of subpart F. However,
if an FDIC-supervised institution uses
the ‘‘shortcut’’ method described in
section 324.132(d)(5) of the interim final
rule to capture the effect of a collateral
agreement when estimating EAD using
the IMM, the FDIC-supervised
institution must calculate the EE for the
counterparty using that method and
keep that EE constant with the maturity
equal to the maximum of half of the
longest maturity occurring in the netting
set, and the notional weighted average
maturity of all transactions in the
netting set.
To calculate the CVAStressed measure in
Formula 3a, the interim final rule
requires an FDIC-supervised institution
to use the EE for a counterparty
calculated using the stress calibration of
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the IMM. However, if an FDICsupervised institution uses the
‘‘shortcut’’ method described in section
324.132(d)(5) of the interim final rule to
capture the effect of a collateral
agreement when estimating EAD using
the IMM, the FDIC-supervised
institution must calculate the EE for the
counterparty using that method and
keep that EE constant with the maturity
equal to the greater of half of the longest
maturity occurring in the netting set
with the notional amount equal to the
weighted average maturity of all
transactions in the netting set.
Consistent with Basel III, the interim
final rule requires an FDIC-supervised
institution to calibrate the VaR model
inputs to historical data from the most
severe twelve-month stress period
contained within the three-year stress
period used to calculate EE. However,
the FDIC retains the flexibility to require
an FDIC-supervised institution to use a
different period of significant financial
stress in the calculation of the
CVAStressed measure that better reflects
actual historic losses of the portfolio.
Under the interim final rule, an FDICsupervised institution’s VaR model is
required to capture the basis between
the spreads of the index that is used as
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the hedging instrument and the hedged
counterparty exposure over various time
periods, including benign and stressed
environments. If the VaR model does
not capture that basis, the FDICsupervised institution is permitted to
reflect only 50 percent of the notional
amount of the CDSind hedge in the VaR
model.
5. Cleared Transactions (Central
Counterparties)
As discussed more fully in section
VIII.E of this preamble on cleared
transactions under the standardized
approach, CCPs help improve the safety
and soundness of the derivatives and
repo-style transaction markets through
the multilateral netting of exposures,
establishment and enforcement of
collateral requirements, and market
transparency. Similar to the changes to
the cleared transaction treatment in the
subpart D of the interim final rule, the
requirements regarding the cleared
transaction framework in the subpart E
has been revised to reflect the material
changes from the BCBS CCP interim
framework. Key changes from the CCP
interim framework, include: (1)
Allowing a clearing member FDICsupervised institution to use a reduced
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margin period of risk when using the
IMM or a scaling factor of no less than
0.71 180 when using the CEM in the
calculation of its EAD for client-facing
derivative trades; (2) updating the risk
weights applicable to a clearing member
FDIC-supervised institution’s exposures
when the clearing member FDICsupervised institution guarantees QCCP
performance; (3) permitting clearing
member FDIC-supervised institutions to
choose from one of two approaches for
determining the capital requirement for
exposures to default fund contributions;
and (4) updating the CEM formula to
recognize netting to a greater extent for
purposes of calculating its risk-weighted
asset amount for default fund
contributions.
Additionally, changes in response to
comments received on the proposal, as
discussed in detail in section VIII.E of
this preamble with respect to cleared
transactions in the standardized
approach, are also reflected in the
interim final rule for advanced
approaches. FDIC-supervised
institutions seeking more information
on the changes relating to the material
elements of the BCBS CCP interim
framework and the comments received
should refer to section VIII.E of this
preamble.
6. Stress Period for Own Estimates
During the recent financial crisis,
increased volatility in the value of
collateral led to higher counterparty
exposures than estimated by banking
organizations. Under the collateral
haircut approach in the advanced
approaches interim final rule, consistent
with the proposal, an FDIC-supervised
institution that receives prior approval
from the FDIC may calculate market
price and foreign exchange volatility
using own internal estimates. In
response to the increased volatility
experienced during the crisis, however,
the interim final rule modifies the
quantitative standards for approval by
requiring FDIC-supervised institutions
to base own internal estimates of
haircuts on a historical observation
period that reflects a continuous 12month period of significant financial
stress appropriate to the security or
category of securities. As described in
section VIII.F of this preamble with
respect to the standardized approach, an
FDIC-supervised institution is also
required to have policies and
procedures that describe how it
determines the period of significant
180 See Table 20 in section VIII.E of this preamble.
Consistent with the scaling factor for the CEM in
Table 20, an advanced approaches FDIC-supervised
institution may reduce the margin period of risk
when using the IMM to no shorter than 5 days.
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financial stress used to calculate the
FDIC-supervised institution’s own
internal estimates, and must be able to
provide empirical support for the period
used. To ensure an appropriate level of
conservativeness, in certain
circumstances the FDIC may require an
FDIC-supervised institution to use a
different period of significant financial
stress in the calculation of own internal
estimates for haircuts. The FDIC is
adopting this aspect of the proposal
without change.
proposed requirements for qualifying
operational risk mitigants, which among
other criteria, must be provided by an
unaffiliated company that the FDICsupervised institution deems to have
strong capacity to meet its claims
payment obligations and the obligor
rating category to which the FDICsupervised institution assigns the
company is assigned a PD equal to or
less than 10 basis points.
B. Removal of Credit Ratings
Consistent with the proposed rule and
section 939A of the Dodd-Frank Act, the
interim final rule includes a number of
changes to definitions in the advanced
approaches rule that currently reference
credit ratings.181 These changes are
consistent with the alternative standards
included in the Standardized Approach
and alternative standards that already
have been implemented in the FDIC’s
market risk rule. In addition, the interim
final rule includes necessary changes to
the hierarchy for risk weighting
securitization exposures necessitated by
the removal of the ratings-based
approach, as described further below.
In certain instances, the interim final
rule uses an ‘‘investment grade’’
standard that does not rely on credit
ratings. Under the interim final rule and
consistent with the market risk rule,
investment grade means that the entity
to which the FDIC-supervised
institution 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.
The FDIC is largely finalizing the
proposed alternatives to ratings as
proposed. Consistent with the proposal,
the FDIC is retaining the standards used
to calculate the PFE for derivative
contracts (as set forth in Table 2 of the
interim final rule), which are based in
part on whether the counterparty
satisfies the definition of investment
grade under the interim final rule. The
FDIC is also finalizing as proposed the
term ‘‘eligible double default
guarantor,’’ which is used for purposes
of determining whether an FDICsupervised institution may recognize a
guarantee or credit derivative under the
credit risk mitigation framework. In
addition, the FDIC is finalizing the
Previously, to be an eligible
securitization guarantor under the
advanced approaches rule, a guarantor
was required to meet a number of
criteria. For example, the guarantor
must have issued and outstanding an
unsecured long-term debt security
without credit enhancement that has a
long-term applicable external rating in
one of the three highest investmentgrade rating categories. The interim final
rule replaces the term ‘‘eligible
securitization guarantor’’ with the term
‘‘eligible guarantor,’’ which includes
certain entities that have issued and
outstanding unsecured debt securities
without credit enhancement that are
investment grade. Comments and
modifications to the definition of
eligible guarantor are discussed below
and in section VIII.F of this preamble.
181 See
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1. Eligible Guarantor
2. Money Market Fund Approach
Previously, under the money market
fund approach in the advanced
approaches rule, banking organizations
were permitted to assign a 7 percent risk
weight to exposures to money market
funds that were subject to SEC rule 2a–
7 and that had an applicable external
rating in the highest investment grade
rating category. The proposed rule
eliminated the money market fund
approach. Commenters stated that the
elimination of the existing 7 percent risk
weight for equity exposures to money
market funds would result in an overly
stringent treatment for those exposures
under the remaining look-through
approaches. However, during the recent
financial crisis, several money market
funds demonstrated elevated credit risk
that is not consistent with a low 7
percent risk weight. Accordingly, the
FDIC believes it is appropriate to
eliminate the preferential risk weight for
money market fund investments. As a
result of the changes, an FDICsupervised institution must use one of
the three alternative approaches under
section 154 of the interim final rule to
determine the risk weight for its
exposures to a money market fund.
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3. Modified Look-Through Approaches
for Equity Exposures to Investment
Funds
Under the proposal, risk weights for
equity exposures under the simple
modified look-through approach would
have been based on the highest risk
weight assigned to the exposure under
the standardized approach (subpart D)
based on the investment limits in the
fund’s prospectus, partnership
agreement, or similar contract that
defines the fund’s permissible
investments. As discussed in the
preamble regarding the standardized
approach, commenters expressed
concerns regarding their ability to
implement the look-through approaches
for investment funds that hold
securitization exposures. However, the
FDIC believes that FDIC-supervised
institutions should be aware of the
nature of the investments in a fund in
which the organization invests. To the
extent that information is not available,
the treatment in the interim final rule
will create incentives for FDICsupervised institutions to obtain the
information necessary to compute riskbased capital requirements under the
approach. These incentives are
consistent with the FDIC’s supervisory
aim that FDIC-supervised institutions
have sufficient understanding of the
characteristics and risks of their
investments.
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C. Revisions to the Treatment of
Securitization Exposures
1. Definitions
As discussed in section VIII.H of this
preamble with respect to the
standardized approach, the proposal
introduced a new definition for
resecuritization exposures consistent
with the 2009 Enhancements and
broadened the definition of a
securitization exposure. In addition, the
agencies proposed to amend the existing
definition of traditional securitization in
order to exclude certain types of
investment firms from treatment under
the securitization framework. Consistent
with the approach taken with respect to
the standardized approach, the
proposed definitions under the
securitization framework in the
advanced approach are largely included
in the interim final rule as proposed,
except for changes described below.
Banking organizations should refer to
part VIII.H of this preamble for further
discussion of these comments.
In response to the proposed definition
of traditional securitization,
commenters generally agreed with the
proposed exemptions from the
definition and requested that the
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agencies provide exemptions for
exposures to a broader set of investment
firms, such as pension funds operated
by state and local governments. In view
of the comments regarding pension
funds, the interim final rule, as
described in part VIII.H of this
preamble, excludes from the definition
of traditional securitization a
‘‘governmental plan’’ (as defined in 29
U.S.C. 1002(32)) that complies with the
tax deferral qualification requirements
provided in the Internal Revenue Code.
In response to the proposed definition
of resecuritization, commenters
requested clarification regarding its
potential scope of application to
exposures that they believed should not
be considered resecuritizations. In
response, the FDIC has amended the
definition of resecuritization by
excluding securitizations that feature retranching of a single exposure. In
addition, the FDIC notes that for
purposes of the interim final rule, a
resecuritization does not include passthrough securities that have been pooled
together and effectively re-issued as
tranched securities. This is because the
pass-through securities do not tranche
credit protection and, as a result, are not
considered securitization exposures
under the interim final rule.
Previously, under the advanced
approaches rule issued in 2007, the
definition of eligible securitization
guarantor included, among other
entities, any entity (other than a
securitization SPE) that has issued and
has outstanding an unsecured long-term
debt security without credit
enhancement that has a long-term
applicable external rating in one of the
three highest investment-grade rating
categories, or has a PD assigned by the
banking organization that is lower than
or equal to the PD associated with a
long-term external rating in the third
highest investment-grade category. The
interim final rule removes the existing
references to ratings from the definition
of an eligible guarantor (the new term
for an eligible securitization guarantor)
and finalizes the requirements as
proposed, as described in section VIII.F
of this preamble.
During the recent financial crisis,
certain guarantors of securitization
exposures had difficulty honoring those
guarantees as the financial condition of
the guarantors deteriorated at the same
time as the guaranteed exposures
experienced losses. Consistent with the
proposal, a guarantor is not an eligible
guarantor under the interim final rule if
the guarantor’s creditworthiness is
positively correlated with the credit risk
of the exposures for which it has
provided guarantees. In addition,
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insurance companies engaged
predominately in the business of
providing credit protection are not
eligible guarantors. Further discussion
can be found in section VIII.F of this
preamble.
2. Operational Criteria for Recognizing
Risk Transference in Traditional
Securitizations
The proposal outlined certain
operational requirements for traditional
securitizations that had to be met in
order to apply the securitization
framework. Consistent with the
standardized approach as discussed in
section VIII.H of this preamble, the
interim final rule includes the
operational criteria for recognizing risk
transference in traditional
securitizations largely as proposed.
3. The Hierarchy of Approaches
Consistent with section 939A of the
Dodd-Frank Act, the proposed rule
removed the ratings-based approach
(RBA) and internal assessment approach
for securitization exposures. The
interim final rule includes the hierarchy
largely as proposed. Under the interim
final rule, the hierarchy for
securitization exposures is as follows:
(1) An FDIC-supervised institution is
required to deduct from common equity
tier 1 capital any after-tax gain-on-sale
resulting from a securitization and
apply a 1,250 percent risk weight to the
portion of a CEIO that does not
constitute after-tax gain-on-sale.
(2) If a securitization exposure does
not require deduction, an FDICsupervised institution is required to
assign a risk weight to the securitization
exposure using the SFA. The FDIC
expects FDIC-supervised institutions to
use the SFA rather than the SSFA in all
instances where data to calculate the
SFA is available.
(3) If the FDIC-supervised institution
cannot apply the SFA because not all
the relevant qualification criteria are
met, it is allowed to apply the SSFA. An
FDIC-supervised institution should be
able to explain and justify (for example,
based on data availability) to the FDIC
any instances in which the FDICsupervised institution uses the SSFA
rather than the SFA for its securitization
exposures.
The SSFA, described in detail in part
VIII.H of this preamble, is similar in
construct and function to the SFA. An
FDIC-supervised institution needs
several inputs to calculate the SSFA.
The first input is the weighted-average
capital requirement calculated under
the standardized approach that applies
to the underlying exposures as if they
are held directly by the FDIC-supervised
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institution. The second and third inputs
indicate the position’s level of
subordination and relative size within
the securitization. The fourth input is
the level of delinquencies experienced
on the underlying exposures. An FDICsupervised institution must apply the
hierarchy of approaches in section 142
of this interim final rule to determine
which approach it applies to a
securitization exposure. The SSFA is
included in this interim final rule as
proposed, with the exception of some
modifications to the delinquency
parameter, as discussed in part VIII.H of
this preamble.
4. Guarantees and Credit Derivatives
Referencing a Securitization Exposure
The current advanced approaches rule
includes methods for calculating riskweighted assets for nth-to-default credit
derivatives, including first-to-default
credit derivatives and second-orsubsequent-to-default credit
derivatives.182 The current advanced
approaches rule, however, does not
specify how to treat guarantees or credit
derivatives (other than nth-to-default
credit derivatives) purchased or sold
that reference a securitization exposure.
Accordingly, the proposal included
specific treatment for credit protection
purchased or provided in the form of a
guarantee or credit derivative (other
than an nth-to-default credit derivative)
that references a securitization
exposure.
For a guarantee or credit derivative
(other than an nth-to-default credit
derivative) where the FDIC-supervised
institution has provided protection, the
interim final rule requires an FDICsupervised institution providing credit
protection to determine the risk-based
capital requirement for the guarantee or
credit derivative as if it directly holds
the portion of the reference exposure
covered by the guarantee or credit
derivative. The FDIC-supervised
institution calculates its risk-based
capital requirement for the guarantee or
credit derivative by applying either (1)
the SFA as provided in section 324.143
of the interim final rule to the reference
exposure if the FDIC-supervised
institution and the reference exposure
qualify for the SFA; or (2) the SSFA as
provided in section 324.144 of the
interim final rule. If the guarantee or
credit derivative and the reference
securitization exposure do not qualify
182 Nth-to-default credit derivative means a credit
derivative that provides credit protection only for
the nth-defaulting reference exposure in a group of
reference exposures. See 12 CFR part 325, appendix
D, section 42(l) (state nonmember banks), and 12
CFR part 390, subpart Z, appendix A, section 42(l)
(state savings associations).
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for the SFA, or the SSFA, the FDICsupervised institution is required to
assign a 1,250 percent risk weight to the
notional amount of protection provided
under the guarantee or credit derivative.
The interim final rule also clarifies
how an FDIC-supervised institution may
recognize a guarantee or credit
derivative (other than an nth-to-default
credit derivative) purchased as a credit
risk mitigant for a securitization
exposure held by the FDIC-supervised
institution. An FDIC-supervised
institution that purchases an OTC credit
derivative (other than an nth-to-default
credit derivative) that is recognized as a
credit risk mitigant for a securitization
exposure that is not a covered position
under the market risk rule is not
required to compute a separate
counterparty credit risk capital
requirement provided that the FDICsupervised institution does so
consistently for all such credit
derivatives. The FDIC-supervised
institution 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. If an
FDIC-supervised institution cannot, or
chooses not to, recognize a credit
derivative that is a securitization
exposure as a credit risk mitigant, the
FDIC-supervised institution must
determine the exposure amount of the
credit derivative under the treatment for
OTC derivatives in section 324.132. If
the FDIC-supervised institution
purchases the credit protection from a
counterparty that is a securitization, the
FDIC-supervised institution must
determine the risk weight for
counterparty credit risk according to the
securitization framework. If the FDICsupervised institution purchases credit
protection from a counterparty that is
not a securitization, the FDICsupervised institution must determine
the risk weight for counterparty credit
risk according to general risk weights
under section 324.131.
5. Due Diligence Requirements for
Securitization Exposures
As the recent financial crisis
unfolded, weaknesses in exposures
underlying securitizations became
apparent and resulted in NRSROs
downgrading many securitization
exposures held by banking
organizations. The agencies found that
many banking organizations relied on
NRSRO ratings as a proxy for the credit
quality of securitization exposures they
purchased and held without conducting
their own sufficient independent credit
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analysis. As a result, some banking
organizations did not have sufficient
capital to absorb the losses attributable
to these exposures. Accordingly,
consistent with the 2009 Enhancements,
the proposed rule introduced due
diligence requirements that banking
organizations would be required to
undertake to use the SFA or SSFA.
Comments received regarding the
proposed due diligence requirements
and the rationale for adopting the
proposed treatment in the interim final
rule are discussed in part VIII of the
preamble.
6. Nth-to-Default Credit Derivatives
Consistent with the proposal, the
interim final rule provides that an FDICsupervised institution that provides
credit protection through an nth-todefault derivative must assign a risk
weight to the derivative using the SFA
or the SSFA. In the case of credit
protection sold, an FDIC-supervised
institution must determine its exposure
in the nth-to-default credit derivative as
the largest notional dollar amount of all
the underlying exposures.
When applying the SSFA to
protection provided in the form of an
nth-to-default credit derivative, the
attachment point (parameter A) is the
ratio of the sum of the notional amounts
of all underlying exposures that are
subordinated to the FDIC-supervised
institution’s exposure to the total
notional amount of all underlying
exposures. For purposes of applying the
SFA, parameter A is set equal to the
credit enhancement level (L) used in the
SFA formula. In the case of a first-todefault credit derivative, there are no
underlying exposures that are
subordinated to the FDIC-supervised
institution’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
FDIC-supervised institution’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 FDIC-supervised
institution’s exposure to the total
notional amount of the underlying
exposures. Under the SFA, Parameter D
is set to equal L plus the thickness of the
tranche (T) under the SFA formula. An
FDIC-supervised institution that does
not use the SFA or SSFA to calculate a
risk weight for an nth-to-default credit
derivative must assign a risk weight of
1,250 percent to the exposure.
For the treatment of protection
purchased through a first-to-default
credit derivative, an FDIC-supervised
institution must determine its risk-based
capital requirement for the underlying
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exposures as if the FDIC-supervised
institution had synthetically securitized
the underlying exposure with the lowest
risk-based capital requirement and had
obtained no credit risk mitigant on the
other underlying exposures. An FDICsupervised institution must calculate a
risk-based capital requirement for
counterparty credit risk according to
section 132 of the interim final rule for
a first-to-default credit derivative that
does not meet the rules of recognition
for guarantees and credit derivatives
under section 324.134(b).
For second-or-subsequent-to default
credit derivatives, an FDIC-supervised
institution 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 324.134(b) of the interim final
rule (other than a first-to-default credit
derivative) is permitted to recognize the
credit risk mitigation benefits of the
derivative only if the FDIC-supervised
institution 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 an FDIC-supervised
institution satisfies these requirements,
the FDIC-supervised institution
determines its risk-based capital
requirement for the underlying
exposures as if the FDIC-supervised
institution had only synthetically
securitized the underlying exposure
with the nth smallest risk-based capital
requirement and had obtained no credit
risk mitigant on the other underlying
exposures. An FDIC-supervised
institution that does not fulfill these
requirements must calculate a riskbased capital requirement for
counterparty credit risk according to
section 132 of the interim final rule for
a nth-to-default credit derivative that
does not meet the rules of recognition of
section 134(b) of the interim final rule.
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D. Treatment of Exposures Subject to
Deduction
Under the current advanced
approaches rule, an FDIC-supervised
institution is required to deduct certain
exposures from total capital, including
securitization exposures such as CEIOs,
low-rated securitization exposures, and
high-risk securitization exposures
subject to the SFA; eligible credit
reserves shortfall; and certain failed
capital markets transactions. Consistent
with Basel III, the proposed rule
required a banking organization to
assign a 1,250 percent risk weight to
many exposures that previously were
deducted from capital.
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In the proposal, the agencies noted
that such treatment would not be
equivalent to a deduction from tier 1
capital, as the effect of a 1,250 percent
risk weight would depend on an
individual banking organization’s
current risk-based capital ratios.
Specifically, when a risk-based capital
ratio (either tier 1 or total risk-based
capital) exceeds 8.0 percent, the effect
on that risk-based capital ratio of
assigning an exposure a 1,250 percent
risk weight would be more conservative
than a deduction from total capital. The
more a risk-based capital ratio exceeds
8.0 percent, the harsher is the effect of
a 1,250 percent risk weight on riskbased capital ratios. Commenters
acknowledged these points and asked
the agencies to replace the 1,250 percent
risk weight with the maximum risk
weight that would correspond with
deduction. Commenters also stated that
the agencies should consider the effect
of the 1,250 percent risk weight given
that the Basel III proposals, over time,
would require banking organizations to
maintain a total risk-based capital ratio
of at least 10.5 percent to meet the
minimum required capital ratio plus the
capital conservation buffer.
The FDIC is finalizing the
requirements as proposed, in order to
provide for comparability in riskweighted asset measurements across
institutions. The FDIC did not propose
to apply a 1,250 percent risk weight to
those exposures currently deducted
from tier 1 capital under the advanced
approaches rule. For example, the
agencies proposed that an after-tax gainon-sale that is deducted from tier 1
under the advanced approaches rule be
deducted from common equity tier 1
under the proposed rule. In this regard,
the agencies also clarified that any asset
deducted from common equity tier 1,
tier 1, or tier 2 capital under the
advanced approaches rule would not be
included in the measure of riskweighted assets under the advanced
approaches rule. The interim final rule
includes these requirements as
proposed.
E. Technical Amendments to the
Advanced Approaches Rule
In the proposed rule, the agencies
introduced a number of amendments to
the advanced approaches rule that were
designed to refine and clarify certain
aspects of the rule’s implementation.
The interim final rule includes each of
these technical amendments as
proposed. Additionally, in the interim
final rule, the FDIC is amending the
treatment of defaulted exposures that
are covered by government guarantees.
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Each of these revisions is described
below.
1. Eligible Guarantees and Contingent
U.S. Government Guarantees
In order to be recognized as an
eligible guarantee under the advanced
approaches rule, the guarantee, among
other criteria, must be unconditional.
The FDIC notes that this definition
would exclude certain guarantees
provided by the U.S. Government or its
agencies that would require some action
on the part of the FDIC-supervised
institution or some other third party.
However, based on their risk
characteristics, the FDIC believes that
these guarantees should be recognized
as eligible guarantees. Therefore, the
FDIC is amending the definition of
eligible guarantee so that it explicitly
includes a contingent obligation of the
U.S. Government or an agency of the
U.S. Government, the validity of which
is dependent on some affirmative action
on the part of the beneficiary or a third
party (for example, servicing
requirements) irrespective of whether
such contingent obligation is otherwise
considered a conditional guarantee.
Related to the change to the eligible
guarantee definition, the FDIC has
amended the provision in the advanced
approaches rule pertaining to the 10
percent floor on the LGD for residential
mortgage exposures. Currently, the rule
provides that the LGD for each segment
of residential mortgage exposures (other
than segments of residential mortgage
exposures for which all or substantially
all of the principal of each exposure is
directly and unconditionally guaranteed
by the full faith and credit of a sovereign
entity) may not be less than 10 percent.
The provision would therefore require a
10 percent LGD floor on segments of
residential mortgage exposures for
which all or substantially all of the
principal are conditionally guaranteed
by the U.S. government. The interim
final rule allows an exception from the
10 percent floor in such cases.
2. Calculation of Foreign Exposures for
Applicability of the Advanced
Approaches—Changes to Federal
Financial Institutions Economic Council
009
The FDIC is revising the advanced
approaches rule to comport with
changes to the FFIEC’s Country
Exposure Report (FFIEC 009) that
occurred after the issuance of the
advanced approaches rule in 2007.
Specifically, the FFIEC 009 replaced the
term ‘‘local country claims’’ with the
term ‘‘foreign-office claims.’’
Accordingly, the FDIC has made a
similar change under section 100, the
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section of the interim final rule that
makes the rules applicable to an FDICsupervised institution that has
consolidated total on-balance sheet
foreign exposures equal to $10 billion or
more. As a result, to determine total onbalance sheet foreign exposure, an
FDIC-supervised institution sums its
adjusted cross-border claims, local
country claims, and cross-border
revaluation gains calculated in
accordance with FFIEC 009. Adjusted
cross-border claims equal total crossborder claims less claims with the head
office or guarantor located in another
country, plus redistributed guaranteed
amounts to the country of the head
office or guarantor.
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3. Applicability of the Interim Final
Rule
The FDIC believes that once an FDICsupervised institution reaches the asset
size or level of foreign activity that
causes it to become subject to the
advanced approaches that it should
remain subject to the advanced
approaches rule even if it subsequently
drops below the asset or foreign
exposure threshold. The FDIC believes
that it is appropriate for it to evaluate
whether an FDIC-supervised
institution’s business or risk exposure
has changed after dropping below the
thresholds in a manner that it would no
longer be appropriate for the FDICsupervised institution to be subject to
the advanced approaches. As a result,
consistent with the proposal, the
interim final rule clarifies that once an
FDIC-supervised institution is subject to
the advanced approaches rule under
subpart E, it remains subject to subpart
E until the FDIC determines that
application of the rule would not be
appropriate in light of the FDICsupervised institution’s asset size, level
of complexity, risk profile, or scope of
operations. In connection with the
consideration of an FDIC-supervised
institution’s level of complexity, risk
profile, and scope of operations, the
FDIC also may consider an FDICsupervised institution’s
interconnectedness and other relevant
risk-related factors.
4. Change to the Definition of
Probability of Default Related to
Seasoning
The advanced approaches rule
requires an upward adjustment to
estimated PD for segments of retail
exposures for which seasoning effects
are material. The rationale underlying
this requirement was the seasoning
pattern displayed by some types of retail
exposures—that is, the exposures have
very low default rates in their first year,
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rising default rates in the next few years,
and declining default rates for the
remainder of their terms. Because of the
one-year internal ratings-based (IRB)
default horizon, capital based on the
very low PDs for newly originated, or
‘‘unseasoned,’’ loans would be
insufficient to cover the elevated risk in
subsequent years. The upward
seasoning adjustment to PD was
designed to ensure that banking
organizations would have sufficient
capital when default rates for such
segments rose predictably beginning in
year two.
Since the issuance of the advanced
approaches rule, the FDIC has found the
seasoning provision to be problematic.
First, it is difficult to ensure consistency
across institutions, given that there is no
guidance or criteria for determining
when seasoning is ‘‘material’’ or what
magnitude of upward adjustment to PD
is ‘‘appropriate.’’ Second, the advanced
approaches rule lacks flexibility by
requiring an upward PD adjustment
whenever there is a significant
relationship between a segment’s
default rate and its age (since
origination). For example, the upward
PD adjustment may be inappropriate in
cases where (1) the outstanding balance
of a segment is falling faster over time
(due to defaults and prepayments) than
the default rate is rising; (2) the age
(since origination) distribution of a
portfolio is stable over time; or (3)
where the loans in a segment are
intended, with a high degree of
certainty, to be sold or securitized
within a short time period.
Therefore, consistent with the
proposal, the FDIC is deleting the
regulatory seasoning provision and will
instead consider seasoning when
evaluating an FDIC-supervised
institution’s assessment of its capital
adequacy from a supervisory
perspective. In addition to the
difficulties in applying the advanced
approaches rule’s seasoning
requirements discussed above, the FDIC
believes that seasoning is more
appropriately considered from a
supervisory perspective. First, seasoning
involves the determination of minimum
required capital for a period in excess of
the 12-month time horizon implicit in
the advanced approaches risk-based
capital ratio calculations. It thus falls
more appropriately under longer-term
capital planning and capital adequacy,
which are major focal points of the
internal capital adequacy assessment
process. Second, seasoning is a major
issue only where an FDIC-supervised
institution has a concentration of
unseasoned loans. The risk-based
capital ratios do not take concentrations
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of any kind into account; however, they
are an explicit factor in the internal
capital adequacy assessment process.
5. Cash Items in Process of Collection
Under the current advanced
approaches rule, cash items in the
process of collection are not assigned a
risk-based capital treatment and, as a
result, are subject to a 100 percent risk
weight. Under the interim final rule,
consistent with the proposal, the FDIC
is revising the advanced approaches
rule to risk weight cash items in the
process of collection at 20 percent of the
carrying value, as the FDIC believes that
this treatment is more commensurate
with the risk of these exposures. A
corresponding provision is included in
section 324.32 of the interim final rule.
6. Change to the Definition of Qualifying
Revolving Exposure
The agencies proposed modifying the
definition of qualifying revolving
exposure (QRE) such that certain
unsecured and unconditionally
cancellable exposures where a banking
organization consistently imposes in
practice an upper exposure limit of
$100,000 and requires payment in full
every cycle would qualify as QRE.
Under the previous definition in the
advanced approaches rule, only
unsecured and unconditionally
cancellable revolving exposures with a
pre-established maximum exposure
amount of $100,000 or less (such as
credit cards) were classified as QRE.
Unsecured, unconditionally cancellable
exposures that require payment in full
and have no communicated maximum
exposure amount (often referred to as
‘‘charge cards’’) were instead classified
as ‘‘other retail.’’ For risk-based capital
purposes, this classification was
material and generally results in
substantially higher minimum required
capital to the extent that the exposure’s
asset value correlation (AVC) would
differ if classified as QRE (where it is
assigned an AVC of 4 percent) or other
retail (where AVC varies inversely with
through-the-cycle PD estimated at the
segment level and can go as high as
almost 16 percent for very low PD
segments).
Under the proposed definition,
certain charge card products would
qualify as QRE. Charge card exposures
may be viewed as revolving in that there
is an ability to borrow despite a
requirement to pay in full. Commenters
agreed that charge cards should be
included as QRE because, compared to
credit cards, they generally exhibit
lower loss rates and loss volatility.
Where an FDIC-supervised institution
consistently imposes in practice an
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upper exposure limit of $100,000 the
FDIC believes that charge cards are more
closely aligned from a risk perspective
with credit cards than with any type of
‘‘other retail’’ exposure and is therefore
amending the definition of QRE in order
to more appropriately capture such
products under the definition of QRE.
With respect to a product with a balance
that the borrower is required to pay in
full every month, the exposure would
qualify as QRE under the interim final
rule as long as its balance does not in
practice exceed $100,000. If the balance
of an exposure were to exceed that
amount, it would represent evidence
that such a limit is not maintained in
practice for the segment of exposures in
which that exposure is placed for risk
parameter estimation purposes. As a
result, that segment of exposures would
not qualify as QRE over the next 24
month period. In addition, the FDIC
believes that the definition of QRE
should be sufficiently flexible to
encompass products with new features
that were not envisioned at the time of
finalizing the advanced approaches rule,
provided, however, that the FDICsupervised institution can demonstrate
to the satisfaction of the FDIC that the
performance and risk characteristics (in
particular the volatility of loss rates over
time) of the new product are consistent
with the definition and requirements of
QRE portfolios.
7. Trade-Related Letters of Credit
In 2011, the BCBS revised the Basel
II advanced internal ratings-based
approach to remove the one-year
maturity floor for trade finance
instruments. Consistent with this
revision, the proposed rule specified
that an exposure’s effective maturity
must be no greater than five years and
no less than one year, except that an
exposure’s effective maturity must be no
less than one day if the exposure is a
trade-related letter of credit, or if the
exposure has an original maturity of less
than one year and is not part of a
banking organization’s ongoing
financing of the obligor. Commenters
requested clarification on whether
short-term self-liquidating trade finance
instruments would be considered
exempt from the one-year maturity
floor, as they do not constitute an
ongoing financing of the obligor. In
addition, commenters stated that
applying the proposed framework for
AVCs to trade-related letters of credit
would result in banking organizations
maintaining overly conservative capital
requirements in relation to the risk of
trade finance exposures, which could
reduce the availability of trade finance
and increase the cost of providing trade
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finance for businesses globally. As a
result, commenters requested that trade
finance exposures be assigned a separate
AVC that would better reflect the
product’s low default rates and low
correlation.
The FDIC believes that, in light of the
removal of the one-year maturity floor,
the proposed requirements for traderelated letters of credit are appropriate
without a separate AVC. The interim
final rule includes the treatment of
trade-related letters of credit as
proposed. Under the interim final rule,
trade finance exposures that meet the
stated requirements above may be
assigned a maturity lower than one year.
Section 324.32 of the interim final rule
includes a provision that similarly
recognizes the low default rates of these
exposures.
8. Defaulted Exposures That Are
Guaranteed by the U.S. Government
Under the current advanced
approaches rule, a banking organization
is required to apply an 8.0 percent
capital requirement to the EAD for each
wholesale exposure to a defaulted
obligor and for each segment of
defaulted retail exposures. The
advanced approaches rule does not
recognize yet-to-be paid protection in
the form of guarantees or insurance on
defaulted exposures. For example,
under certain programs, a U.S.
government agency that provides a
guarantee or insurance is not required to
pay on claims on exposures to defaulted
obligors or segments of defaulted retail
exposures until the collateral is sold.
The time period from default to sale of
collateral can be significant and the
exposure amount covered by such U.S.
sovereign guarantees or insurance can
be substantial.
In order to make the treatment for
exposures to defaulted obligors and
segments of defaulted retail exposures
more risk sensitive, the FDIC has
decided to amend the advanced
approaches rule by assigning a 1.6
percent capital requirement to the
portion of the EAD for each wholesale
exposure to a defaulted obligor and each
segment of defaulted retail exposures
that is covered by an eligible guarantee
from the U.S. government. The portion
of the exposure amount for each
wholesale exposure to a defaulted
obligor and each segment of defaulted
retail exposures not covered by an
eligible guarantee from the U.S.
government continues to be assigned an
8.0 percent capital requirement.
9. Stable Value Wraps
The FDIC is clarifying that an FDICsupervised institution that provides
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stable value protection, such as through
a stable value wrap that has provisions
and conditions that minimize the wrap’s
exposure to credit risk of the underlying
assets in the fund, must treat the
exposure as if it were an equity
derivative on an investment fund and
determine the adjusted carrying value of
the exposure as the sum of the adjusted
carrying values of any on-balance sheet
asset component determined according
to section 324.151(b)(1) and the offbalance sheet component determined
according to section 324.151(b)(2). That
is, the adjusted carrying value is 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 without subtracting the
adjusted carrying value of the onbalance sheet component of the
exposure as calculated under the same
paragraph. Risk-weighted assets for such
an exposure is determined by applying
one of the three look-through
approaches as provided in section
324.154 of the interim final rule.
10. Treatment of Pre-Sold Construction
Loans and Multi-Family Residential
Loans
The interim final rule assigns either a
50 percent or a 100 percent risk weight
to certain one-to-four family residential
pre-sold construction loans under the
advanced approaches rule, consistent
with provisions of the RTCRRI Act.183
This treatment is consistent with the
treatment under the general risk-based
capital rules and under the standardized
approach.
F. Pillar 3 Disclosures
1. Frequency and Timeliness of
Disclosures
For purposes of the interim final rule,
an FDIC-supervised institution is
required to provide certain qualitative
and quantitative public disclosures on a
quarterly, or in some cases, annual
basis, and these disclosures must be
‘‘timely.’’ Qualitative disclosures that
provide a general summary of an FDICsupervised institution’s riskmanagement objectives and policies,
reporting system, and definitions may
be disclosed annually after the end of
the fourth calendar quarter, provided
any significant changes are disclosed in
the interim. In the preamble to the
advanced approaches rule, the FDIC
183 See
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indicated that quarterly disclosures
would be timely if they were provided
within 45 days after calendar quarterend. The preamble did not specify
expectations regarding annual
disclosures.
The FDIC acknowledges that timing of
disclosures required under the federal
banking laws may not always coincide
with the timing of disclosures under
other federal laws, including federal
securities laws and their implementing
regulations by the SEC. The FDIC also
indicated that an FDIC-supervised
institution may use disclosures made
pursuant to SEC, regulatory reporting,
and other disclosure requirements to
help meet its public disclosure
requirements under the advanced
approaches rule. For calendar quarters
that do not correspond to fiscal year
end, the FDIC considers those
disclosures that are made within 45
days of the end of the calendar quarter
(or within 60 days for the limited
purpose of the FDIC-supervised
institution’s first reporting period in
which it is subject to the public
disclosure requirements) as timely. In
general, where an FDIC-supervised
institution’s fiscal year-end coincides
with the end of a calendar quarter, the
FDIC considers qualitative and
quantitative 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 FDIC
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 FDICsupervised institution’s capital
adequacy and risk profile. In those
cases, an FDIC-supervised institution
needs to disclose the general nature of
these changes and briefly describe how
they are likely to affect public
disclosures going forward. An FDICsupervised institution should make
these interim disclosures as soon as
practicable after the determination that
a significant change has occurred.
2. Enhanced Securitization Disclosure
Requirements
In view of the significant market
uncertainty during the recent financial
crisis caused by the lack of disclosures
regarding banking organizations’
securitization-related exposures, the
FDIC believes that enhanced disclosure
requirements are appropriate.
Consistent with the disclosures
introduced by the 2009 Enhancements,
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the proposal amended the qualitative
section for Table 9 disclosures
(Securitization) under section 324.173
to include the following:
D The nature of the risks inherent in
a banking organization’s securitized
assets,
D A description of the policies that
monitor changes in the credit and
market risk of a banking organization’s
securitization exposures,
D A description of a banking
organization’s policy regarding the use
of credit risk mitigation for
securitization exposures,
D A list of the special purpose entities
a banking organization uses to securitize
exposures and the affiliated entities that
a bank manages or advises and that
invest in securitization exposures or the
referenced SPEs, and
D A summary of the banking
organization’s accounting policies for
securitization activities.
To the extent possible, the FDIC is
implementing the disclosure
requirements included in the 2009
Enhancements in the interim final rule.
However, consistent with section 939A
of the Dodd-Frank Act, the tables do not
include those disclosure requirements
that are tied to the use of ratings.
3. Equity Holdings That Are Not
Covered Positions
The current advanced approaches rule
requires banking organizations to
include in their public disclosures a
discussion of ‘‘important policies
covering the valuation of and
accounting for equity holdings in the
banking book.’’ Since ‘‘banking book’’ is
not a defined term under the interim
final rule, the FDIC refers to such
exposures as equity holdings that are
not covered positions in the interim
final rule.
XII. Market Risk Rule
On August 30, 2012, the agencies
revised their respective market risk
rules to better capture positions subject
to market risk, reduce pro-cyclicality in
market risk capital requirements,
enhance the rule’s sensitivity to risks
that were not adequately captured under
the prior regulatory measurement
methodologies, and increase
transparency through enhanced
disclosures.184
As noted in the introduction of this
preamble, the agencies proposed to
expand the scope of the market risk rule
to include state savings associations,
and to codify the market risk rule in a
manner similar to the other regulatory
capital rules in the three proposals. In
184 See
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the interim final rule, consistent with
the proposal, the FDIC has also merged
definitions and made appropriate
technical changes.
As a general matter, an FDICsupervised institution that is subject to
the market risk rule will continue to
exclude covered positions (other than
certain foreign exchange and
commodities positions) when
calculating its risk-weighted assets
under the other risk-based capital rules.
Instead, the FDIC-supervised institution
must determine an appropriate capital
requirement for such positions using the
methodologies set forth in the final
market risk rule. The banking
organization then must multiply its
market risk capital requirement by 12.5
to determine a risk-weighted asset
amount for its market risk exposures
and include that amount in its
standardized approach risk-weighted
assets and for an advanced approaches
banking organization’s advanced
approaches risk-weighted assets.
The market risk rule is designed to
determine capital requirements for
trading assets based on general and
specific market risk associated with
these assets. General market risk is the
risk of loss in the market value of
positions resulting from broad market
movements, such as changes in the
general level of interest rates, equity
prices, foreign exchange rates, or
commodity prices. Specific market risk
is the risk of loss from changes in the
fair value of a position due to factors
other than broad market movements,
including event risk (changes in market
price due to unexpected events specific
to a particular obligor or position) and
default risk.
The agencies proposed to apply the
market risk rule to state savings
associations. Consistent with the
proposal, the FDIC in this interim final
rule has expanded the scope of the
market risk rule to state savings
associations that meet the stated
thresholds. The market risk rule applies
to any state savings association whose
trading activity (the gross sum of its
trading assets and trading liabilities) is
equal to 10 percent or more of its total
assets or $1 billion or more. The FDIC
retains the authority to apply its
respective market risk rule to any entity
under its jurisdiction, regardless of
whether it meets either of the thresholds
described above, if the agency deems it
necessary or appropriate for safe and
sound banking practices.
Application of the market risk rule to
all banking organizations with material
exposure to market risk is particularly
important because of banking
organizations’ increased exposure to
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traded credit products, such as CDSs,
asset-backed securities and other
structured products, as well as other
less liquid products. In fact, many of the
August 2012 revisions to the market risk
rule were made in response to concerns
that arose during the recent financial
crisis when banking organizations
holding certain trading assets suffered
substantial losses. For example, in
addition to a market risk capital
requirement to account for general
market risk, the revised rules apply
more conservative standardized specific
risk capital requirements to most
securitization positions and implement
an additional incremental risk capital
requirement for a banking organization
that models specific risk for one or more
portfolios of debt or, if applicable,
equity positions. Additionally, to
address concerns about the appropriate
treatment of traded positions that have
limited price transparency, a banking
organization subject to the market risk
rule must have a well-defined valuation
process for all covered positions.
The FDIC received comments on the
market risk rule. One commenter
asserted that the agencies should
establish standardized capital
requirements for trading operations
rather than relying on risk modeling
techniques because there is no way for
regulators or market participants to
judge whether bank calculations of
market risk are meaningful. Regarding
the use of standardized requirements for
trading operations rather than reliance
on risk modeling, banking
organizations’ models are subject to
initial approval and ongoing review
under the market risk rule. The FDIC is
aware that the BCBS is considering,
among other options, greater use of
standardized approaches for market
risk. The FDIC would consider
modifications to the international
market risk framework when and if it is
revised.
Another commenter asserted that the
effective date for application of the
market risk rule (and the advanced
approaches rule) to SLHCs should be
deferred until at least July 21, 2015.
This commenter also asserted that
SLHCs with substantial insurance
operations should be exempt from the
advanced approaches and market risk
rules if their subsidiary bank or savings
association comprised less than 5
percent or 10 percent of the total assets
of the SLHC. As a general matter,
savings associations and SLHCs do not
engage in trading activity to a
substantial degree. However, the FDIC
believes that any state savings
association whose trading activity grows
to the extent that it meets either of the
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thresholds should hold capital
commensurate with the risk of the
trading activity and should have in
place the prudential risk-management
systems and processes required under
the market risk rule. Therefore, it is
appropriate to expand the scope of the
market risk rule to apply to state savings
associations as of January 1, 2015.
Another commenter asserted that
regulations should increase the cost of
excessive use of short-term borrowing to
fund long maturity assets. The FDIC is
considering the implications of shortterm funding from several perspectives
outside of the regulatory capital
framework. Specifically, the FDIC
expects short-term funding risks would
be a potential area of focus in
forthcoming Basel III liquidity and
enhanced prudential standards
regulations.
The FDIC also has adopted
conforming changes to certain elements
of the market risk rule to reflect changes
that are being made to other aspects of
the regulatory capital framework. These
changes are designed to correspond to
the changes to the CRC references and
treatment of securitization exposures
under subparts D and E of the interim
final rule, which are discussed more
fully in the standardized and advanced
approaches sections. See sections VIII.B
and XII.C of this preamble for a
discussion of these changes.
More specifically, the market risk rule
is being amended to incorporate a
revised definition of parameter W in the
SSFA. The agencies received comment
on the existing definition, which
assessed a capital penalty if borrowers
exercised contractual rights to defer
payment of principal or interest for
more than 90 days on exposures
underlying a securitization. In response
to commenters, the FDIC is modifying
this definition to exclude all loans
issued under Federally-guaranteed
student loan programs, and certain
consumer loans (including nonFederally guaranteed student loans)
from being included in this component
of parameter W.
The FDIC has made a technical
amendment to the market risk rule with
respect to the covered position
definition. Previously, the definition of
covered position excluded equity
positions that are not publicly traded.
The FDIC has refined this exception
such that a covered position may
include a position in a non-publicly
traded investment company, as defined
in and registered with the SEC under
the Investment Company Act of 1940
(15 U.S.C. 80a–1 et seq.) (or its non-U.S.
equivalent), provided that all the
underlying equities held by the
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investment company are publicly
traded. The FDIC believes that a ‘‘lookthrough’’ approach is appropriate in
these circumstances because of the
liquidity of the underlying positions, so
long as the other conditions of a covered
position are satisfied.
The FDIC also has clarified where an
FDIC-supervised institution subject to
the market risk rule must make its
required market risk disclosures and
require that these disclosures be timely.
The FDIC-supervised institution must
provide its quantitative disclosures after
each calendar quarter. In addition, the
interim final rule clarifies that an FDICsupervised institution must provide its
qualitative disclosures at least annually,
after the end of the fourth calendar
quarter, provided any significant
changes are disclosed in the interim.
The FDIC acknowledges 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 FDIC considers those
disclosures that are made within 45
days of the end of the calendar quarter
(or within 60 days for the limited
purpose of the FDIC-supervised
institution’s first reporting period in
which it is subject to the rule) as timely.
In general, where an FDIC-supervised
institution’s fiscal year-end coincides
with the end of a calendar quarter, the
FDIC considers qualitative and
quantitative 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 FDIC
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 FDICsupervised institution’s capital
adequacy and risk profile. In those
cases, an FDIC-supervised institution
needs to disclose the general nature of
these changes and briefly describe how
they are likely to affect public
disclosures going forward. An FDICsupervised institution should make
these interim disclosures as soon as
practicable after the determination that
a significant change has occurred.
The interim final rule also clarifies
that an FDIC-supervised institution’s
management may provide all of the
disclosures required by the market risk
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rule in one place on the FDICsupervised institution’s public Web site
or may provide the disclosures in more
than one public financial report or other
regulatory reports, provided that the
FDIC-supervised institution publicly
provides a summary table specifically
indicating the location(s) of all such
disclosures.
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XIII. Abbreviations
ABCP Asset-Backed Commercial Paper
ADC Acquisition, Development, or
Construction
AFS Available For Sale
ALLL Allowance for Loan and Lease Losses
AOCI Accumulated Other Comprehensive
Income
AVC Asset Value Correlation
BCBS Basel Committee on Banking
Supervision
BCBS FAQ Basel Committee on Banking
Supervision Frequently Asked Questions
BHC Bank Holding Company
CCF Credit Conversion Factor
CCP Central Counterparty
CDFI Community Development Financial
Institution
CDS Credit Default Swap
CDSind Index Credit Default Swap
CEIO Credit-Enhancing Interest-Only Strip
CEM Current Exposure Method
CFR Code of Federal Regulations
CFPB Consumer Financial Protection
Bureau
CFTC Commodity Futures Trading
Commission
CPSS Committee on Payment and
Settlement Systems
CRC Country Risk Classifications
CUSIP Committee on Uniform Securities
Identification Procedures
CVA Credit Valuation Adjustment
DAC Deferred Acquisition Cost
DCO Derivatives Clearing Organizations
DTA Deferred Tax Asset
DTL Deferred Tax Liability
DvP Delivery-versus-Payment
E Measure of Effectiveness
EAD Exposure at Default
ECL Expected Credit Loss
EE Expected Exposure
EPE Expected Positive Exposure
ERISA Employee Retirement Income
Security Act of 1974
ESOP Employee Stock Ownership Plan
FDIC Federal Deposit Insurance
Corporation
FDICIA Federal Deposit Insurance
Corporation Improvement Act of 1991
FFIEC Federal Financial Institutions
Examination Council
FHA Federal Housing Administration
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage
Corporation
FIRREA Financial Institutions, Reform,
Recovery and Enforcement Act
FMU Financial Market Utility
FNMA Federal National Mortgage
Association
FRFA Final Regulatory Flexibility Act
GAAP U.S. Generally Accepted Accounting
Principles
GNMA Government National Mortgage
Association
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GSE Government-sponsored Enterprise
HAMP Home Affordable Mortgage Program
HOLA Home Owners’ Loan Act
HTM Held-To-Maturity
HVCRE High-Volatility Commercial Real
Estate
IFRS International Financial Reporting
Standards
IMM Internal Models Methodology
IOSCO International Organization of
Securities Commissions
IRB Internal Ratings-Based
IRFA Initial Regulatory Flexibility Analysis
LGD Loss Given Default
LTV Loan-to-Value Ratio
M Effective Maturity
MBS Mortgage-backed Security
MDB Multilateral Development Bank
MDI Minority Depository Institution
MHC Mutual Holding Company
MSA Mortgage Servicing Assets
NPR Notice of Proposed Rulemaking
NRSRO Nationally Recognized Statistical
Rating Organization
OCC Office of the Comptroller of the
Currency
OECD Organization for Economic Cooperation and Development
OMB Office of Management and Budget
OTC Over-the-Counter
OTS Office of Thrift Supervision
PCA Prompt Corrective Action
PCCR Purchased Credit Card Relationship
PD Probability of Default
PFE Potential Future Exposure
PMI Private Mortgage Insurance
PMSR Purchased Mortgage Servicing Right
PRA Paperwork Reduction Act of 1995
PSE Public Sector Entities
PvP Payment-versus-Payment
QCCP Qualifying Central Counterparty
QIS Quantitative Impact Study
QM Qualified Mortgages
QRE Qualifying Revolving Exposure
RBA Ratings-Based Approach
RBC Risk-Based Capital
REIT Real Estate Investment Trust
Re-REMIC Resecuritization of Real Estate
Mortgage Investment Conduit
RFA Regulatory Flexibility Act
RTCRRI Act Resolution Trust Corporation
Refinancing, Restructuring, and
Improvement Act of 1991
RVC Ratio of Value Change
SAP Statutory Accounting Principles
SEC U.S. Securities and Exchange
Commission
SFA Supervisory Formula Approach
SLHC Savings and Loan Holding Company
SPE Special Purpose Entity
SR Supervision and Regulation Letter
SRWA Simple Risk-Weight Approach
SSFA Simplified Supervisory Formula
Approach
TruPS Trust Preferred Security
TruPS CDO Trust Preferred Security
Collateralized Debt Obligation
UMRA Unfunded Mandates Reform Act of
1995
U.S.C. United States Code
VA Veterans Administration
VaR Value-at-Risk
VOBA Value of Business Acquired
WAM Weighted Average Maturity
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XIV. Regulatory Flexibility Act
In general, section 4 of the Regulatory
Flexibility Act (5 U.S.C. 604) (RFA)
requires an agency to prepare a final
regulatory flexibility analysis (FRFA),
for a final rule unless the agency
certifies that the rule will not, if
promulgated, have a significant
economic impact on a substantial
number of small entities (defined for
purposes of the RFA to include banking
entities with total assets of $175 million
or less and after July 22, 2013, total
assets of $500 million or less). Pursuant
to the RFA, the agency must make the
FRFA available to members of the
public and must publish the FRFA, or
a summary thereof, in the Federal
Register. In accordance with section 4 of
the RFA, the FDIC is publishing the
following summary of its FRFA.185
For purposes of the FRFA, the FDIC
analyzed the potential economic impact
on the entities it regulates with total
assets of $175 million or less and $500
million or less, including state
nonmember banks and state savings
associations (small FDIC-supervised
institutions).
As discussed in more detail in section
E, below, the FDIC believes that this
interim final rule may have a significant
economic impact on a substantial
number of the small entities under its
jurisdiction. Accordingly, the FDIC has
prepared the following FRFA pursuant
to the RFA.
A. Statement of the Need for, and
Objectives of, the Interim Final Rule
As discussed in the Supplementary
Information of the preamble to this
interim final rule, the FDIC is revising
its regulatory capital requirements to
promote safe and sound banking
practices, implement Basel III and other
aspects of the Basel capital framework,
harmonize capital requirements
between types of FDIC-supervised
institutions, and codify capital
requirements.
Additionally, this interim final rule
satisfies certain requirements under the
185 The FDIC published a summary of its initial
regulatory flexibility analysis (IRFA) in connection
with each of the proposed rules in accordance with
Section 3(a) of the Regulatory Flexibility Act, 5
U.S.C. 603 (RFA). In the IRFAs provided in
connection with the proposed rules, the FDIC
requested comment on all aspects of the IRFAs,
and, in particular, on any significant alternatives to
the proposed rules applicable to covered small
FDIC-supervised institutions that would minimize
their impact on those entities. In the IRFA provided
by the FDIC in connection with the advanced
approach proposed rule, the FDIC determined that
there would not be a significant economic impact
on a substantial number of small FDIC-supervised
institutions and published a certification and a
short explanatory statement pursuant to section
605(b) of the RFA.
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Dodd-Frank Act by: (1) Revising
regulatory capital requirements to
remove references to, and requirements
of reliance on, credit ratings,186 and (2)
imposing new or revised minimum
capital requirements on certain FDICsupervised institutions.187
Under section 38(c)(1) of the Federal
Deposit Insurance Act, the FDIC may
prescribe capital standards for
depository institutions that it
regulates.188 The FDIC also must
establish capital requirements under the
International Lending Supervision Act
for institutions that it regulates.189
B. Summary and Assessment of
Significant Issues Raised by Public
Comments in Response to the IRFAs,
and a Statement of Changes Made as a
Result of These Comments
The FDIC received three public
comments directly addressing the
IRFAs. One commenter questioned the
FDIC’s assumption that risk-weighted
assets would increase only 10 percent
and questioned reliance on Call Report
data for this assumption, as the
commenter asserted that existing Call
Report data does not contain the
information required to accurately
analyze the proposal’s impact on riskweighted assets (for example, under the
Standardized Approach NPR, an
increase in the risk weights for 1–4
family residential mortgage exposures
that are balloon mortgages). The
commenters also expressed general
concern that the FDIC was
underestimating the compliance cost of
the proposed rules. For instance, one
commenter questioned whether small
banking organizations would have the
information required to determine the
applicable risk weights for residential
mortgage exposures, and stated that the
cost of applying the proposed standards
to existing exposures was
underestimated. Another commenter
stated that the FDIC did not adequately
consider the additional costs relating to
new reporting systems, assimilating
data, and preparing reports required
under the proposed rules.
To measure the potential impact on
small entities for the purposes of its
IRFAs, the FDIC used the most current
reporting data available and, to address
information gaps, applied conservative
assumptions. The FDIC considered the
comments it received on the potential
impact of the proposed rules, and, as
discussed in Item F, below, made
significant revisions to the interim final
186 See
15 U.S.C. 78o–7, note.
12 U.S.C. 5371.
188 See 12 U.S.C. 1831o(c).
189 See 12 U.S.C. 3907.
187 See
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rule in response to the concerns
expressed regarding the potential
burden on small FDIC-supervised
institutions.
Commenters expressed concern that
the FDIC, along with the OCC and
Federal Reserve, did not use a uniform
methodology for conducting their IRFAs
and suggested that the agencies should
have compared their analyses prior to
publishing the proposed rules. The
agencies coordinated closely in
conducting the IRFAs to maximize
consistency among the methodologies
used for determining the potential
impact on the entities regulated by each
agency. However, the analyses differed
as appropriate in light of the different
entities each agency supervises. For
their respective FRFAs, the agencies
continued to coordinate closely in order
to ensure maximum consistency and
comparability.
One commenter questioned the
alternatives described in the IRFAs.
This commenter asserted that the
alternatives were counter-productive
and added complexity to the capital
framework without any meaningful
benefit. As discussed throughout the
preamble and in Item F, below, the FDIC
has responded to commenters’ concerns
and sought to reduce the compliance
burden on FDIC-supervised institutions
throughout this interim final rule.
The FDIC also received a number of
more general comments regarding the
overall burden of the proposed rules.
For example, many commenters
expressed concern that the complexity
and implementation cost of the
proposed rules would exceed the
expected benefit. According to these
commenters, implementation of the
proposed rules would require software
upgrades for new internal reporting
systems, increased employee training,
and the hiring of additional employees
for compliance purposes.
A few commenters also urged the
FDIC to recognize that compliance costs
have increased significantly over recent
years due to other regulatory changes.
As discussed throughout the preamble
and in Item F, below, the FDIC
recognizes the potential compliance
costs associated with the proposals.
Accordingly, for purposes of the interim
final rule the FDIC modified certain
requirements of the proposals to reduce
the compliance burden on small FDICsupervised institutions. The FDIC
believes the interim final rule maintains
its objectives regarding the
implementation of the Basel III
framework while reducing costs for
small FDIC-supervised institutions.
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C. Response to Comments Filed by the
Chief Counsel for Advocacy of the Small
Business Administration, and Statement
of Changes Made as a Result of the
Comment
The Chief Counsel for Advocacy of
the Small Business Administration
(CCA) filed a letter with the FDIC
providing comments on the proposed
rules. The CCA generally commended
the FDIC for the IRFAs provided with
the proposed rules, and specifically
commended the FDIC for considering
the cumulative economic impact of the
proposals on small FDIC-supervised
institutions. The CCA acknowledged
that the FDIC provided lists of
alternatives being considered, but
encouraged the FDIC to provide more
detailed discussion of these alternatives
and the potential burden reductions
associated with the alternatives. The
CCA acknowledged that the FDIC had
certified that the advanced approaches
proposed rule would not have a
significant economic impact on a
substantial number of small FDICsupervised institutions.
The CCA stated that small FDICsupervised institutions should be able to
continue to use the current regulatory
capital framework to compute their
capital requirements. The FDIC
recognizes that the new regulatory
capital framework will carry costs, but
believes that the supervisory interest in
improved and uniform capital
standards, and the resulting
improvements in the safety and
soundness of the U.S. banking system,
outweighs the increased burden.
The CCA also urged the FDIC to give
careful consideration to comments
discussing the impact of the proposed
rules on small FDIC-supervised
institutions and to analyze possible
alternatives to reduce this impact. The
FDIC gave careful consideration to all
comments received, in particular the
comments that discussed the potential
impact of the proposed rules on small
FDIC-supervised institutions and made
certain changes to reduce the potential
impact of the interim final rule, as
discussed throughout the preamble and
in Item F, below.
The CCA expressed concern that
aspects of the proposals could be
problematic and onerous for small
FDIC-supervised institutions. The CCA
stated that the proposed rules were
designed for large, international banks
and not adapted to the circumstances of
small FDIC-supervised institutions.
Specifically, the CCA expressed concern
over higher risk weights for certain
products, which, the CCA argued, could
drive small FDIC-supervised institutions
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into products carrying additional risks.
The CCA also noted heightened
compliance and technology costs
associated with implementing the
proposed rules and raised the
possibility that small FDIC-supervised
institutions may exit the mortgage
market. As discussed throughout the
preamble and in Item F below, the FDIC
has made significant revisions to the
proposed rules that address the
concerns raised in the CCA’s comment.
D. Description and Estimate of Small
FDIC-Supervised Institutions Affected
by the Interim Final Rule
Under regulations issued by the Small
Business Administration,190 a small
entity includes a depository institution
with total assets of $175 million or less
and beginning July 22, 2013, total assets
of $500 million or less.
As of March 31, 2013, the FDIC
supervised approximately 2,453 small
depository institutions with total assets
of $175 million or less. 2,295 are small
state nonmember banks, 112 are small
state savings banks, and 46 are small
state savings associations. As of March
31, 2013, the FDIC supervised
approximately 3,711 small depository
institutions with total assets of $500
million or less. 3,398 are small state
nonmember banks, 259 are small state
savings banks, and 54 are small state
savings associations.
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E. Projected Reporting, Recordkeeping,
and Other Compliance Requirements
The interim final rule may impact
small FDIC-supervised institutions in
several ways. The interim final rule
affects small FDIC-supervised
institutions’ regulatory capital
requirements by changing the qualifying
criteria for regulatory capital, including
required deductions and adjustments,
and modifying the risk weight treatment
for some exposures. The interim final
rule also requires small FDIC-supervised
institutions to meet new minimum
common equity tier 1 to risk-weighted
assets ratio of 4.5 percent and an
increased minimum tier 1 capital to
risk-weighted assets risk-based capital
ratio of 6 percent. Under the interim
final rule, all FDIC-supervised
institutions would remain subject to a 4
percent minimum tier 1 leverage
ratio.191 The interim final rule imposes
190 See
13 CFR 121.201.
institutions subject to the
advanced approaches rule also would be required
in 2018 to achieve a minimum tier 1 capital to total
leverage exposure ratio (the supplementary leverage
ratio) of 3 percent. Advanced approaches banking
organizations should refer to section 10 of subpart
B of the interim final rule and section II.B of the
preamble for a more detailed discussion of the
applicable minimum capital ratios.
191 FDIC-supervised
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limitations on capital distributions and
discretionary bonus payments for small
FDIC-supervised institutions that do not
hold a buffer of common equity tier 1
capital above the minimum ratios.
The interim final rule also includes
changes to the general risk-based capital
requirements that address the
calculation of risk-weighted assets. The
interim final rule:
• Introduces a higher risk weight for
certain past due exposures and
acquisition and development real estate
loans;
• Provides a more risk sensitive
approach to exposures to non-U.S.
sovereigns and non-U.S. public sector
entities;
• Replaces references to credit ratings
with new measures of
creditworthiness; 192
• Provides more comprehensive
recognition of collateral and guarantees;
and
• Provides a more favorable capital
treatment for transactions cleared
through qualifying central
counterparties.
As a result of the new requirements,
some small FDIC-supervised institutions
may have to alter their capital structure
(including by raising new capital or
increasing retention of earnings) in
order to achieve compliance.
The FDIC has excluded from its
analysis any burden associated with
changes to the Consolidated Reports of
Income and Condition for small FDICsupervised institutions (FFIEC 031 and
041; OMB Nos. 7100–0036, 3064–0052,
1557–0081). The FDIC is proposing
information collection changes to reflect
the requirements of the interim final
rule, and is publishing separately for
comment on the regulatory reporting
requirements that will include
associated estimates of burden. Further
analysis of the projected reporting
requirements imposed by the interim
final rule is located in the Paperwork
Reduction Act section, below.
Most small FDIC-supervised
institutions hold capital in excess of the
minimum leverage and risk-based
capital requirements set forth in the
interim final rule. Although the capital
requirements under the interim final
rule are not expected to significantly
impact the capital structure of these
institutions, the FDIC expects that some
may change internal capital allocation
policies and practices to accommodate
the requirements of the interim final
192 Section 939A of the Dodd-Frank Act addresses
the use of credit ratings in regulations of the FDIC.
Accordingly, the interim final rule introduces
alternative measures of creditworthiness for foreign
debt, securitization positions, and resecuritization
positions.
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55467
rule. For example, an institution may
elect to raise capital to return its excess
capital position to the levels maintained
prior to implementation of the interim
final rule.
A comparison of the capital
requirements in the interim final rule on
a fully-implemented basis to the
minimum requirements under the
general risk-based capital rules shows
that approximately 57 small FDICsupervised institutions with total assets
of $175 million or less currently do not
hold sufficient capital to satisfy the
requirements of the interim final rule.
Those institutions, which represent
approximately two percent of small
FDIC-supervised institutions,
collectively would need to raise
approximately $83 million in regulatory
capital to meet the minimum capital
requirements under the interim final
rule.
A comparison of the capital
requirements in the interim final rule on
a fully-implemented basis to the
minimum requirements under the
general risk-based capital rules shows
that approximately 96 small FDICsupervised institutions with total assets
of $500 million or less currently do not
hold sufficient capital to satisfy the
requirements of the interim final rule.
Those institutions, which represent
approximately three percent of small
FDIC-supervised institutions,
collectively would need to raise
approximately $445 million in
regulatory capital to meet the minimum
capital requirements under the interim
final rule.
To estimate the cost to FDICsupervised institutions of the new
capital requirement, the FDIC examined
the effect of this requirement on capital
structure and the overall cost of
capital.193 The cost of financing an
FDIC-supervised institution is the
weighted average cost of its various
financing sources, which amounts to a
weighted average cost of capital
reflecting many different types of debt
and equity financing. Because interest
payments on debt are tax deductible, a
more leveraged capital structure reduces
corporate taxes, thereby lowering
funding costs, and the weighted average
cost of financing tends to decline as
leverage increases. Thus, an increase in
required equity capital would—all else
equal—increase the cost of capital for
that institution. This effect could be
offset to some extent if the additional
capital protection caused the riskpremium demanded by the institution’s
193 See Merton H. Miller, (1995), ‘‘Do the M & M
propositions apply to banks?’’ Journal of Banking &
Finance, Vol. 19, pp. 483–489.
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counterparties to decline sufficiently.
The FDIC did not try to measure this
effect. This increased cost in the most
burdensome year would be tax benefits
foregone: The capital requirement,
multiplied by the interest rate on the
debt displaced and by the effective
marginal tax rate for the FDICsupervised institutions affected by the
interim final rule. The effective
marginal corporate tax rate is affected
not only by the statutory federal and
state rates, but also by the probability of
positive earnings and the offsetting
effects of personal taxes on required
bond yields. Graham (2000) considers
these factors and estimates a median
marginal tax benefit of $9.40 per $100
of interest.194 So, using an estimated
interest rate on debt of 6 percent, the
FDIC estimated that for institutions with
total assets of $175 million or less, the
annual tax benefits foregone on $83
million of capital switching from debt to
equity is approximately $469,000 per
year ($83 million * 0.06 (interest rate) *
0.094 (median marginal tax savings)).
Averaged across 57 institutions, the cost
is approximately $8,000 per institution
per year. Similarly, for institutions with
total assets of $500 million or less, the
annual tax benefits foregone on $445
million of capital switching from debt to
equity is approximately $2.5 million per
year ($445 million * 0.06 (interest rate)
* 0.094 (median marginal tax savings)).
Averaged across 96 institutions, the cost
is approximately $26,000 per institution
per year.
Working with the other agencies, the
FDIC also estimated the direct
compliance costs related to financial
reporting as a result of the interim final
rule. This aspect of the interim final rule
likely will require additional personnel
training and expenses related to new
systems (or modification of existing
systems) for calculating regulatory
capital ratios, in addition to updating
risk weights for certain exposures. The
FDIC assumes that small FDICsupervised institutions will spend
approximately $43,000 per institution to
update reporting system and change the
classification of existing exposures.
Based on comments from the industry,
the FDIC increased this estimate from
the $36,125 estimate used in the
proposed rules. The FDIC believes that
this revised cost estimate is more
conservative because it has increased
even though many of the labor-intensive
provisions of the interim final rule have
been excluded. For example, small
FDIC-supervised institutions have the
option to maintain the current reporting
methodology for gains and losses
classified as Available for Sale (AFS)
thus eliminating the need to update
systems. Additionally the exposures
where the risk-weights are changing
typically represent a small portion of
assets (less than 5 percent) on
institutions’ balance sheets.
Additionally, small FDIC-supervised
institutions can maintain existing riskweights for residential mortgage
exposures, eliminating the need for
those institutions to reclassify existing
exposure. This estimate of direct
compliance costs is the same under both
the $175 million and $500 million size
thresholds.
The FDIC estimates that the $43,000
in direct compliance costs will
represent a significant burden for
approximately 37 percent of small FDICsupervised institutions with total assets
of $175 million or less. The FDIC
estimates that the $43,000 in direct
compliance costs will represent a
burden for approximately 25 percent of
small FDIC-supervised institutions with
total assets of $500 million or less. For
purposes of this interim final rule, the
FDIC defines significant burden as an
estimated cost greater than 2.5 percent
of total non-interest expense or 5
percent of annual salaries and employee
benefits. The direct compliance costs
are the most significant cost since few
small FDIC-supervised institutions will
need to raise capital to meet the
minimum ratios, as noted above.
194 See John R. Graham, (2000), How Big Are the
Tax Benefits of Debt?, Journal of Finance, Vol. 55,
No. 5, pp. 1901–1941. Graham points out that
ignoring the offsetting effects of personal taxes
would increase the median marginal tax rate to
$31.5 per $100 of interest.
195 For most non-advanced approaches banking
organizations, this will be a one-time only election.
However, in certain limited circumstances, such as
a merger of organizations that have made different
elections, the FDIC may permit the resultant entity
to make a new election.
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F. Steps Taken To Minimize the
Economic Impact on Small FDICSupervised Institutions; Significant
Alternatives
In response to commenters’ concerns
about the potential implementation
burden on small FDIC-supervised
institutions, the FDIC has made several
significant revisions to the proposals for
purposes of the interim final rule. Under
the interim final rule, non-advanced
approaches FDIC-supervised
institutions will be permitted to elect to
exclude amounts reported as
accumulated other comprehensive
income (AOCI) when calculating
regulatory capital, to the same extent
currently permitted under the general
risk-based capital rules.195 In addition,
for purposes of calculating riskweighted assets under the standardized
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approach, the FDIC is not adopting the
proposed treatment for 1–4 family
residential mortgages, which would
have required small FDIC-supervised
institutions to categorize residential
mortgage loans into one of two
categories based on certain underwriting
standards and product features, and
then risk-weight each loan based on its
loan-to-value ratio. The FDIC also is
retaining the 120-day safe harbor from
recourse treatment for loans transferred
pursuant to an early default provision.
The FDIC believes that these changes
will meaningfully reduce the
compliance burden of the interim final
rule for small FDIC-supervised
institutions. For instance, in contrast to
the proposal, the interim final rule does
not require small FDIC-supervised
institutions to review existing mortgage
loan files, purchase new software to
track loan-to-value ratios, train
employees on the new risk-weight
methodology, or hold more capital for
exposures that would have been deemed
category 2 under the proposed rule,
removing the proposed distinction
between risk weights for category 1 and
2 residential mortgage exposures.
Similarly, the option to elect to retain
the current treatment of AOCI will
reduce the burden associated with
managing the volatility in regulatory
capital resulting from changes in the
value of an FDIC-supervised
institutions’ AFS debt securities
portfolio due to shifting interest rate
environments. The FDIC believes these
modifications to the proposed rule will
substantially reduce compliance burden
for small FDIC-supervised institutions.
XV. Paperwork Reduction Act
In accordance with the requirements
of the Paperwork Reduction Act (PRA)
of 1995 (44 U.S.C. 3501–3521), the FDIC
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.
In conjunction with the proposed
rules, the FDIC submitted the
information collection requirements
contained therein to OMB for review. In
response, OMB filed comments with the
FDIC in accordance with 5 CFR
1320.11(c) withholding PRA approval
and instructing that the collection
should be resubmitted to OMB at the
interim final rule stage. As instructed by
OMB, the information collection
requirements contained in this interim
final rule have been submitted by the
FDIC to OMB for review under the PRA,
under OMB Control No. 3064–0153.
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The interim final rule contains
information collection requirements
subject to the PRA. They are found in
sections 324.3, 324.22, 324.35, 324.37,
324.41, 324.42, 324.62, 324.63
(including tables), 324.121, through
324.124, 324.132, 324.141, 324.142,
324.153, 324.173 (including tables). The
information collection requirements
contained in sections 324.203, through
324.210, and 324.212 concerning market
risk are approved by OMB under
Control No. 3604–0178.
A total of nine comments were
received concerning paperwork. Seven
expressed concern regarding the
increase in paperwork resulting from
the rule. They addressed the concept of
paperwork generally and not within the
context of the PRA.
One comment addressed cost,
competitiveness, and qualitative impact
statements, and noted the lack of cost
estimates. It was unclear whether the
commenter was referring to cost
estimates for regulatory burden, which
are included in the preamble to the rule,
or cost estimates regarding the PRA
burden, which are included in the
submissions (information collection
requests) made to OMB by the agencies
regarding the interim final rule. All of
the agencies’ submissions are publicly
available at www.reginfo.gov.
One commenter seemed to indicate
that the agencies’ burden estimates are
overstated. The commenter stated that,
for their institution, the PRA burden
will parallel that of interest rate risk
(240 hours per year). The agencies’
estimates far exceed that figure, so no
change to the estimates would be
necessary. The FDIC continues to
believe that its estimates are reasonable
averages that are not overstated.
The FDIC has an ongoing interest in
your comments. 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,
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maintenance, and purchase of services
to provide information.
XVI. Plain Language
Section 722 of the Gramm-LeachBliley Act requires the FDIC to use plain
language in all proposed and rules
published after January 1, 2000. The
agencies have sought to present the
proposed rule in a simple and
straightforward manner and did not
receive any comments on the use of
plain language.
XVII. Small Business Regulatory
Enforcement Fairness Act of 1996
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996, or ‘‘SBREFA,’’ the FDIC must
advise the OMB as to whether the
interim final rule constitutes a ‘‘major’’
rule.196 If a rule is major, its
effectiveness will generally be delayed
for 60 days pending congressional
review.
In accordance with SBREFA, the FDIC
has advised the OMB that this interim
final rule is a major rule for the purpose
of congressional review. Following
OMB’s review, the FDIC will file the
appropriate reports with Congress and
the Government Accountability Office
so that the final rule may be reviewed.
List of Subjects
12 CFR Part 303
Administrative practice and
procedure, Banks, banking, Bank
merger, Branching, Foreign investments,
Golden parachute payments, Insured
branches, Interstate branching,
Reporting and recordkeeping
requirements, Savings associations.
12 CFR Part 308
Administrative practice and
procedure, Banks, banking, Claims,
Crime; Equal access to justice, Ex parte
communications, Hearing procedure,
Lawyers, Penalties, State nonmember
banks.
12 CFR Part 324
55469
12 CFR Part 337
Banks, banking, Reporting and
recordkeeping requirements, Savings
associations, Securities.
12 CFR Part 347
Authority delegations (Government
agencies), Bank deposit insurance,
Banks, banking, Credit, Foreign banking,
Investments, Reporting and
recordkeeping requirements, United
States investments abroad.
12 CFR Part 349
Foreign banking, Banks, banking.
12 CFR Part 360
Banks, banking, Investments.
12 CFR Part 362
Administrative practice and
procedure, Authority delegations
(Government agencies), Bank deposit
insurance, Banks, banking, Investments,
Reporting and recordkeeping
requirements.
12 CFR Part 363
Accounting, Administrative practice
and procedure, Banks, banking,
Reporting and recordkeeping
requirements.
12 CFR Part 364
Administrative practice and
procedure, Bank deposit insurance,
Banks, banking, Reporting and
recordkeeping requirements, Safety and
soundness.
12 CFR Part 365
Banks, banking, Mortgages.
12 CFR Part 390
Administrative practice and
procedure, Advertising, Aged, Credit,
Civil rights, Conflicts of interest, Crime,
Equal employment opportunity, Ethics,
Fair housing’ Governmental employees,
Home mortgage disclosure, Individuals
with disabilities, OTS employees,
Reporting and recordkeeping
requirements, Savings associations.
12 CFR Part 391
Administrative practice and
procedure, Banks, banking, Capital
adequacy, Reporting and recordkeeping
requirements, Savings associations,
State non-member banks.
Bank deposit insurance, Banks,
banking, Savings associations.
Administrative practice and
procedure, Advertising, Aged, Credit,
Civil rights, Conflicts of interest, Crime,
Equal employment opportunity, Ethics,
Fair housing, Governmental employees,
Home mortgage disclosure, Individuals
with disabilities, OTS employees,
Reporting and recordkeeping
requirements, Savings associations.
12 CFR Part 333
Authority and Issuance
12 CFR Part 327
Banks, banking, Corporate powers.
196 5
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For the reasons set forth in the
preamble, the Federal Deposit Insurance
Corporation amends chapter III of title
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12 of the Code of Federal Regulations as
follows:
PART 303—FILING PROCEDURES
1. The authority citation for part 303
continues to read as follows:
■
Authority: 12 U.S.C. 378, 1464, 1813, 1815,
1817, 1818, 1819 (Seventh and Tenth), 1820,
1823, 1828, 1831a, 1831e, 1831o, 1831p–1,
1831w, 1835a, 1843(l), 3104, 3105, 3108,
3207; 15 U.S.C. 1601–1607.
2. Section 303.2 is amended by
revising paragraphs (b), (ee), and (ff) to
read as follows:
■
§ 303.2
Definitions.
*
*
*
*
*
(b) Adjusted part 325 total assets
means adjusted 12 CFR part 325 or part
324, as applicable, total assets as
calculated and reflected in the FDIC’s
Report of Examination.
*
*
*
*
*
(ee) Tier 1 capital shall have the same
meaning as provided in § 325.2(v) of
this chapter (12 CFR 325.2(v)) or
§ 324.2, as applicable.
(ff) Total assets shall have the same
meaning as provided in § 325.2(x) of
this chapter (12 CFR 325.2(x)) or
§ 324.401(g), as applicable.
*
*
*
*
*
■ 3. Section 303.64 is amended by
revising paragraph (a)(4)(i) to read as
follows:
§ 303.64
Processing.
(a) * * *
(4) * * *
(i) Immediately following the merger
transaction, the resulting institution will
be ‘‘well-capitalized’’ pursuant to
subpart B of part 325 of this chapter (12
CFR part 325) or subpart H of part 324
of this chapter (12 CFR part 324), as
applicable; and
*
*
*
*
*
■ 4. Section 303.181 is amended by
revising paragraph (c)(4) to read as
follows:
§ 303.181
Definitions.
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*
*
*
*
*
(c) * * *
(4) Is well-capitalized as defined in
subpart B of part 325 of this chapter or
subpart H of part 324 of this chapter, as
applicable; and
*
*
*
*
*
■ 5. Section 303.184 is amended by
revising paragraph (d)(1)(ii) to read as
follows:
§ 303.184 Moving an insured branch of a
foreign bank.
*
*
*
(d) * * *
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*
*
17:14 Sep 09, 2013
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(1) * * *
(ii) The applicant is at least
adequately capitalized as defined in
subpart B of part 325 of this chapter or
subpart H of part 324 of this chapter, as
applicable;
*
*
*
*
*
■ 6. Section 303.200 is amended by
revising paragraphs (a)(2) and (b) to read
as follows:
package, including all obligations held
by all participants is $20 million or
more, or such lower level as the FDIC
may establish by order on a case-by-case
basis, will be excluded from this
definition.
*
*
*
*
*
■ 8. Section 303.241 is amended by
revising paragraph (c)(4) to read as
follows:
§ 303.200
§ 303.241 Reduce or retire capital stock or
capital debt instruments.
Scope.
(a) * * *
(2) Definitions of the capital
categories referenced in this Prompt
Corrective Action subpart may be found
in subpart B of part 325 of this chapter,
§ 325.103(b) for state nonmember banks
and § 325.103(c) for insured branches of
foreign banks, or subpart H of part 324
of this chapter, § 324.403(b) for state
nonmember banks and § 324.403(c) for
insured branches of foreign banks, as
applicable.
(b) Institutions covered. Restrictions
and prohibitions contained in subpart B
of part 325 of this chapter, and subpart
H of part 324 of this chapter, as
applicable, apply primarily to state
nonmember banks and insured branches
of foreign banks, as well as to directors
and senior executive officers of those
institutions. Portions of subpart B of
part 325 of this chapter or subpart H of
part 324 of this chapter, as applicable,
also apply to all insured depository
institutions that are deemed to be
critically undercapitalized.
■ 7. Section 303.207 is amended by
revising paragraph (b)(2) to read as
follows:
*
*
*
*
*
(c) * * *
(4) If the proposal involves a series of
transactions affecting Tier 1 capital
components which will be
consummated over a period of time
which shall not exceed twelve months,
the application shall certify that the
insured depository institution will
maintain itself as a well-capitalized
institution as defined in part 325 of this
chapter or part 324 of this chapter, as
applicable, both before and after each of
the proposed transactions;
*
*
*
*
*
PART 308—RULES OF PRACTICE AND
PROCEDURE
9. The authority citation for part 308
continues to read as follows:
■
§ 303.207 Restricted activities for critically
undercapitalized institutions.
Authority: 5 U.S.C. 504, 554–557; 12
U.S.C. 93(b), 164, 505, 1815(e), 1817, 1818,
1820, 1828, 1829, 1829b, 1831i, 1831m(g)(4),
1831o, 1831p–1, 1832(c), 1884(b), 1972,
3102, 3108(a), 3349, 3909, 4717, 15 U.S.C.
78(h) and (i), 78o–4(c), 78o–5, 78q–1, 78s,
78u, 78u–2, 78u–3, and 78w, 6801(b),
6805(b)(1); 28 U.S.C. 2461 note; 31 U.S.C.
330, 5321; 42 U.S.C. 4012a; Sec. 3100(s), Pub.
L. 104–134, 110 Stat. 1321–358; and Pub. L.
109–351.
*
■
*
*
*
*
(b) * * *
(2) Extend credit for any highly
leveraged transaction. A highly
leveraged transaction means an
extension of credit to or investment in
a business by an insured depository
institution where the financing
transaction involves a buyout,
acquisition, or recapitalization of an
existing business and one of the
following criteria is met:
(i) The transaction results in a
liabilities-to-assets leverage ratio higher
than 75 percent; or
(ii) The transaction at least doubles
the subject company’s liabilities and
results in a liabilities-to-assets leverage
ratio higher than 50 percent; or
(iii) The transaction is designated an
highly leverage transaction by a
syndication agent or a federal bank
regulator.
(iv) Loans and exposures to any
obligor in which the total financing
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10. Section 308.200 is revised to read
as follows:
§ 308.200
Scope.
The rules and procedures set forth in
this subpart apply to banks, insured
branches of foreign banks and senior
executive officers and directors of banks
that are subject to the provisions of
section 38 of the Federal Deposit
Insurance Act (section 38) (12 U.S.C.
1831o) and subpart B of part 325 of this
chapter or subpart H of part 324 of this
chapter, as applicable.
■ 11. Section 308.202 is amended by
revising paragraphs (a)(1)(i)(A)
introductory text and (a)(1)(ii) to read as
follows:
§ 308.202 Procedures for reclassifying a
bank based on criteria other than capital.
(a) * * *
(1) * * *
(i) Grounds for reclassification. (A)
Pursuant to § 325.103(d) of this chapter
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or § 324.403(d) of this chapter, as
applicable, the FDIC may reclassify a
well-capitalized bank as adequately
capitalized or subject an adequately
capitalized or undercapitalized
institution to the supervisory actions
applicable to the next lower capital
category if:
*
*
*
*
*
(ii) Prior notice to institution. Prior to
taking action pursuant to § 325.103(d) of
this chapter or § 324.403(d) of this
chapter, as applicable, the FDIC shall
issue and serve on the bank a written
notice of the FDIC’s intention to
reclassify it.
*
*
*
*
*
■ 12. Section 308.204 is amended by
revising paragraphs (b)(2) and (c) to read
as follows:
§ 308.204
Enforcement of directives.
*
*
*
*
*
(b) * * *
(2) Failure to implement capital
restoration plan. The failure of a bank
to implement a capital restoration plan
required under section 38, or subpart B
of part 325 of this chapter or subpart H
of part 324 of this chapter, as applicable,
or the failure of a company having
control of a bank to fulfill a guarantee
of a capital restoration plan made
pursuant to section 38(e)(2) of the FDI
Act shall subject the bank to the
assessment of civil money penalties
pursuant to section 8(i)(2)(A) of the FDI
Act.
(c) Other enforcement action. In
addition to the actions described in
paragraphs (a) and (b) of this section,
the FDIC may seek enforcement of the
provisions of section 38 or subpart B of
part 325 of this chapter or subpart H of
part 324 of this chapter, as applicable,
through any other judicial or
administrative proceeding authorized by
law.
■ 13. Part 324 is added to read as
follows:
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PART 324—CAPITAL ADEQUACY OF
FDIC-SUPERVISED INSTITUTIONS
Subpart A—General Provisions
Sec.
324.1 Purpose, applicability, reservations of
authority, and timing.
324.2 Definitions.
324.3 Operational requirements for
counterparty credit risk.
324.4 Inadequate capital as an unsafe or
unsound practice or condition.
324.5 Issuance of directives.
324.6 through 324.9 [Reserved]
Subpart B—Capital Ratio Requirements and
Buffers
324.10 Minimum capital requirements.
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324.11 Capital conservation buffer and
countercyclical capital buffer amount.
324.12 through 324.19 [Reserved]
Subpart C—Definition of Capital
324.20 Capital components and eligibility
criteria for regulatory capital
instruments.
324.21 Minority interest.
324.22 Regulatory capital adjustments and
deductions.
324.23 through 324.29 [Reserved]
Subpart D—Risk-Weighted Assets—
Standardized Approach
324.30 Applicability.
Risk-Weighted Assets for General Credit
Risk
324.31 Mechanics for calculating riskweighted assets for general credit risk.
324.32 General risk weights.
324.33 Off-balance sheet exposures.
324.34 OTC derivative contracts.
324.35 Cleared transactions.
324.36 Guarantees and credit derivatives:
substitution treatment.
324.37 Collateralized transactions.
Risk-Weighted Assets for Unsettled
Transactions
324.38 Unsettled transactions.
324.39 through 324.40 [Reserved]
Risk-Weighted Assets for Securitization
Exposures
324.41 Operational requirements for
securitization exposures.
324.42 Risk-weighted assets for
securitization exposures.
324.43 Simplified supervisory formula
approach (SSFA) and the gross-up
approach.
324.44 Securitization exposures to which
the SSFA and gross-up approach do not
apply.
324.45 Recognition of credit risk mitigants
for securitization exposures.
324.46 through 324.50 [Reserved]
Risk-Weighted Assets for Equity Exposures
324.51 Introduction and exposure
measurement.
324.52 Simple risk-weight approach
(SRWA).
324.53 Equity exposures to investment
funds.
324.54 through 324.60 [Reserved]
Disclosures
324.61 Purpose and scope.
324.62 Disclosure requirements.
324.63 Disclosures by FDIC-supervised
institutions described in § 324.61.
324.64 through 324.99 [Reserved]
Subpart E—Risk-Weighted Assets—Internal
Ratings-Based and Advanced Measurement
Approaches
324.100 Purpose, applicability, and
principle of conservatism.
324.101 Definitions.
324.102 through 324.120 [Reserved]
Qualification
324.121 Qualification process.
324.122 Qualification requirements.
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324.123 Ongoing qualification.
324.124 Merger and acquisition transitional
arrangements.
324.125 through 324.130 [Reserved]
Risk-Weighted Assets for General Credit
Risk
324.131 Mechanics for calculating total
wholesale and retail risk-weighted
assets.
324.132 Counterparty credit risk of repostyle transactions, eligible margin loans,
and OTC derivative contracts.
324.133 Cleared transactions.
324.134 Guarantees and credit derivatives:
PD substitution and LGD adjustment
approaches.
324.135 Guarantees and credit derivatives:
double default treatment.
324.136 Unsettled transactions.
324.137 through 324.140 [Reserved]
Risk-Weighted Assets for Securitization
Exposures
324.141 Operational criteria for recognizing
the transfer of risk.
324.142 Risk-weighted assets for
securitization exposures.
324.143 Supervisory formula approach
(SFA).
324.144 Simplified supervisory formula
approach (SSFA).
324.145 Recognition of credit risk mitigants
for securitization exposures.
324.146 through 324.150 [Reserved]
Risk-Weighted Assets for Equity Exposures
324.151 Introduction and exposure
measurement.
324.152 Simple risk weight approach
(SRWA).
324.153 Internal models approach (IMA).
324.154 Equity exposures to investment
funds.
324.155 Equity derivative contracts.
324.156 through 324.160 [Reserved]
Risk-Weighted Assets for Operational Risk
324.161 Qualification requirements for
incorporation of operational risk
mitigants.
324.162 Mechanics of risk-weighted asset
calculation.
324.163 through 324.170 [Reserved]
Disclosures
324.171 Purpose and scope.
324.172 Disclosure requirements.
324.173 Disclosures by certain advanced
approaches FDIC-supervised institutions.
324.174 through 324.200 [Reserved]
Subpart F—Risk-Weighted Assets—Market
Risk
324.201 Purpose, applicability, and
reservation of authority.
324.202 Definitions.
324.203 Requirements for application of
this subpart F.
324.204 Measure for market risk.
324.205 VaR-based measure.
324.206 Stressed VaR-based measure.
324.207 Specific risk.
324.208 Incremental risk.
324.209 Comprehensive risk.
324.210 Standardized measurement method
for specific risk.
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324.211 Simplified supervisory formula
approach (SSFA).
324.212 Market risk disclosures.
324.213 through 324.299 [Reserved]
Subpart G—Transition Provisions
324.300 Transitions.
324.301 through 324.399 [Reserved]
Subpart H—Prompt Corrective Action
324.401 Authority, purpose, scope, other
supervisory authority, disclosure of
capital categories, and transition
procedures.
324.402 Notice of capital category.
324.403 Capital measures and capital
category definitions.
324.404 Capital restoration plans.
324.405 Mandatory and discretionary
supervisory actions.
324.406 through 324.999 [Reserved]
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).
Subpart A—General Provisions
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§ 324.1 Purpose, applicability,
reservations of authority, and timing.
(a) Purpose. This part 324 establishes
minimum capital requirements and
overall capital adequacy standards for
FDIC-supervised institutions. This part
324 includes methodologies for
calculating minimum capital
requirements, public disclosure
requirements related to the capital
requirements, and transition provisions
for the application of this part 324.
(b) Limitation of authority. Nothing in
this part 324 shall be read to limit the
authority of the FDIC to take action
under other provisions of law, including
action to address unsafe or unsound
practices or conditions, deficient capital
levels, or violations of law or regulation,
under section 8 of the Federal Deposit
Insurance Act.
(c) Applicability. Subject to the
requirements in paragraphs (d) and (f) of
this section:
(1) Minimum capital requirements
and overall capital adequacy standards.
Each FDIC-supervised institution must
calculate its minimum capital
requirements and meet the overall
capital adequacy standards in subpart B
of this part.
(2) Regulatory capital. Each FDICsupervised institution must calculate its
regulatory capital in accordance with
subpart C of this part.
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(3) Risk-weighted assets. (i) Each
FDIC-supervised institution must use
the methodologies in subpart D of this
part (and subpart F of this part for a
market risk FDIC-supervised institution)
to calculate standardized total riskweighted assets.
(ii) Each advanced approaches FDICsupervised institution must use the
methodologies in subpart E (and subpart
F of this part for a market risk FDICsupervised institution) to calculate
advanced approaches total riskweighted assets.
(4) Disclosures. (i) Except for an
advanced approaches FDIC-supervised
institution that is making public
disclosures pursuant to the
requirements in subpart E of this part,
each FDIC-supervised institution with
total consolidated assets of $50 billion
or more must make the public
disclosures described in subpart D of
this part.
(ii) Each market risk FDIC-supervised
institution must make the public
disclosures described in subpart F of
this part.
(iii) Each advanced approaches FDICsupervised institution must make the
public disclosures described in subpart
E of this part.
(d) Reservation of authority. (1)
Additional capital in the aggregate. The
FDIC may require an FDIC-supervised
institution to hold an amount of
regulatory capital greater than otherwise
required under this part if the FDIC
determines that the FDIC-supervised
institution’s capital requirements under
this part are not commensurate with the
FDIC-supervised institution’s credit,
market, operational, or other risks.
(2) Regulatory capital elements. (i) If
the FDIC determines that a particular
common equity tier 1, additional tier 1,
or tier 2 capital element has
characteristics or terms that diminish its
ability to absorb losses, or otherwise
present safety and soundness concerns,
the FDIC may require the FDICsupervised institution to exclude all or
a portion of such element from common
equity tier 1 capital, additional tier 1
capital, or tier 2 capital, as appropriate.
(ii) Notwithstanding the criteria for
regulatory capital instruments set forth
in subpart C of this part, the FDIC may
find that a capital element may be
included in an FDIC-supervised
institution’s common equity tier 1
capital, additional tier 1 capital, or tier
2 capital on a permanent or temporary
basis consistent with the loss absorption
capacity of the element and in
accordance with § 324.20(e).
(3) Risk-weighted asset amounts. If
the FDIC determines that the riskweighted asset amount calculated under
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this part by the FDIC-supervised
institution for one or more exposures is
not commensurate with the risks
associated with those exposures, the
FDIC may require the FDIC-supervised
institution to assign a different riskweighted asset amount to the
exposure(s) or to deduct the amount of
the exposure(s) from its regulatory
capital.
(4) Total leverage. If the FDIC
determines that the leverage exposure
amount, or the amount reflected in the
FDIC-supervised institution’s reported
average total consolidated assets, for an
on- or off-balance sheet exposure
calculated by an FDIC-supervised
institution under § 324.10 is
inappropriate for the exposure(s) or the
circumstances of the FDIC-supervised
institution, the FDIC may require the
FDIC-supervised institution to adjust
this exposure amount in the numerator
and the denominator for purposes of the
leverage ratio calculations.
(5) Consolidation of certain
exposures. The FDIC may determine
that the risk-based capital treatment for
an exposure or the treatment provided
to an entity that is not consolidated on
the FDIC-supervised institution’s
balance sheet is not commensurate with
the risk of the exposure or the
relationship of the FDIC-supervised
institution to the entity. Upon making
this determination, the FDIC may
require the FDIC-supervised institution
to treat the exposure or entity as if it
were consolidated on the balance sheet
of the FDIC-supervised institution for
purposes of determining the FDICsupervised institution’s risk-based
capital requirements and calculating the
FDIC-supervised institution’s risk-based
capital ratios accordingly. The FDIC will
look to the substance of, and risk
associated with, the transaction, as well
as other relevant factors the FDIC deems
appropriate in determining whether to
require such treatment.
(6) Other reservation of authority.
With respect to any deduction or
limitation required under this part, the
FDIC may require a different deduction
or limitation, provided that such
alternative deduction or limitation is
commensurate with the FDICsupervised institution’s risk and
consistent with safety and soundness.
(e) Notice and response procedures.
In making a determination under this
section, the FDIC will apply notice and
response procedures in the same
manner as the notice and response
procedures in § 324.5(c).
(f) Timing. (1) Subject to the transition
provisions in subpart G of this part, an
advanced approaches FDIC-supervised
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institution that is not a savings and loan
holding company must:
(i) Except as described in paragraph
(f)(1)(ii) of this section, beginning on
January 1, 2014, calculate advanced
approaches total risk-weighted assets in
accordance with subpart E and, if
applicable, subpart F of this part and,
beginning on January 1, 2015, calculate
standardized total risk-weighted assets
in accordance with subpart D and, if
applicable, subpart F of this part;
(ii) From January 1, 2014 to December
31, 2014:
(A) Calculate risk-weighted assets in
accordance with the general risk-based
capital rules under 12 CFR part 325,
appendix A, and, if applicable appendix
C (state nonmember banks), or 12 CFR
part 390, subpart Z and, if applicable, 12
CFR part 325, appendix C (state savings
associations) 1 and substitute such riskweighted assets for standardized total
risk-weighted assets for purposes of
§ 324.10;
(B) If applicable, calculate general
market risk equivalent assets in
accordance with 12 CFR part 325,
appendix C, section 4(a)(3) and
substitute such general market risk
equivalent assets for standardized
market risk-weighted assets for purposes
of § 324.20(d)(3); and
(C) Substitute the corresponding
provision or provisions of 12 CFR part
325, appendix A, and, if applicable,
appendix C (state nonmember banks),
and 12 CFR part 390, subpart Z and, if
applicable, 12 CFR part 325, appendix
C (state savings associations) for any
reference to subpart D of this part in:
§ 324.121(c); § 324.124(a) and (b);
§ 324.144(b); § 324.154(c) and (d);
§ 324.202(b) (definition of covered
position in paragraph (b)(3)(iv)); and
§ 324.211(b); 2
(iii) Beginning on January 1, 2014,
calculate and maintain minimum
capital ratios in accordance with
1 For the purpose of calculating its general riskbased capital ratios from January 1, 2014 to
December 31, 2014, an advanced approaches FDICsupervised institution shall adjust, as appropriate,
its risk-weighted asset measure (as that amount is
calculated under 12 CFR part 325, appendix A,
(state nonmember banks), and 12 CFR part 390,
subpart Z (state savings associations) in the general
risk-based capital rules) by excluding those assets
that are deducted from its regulatory capital under
§ 324.22.
2 In addition, for purposes of § 324.201(c)(3), from
January 1, 2014 to December 31, 2014, for any
circumstance in which the FDIC may require an
FDIC-supervised institution to calculate risk-based
capital requirements for specific positions or
portfolios under subpart D of this part, the FDIC
will instead require the FDIC-supervised institution
to make such calculations according to 12 CFR part
325, appendix A, and, if applicable, appendix C
(state nonmember banks), or 12 CFR part 390,
subpart Z and, if applicable, 12 CFR part 325,
appendix C (state savings associations).
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subparts A, B, and C of this part,
provided, however, that such FDICsupervised institution must:
(A) From January 1, 2014 to December
31, 2014, maintain a minimum common
equity tier 1 capital ratio of 4 percent,
a minimum tier 1 capital ratio of 5.5
percent, a minimum total capital ratio of
8 percent, and a minimum leverage ratio
of 4 percent; and
(B) From January 1, 2015 to December
31, 2017, an advanced approaches FDICsupervised institution:
(1) Is not required to maintain a
supplementary leverage ratio; and
(2) Must calculate a supplementary
leverage ratio in accordance with
§ 324.10(c), and must report the
calculated supplementary leverage ratio
on any applicable regulatory reports.
(2) Subject to the transition provisions
in subpart G of this part, an FDICsupervised institution that is not an
advanced approaches FDIC-supervised
institution or a savings and loan holding
company that is an advanced
approaches FDIC-supervised institution
must:
(i) Beginning on January 1, 2015,
calculate standardized total riskweighted assets in accordance with
subpart D, and if applicable, subpart F
of this part; and
(ii) Beginning on January 1, 2015,
calculate and maintain minimum
capital ratios in accordance with
subparts A, B and C of this part,
provided, however, that from January 1,
2015, to December 31, 2017, a savings
and loan holding company that is an
advanced approaches FDIC-supervised
institution:
(A) Is not required to maintain a
supplementary leverage ratio; and
(B) Must calculate a supplementary
leverage ratio in accordance with
§ 324.10(c), and must report the
calculated supplementary leverage ratio
on any applicable regulatory reports.
(3) Beginning on January 1, 2016, and
subject to the transition provisions in
subpart G of this part, an FDICsupervised institution is subject to
limitations on distributions and
discretionary bonus payments with
respect to its capital conservation buffer
and any applicable countercyclical
capital buffer amount, in accordance
with subpart B of this part.
§ 324.2
Definitions.
As used in this part:
Additional tier 1 capital is defined in
§ 324.20(c).
Advanced approaches FDICsupervised institution means an FDICsupervised institution that is described
in § 324.100(b)(1).
Advanced approaches total riskweighted assets means:
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(1) The sum of:
(i) Credit-risk-weighted assets;
(ii) Credit valuation adjustment (CVA)
risk-weighted assets;
(iii) Risk-weighted assets for
operational risk; and
(iv) For a market risk FDIC-supervised
institution only, advanced market riskweighted assets; minus
(2) Excess eligible credit reserves not
included in the FDIC-supervised
institution’s tier 2 capital.
Advanced market risk-weighted assets
means the advanced measure for market
risk calculated under § 324.204
multiplied by 12.5.
Affiliate with respect to a company,
means any company that controls, is
controlled by, or is under common
control with, the company.
Allocated transfer risk reserves means
reserves that have been established in
accordance with section 905(a) of the
International Lending Supervision Act,
against certain assets whose value U.S.
supervisory authorities have found to be
significantly impaired by protracted
transfer risk problems.
Allowances for loan and lease losses
(ALLL) means valuation allowances that
have been established through a charge
against earnings to cover estimated
credit losses on loans, lease financing
receivables or other extensions of credit
as determined in accordance with
GAAP. ALLL excludes ‘‘allocated
transfer risk reserves.’’ For purposes of
this part, ALLL includes allowances that
have been established through a charge
against earnings to cover estimated
credit losses associated with off-balance
sheet credit exposures as determined in
accordance with GAAP.
Asset-backed commercial paper
(ABCP) program means a program
established primarily for the purpose of
issuing commercial paper that is
investment grade and backed by
underlying exposures held in a
bankruptcy-remote special purpose
entity (SPE).
Asset-backed commercial paper
(ABCP) program sponsor means an
FDIC-supervised institution that:
(1) Establishes an ABCP program;
(2) Approves the sellers permitted to
participate in an ABCP program;
(3) Approves the exposures to be
purchased by an ABCP program; or
(4) Administers the ABCP program by
monitoring the underlying exposures,
underwriting or otherwise arranging for
the placement of debt or other
obligations issued by the program,
compiling monthly reports, or ensuring
compliance with the program
documents and with the program’s
credit and investment policy.
Assets classified loss means:
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(1) When measured as of the date of
examination of an FDIC-supervised
institution, those assets that have been
determined by an evaluation made by a
state or Federal examiner as of that date
to be a loss; and
(2) When measured as of any other
date, those assets:
(i) That have been determined—
(A) By an evaluation made by a state
or Federal examiner at the most recent
examination of an FDIC-supervised
institution to be a loss; or
(B) By evaluations made by the FDICsupervised institution since its most
recent examination to be a loss; and
(ii) That have not been charged off
from the FDIC-supervised institution’s
books or collected.
Bank means an FDIC-insured, statechartered commercial or savings bank
that is not a member of the Federal
Reserve System and for which the FDIC
is the appropriate Federal banking
agency pursuant to section 3(q) of the
Federal Deposit Insurance Act (12
U.S.C. 1813(q)).
Bank holding company means a bank
holding company as defined in section
2 of the Bank Holding Company Act.
Bank Holding Company Act means
the Bank Holding Company Act of 1956,
as amended (12 U.S.C. 1841 et seq.).
Bankruptcy remote means, with
respect to an entity or asset, that the
entity or asset would be excluded from
an insolvent entity’s estate in
receivership, insolvency, liquidation, or
similar proceeding.
Call Report means Consolidated
Reports of Condition and Income.
Carrying value means, with respect to
an asset, the value of the asset on the
balance sheet of the FDIC-supervised
institution, determined in accordance
with GAAP.
Central counterparty (CCP) means a
counterparty (for example, a clearing
house) that facilitates trades between
counterparties in one or more financial
markets by either guaranteeing trades or
novating contracts.
CFTC means the U.S. Commodity
Futures Trading Commission.
Clean-up call means a contractual
provision that permits an originating
FDIC-supervised institution or servicer
to call securitization exposures before
their stated maturity or call date.
Cleared transaction means an
exposure associated with an outstanding
derivative contract or repo-style
transaction that an FDIC-supervised
institution or clearing member has
entered into with a central counterparty
(that is, a transaction that a central
counterparty has accepted).
(1) The following transactions are
cleared transactions:
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(i) A transaction between a CCP and
an FDIC-supervised institution that is a
clearing member of the CCP where the
FDIC-supervised institution enters into
the transaction with the CCP for the
FDIC-supervised institution’s own
account;
(ii) A transaction between a CCP and
an FDIC-supervised institution that is a
clearing member of the CCP where the
FDIC-supervised institution is acting as
a financial intermediary on behalf of a
clearing member client and the
transaction offsets another transaction
that satisfies the requirements set forth
in § 324.3(a);
(iii) A transaction between a clearing
member client FDIC-supervised
institution and a clearing member where
the clearing member acts as a financial
intermediary on behalf of the clearing
member client and enters into an
offsetting transaction with a CCP,
provided that the requirements set forth
in § 324.3(a) are met; or
(iv) A transaction between a clearing
member client FDIC-supervised
institution and a CCP where a clearing
member guarantees the performance of
the clearing member client FDICsupervised institution to the CCP and
the transaction meets the requirements
of § 324.3(a)(2) and (3).
(2) The exposure of an FDICsupervised institution that is a clearing
member to its clearing member client is
not a cleared transaction where the
FDIC-supervised institution is either
acting as a financial intermediary and
enters into an offsetting transaction with
a CCP or where the FDIC-supervised
institution provides a guarantee to the
CCP on the performance of the client.3
Clearing member means a member of,
or direct participant in, a CCP that is
entitled to enter into transactions with
the CCP.
Clearing member client means a party
to a cleared transaction associated with
a CCP in which a clearing member acts
either as a financial intermediary with
respect to the party or guarantees the
performance of the party to the CCP.
Collateral agreement means a legal
contract that specifies the time when,
and circumstances under which, a
counterparty is required to pledge
collateral to an FDIC-supervised
institution for a single financial contract
or for all financial contracts in a netting
3 For the standardized approach treatment of
these exposures, see § 324.34(e) (OTC derivative
contracts) or § 324.37(c) (repo-style transactions).
For the advanced approaches treatment of these
exposures, see § 324.132(c)(8) and (d) (OTC
derivative contracts) or § 324.132(b) and 324.132(d)
(repo-style transactions) and for calculation of the
margin period of risk, see § 324.132(d)(5)(iii)(C)
(OTC derivative contracts) and
§ 324.132(d)(5)(iii)(A) (repo-style transactions).
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set and confers upon the FDICsupervised institution a perfected, firstpriority security interest
(notwithstanding the prior security
interest of any custodial agent), or the
legal equivalent thereof, in the collateral
posted by the counterparty under the
agreement. This security interest must
provide the FDIC-supervised institution
with a right to close out the financial
positions and liquidate the collateral
upon an event of default of, or failure
to perform by, the counterparty under
the collateral agreement. A contract
would not satisfy this requirement if the
FDIC-supervised institution’s exercise of
rights under the agreement may be
stayed or avoided under applicable law
in the relevant jurisdictions, other than
in receivership, conservatorship,
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs.
Commitment means any legally
binding arrangement that obligates an
FDIC-supervised institution to extend
credit or to purchase assets.
Commodity derivative contract means
a commodity-linked swap, purchased
commodity-linked option, forward
commodity-linked contract, or any other
instrument linked to commodities that
gives rise to similar counterparty credit
risks.
Commodity Exchange Act means the
Commodity Exchange Act of 1936 (7
U.S.C. 1 et seq.)
Common equity tier 1 capital is
defined in § 324.20(b).
Common equity tier 1 minority
interest means the common equity tier
1 capital of a depository institution or
foreign bank that is:
(1) A consolidated subsidiary of an
FDIC-supervised institution; and
(2) Not owned by the FDIC-supervised
institution.
Company means a corporation,
partnership, limited liability company,
depository institution, business trust,
special purpose entity, association, or
similar organization.
Control. A person or company
controls a company if it:
(1) Owns, controls, or holds with
power to vote 25 percent or more of a
class of voting securities of the
company; or
(2) Consolidates the company for
financial reporting purposes.
Core capital means Tier 1 capital, as
defined in § 324.2 of subpart A of this
part.
Corporate exposure means an
exposure to a company that is not:
(1) An exposure to a sovereign, the
Bank for International Settlements, the
European Central Bank, the European
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Commission, the International Monetary
Fund, a multi-lateral development bank
(MDB), a depository institution, a
foreign bank, a credit union, or a public
sector entity (PSE);
(2) An exposure to a GSE;
(3) A residential mortgage exposure;
(4) A pre-sold construction loan;
(5) A statutory multifamily mortgage;
(6) A high volatility commercial real
estate (HVCRE) exposure;
(7) A cleared transaction;
(8) A default fund contribution;
(9) A securitization exposure;
(10) An equity exposure; or
(11) An unsettled transaction.
Country risk classification (CRC) with
respect to a sovereign, means the most
recent consensus CRC published by the
Organization for Economic Cooperation
and Development (OECD) as of
December 31st of the prior calendar year
that provides a view of the likelihood
that the sovereign will service its
external debt.
Covered savings and loan holding
company means a top-tier savings and
loan holding company other than:
(1) A top-tier savings and loan
holding company that is:
(i) A grandfathered unitary savings
and loan holding company as defined in
section 10(c)(9)(A) of HOLA; and
(ii) As of June 30 of the previous
calendar year, derived 50 percent or
more of its total consolidated assets or
50 percent of its total revenues on an
enterprise-wide basis (as calculated
under GAAP) from activities that are not
financial in nature under section 4(k) of
the Bank Holding Company Act (12
U.S.C. 1842(k));
(2) A top-tier savings and loan
holding company that is an insurance
underwriting company; or
(3)(i) A top-tier savings and loan
holding company that, as of June 30 of
the previous calendar year, held 25
percent or more of its total consolidated
assets in subsidiaries that are insurance
underwriting companies (other than
assets associated with insurance for
credit risk); and
(ii) For purposes of paragraph 3(i) of
this definition, the company must
calculate its total consolidated assets in
accordance with GAAP, or if the
company does not calculate its total
consolidated assets under GAAP for any
regulatory purpose (including
compliance with applicable securities
laws), the company may estimate its
total consolidated assets, subject to
review and adjustment by the Federal
Reserve.
Credit derivative means a financial
contract executed under standard
industry credit derivative
documentation that allows one party
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(the protection purchaser) to transfer the
credit risk of one or more exposures
(reference exposure(s)) to another party
(the protection provider) for a certain
period of time.
Credit-enhancing interest-only strip
(CEIO) means an on-balance sheet asset
that, in form or in substance:
(1) Represents a contractual right to
receive some or all of the interest and
no more than a minimal amount of
principal due on the underlying
exposures of a securitization; and
(2) Exposes the holder of the CEIO to
credit risk directly or indirectly
associated with the underlying
exposures that exceeds a pro rata share
of the holder’s claim on the underlying
exposures, whether through
subordination provisions or other
credit-enhancement techniques.
Credit-enhancing representations and
warranties means representations and
warranties that are made or assumed in
connection with a transfer of underlying
exposures (including loan servicing
assets) and that obligate an FDICsupervised institution to protect another
party from losses arising from the credit
risk of the underlying exposures. Creditenhancing representations and
warranties include provisions to protect
a party from losses resulting from the
default or nonperformance of the
counterparties of the underlying
exposures or from an insufficiency in
the value of the collateral backing the
underlying exposures. Credit-enhancing
representations and warranties do not
include:
(1) Early default clauses and similar
warranties that permit the return of, or
premium refund clauses covering, 1–4
family residential first mortgage loans
that qualify for a 50 percent risk weight
for a period not to exceed 120 days from
the date of transfer. These warranties
may cover only those loans that were
originated within 1 year of the date of
transfer;
(2) Premium refund clauses that cover
assets guaranteed, in whole or in part,
by the U.S. Government, a U.S.
Government agency or a GSE, provided
the premium refund clauses are for a
period not to exceed 120 days from the
date of transfer; or
(3) Warranties that permit the return
of underlying exposures in instances of
misrepresentation, fraud, or incomplete
documentation.
Credit risk mitigant means collateral,
a credit derivative, or a guarantee.
Credit-risk-weighted assets means
1.06 multiplied by the sum of:
(1) Total wholesale and retail riskweighted assets as calculated under
§ 324.131;
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(2) Risk-weighted assets for
securitization exposures as calculated
under § 324.142; and
(3) Risk-weighted assets for equity
exposures as calculated under
§ 324.151.
Credit union means an insured credit
union as defined under the Federal
Credit Union Act (12 U.S.C. 1751 et
seq.).
Current exposure means, with respect
to a netting set, the larger of zero or the
fair value of a transaction or portfolio of
transactions within the netting set that
would be lost upon default of the
counterparty, assuming no recovery on
the value of the transactions. Current
exposure is also called replacement
cost.
Current exposure methodology means
the method of calculating the exposure
amount for over-the-counter derivative
contracts in § 324.34(a) and exposure at
default (EAD) in § 324.132(c)(5) or (6),
as applicable.
Custodian means a financial
institution that has legal custody of
collateral provided to a CCP.
Default fund contribution means the
funds contributed or commitments
made by a clearing member to a CCP’s
mutualized loss sharing arrangement.
Depository institution means a
depository institution as defined in
section 3 of the Federal Deposit
Insurance Act.
Depository institution holding
company means a bank holding
company or savings and loan holding
company.
Derivative contract means a financial
contract whose value is derived from
the values of one or more underlying
assets, reference rates, or indices of asset
values or reference rates. Derivative
contracts include interest rate derivative
contracts, exchange rate derivative
contracts, equity derivative contracts,
commodity derivative contracts, credit
derivative contracts, and any other
instrument that poses similar
counterparty credit risks. Derivative
contracts also include unsettled
securities, commodities, and foreign
exchange transactions with a
contractual settlement or delivery lag
that is longer than the lesser of the
market standard for the particular
instrument or five business days.
Discretionary bonus payment means a
payment made to an executive officer of
an FDIC-supervised institution, where:
(1) The FDIC-supervised institution
retains discretion as to whether to make,
and the amount of, the payment until
the payment is awarded to the executive
officer;
(2) The amount paid is determined by
the FDIC-supervised institution without
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prior promise to, or agreement with, the
executive officer; and
(3) The executive officer has no
contractual right, whether express or
implied, to the bonus payment.
Distribution means:
(1) A reduction of tier 1 capital
through the repurchase of a tier 1 capital
instrument or by other means, except
when an FDIC-supervised institution,
within the same quarter when the
repurchase is announced, fully replaces
a tier 1 capital instrument it has
repurchased by issuing another capital
instrument that meets the eligibility
criteria for:
(i) A common equity tier 1 capital
instrument if the instrument being
repurchased was part of the FDICsupervised institution’s common equity
tier 1 capital, or
(ii) A common equity tier 1 or
additional tier 1 capital instrument if
the instrument being repurchased was
part of the FDIC-supervised institution’s
tier 1 capital;
(2) A reduction of tier 2 capital
through the repurchase, or redemption
prior to maturity, of a tier 2 capital
instrument or by other means, except
when an FDIC-supervised institution,
within the same quarter when the
repurchase or redemption is announced,
fully replaces a tier 2 capital instrument
it has repurchased by issuing another
capital instrument that meets the
eligibility criteria for a tier 1 or tier 2
capital instrument;
(3) A dividend declaration or payment
on any tier 1 capital instrument;
(4) A dividend declaration or interest
payment on any tier 2 capital
instrument if the FDIC-supervised
institution has full discretion to
permanently or temporarily suspend
such payments without triggering an
event of default; or
(5) Any similar transaction that the
FDIC determines to be in substance a
distribution of capital.
Dodd-Frank Act means the DoddFrank Wall Street Reform and Consumer
Protection Act of 2010 (Pub. L. 111–203,
124 Stat. 1376).
Early amortization provision means a
provision in the documentation
governing a securitization that, when
triggered, causes investors in the
securitization exposures to be repaid
before the original stated maturity of the
securitization exposures, unless the
provision:
(1) Is triggered solely by events not
directly related to the performance of
the underlying exposures or the
originating FDIC-supervised institution
(such as material changes in tax laws or
regulations); or
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(2) Leaves investors fully exposed to
future draws by borrowers on the
underlying exposures even after the
provision is triggered.
Effective notional amount means for
an eligible guarantee or eligible credit
derivative, the lesser of the contractual
notional amount of the credit risk
mitigant and the exposure amount (or
EAD for purposes of subpart E of this
part) of the hedged exposure, multiplied
by the percentage coverage of the credit
risk mitigant.
Eligible ABCP liquidity facility means
a liquidity facility supporting ABCP, in
form or in substance, that is subject to
an asset quality test at the time of draw
that precludes funding against assets
that are 90 days or more past due or in
default. Notwithstanding the preceding
sentence, a liquidity facility is an
eligible ABCP liquidity facility if the
assets or exposures funded under the
liquidity facility that do not meet the
eligibility requirements are guaranteed
by a sovereign that qualifies for a 20
percent risk weight or lower.
Eligible clean-up call means a cleanup call that:
(1) Is exercisable solely at the
discretion of the originating FDICsupervised institution or servicer;
(2) Is not structured to avoid
allocating losses to securitization
exposures held by investors or
otherwise structured to provide credit
enhancement to the securitization; and
(3)(i) For a traditional securitization,
is only exercisable when 10 percent or
less of the principal amount of the
underlying exposures or securitization
exposures (determined as of the
inception of the securitization) is
outstanding; or
(ii) For a synthetic securitization, is
only exercisable when 10 percent or less
of the principal amount of the reference
portfolio of underlying exposures
(determined as of the inception of the
securitization) is outstanding.
Eligible credit derivative means a
credit derivative in the form of a credit
default swap, nth-to-default swap, total
return swap, or any other form of credit
derivative approved by the FDIC,
provided that:
(1) The contract meets the
requirements of an eligible guarantee
and has been confirmed by the
protection purchaser and the protection
provider;
(2) Any assignment of the contract has
been confirmed by all relevant parties;
(3) If the credit derivative is a credit
default swap or nth-to-default swap, the
contract includes the following credit
events:
(i) Failure to pay any amount due
under the terms of the reference
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exposure, subject to any applicable
minimal payment threshold that is
consistent with standard market
practice and with a grace period that is
closely in line with the grace period of
the reference exposure; and
(ii) Receivership, insolvency,
liquidation, conservatorship or inability
of the reference exposure issuer to pay
its debts, or its failure or admission in
writing of its inability generally to pay
its debts as they become due, and
similar events;
(4) The terms and conditions dictating
the manner in which the contract is to
be settled are incorporated into the
contract;
(5) If the contract allows for cash
settlement, the contract incorporates a
robust valuation process to estimate loss
reliably and specifies a reasonable
period for obtaining post-credit event
valuations of the reference exposure;
(6) If the contract requires the
protection purchaser to transfer an
exposure to the protection provider at
settlement, the terms of at least one of
the exposures that is permitted to be
transferred under the contract provide
that any required consent to transfer
may not be unreasonably withheld;
(7) If the credit derivative is a credit
default swap or nth-to-default swap, the
contract clearly identifies the parties
responsible for determining whether a
credit event has occurred, specifies that
this determination is not the sole
responsibility of the protection
provider, and gives the protection
purchaser the right to notify the
protection provider of the occurrence of
a credit event; and
(8) If the credit derivative is a total
return swap and the FDIC-supervised
institution records net payments
received on the swap as net income, the
FDIC-supervised institution records
offsetting deterioration in the value of
the hedged exposure (either through
reductions in fair value or by an
addition to reserves).
Eligible credit reserves means all
general allowances that have been
established through a charge against
earnings to cover estimated credit losses
associated with on- or off-balance sheet
wholesale and retail exposures,
including the ALLL associated with
such exposures, but excluding allocated
transfer risk reserves established
pursuant to 12 U.S.C. 3904 and other
specific reserves created against
recognized losses.
Eligible guarantee means a guarantee
from an eligible guarantor that:
(1) Is written;
(2) Is either:
(i) Unconditional, or
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(ii) A contingent obligation of the U.S.
government or its agencies, the
enforceability of which is dependent
upon some affirmative action on the
part of the beneficiary of the guarantee
or a third party (for example, meeting
servicing requirements);
(3) Covers all or a pro rata portion of
all contractual payments of the
obligated party on the reference
exposure;
(4) Gives the beneficiary a direct
claim against the protection provider;
(5) Is not unilaterally cancelable by
the protection provider for reasons other
than the breach of the contract by the
beneficiary;
(6) Except for a guarantee by a
sovereign, is legally enforceable against
the protection provider in a jurisdiction
where the protection provider has
sufficient assets against which a
judgment may be attached and enforced;
(7) Requires the protection provider to
make payment to the beneficiary on the
occurrence of a default (as defined in
the guarantee) of the obligated party on
the reference exposure in a timely
manner without the beneficiary first
having to take legal actions to pursue
the obligor for payment;
(8) Does not increase the beneficiary’s
cost of credit protection on the
guarantee in response to deterioration in
the credit quality of the reference
exposure; and
(9) Is not provided by an affiliate of
the FDIC-supervised institution, unless
the affiliate is an insured depository
institution, foreign bank, securities
broker or dealer, or insurance company
that:
(i) Does not control the FDICsupervised institution; and
(ii) Is subject to consolidated
supervision and regulation comparable
to that imposed on depository
institutions, U.S. securities brokerdealers, or U.S. insurance companies (as
the case may be).
Eligible guarantor means:
(1) A sovereign, the Bank for
International Settlements, the
International Monetary Fund, the
European Central Bank, the European
Commission, a Federal Home Loan
Bank, Federal Agricultural Mortgage
Corporation (Farmer Mac), a multilateral
development bank (MDB), a depository
institution, a bank holding company, a
savings and loan holding company, a
credit union, a foreign bank, or a
qualifying central counterparty; or
(2) An entity (other than a special
purpose entity):
(i) That at the time the guarantee is
issued or anytime thereafter, has issued
and outstanding an unsecured debt
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security without credit enhancement
that is investment grade;
(ii) Whose creditworthiness is not
positively correlated with the credit risk
of the exposures for which it has
provided guarantees; and
(iii) That is not an insurance company
engaged predominately in the business
of providing credit protection (such as
a monoline bond insurer or re-insurer).
Eligible margin loan means:
(1) An extension of credit where:
(i) The extension of credit is
collateralized exclusively by liquid and
readily marketable debt or equity
securities, or gold;
(ii) The collateral is marked to fair
value daily, and the transaction is
subject to daily margin maintenance
requirements; and
(iii) The extension of credit is
conducted under an agreement that
provides the FDIC-supervised
institution the right to accelerate and
terminate the extension of credit and to
liquidate or set off collateral promptly
upon an event of default, including
upon an event of receivership,
insolvency, liquidation,
conservatorship, or similar proceeding,
of the counterparty, provided that, in
any such case, any exercise of rights
under the agreement will not be stayed
or avoided under applicable law in the
relevant jurisdictions, other than in
receivership, conservatorship,
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs.4
(2) In order to recognize an exposure
as an eligible margin loan for purposes
of this subpart, an FDIC-supervised
institution must comply with the
requirements of § 324.3(b) with respect
to that exposure.
Eligible servicer cash advance facility
means a servicer cash advance facility
in which:
(1) The servicer is entitled to full
reimbursement of advances, except that
a servicer may be obligated to make
non-reimbursable advances for a
particular underlying exposure if any
such advance is contractually limited to
an insignificant amount of the
outstanding principal balance of that
exposure;
4 This requirement is met where all transactions
under the agreement are (i) executed under U.S. law
and (ii) constitute ‘‘securities contracts’’ under
section 555 of the Bankruptcy Code (11 U.S.C. 555),
qualified financial contracts under section 11(e)(8)
of the Federal Deposit Insurance Act, or netting
contracts between or among financial institutions
under sections 401–407 of the Federal Deposit
Insurance Corporation Improvement Act or the
Federal Reserve Board’s Regulation EE (12 CFR part
231).
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(2) The servicer’s right to
reimbursement is senior in right of
payment to all other claims on the cash
flows from the underlying exposures of
the securitization; and
(3) The servicer has no legal
obligation to, and does not make
advances to the securitization if the
servicer concludes the advances are
unlikely to be repaid.
Employee stock ownership plan has
the same meaning as in 29 CFR
2550.407d-6.
Equity derivative contract means an
equity-linked swap, purchased equitylinked option, forward equity-linked
contract, or any other instrument linked
to equities that gives rise to similar
counterparty credit risks.
Equity exposure means:
(1) A security or instrument (whether
voting or non-voting) that represents a
direct or an indirect ownership interest
in, and is a residual claim on, the assets
and income of a company, unless:
(i) The issuing company is
consolidated with the FDIC-supervised
institution under GAAP;
(ii) The FDIC-supervised institution is
required to deduct the ownership
interest from tier 1 or tier 2 capital
under this part;
(iii) The ownership interest
incorporates a payment or other similar
obligation on the part of the issuing
company (such as an obligation to make
periodic payments); or
(iv) The ownership interest is a
securitization exposure;
(2) A security or instrument that is
mandatorily convertible into a security
or instrument described in paragraph (1)
of this definition;
(3) An option or warrant that is
exercisable for a security or instrument
described in paragraph (1) of this
definition; or
(4) Any other security or instrument
(other than a securitization exposure) to
the extent the return on the security or
instrument is based on the performance
of a security or instrument described in
paragraph (1) of this definition.
ERISA means the Employee
Retirement Income and Security Act of
1974 (29 U.S.C. 1001 et seq.).
Exchange rate derivative contract
means a cross-currency interest rate
swap, forward foreign-exchange
contract, currency option purchased, or
any other instrument linked to exchange
rates that gives rise to similar
counterparty credit risks.
Executive officer means a person who
holds the title or, without regard to title,
salary, or compensation, performs the
function of one or more of the following
positions: president, chief executive
officer, executive chairman, chief
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operating officer, chief financial officer,
chief investment officer, chief legal
officer, chief lending officer, chief risk
officer, or head of a major business line,
and other staff that the board of
directors of the FDIC-supervised
institution deems to have equivalent
responsibility.
Expected credit loss (ECL) means:
(1) For a wholesale exposure to a nondefaulted obligor or segment of nondefaulted retail exposures that is carried
at fair value with gains and losses
flowing through earnings or that is
classified as held-for-sale and is carried
at the lower of cost or fair value with
losses flowing through earnings, zero.
(2) For all other wholesale exposures
to non-defaulted obligors or segments of
non-defaulted retail exposures, the
product of the probability of default
(PD) times the loss given default (LGD)
times the exposure at default (EAD) for
the exposure or segment.
(3) For a wholesale exposure to a
defaulted obligor or segment of
defaulted retail exposures, the FDICsupervised institution’s impairment
estimate for allowance purposes for the
exposure or segment.
(4) Total ECL is the sum of expected
credit losses for all wholesale and retail
exposures other than exposures for
which the FDIC-supervised institution
has applied the double default treatment
in § 324.135.
Exposure amount means:
(1) For the on-balance sheet
component of an exposure (other than
an available-for-sale or held-to-maturity
security, if the FDIC-supervised
institution has made an AOCI opt-out
election (as defined in § 324.22(b)(2));
an OTC derivative contract; a repo-style
transaction or an eligible margin loan
for which the FDIC-supervised
institution determines the exposure
amount under § 324.37; a cleared
transaction; a default fund contribution;
or a securitization exposure), the FDICsupervised institution’s carrying value
of the exposure.
(2) For a security (that is not a
securitization exposure, an equity
exposure, or preferred stock classified as
an equity security under GAAP)
classified as available-for-sale or heldto-maturity if the FDIC-supervised
institution has made an AOCI opt-out
election (as defined in § 324.22(b)(2)),
the FDIC-supervised institution’s
carrying value (including net accrued
but unpaid interest and fees) for the
exposure less any net unrealized gains
on the exposure and plus any net
unrealized losses on the exposure.
(3) For available-for-sale preferred
stock classified as an equity security
under GAAP if the FDIC-supervised
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institution has made an AOCI opt-out
election (as defined in § 324.22(b)(2)),
the FDIC-supervised institution’s
carrying value of the exposure less any
net unrealized gains on the exposure
that are reflected in such carrying value
but excluded from the FDIC-supervised
institution’s regulatory capital
components.
(4) For the off-balance sheet
component of an exposure (other than
an OTC derivative contract; a repo-style
transaction or an eligible margin loan
for which the FDIC-supervised
institution calculates the exposure
amount under § 324.37; a cleared
transaction; a default fund contribution;
or a securitization exposure), the
notional amount of the off-balance sheet
component multiplied by the
appropriate credit conversion factor
(CCF) in § 324.33.
(5) For an exposure that is an OTC
derivative contract, the exposure
amount determined under § 324.34;
(6) For an exposure that is a cleared
transaction, the exposure amount
determined under § 324.35.
(7) For an exposure that is an eligible
margin loan or repo-style transaction for
which the FDIC-supervised institution
calculates the exposure amount as
provided in § 324.37, the exposure
amount determined under § 324.37.
(8) For an exposure that is a
securitization exposure, the exposure
amount determined under § 324.42.
FDIC-supervised institution means
any bank or state savings association.
Federal Deposit Insurance Act means
the Federal Deposit Insurance Act (12
U.S.C. 1811 et seq.).
Federal Deposit Insurance
Corporation Improvement Act means
the Federal Deposit Insurance
Corporation Improvement Act of 1991
((Pub. L. 102–242, 105 Stat. 2236).
Federal Reserve means the Board of
Governors of the Federal Reserve
System.
Financial collateral means collateral:
(1) In the form of:
(i) Cash on deposit with the FDICsupervised institution (including cash
held for the FDIC-supervised institution
by a third-party custodian or trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that are
not resecuritization exposures and that
are investment grade;
(iv) Short-term debt instruments that
are not resecuritization exposures and
that are investment grade;
(v) Equity securities that are publicly
traded;
(vi) Convertible bonds that are
publicly traded; or
(vii) Money market fund shares and
other mutual fund shares if a price for
the shares is publicly quoted daily; and
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(2) In which the FDIC-supervised
institution has a perfected, first-priority
security interest or, outside of the
United States, the legal equivalent
thereof (with the exception of cash on
deposit and notwithstanding the prior
security interest of any custodial agent).
Financial institution means:
(1) A bank holding company; savings
and loan holding company; nonbank
financial institution supervised by the
Federal Reserve under Title I of the
Dodd-Frank Act; depository institution;
foreign bank; credit union; industrial
loan company, industrial bank, or other
similar institution described in section
2 of the Bank Holding Company Act;
national association, state member bank,
or state non-member bank that is not a
depository institution; insurance
company; securities holding company
as defined in section 618 of the DoddFrank Act; broker or dealer registered
with the SEC under section 15 of the
Securities Exchange Act; futures
commission merchant as defined in
section 1a of the Commodity Exchange
Act; swap dealer as defined in section
1a of the Commodity Exchange Act; or
security-based swap dealer as defined in
section 3 of the Securities Exchange Act;
(2) Any designated financial market
utility, as defined in section 803 of the
Dodd-Frank Act;
(3) Any entity not domiciled in the
United States (or a political subdivision
thereof) that is supervised and regulated
in a manner similar to entities described
in paragraphs (1) or (2) of this
definition; or
(4) Any other company:
(i) Of which the FDIC-supervised
institution owns:
(A) An investment in GAAP equity
instruments of the company with an
adjusted carrying value or exposure
amount equal to or greater than $10
million; or
(B) More than 10 percent of the
company’s issued and outstanding
common shares (or similar equity
interest), and
(ii) Which is predominantly engaged
in the following activities:
(A) Lending money, securities or
other financial instruments, including
servicing loans;
(B) Insuring, guaranteeing,
indemnifying against loss, harm,
damage, illness, disability, or death, or
issuing annuities;
(C) Underwriting, dealing in, making
a market in, or investing as principal in
securities or other financial instruments;
or
(D) Asset management activities (not
including investment or financial
advisory activities).
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(5) For the purposes of this definition,
a company is ‘‘predominantly engaged’’
in an activity or activities if:
(i) 85 percent or more of the total
consolidated annual gross revenues (as
determined in accordance with
applicable accounting standards) of the
company is either of the two most
recent calendar years were derived,
directly or indirectly, by the company
on a consolidated basis from the
activities; or
(ii) 85 percent or more of the
company’s consolidated total assets (as
determined in accordance with
applicable accounting standards) as of
the end of either of the two most recent
calendar years were related to the
activities.
(6) Any other company that the FDIC
may determine is a financial institution
based on activities similar in scope,
nature, or operation to those of the
entities included in (1) through (4).
(7) For purposes of this part,
‘‘financial institution’’ does not include
the following entities:
(i) GSEs;
(ii) Small business investment
companies, as defined in section 102 of
the Small Business Investment Act of
1958 (15 U.S.C. 661 et seq.);
(iii) Entities designated as Community
Development Financial Institutions
(CDFIs) under 12 U.S.C. 4701 et seq. and
12 CFR part 1805;
(iv) Entities registered with the SEC
under the Investment Company Act or
foreign equivalents thereof;
(v) Entities to the extent that the
FDIC-supervised institution’s
investment in such entities would
qualify as a community development
investment under section 24 (Eleventh)
of the National Bank Act; and
(vi) An employee benefit plan as
defined in paragraphs (3) and (32) of
section 3 of ERISA, a ‘‘governmental
plan’’ (as defined in 29 U.S.C. 1002(32))
that complies with the tax deferral
qualification requirements provided in
the Internal Revenue Code, or any
similar employee benefit plan
established under the laws of a foreign
jurisdiction.
First-lien residential mortgage
exposure means a residential mortgage
exposure secured by a first lien.
Foreign bank means a foreign bank as
defined in § 211.2 of the Federal
Reserve’s Regulation K (12 CFR 211.2)
(other than a depository institution).
Forward agreement means a legally
binding contractual obligation to
purchase assets with certain drawdown
at a specified future date, not including
commitments to make residential
mortgage loans or forward foreign
exchange contracts.
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GAAP means generally accepted
accounting principles as used in the
United States.
Gain-on-sale means an increase in the
equity capital of an FDIC-supervised
institution (as reported on Schedule RC
of the Call Report) resulting from a
traditional securitization (other than an
increase in equity capital resulting from
the FDIC-supervised institution’s receipt
of cash in connection with the
securitization or reporting of a mortgage
servicing asset on Schedule RC of the
Call Report.
General obligation means a bond or
similar obligation that is backed by the
full faith and credit of a public sector
entity (PSE).
Government-sponsored enterprise
(GSE) means an entity established or
chartered by the U.S. government to
serve public purposes specified by the
U.S. Congress but whose debt
obligations are not explicitly guaranteed
by the full faith and credit of the U.S.
government.
Guarantee means a financial
guarantee, letter of credit, insurance, or
other similar financial instrument (other
than a credit derivative) that allows one
party (beneficiary) to transfer the credit
risk of one or more specific exposures
(reference exposure) to another party
(protection provider).
High volatility commercial real estate
(HVCRE) exposure means a credit
facility that, prior to conversion to
permanent financing, finances or has
financed the acquisition, development,
or construction (ADC) of real property,
unless the facility finances:
(1) One- to four-family residential
properties;
(2) Real property that:
(i) Would qualify as an investment in
community development under 12
U.S.C. 338a or 12 U.S.C. 24 (Eleventh),
as applicable, or as a ‘‘qualified
investment’’ under 12 CFR part 345, and
(ii) Is not an ADC loan to any entity
described in 12 CFR 345.12(g)(3), unless
it is otherwise described in paragraph
(1), (2)(i), (3) or (4) of this definition;
(3) The purchase or development of
agricultural land, which includes all
land known to be used or usable for
agricultural purposes (such as crop and
livestock production), provided that the
valuation of the agricultural land is
based on its value for agricultural
purposes and the valuation does not
take into consideration any potential
use of the land for non-agricultural
commercial development or residential
development; or
(4) Commercial real estate projects in
which:
(i) The loan-to-value ratio is less than
or equal to the applicable maximum
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supervisory loan-to-value ratio in the
FDIC’s real estate lending standards at
12 CFR part 365, subpart A (state
nonmember banks), 12 CFR 390.264 and
390.265 (state savings associations);
(ii) The borrower has contributed
capital to the project in the form of cash
or unencumbered readily marketable
assets (or has paid development
expenses out-of-pocket) of at least 15
percent of the real estate’s appraised ‘‘as
completed’’ value; and
(iii) The borrower contributed the
amount of capital required by paragraph
(4)(ii) of this definition before the FDICsupervised institution 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 FDIC-supervised
institution that provided the ADC
facility as long as the permanent
financing is subject to the FDICsupervised institution’s underwriting
criteria for long-term mortgage loans.
Home country means the country
where an entity is incorporated,
chartered, or similarly established.
Identified losses means:
(1) When measured as of the date of
examination of an FDIC-supervised
institution, those items that have been
determined by an evaluation made by a
state or Federal examiner as of that date
to be chargeable against income, capital
and/or general valuation allowances
such as the allowance for loan and lease
losses (examples of identified losses
would be assets classified loss, offbalance sheet items classified loss, any
provision expenses that are necessary
for the FDIC-supervised institution to
record in order to replenish its general
valuation allowances to an adequate
level, liabilities not shown on the FDICsupervised institution’s books,
estimated losses in contingent
liabilities, and differences in accounts
which represent shortages); and
(2) When measured as of any other
date, those items:
(i) That have been determined—
(A) By an evaluation made by a state
or Federal examiner at the most recent
examination of an FDIC-supervised
institution to be chargeable against
income, capital and/or general valuation
allowances; or
(B) By evaluations made by the FDICsupervised institution since its most
recent examination to be chargeable
against income, capital and/or general
valuation allowances; and
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(ii) For which the appropriate
accounting entries to recognize the loss
have not yet been made on the FDICsupervised institution’s books nor has
the item been collected or otherwise
settled.
Indirect exposure means an exposure
that arises from the FDIC-supervised
institution’s investment in an
investment fund which holds an
investment in the FDIC-supervised
institution’s own capital instrument or
an investment in the capital of an
unconsolidated financial institution.
Insurance company means an
insurance company as defined in
section 201 of the Dodd-Frank Act (12
U.S.C. 5381).
Insurance underwriting company
means an insurance company as defined
in section 201 of the Dodd-Frank Act
(12 U.S.C. 5381) that engages in
insurance underwriting activities.
Insured depository institution means
an insured depository institution as
defined in section 3 of the Federal
Deposit Insurance Act.
Interest rate derivative contract means
a single-currency interest rate swap,
basis swap, forward rate agreement,
purchased interest rate option, whenissued securities, or any other
instrument linked to interest rates that
gives rise to similar counterparty credit
risks.
International Lending Supervision Act
means the International Lending
Supervision Act of 1983 (12 U.S.C. 3901
et seq.).
Investing bank means, with respect to
a securitization, an FDIC-supervised
institution that assumes the credit risk
of a securitization exposure (other than
an originating FDIC-supervised
institution of the securitization). In the
typical synthetic securitization, the
investing FDIC-supervised institution
sells credit protection on a pool of
underlying exposures to the originating
FDIC-supervised institution.
Investment Company Act means the
Investment Company Act of 1940 (15
U.S.C. 80 a–1 et seq.)
Investment fund means a company:
(1) Where all or substantially all of the
assets of the company are financial
assets; and
(2) That has no material liabilities.
Investment grade means that the
entity to which the FDIC-supervised
institution 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
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timely repayment of principal and
interest is expected.
Investment in the capital of an
unconsolidated financial institution
means a net long position calculated in
accordance with § 324.22(h) in an
instrument that is recognized as capital
for regulatory purposes by the primary
supervisor of an unconsolidated
regulated financial institution and is an
instrument that is part of the GAAP
equity of an unconsolidated unregulated
financial institution, including direct,
indirect, and synthetic exposures to
capital instruments, excluding
underwriting positions held by the
FDIC-supervised institution for five or
fewer business days.
Investment in the FDIC-supervised
institution’s own capital instrument
means a net long position calculated in
accordance with § 324.22(h) in the
FDIC-supervised institution’s own
common stock instrument, own
additional tier 1 capital instrument or
own tier 2 capital instrument, including
direct, indirect, or synthetic exposures
to such capital instruments. An
investment in the FDIC-supervised
institution’s own capital instrument
includes any contractual obligation to
purchase such capital instrument.
Junior-lien residential mortgage
exposure means a residential mortgage
exposure that is not a first-lien
residential mortgage exposure.
Main index means the Standard &
Poor’s 500 Index, the FTSE All-World
Index, and any other index for which
the FDIC-supervised institution can
demonstrate to the satisfaction of the
FDIC that the equities represented in the
index have comparable liquidity, depth
of market, and size of bid-ask spreads as
equities in the Standard & Poor’s 500
Index and FTSE All-World Index.
Market risk FDIC-supervised
institution means an FDIC-supervised
institution that is described in
§ 324.201(b).
Money market fund means an
investment fund that is subject to 17
CFR 270.2a–7 or any foreign equivalent
thereof.
Mortgage servicing assets (MSAs)
means the contractual rights owned by
an FDIC-supervised institution to
service for a fee mortgage loans that are
owned by others.
Multilateral development bank (MDB)
means the International Bank for
Reconstruction and Development, the
Multilateral Investment Guarantee
Agency, the International Finance
Corporation, the Inter-American
Development Bank, the Asian
Development Bank, the African
Development Bank, the European Bank
for Reconstruction and Development,
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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 FDIC
determines poses comparable credit
risk.
National Bank Act means the
National Bank Act (12 U.S.C. 1 et seq.).
Netting set means a group of
transactions with a single counterparty
that are subject to a qualifying master
netting agreement or a qualifying crossproduct master netting agreement. For
purposes of calculating risk-based
capital requirements using the internal
models methodology in subpart E of this
part, this term does not cover a
transaction:
(1) That is not subject to such a master
netting agreement, or
(2) Where the FDIC-supervised
institution has identified specific
wrong-way risk.
Non-significant investment in the
capital of an unconsolidated financial
institution means an investment in the
capital of an unconsolidated financial
institution where the FDIC-supervised
institution owns 10 percent or less of
the issued and outstanding common
stock of the unconsolidated financial
institution.
Nth-to-default credit derivative means
a credit derivative that provides credit
protection only for the nth-defaulting
reference exposure in a group of
reference exposures.
OCC means the Office of the
Comptroller of the Currency, U.S.
Treasury.
Operating entity means a company
established to conduct business with
clients with the intention of earning a
profit in its own right.
Original maturity with respect to an
off-balance sheet commitment means
the length of time between the date a
commitment is issued and:
(1) For a commitment that is not
subject to extension or renewal, the
stated expiration date of the
commitment; or
(2) For a commitment that is subject
to extension or renewal, the earliest date
on which the FDIC-supervised
institution can, at its option,
unconditionally cancel the
commitment.
Originating FDIC-supervised
institution, with respect to a
securitization, means an FDICsupervised institution that:
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(1) Directly or indirectly originated or
securitized the underlying exposures
included in the securitization; or
(2) Serves as an ABCP program
sponsor to the securitization.
Over-the-counter (OTC) derivative
contract means a derivative contract
that is not a cleared transaction. An
OTC derivative includes a transaction:
(1) Between an FDIC-supervised
institution that is a clearing member and
a counterparty where the FDICsupervised institution is acting as a
financial intermediary and enters into a
cleared transaction with a CCP that
offsets the transaction with the
counterparty; or
(2) In which an FDIC-supervised
institution that is a clearing member
provides a CCP a guarantee on the
performance of the counterparty to the
transaction.
Performance standby letter of credit
(or performance bond) means an
irrevocable obligation of an FDICsupervised institution to pay a thirdparty beneficiary when a customer
(account party) fails to perform on any
contractual nonfinancial or commercial
obligation. To the extent permitted by
law or regulation, performance standby
letters of credit include arrangements
backing, among other things,
subcontractors’ and suppliers’
performance, labor and materials
contracts, and construction bids.
Pre-sold construction loan means any
one-to-four family residential
construction loan to a builder that meets
the requirements of section 618(a)(1) or
(2) of the Resolution Trust Corporation
Refinancing, Restructuring, and
Improvement Act of 1991 (Pub. L. 102–
233, 105 Stat. 1761) and the following
criteria:
(1) The loan is made in accordance
with prudent underwriting standards,
meaning that the FDIC-supervised
institution has obtained sufficient
documentation that the buyer of the
home has a legally binding written sales
contract and has a firm written
commitment for permanent financing of
the home upon completion;
(2) The purchaser is an individual(s)
that intends to occupy the residence and
is not a partnership, joint venture, trust,
corporation, or any other entity
(including an entity acting as a sole
proprietorship) that is purchasing one or
more of the residences for speculative
purposes;
(3) The purchaser has entered into a
legally binding written sales contract for
the residence;
(4) The purchaser has not terminated
the contract;
(5) The purchaser has made a
substantial earnest money deposit of no
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less than 3 percent of the sales price,
which is subject to forfeiture if the
purchaser terminates the sales contract;
provided that, the earnest money
deposit shall not be subject to forfeiture
by reason of breach or termination of the
sales contract on the part of the builder;
(6) The earnest money deposit must
be held in escrow by the FDICsupervised institution or an
independent party in a fiduciary
capacity, and the escrow agreement
must provide that in an event of default
arising from the cancellation of the sales
contract by the purchaser of the
residence, the escrow funds shall be
used to defray any cost incurred by the
FDIC-supervised institution;
(7) The builder must incur at least the
first 10 percent of the direct costs of
construction of the residence (that is,
actual costs of the land, labor, and
material) before any drawdown is made
under the loan;
(8) The loan may not exceed 80
percent of the sales price of the presold
residence; and
(9) The loan is not more than 90 days
past due, or on nonaccrual.
Protection amount (P) means, with
respect to an exposure hedged by an
eligible guarantee or eligible credit
derivative, the effective notional amount
of the guarantee or credit derivative,
reduced to reflect any currency
mismatch, maturity mismatch, or lack of
restructuring coverage (as provided in
§ 324.36 or § 324.134, as appropriate).
Publicly-traded means traded on:
(1) Any exchange registered with the
SEC as a national securities exchange
under section 6 of the Securities
Exchange Act; or
(2) Any non-U.S.-based securities
exchange that:
(i) Is registered with, or approved by,
a national securities regulatory
authority; and
(ii) Provides a liquid, two-way market
for the instrument in question.
Public sector entity (PSE) means a
state, local authority, or other
governmental subdivision below the
sovereign level.
Qualifying central counterparty
(QCCP) means a central counterparty
that:
(1)(i) Is a designated financial market
utility (FMU) under Title VIII of the
Dodd-Frank Act;
(ii) If not located in the United States,
is regulated and supervised in a manner
equivalent to a designated FMU; or
(iii) Meets the following standards:
(A) The central counterparty requires
all parties to contracts cleared by the
counterparty to be fully collateralized
on a daily basis;
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(B) The FDIC-supervised institution
demonstrates to the satisfaction of the
FDIC that the central counterparty:
(1) Is in sound financial condition;
(2) Is subject to supervision by the
Federal Reserve, the CFTC, or the
Securities Exchange Commission (SEC),
or, if the central counterparty is not
located in the United States, is subject
to effective oversight by a national
supervisory authority in its home
country; and
(3) Meets or exceeds the riskmanagement standards for central
counterparties set forth in regulations
established by the Federal Reserve, the
CFTC, or the SEC under Title VII or
Title VIII of the Dodd-Frank Act; or if
the central counterparty is not located
in the United States, meets or exceeds
similar risk-management standards
established under the law of its home
country that are consistent with
international standards for central
counterparty risk management as
established by the relevant standard
setting body of the Bank of International
Settlements; and
(2)(i) Provides the FDIC-supervised
institution with the central
counterparty’s hypothetical capital
requirement or the information
necessary to calculate such hypothetical
capital requirement, and other
information the FDIC-supervised
institution is required to obtain under
§§ 324.35(d)(3) and 324.133(d)(3);
(ii) Makes available to the FDIC and
the CCP’s regulator the information
described in paragraph (2)(i) of this
definition; and
(iii) Has not otherwise been
determined by the FDIC to not be a
QCCP due to its financial condition, risk
profile, failure to meet supervisory risk
management standards, or other
weaknesses or supervisory concerns that
are inconsistent with the risk weight
assigned to qualifying central
counterparties under §§ 324.35 and
324.133.
(3) Exception. A QCCP that fails to
meet the requirements of a QCCP in the
future may still be treated as a QCCP
under the conditions specified in
§ 324.3(f).
Qualifying master netting agreement
means a written, legally enforceable
agreement provided that:
(1) The agreement creates a single
legal obligation for all individual
transactions covered by the agreement
upon an event of default, including
upon an event of receivership,
insolvency, liquidation, or similar
proceeding, of the counterparty;
(2) The agreement provides the FDICsupervised institution the right to
accelerate, terminate, and close-out on a
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net basis all transactions under the
agreement and to liquidate or set off
collateral promptly upon an event of
default, including upon an event of
receivership, insolvency, liquidation, or
similar proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than in receivership,
conservatorship, resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Act, or under any
similar insolvency law applicable to
GSEs;
(3) The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
than it otherwise would make under the
agreement, or no payment at all, to a
defaulter or the estate of a defaulter,
even if the defaulter or the estate of the
defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement
as a qualifying master netting agreement
for purposes of this subpart, an FDICsupervised institution must comply
with the requirements of § 324.3(d) with
respect to that agreement.
Regulated financial institution means
a financial institution subject to
consolidated supervision and regulation
comparable to that imposed on the
following U.S. financial institutions:
Depository institutions, depository
institution holding companies, nonbank
financial companies supervised by the
Federal Reserve, designated financial
market utilities, securities brokerdealers, credit unions, or insurance
companies.
Repo-style transaction means a
repurchase or reverse repurchase
transaction, or a securities borrowing or
securities lending transaction, including
a transaction in which the FDICsupervised institution acts as agent for
a customer and indemnifies the
customer against loss, provided that:
(1) The transaction is based solely on
liquid and readily marketable securities,
cash, or gold;
(2) The transaction is marked-to-fair
value daily and subject to daily margin
maintenance requirements;
(3)(i) The transaction is a ‘‘securities
contract’’ or ‘‘repurchase agreement’’
under section 555 or 559, respectively,
of the Bankruptcy Code (11 U.S.C. 555
or 559), a qualified financial contract
under section 11(e)(8) of the Federal
Deposit Insurance Act, or a netting
contract between or among financial
institutions under sections 401–407 of
the Federal Deposit Insurance
Corporation Improvement Act or the
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Federal Reserve’s Regulation EE (12 CFR
part 231); or
(ii) If the transaction does not meet
the criteria set forth in paragraph (3)(i)
of this definition, then either:
(A) The transaction is executed under
an agreement that provides the FDICsupervised institution the right to
accelerate, terminate, and close-out the
transaction on a net basis and to
liquidate or set off collateral promptly
upon an event of default, including
upon an event of receivership,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than in receivership,
conservatorship, resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Act, or under any
similar insolvency law applicable to
GSEs; or
(B) The transaction is:
(1) Either overnight or
unconditionally cancelable at any time
by the FDIC-supervised institution; and
(2) Executed under an agreement that
provides the FDIC-supervised
institution the right to accelerate,
terminate, and close-out the transaction
on a net basis and to liquidate or set off
collateral promptly upon an event of
counterparty default; and
(4) In order to recognize an exposure
as a repo-style transaction for purposes
of this subpart, an FDIC-supervised
institution must comply with the
requirements of § 324.3(e) of this part
with respect to that exposure.
Resecuritization means a
securitization which has more than one
underlying exposure and in which one
or more of the underlying exposures is
a securitization exposure.
Resecuritization exposure means:
(1) An on- or off-balance sheet
exposure to a resecuritization;
(2) An exposure that directly or
indirectly references a resecuritization
exposure.
(3) An exposure to an asset-backed
commercial paper program is not a
resecuritization exposure if either:
(i) The program-wide credit
enhancement does not meet the
definition of a resecuritization exposure;
or
(ii) The entity sponsoring the program
fully supports the commercial paper
through the provision of liquidity so
that the commercial paper holders
effectively are exposed to the default
risk of the sponsor instead of the
underlying exposures.
Residential mortgage exposure means
an exposure (other than a securitization
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exposure, equity exposure, statutory
multifamily mortgage, or presold
construction loan) that is:
(1) An exposure that is primarily
secured by a first or subsequent lien on
one-to-four family residential property;
or
(2)(i) An exposure with an original
and outstanding amount of $1 million or
less that is primarily secured by a first
or subsequent lien on residential
property that is not one-to-four family;
and
(ii) For purposes of calculating capital
requirements under subpart E of this
part, is managed as part of a segment of
exposures with homogeneous risk
characteristics and not on an individualexposure basis.
Revenue obligation means a bond or
similar obligation that is an obligation of
a PSE, but which the PSE is committed
to repay with revenues from the specific
project financed rather than general tax
funds.
Savings and loan holding company
means a savings and loan holding
company as defined in section 10 of the
Home Owners’ Loan Act (12 U.S.C.
1467a).
Securities and Exchange Commission
(SEC) means the U.S. Securities and
Exchange Commission.
Securities Exchange Act means the
Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.).
Securitization exposure means:
(1) An on-balance sheet or off-balance
sheet credit exposure (including creditenhancing representations and
warranties) that arises from a traditional
securitization or synthetic securitization
(including a resecuritization), or
(2) An exposure that directly or
indirectly references a securitization
exposure described in paragraph (1) of
this definition.
Securitization special purpose entity
(securitization SPE) means a
corporation, trust, or other entity
organized for the specific purpose of
holding underlying exposures of a
securitization, the activities of which
are limited to those appropriate to
accomplish this purpose, and the
structure of which is intended to isolate
the underlying exposures held by the
entity from the credit risk of the seller
of the underlying exposures to the
entity.
Separate account means a legally
segregated pool of assets owned and
held by an insurance company and
maintained separately from the
insurance company’s general account
assets for the benefit of an individual
contract holder. To be a separate
account:
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(1) The account must be legally
recognized as a separate account under
applicable law;
(2) The assets in the account must be
insulated from general liabilities of the
insurance company under applicable
law in the event of the insurance
company’s insolvency;
(3) The insurance company must
invest the funds within the account as
directed by the contract holder in
designated investment alternatives or in
accordance with specific investment
objectives or policies; and
(4) All investment gains and losses,
net of contract fees and assessments,
must be passed through to the contract
holder, provided that the contract may
specify conditions under which there
may be a minimum guarantee but must
not include contract terms that limit the
maximum investment return available
to the policyholder.
Servicer cash advance facility means
a facility under which the servicer of the
underlying exposures of a securitization
may advance cash to ensure an
uninterrupted flow of payments to
investors in the securitization, including
advances made to cover foreclosure
costs or other expenses to facilitate the
timely collection of the underlying
exposures.
Significant investment in the capital
of an unconsolidated financial
institution means an investment in the
capital of an unconsolidated financial
institution where the FDIC-supervised
institution owns more than 10 percent
of the issued and outstanding common
stock of the unconsolidated financial
institution.
Small Business Act means the Small
Business Act (15 U.S.C. 631 et seq.).
Small Business Investment Act means
the Small Business Investment Act of
1958 (15 U.S.C. 681 et seq.).
Sovereign means a central government
(including the U.S. government) or an
agency, department, ministry, or central
bank of a central government.
Sovereign default means
noncompliance by a sovereign with its
external debt service obligations or the
inability or unwillingness of a sovereign
government to service an existing loan
according to its original terms, as
evidenced by failure to pay principal
and interest timely and fully, arrearages,
or restructuring.
Sovereign exposure means:
(1) A direct exposure to a sovereign;
or
(2) An exposure directly and
unconditionally backed by the full faith
and credit of a sovereign.
Specific wrong-way risk means wrongway risk that arises when either:
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(1) The counterparty and issuer of the
collateral supporting the transaction; or
(2) The counterparty and the reference
asset of the transaction, are affiliates or
are the same entity.
Standardized market risk-weighted
assets means the standardized measure
for market risk calculated under
§ 324.204 multiplied by 12.5.
Standardized total risk-weighted
assets means:
(1) The sum of:
(i) Total risk-weighted assets for
general credit risk as calculated under
§ 324.31;
(ii) Total risk-weighted assets for
cleared transactions and default fund
contributions as calculated under
§ 324.35;
(iii) Total risk-weighted assets for
unsettled transactions as calculated
under § 324.38;
(iv) Total risk-weighted assets for
securitization exposures as calculated
under § 324.42;
(v) Total risk-weighted assets for
equity exposures as calculated under
§§ 324.52 and 324.53; and
(vi) For a market risk FDIC-supervised
institution only, standardized market
risk-weighted assets; minus
(2) Any amount of the FDICsupervised institution’s allowance for
loan and lease losses that is not
included in tier 2 capital and any
amount of allocated transfer risk
reserves.
State savings association means a
State savings association as defined in
section 3(b)(3) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(b)(3)), the
deposits of which are insured by the
Corporation. It includes a building and
loan, savings and loan, or homestead
association, or a cooperative bank (other
than a cooperative bank which is a state
bank as defined in section 3(a)(2) of the
Federal Deposit Insurance Act)
organized and operating according to
the laws of the State in which it is
chartered or organized, or a corporation
(other than a bank as defined in section
3(a)(1) of the Federal Deposit Insurance
Act) that the Board of Directors of the
Federal Deposit Insurance Corporation
determine to be operating substantially
in the same manner as a state savings
association.
Statutory multifamily mortgage means
a loan secured by a multifamily
residential property that meets the
requirements under section 618(b)(1) of
the Resolution Trust Corporation
Refinancing, Restructuring, and
Improvement Act of 1991, and that
meets the following criteria: 5
5 The types of loans that qualify as loans secured
by multifamily residential properties are listed in
the instructions for preparation of the Call Report.
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(1) The loan is made in accordance
with prudent underwriting standards;
(2) The principal amount of the loan
at origination does not exceed 80
percent of the value of the property (or
75 percent of the value of the property
if the loan is based on an interest rate
that changes over the term of the loan)
where the value of the property is the
lower of the acquisition cost of the
property or the appraised (or, if
appropriate, evaluated) value of the
property;
(3) All principal and interest
payments on the loan must have been
made on a timely basis in accordance
with the terms of the loan for at least
one year prior to applying a 50 percent
risk weight to the loan, or in the case
where an existing owner is refinancing
a loan on the property, all principal and
interest payments on the loan being
refinanced must have been made on a
timely basis in accordance with the
terms of the loan for at least one year
prior to applying a 50 percent risk
weight to the loan;
(4) Amortization of principal and
interest on the loan must occur over a
period of not more than 30 years and the
minimum original maturity for
repayment of principal must not be less
than 7 years;
(5) Annual net operating income
(before making any payment on the
loan) generated by the property securing
the loan during its most recent fiscal
year must not be less than 120 percent
of the loan’s current annual debt service
(or 115 percent of current annual debt
service if the loan is based on an interest
rate that changes over the term of the
loan) or, in the case of a cooperative or
other not-for-profit housing project, the
property must generate sufficient cash
flow to provide comparable protection
to the FDIC-supervised institution; and
(6) The loan is not more than 90 days
past due, or on nonaccrual.
Subsidiary means, with respect to a
company, a company controlled by that
company.
Synthetic exposure means an
exposure whose value is linked to the
value of an investment in the FDICsupervised institution’s own capital
instrument or to the value of an
investment in the capital of an
unconsolidated financial institution.
Synthetic securitization means a
transaction in which:
(1) All or a portion of the credit risk
of one or more underlying exposures is
retained or transferred to one or more
third parties through the use of one or
more credit derivatives or guarantees
(other than a guarantee that transfers
only the credit risk of an individual
retail exposure);
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(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).
Tangible capital means the amount of
core capital (Tier 1 capital), as defined
in accordance with § 324.2, plus the
amount of outstanding perpetual
preferred stock (including related
surplus) not included in Tier 1 capital.
Tangible equity means the amount of
Tier 1 capital, as calculated in
accordance with § 324.2, plus the
amount of outstanding perpetual
preferred stock (including related
surplus) not included in Tier 1 capital.
Tier 1 capital means the sum of
common equity tier 1 capital and
additional tier 1 capital.
Tier 1 minority interest means the tier
1 capital of a consolidated subsidiary of
an FDIC-supervised institution that is
not owned by the FDIC-supervised
institution.
Tier 2 capital is defined in
§ 324.20(d).
Total capital means the sum of tier 1
capital and tier 2 capital.
Total capital minority interest means
the total capital of a consolidated
subsidiary of an FDIC-supervised
institution that is not owned by the
FDIC-supervised institution.
Total leverage exposure means the
sum of the following:
(1) The balance sheet carrying value
of all of the FDIC-supervised
institution’s on-balance sheet assets,
less amounts deducted from tier 1
capital under § 324.22(a), (c), and (d);
(2) The potential future credit
exposure (PFE) amount for each
derivative contract to which the FDICsupervised institution is a counterparty
(or each single-product netting set of
such transactions) determined in
accordance with § 324.34, but without
regard to § 324.34(b);
(3) 10 percent of the notional amount
of unconditionally cancellable
commitments made by the FDICsupervised institution; and
(4) The notional amount of all other
off-balance sheet exposures of the FDICsupervised institution (excluding
securities lending, securities borrowing,
reverse repurchase transactions,
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derivatives and unconditionally
cancellable commitments).
Traditional securitization means a
transaction in which:
(1) All or a portion of the credit risk
of one or more underlying exposures is
transferred to one or more third parties
other than through the use of credit
derivatives or guarantees;
(2) The credit risk associated with the
underlying exposures has been
separated into at least two tranches
reflecting different levels of seniority;
(3) Performance of the securitization
exposures depends upon the
performance of the underlying
exposures;
(4) All or substantially all of the
underlying exposures are financial
exposures (such as loans, commitments,
credit derivatives, guarantees,
receivables, asset-backed securities,
mortgage-backed securities, other debt
securities, or equity securities);
(5) The underlying exposures are not
owned by an operating company;
(6) The underlying exposures are not
owned by a small business investment
company defined in section 302 of the
Small Business Investment Act;
(7) The underlying exposures are not
owned by a firm an investment in which
qualifies as a community development
investment under section 24 (Eleventh)
of the National Bank Act;
(8) The FDIC may determine that a
transaction in which the underlying
exposures are owned by an investment
firm that exercises substantially
unfettered control over the size and
composition of its assets, liabilities, and
off-balance sheet exposures is not a
traditional securitization based on the
transaction’s leverage, risk profile, or
economic substance;
(9) The FDIC may deem a transaction
that meets the definition of a traditional
securitization, notwithstanding
paragraph (5), (6), or (7) of this
definition, to be a traditional
securitization based on the transaction’s
leverage, risk profile, or economic
substance; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund (as
defined in 12 CFR 344.3 (state
nonmember bank), and 12 CFR 390.203
(state savings association);
(iii) An employee benefit plan (as
defined in paragraphs (3) and (32) of
section 3 of ERISA), a ‘‘governmental
plan’’ (as defined in 29 U.S.C. 1002(32))
that complies with the tax deferral
qualification requirements provided in
the Internal Revenue Code, or any
similar employee benefit plan
established under the laws of a foreign
jurisdiction;
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(iv) A synthetic exposure to the
capital of a financial institution to the
extent deducted from capital under
§ 324.22; or
(v) Registered with the SEC under the
Investment Company Act or foreign
equivalents thereof.
Tranche means all securitization
exposures associated with a
securitization that have the same
seniority level.
Two-way market means a market
where there are independent bona fide
offers to buy and sell so that a price
reasonably related to the last sales price
or current bona fide competitive bid and
offer quotations can be determined
within one day and settled at that price
within a relatively short time frame
conforming to trade custom.
Unconditionally cancelable means
with respect to a commitment, that an
FDIC-supervised institution may, at any
time, with or without cause, refuse to
extend credit under the commitment (to
the extent permitted under applicable
law).
Underlying exposures means one or
more exposures that have been
securitized in a securitization
transaction.
Unregulated financial institution
means, for purposes of § 324.131, a
financial institution that is not a
regulated financial institution,
including any financial institution that
would meet the definition of ‘‘financial
institution’’ under this section but for
the ownership interest thresholds set
forth in paragraph (4)(i) of that
definition.
U.S. Government agency means an
instrumentality of the U.S. Government
whose obligations are fully and
explicitly guaranteed as to the timely
payment of principal and interest by the
full faith and credit of the U.S.
Government.
Value-at-Risk (VaR) means the
estimate of the maximum amount that
the value of one or more exposures
could decline due to market price or
rate movements during a fixed holding
period within a stated confidence
interval.
Wrong-way risk means the risk that
arises when an exposure to a particular
counterparty is positively correlated
with the probability of default of such
counterparty itself.
§ 324.3 Operational requirements for
counterparty credit risk.
For purposes of calculating riskweighted assets under subparts D and E
of this part:
(a) Cleared transaction. In order to
recognize certain exposures as cleared
transactions pursuant to paragraphs
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(1)(ii), (iii), or (iv) of the definition of
‘‘cleared transaction’’ in § 324.2, the
exposures must meet the applicable
requirements set forth in this paragraph.
(1) The offsetting transaction must be
identified by the CCP as a transaction
for the clearing member client.
(2) The collateral supporting the
transaction must be held in a manner
that prevents the FDIC-supervised
institution from facing any loss due to
an event of default, including from a
liquidation, receivership, insolvency, or
similar proceeding of either the clearing
member or the clearing member’s other
clients. Omnibus accounts established
under 17 CFR parts 190 and 300 satisfy
the requirements of this paragraph (a).
(3) The FDIC-supervised institution
must conduct sufficient legal review to
conclude with a well-founded basis
(and maintain sufficient written
documentation of that legal review) that
in the event of a legal challenge
(including one resulting from a default
or receivership, insolvency, liquidation,
or similar proceeding) the relevant court
and administrative authorities would
find the arrangements of paragraph
(a)(2) of this section to be legal, valid,
binding and enforceable under the law
of the relevant jurisdictions.
(4) The offsetting transaction with a
clearing member must be transferable
under the transaction documents and
applicable laws in the relevant
jurisdiction(s) to another clearing
member should the clearing member
default, become insolvent, or enter
receivership, insolvency, liquidation, or
similar proceedings.
(b) Eligible margin loan. In order to
recognize an exposure as an eligible
margin loan as defined in § 324.2, an
FDIC-supervised institution must
conduct sufficient legal review to
conclude with a well-founded basis
(and maintain sufficient written
documentation of that legal review) that
the agreement underlying the exposure:
(1) Meets the requirements of
paragraph (1)(iii) of the definition of
eligible margin loan in § 324.2, and
(2) Is legal, valid, binding, and
enforceable under applicable law in the
relevant jurisdictions.
(c) Qualifying cross-product master
netting agreement. In order to recognize
an agreement as a qualifying crossproduct master netting agreement as
defined in § 324.101, an FDICsupervised institution must obtain a
written legal opinion verifying the
validity and enforceability of the
agreement under applicable law of the
relevant jurisdictions if the counterparty
fails to perform upon an event of
default, including upon receivership,
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insolvency, liquidation, or similar
proceeding.
(d) Qualifying master netting
agreement. In order to recognize an
agreement as a qualifying master netting
agreement as defined in § 324.2, an
FDIC-supervised institution must:
(1) Conduct sufficient legal review to
conclude with a well-founded basis
(and maintain sufficient written
documentation of that legal review) that:
(i) The agreement meets the
requirements of paragraph (2) of the
definition of qualifying master netting
agreement in § 324.2; and
(ii) In the event of a legal challenge
(including one resulting from default or
from receivership, insolvency,
liquidation, or similar proceeding) the
relevant court and administrative
authorities would find the agreement to
be legal, valid, binding, and enforceable
under the law of the relevant
jurisdictions; and
(2) Establish and maintain written
procedures to monitor possible changes
in relevant law and to ensure that the
agreement continues to satisfy the
requirements of the definition of
qualifying master netting agreement in
§ 324.2.
(e) Repo-style transaction. In order to
recognize an exposure as a repo-style
transaction as defined in § 324.2, an
FDIC-supervised institution must
conduct sufficient legal review to
conclude with a well-founded basis
(and maintain sufficient written
documentation of that legal review) that
the agreement underlying the exposure:
(1) Meets the requirements of
paragraph (3) of the definition of repostyle transaction in § 324.2, and
(2) Is legal, valid, binding, and
enforceable under applicable law in the
relevant jurisdictions.
(f) Failure of a QCCP to satisfy the
rule’s requirements. If an FDICsupervised institution determines that a
CCP ceases to be a QCCP due to the
failure of the CCP to satisfy one or more
of the requirements set forth in
paragraphs (2)(i) through (2)(iii) of the
definition of a QCCP in § 324.2, the
FDIC-supervised institution may
continue to treat the CCP as a QCCP for
up to three months following the
determination. If the CCP fails to
remedy the relevant deficiency within
three months after the initial
determination, or the CCP fails to satisfy
the requirements set forth in paragraphs
(2)(i) through (2)(iii) of the definition of
a QCCP continuously for a three-month
period after remedying the relevant
deficiency, an FDIC-supervised
institution may not treat the CCP as a
QCCP for the purposes of this part until
after the FDIC-supervised institution has
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determined that the CCP has satisfied
the requirements in paragraphs (2)(i)
through (2)(iii) of the definition of a
QCCP for three continuous months.
§ 324.4 Inadequate capital as an unsafe or
unsound practice or condition.
(a) General. As a condition of Federal
deposit insurance, all insured
depository institutions must remain in a
safe and sound condition.
(b) Unsafe or unsound practice. Any
insured depository institution which
has less than its minimum leverage
capital requirement is deemed to be
engaged in an unsafe or unsound
practice pursuant to section 8(b)(1) and/
or 8(c) of the Federal Deposit Insurance
Act (12 U.S.C. 1818(b)(1) and/or
1818(c)). Except that such an insured
depository institution which has
entered into and is in compliance with
a written agreement with the FDIC or
has submitted to the FDIC and is in
compliance with a plan approved by the
FDIC to increase its leverage capital
ratio to such level as the FDIC deems
appropriate and to take such other
action as may be necessary for the
insured depository institution to be
operated so as not to be engaged in such
an unsafe or unsound practice will not
be deemed to be engaged in an unsafe
or unsound practice pursuant to section
8(b)(1) and/or 8(c) of the Federal
Deposit Insurance Act (12 U.S.C.
1818(b)(1) and/or 1818(c)) on account of
its capital ratios. The FDIC is not
precluded from taking action under
section 8(b)(1), section 8(c) or any other
enforcement action against an insured
depository institution with capital
above the minimum requirement if the
specific circumstances deem such
action to be appropriate.
(c) Unsafe or unsound condition. Any
insured depository institution with a
ratio of tier 1 capital to total assets 6 that
is less than two percent is deemed to be
operating in an unsafe or unsound
condition pursuant to section 8(a) of the
Federal Deposit Insurance Act (12
U.S.C. 1818(a)).
(1) An insured depository institution
with a ratio of tier 1 capital to total
assets of less than two percent which
has entered into and is in compliance
with a written agreement with the FDIC
(or any other insured depository
institution with a ratio of tier 1 capital
to total assets of less than two percent
which has entered into and is in
compliance with a written agreement
with its primary Federal regulator and
6 For purposes of this paragraph (c), until January
1, 2015, the term total assets shall have the same
meaning as provided in 12 CFR 325.2(x). As of
January 1, 2015, the term total assets shall have the
same meaning as provided in 12 CFR 324.401(g).
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to which agreement the FDIC is a party)
to increase its tier 1 leverage capital
ratio to such level as the FDIC deems
appropriate and to take such other
action as may be necessary for the
insured depository institution to be
operated in a safe and sound manner,
will not be subject to a proceeding by
the FDIC pursuant to 12 U.S.C. 1818(a)
on account of its capital ratios.
(2) An insured depository institution
with a ratio of tier 1 capital to total
assets that is equal to or greater than two
percent may be operating in an unsafe
or unsound condition. The FDIC is not
precluded from bringing an action
pursuant to 12 U.S.C. 1818(a) where an
insured depository institution has a
ratio of tier 1 capital to total assets that
is equal to or greater than two percent.
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§ 324.5
Issuance of directives.
(a) General. A directive is a final order
issued to an FDIC-supervised institution
that fails to maintain capital at or above
the minimum leverage capital
requirement as set forth in §§ 324.4 and
324.10. A directive issued pursuant to
this section, including a plan submitted
under a directive, is enforceable in the
same manner and to the same extent as
a final cease-and-desist order issued
under section 8(b) of the Federal
Deposit Insurance Act (12 U.S.C.
1818(b)).
(b) Issuance of directives. If an FDICsupervised institution is operating with
less than the minimum leverage capital
requirement established by this
regulation, the FDIC Board of Directors,
or its designee(s), may issue and serve
upon any FDIC-supervised institution a
directive requiring the FDIC-supervised
institution to restore its capital to the
minimum leverage capital requirement
within a specified time period. The
directive may require the FDICsupervised institution to submit to the
appropriate FDIC regional director, or
other specified official, for review and
approval, a plan describing the means
and timing by which the FDICsupervised institution shall achieve the
minimum leverage capital requirement.
After the FDIC has approved the plan,
the FDIC-supervised institution may be
required under the terms of the directive
to adhere to and monitor compliance
with the plan. The directive may be
issued during the course of an
examination of the FDIC-supervised
institution, or at any other time that the
FDIC deems appropriate, if the FDICsupervised institution is found to be
operating with less than the minimum
leverage capital requirement.
(c) Notice and opportunity to respond
to issuance of a directive. (1) If the FDIC
makes an initial determination that a
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directive should be issued to an FDICsupervised institution pursuant to
paragraph (b) of this section, the FDIC,
through the appropriate designated
official(s), shall serve written
notification upon the FDIC-supervised
institution of its intent to issue a
directive. The notice shall include the
current leverage capital ratio, the basis
upon which said ratio was calculated,
the proposed capital injection, the
proposed date for achieving the
minimum leverage capital requirement
and any other relevant information
concerning the decision to issue a
directive. When deemed appropriate,
specific requirements of a proposed
plan for meeting the minimum leverage
capital requirement may be included in
the notice.
(2) Within 14 days of receipt of
notification, the FDIC-supervised
institution may file with the appropriate
designated FDIC official(s) a written
response, explaining why the directive
should not be issued, seeking
modification of its terms, or other
appropriate relief. The FDIC-supervised
institution’s response shall include any
information, mitigating circumstances,
documentation, or other relevant
evidence which supports its position,
and may include a plan for attaining the
minimum leverage capital requirement.
(3)(i) After considering the FDICsupervised institution’s response, the
appropriate designated FDIC official(s)
shall serve upon the FDIC-supervised
institution a written determination
addressing the FDIC-supervised
institution’s response and setting forth
the FDIC’s findings and conclusions in
support of any decision to issue or not
to issue a directive. The directive may
be issued as originally proposed or in
modified form. The directive may order
the FDIC-supervised institution to:
(A) Achieve the minimum leverage
capital requirement established by this
regulation by a certain date;
(B) Submit for approval and adhere to
a plan for achieving the minimum
leverage capital requirement;
(C) Take other action as is necessary
to achieve the minimum leverage capital
requirement; or
(D) A combination of the above
actions.
(ii) If a directive is to be issued, it may
be served upon the FDIC-supervised
institution along with the final
determination.
(4) Any FDIC-supervised institution,
upon a change in circumstances, may
request the FDIC to reconsider the terms
of a directive and may propose changes
in the plan under which it is operating
to meet the minimum leverage capital
requirement. The directive and plan
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continue in effect while such request is
pending before the FDIC.
(5) All papers filed with the FDIC
must be postmarked or received by the
appropriate designated FDIC official(s)
within the prescribed time limit for
filing.
(6) Failure by the FDIC-supervised
institution to file a written response to
notification of intent to issue a directive
within the specified time period shall
constitute consent to the issuance of
such directive.
(d) Enforcement of a directive. (1)
Whenever an FDIC-supervised
institution fails to follow the directive
or to submit or adhere to its capital
adequacy plan, the FDIC may seek
enforcement of the directive in the
appropriate United States district court,
pursuant to 12 U.S.C. 3907(b)(2)(B)(ii),
in the same manner and to the same
extent as if the directive were a final
cease-and-desist order. In addition to
enforcement of the directive, the FDIC
may seek assessment of civil money
penalties for violation of the directive
against any FDIC-supervised institution,
any officer, director, employee, agent, or
other person participating in the
conduct of the affairs of the FDICsupervised institution, pursuant to 12
U.S.C. 3909(d).
(2) The directive may be issued
separately, in conjunction with, or in
addition to, any other enforcement
mechanisms available to the FDIC,
including cease-and-desist orders,
orders of correction, the approval or
denial of applications, or any other
actions authorized by law. In addition to
addressing an FDIC-supervised
institution’s minimum leverage capital
requirement, the capital directive may
also address minimum risk-based
capital requirements that are to be
maintained and calculated in
accordance with § 324.10, and, for state
savings associations, the minimum
tangible capital requirements set for in
§ 324.10.
§§ 324.6 through 324.9
[Reserved]
Subpart B—Capital Ratio
Requirements and Buffers
§ 324.10
Minimum capital requirements.
(a) Minimum capital requirements. An
FDIC-supervised institution must
maintain the following minimum
capital ratios:
(1) A common equity tier 1 capital
ratio of 4.5 percent.
(2) A tier 1 capital ratio of 6 percent.
(3) A total capital ratio of 8 percent.
(4) A leverage ratio of 4 percent.
(5) For advanced approaches FDICsupervised institutions, a
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supplementary leverage ratio of 3
percent.
(6) For state savings associations, a
tangible capital ratio of 1.5 percent.
(b) Standardized capital ratio
calculations. Other than as provided in
paragraph (c) of this section:
(1) Common equity tier 1 capital ratio.
An FDIC-supervised institution’s
common equity tier 1 capital ratio is the
ratio of the FDIC-supervised
institution’s common equity tier 1
capital to standardized total riskweighted assets;
(2) Tier 1 capital ratio. An FDICsupervised institution’s tier 1 capital
ratio is the ratio of the FDIC-supervised
institution’s tier 1 capital to
standardized total risk-weighted assets;
(3) Total capital ratio. An FDICsupervised institution’s total capital
ratio is the ratio of the FDIC-supervised
institution’s total capital to standardized
total risk-weighted assets; and
(4) Leverage ratio. An FDICsupervised institution’s leverage ratio is
the ratio of the FDIC-supervised
institution’s tier 1 capital to the FDICsupervised institution’s average total
consolidated assets as reported on the
FDIC-supervised institution’s Call
Report minus amounts deducted from
tier 1 capital under §§ 324.22(a), (c), and
(d).
(5) State savings association tangible
capital ratio. (i) Until January 1, 2015,
a state savings association shall
determine its tangible capital ratio in
accordance with 12 CFR 390.468.
(ii) As of January 1, 2015, a state
savings association’s tangible capital
ratio is the ratio of the state savings
association’s core capital (tier 1 capital)
to total assets. For purposes of this
paragraph, the term total assets shall
have the meaning provided in
§ 324.401(g).
(c) Advanced approaches capital ratio
calculations. An advanced approaches
FDIC-supervised institution that has
completed the parallel run process and
received notification from the FDIC
pursuant to § 324.121(d) must determine
its regulatory capital ratios as described
in this paragraph (c).
(1) Common equity tier 1 capital ratio.
The FDIC-supervised institution’s
common equity tier 1 capital ratio is the
lower of:
(i) The ratio of the FDIC-supervised
institution’s common equity tier 1
capital to standardized total riskweighted assets; and
(ii) The ratio of the FDIC-supervised
institution’s common equity tier 1
capital to advanced approaches total
risk-weighted assets.
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(2) Tier 1 capital ratio. The FDICsupervised institution’s tier 1 capital
ratio is the lower of:
(i) The ratio of the FDIC-supervised
institution’s tier 1 capital to
standardized total risk-weighted assets;
and
(ii) The ratio of the FDIC-supervised
institution’s tier 1 capital to advanced
approaches total risk-weighted assets.
(3) Total capital ratio. The FDICsupervised institution’s total capital
ratio is the lower of:
(i) The ratio of the FDIC-supervised
institution’s total capital to standardized
total risk-weighted assets; and
(ii) The ratio of the FDIC-supervised
institution’s advanced-approachesadjusted total capital to advanced
approaches total risk-weighted assets.
An FDIC-supervised institution’s
advanced-approaches-adjusted total
capital is the FDIC-supervised
institution’s total capital after being
adjusted as follows:
(A) An advanced approaches FDICsupervised institution must deduct from
its total capital any allowance for loan
and lease losses included in its tier 2
capital in accordance with
§ 324.20(d)(3); and
(B) An advanced approaches FDICsupervised institution must add to its
total capital any eligible credit reserves
that exceed the FDIC-supervised
institution’s total expected credit losses
to the extent that the excess reserve
amount does not exceed 0.6 percent of
the FDIC-supervised institution’s credit
risk-weighted assets.
(4) Supplementary leverage ratio. An
advanced approaches FDIC-supervised
institution’s supplementary leverage
ratio is the simple arithmetic mean of
the ratio of its tier 1 capital to total
leverage exposure calculated as of the
last day of each month in the reporting
quarter.
(5) State savings association tangible
capital ratio. (i) Until January 1, 2014,
a state savings association shall
determine its tangible capital ratio in
accordance with 12 CFR 390.468.
(ii) As of January 1, 2014, a state
savings association’s tangible capital
ratio is the ratio of the state savings
association’s core capital (tier 1 capital)
to total assets. For purposes of this
paragraph, the term total assets shall
have the meaning provided in 12 CFR
324.401(g).
(d) Capital adequacy. (1)
Notwithstanding the minimum
requirements in this part, An FDICsupervised institution must maintain
capital commensurate with the level
and nature of all risks to which the
FDIC-supervised institution is exposed.
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(2) An FDIC-supervised institution
must have a process for assessing its
overall capital adequacy in relation to
its risk profile and a comprehensive
strategy for maintaining an appropriate
level of capital.
(3) Insured depository institutions
with less than the minimum leverage
capital requirement. (i) An insured
depository institution making an
application to the FDIC operating with
less than the minimum leverage capital
requirement does not have adequate
capital and therefore has inadequate
financial resources.
(ii) Any insured depository institution
operating with an inadequate capital
structure, and therefore inadequate
financial resources, will not receive
approval for an application requiring
the FDIC to consider the adequacy of its
capital structure or its financial
resources.
(iii) In any merger, acquisition, or
other type of business combination
where the FDIC must give its approval,
where it is required to consider the
adequacy of the financial resources of
the existing and proposed institutions,
and where the resulting entity is either
insured by the FDIC or not otherwise
federally insured, approval will not be
granted when the resulting entity does
not meet the minimum leverage capital
requirement.
(iv) Exceptions. Notwithstanding the
provisions of paragraphs (d)(3)(i), (ii)
and (iii) of this section:
(A) The FDIC, in its discretion, may
approve an application pursuant to the
Federal Deposit Insurance Act where it
is required to consider the adequacy of
capital if it finds that such approval
must be taken to prevent the closing of
a depository institution or to facilitate
the acquisition of a closed depository
institution, or, when severe financial
conditions exist which threaten the
stability of an insured depository
institution or of a significant number of
depository institutions insured by the
FDIC or of insured depository
institutions possessing significant
financial resources, if such action is
taken to lessen the risk to the FDIC
posed by an insured depository
institution under such threat of
instability.
(B) The FDIC, in its discretion, may
approve an application pursuant to the
Federal Deposit Insurance Act where it
is required to consider the adequacy of
capital or the financial resources of the
insured depository institution where it
finds that the applicant has committed
to and is in compliance with a
reasonable plan to meet its minimum
leverage capital requirements within a
reasonable period of time.
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§ 324.11 Capital conservation buffer and
countercyclical capital buffer amount.
(a) Capital conservation buffer. (1)
Composition of the capital conservation
buffer. The capital conservation buffer is
composed solely of common equity tier
1 capital.
(2) Definitions. For purposes of this
section, the following definitions apply:
(i) Eligible retained income. The
eligible retained income of an FDICsupervised institution is the FDICsupervised institution’s net income for
the four calendar quarters preceding the
current calendar quarter, based on the
FDIC-supervised institution’s quarterly
Call Reports, net of any distributions
and associated tax effects not already
reflected in net income.
(ii) Maximum payout ratio. The
maximum payout ratio is the percentage
of eligible retained income that an FDICsupervised institution can pay out in the
form of distributions and discretionary
bonus payments during the current
calendar quarter. The maximum payout
ratio is based on the FDIC-supervised
institution’s capital conservation buffer,
calculated as of the last day of the
previous calendar quarter, as set forth in
Table 1 to § 324.11.
(iii) Maximum payout amount. An
FDIC-supervised institution’s maximum
payout amount for the current calendar
quarter is equal to the FDIC-supervised
institution’s eligible retained income,
multiplied by the applicable maximum
payout ratio, as set forth in Table 1 to
§ 324.11.
(iv) Private sector credit exposure.
Private sector credit exposure means an
exposure to a company or an individual
that is not an exposure to a sovereign,
the Bank for International Settlements,
the European Central Bank, the
European Commission, the International
Monetary Fund, an MDB, a PSE, or a
GSE.
(3) Calculation of capital conservation
buffer. (i) An FDIC-supervised
institution’s capital conservation buffer
is equal to the lowest of the following
ratios, calculated as of the last day of the
previous calendar quarter based on the
FDIC-supervised institution’s most
recent Call Report:
(A) The FDIC-supervised institution’s
common equity tier 1 capital ratio
minus the FDIC-supervised institution’s
minimum common equity tier 1 capital
ratio requirement under § 324.10;
(B) The FDIC-supervised institution’s
tier 1 capital ratio minus the FDICsupervised institution’s minimum tier 1
capital ratio requirement under
§ 324.10; and
(C) The FDIC-supervised institution’s
total capital ratio minus the FDICsupervised institution’s minimum total
capital ratio requirement under
§ 324.10; or
(ii) Notwithstanding paragraphs
(a)(3)(i)(A)–(C) of this section, if the
FDIC-supervised institution’s common
equity tier 1, tier 1 or total capital ratio
is less than or equal to the FDICsupervised institution’s minimum
common equity tier 1, tier 1 or total
capital ratio requirement under
§ 324.10, respectively, the FDICsupervised institution’s capital
conservation buffer is zero.
(4) Limits on distributions and
discretionary bonus payments. (i) An
FDIC-supervised institution shall not
make distributions or discretionary
bonus payments or create an obligation
to make such distributions or payments
during the current calendar quarter that,
in the aggregate, exceed the maximum
payout amount.
(ii) An FDIC-supervised institution
with a capital conservation buffer that is
greater than 2.5 percent plus 100
percent of its applicable countercyclical
capital buffer, in accordance with
paragraph (b) of this section, is not
subject to a maximum payout amount
under this section.
(iii) Negative eligible retained income.
Except as provided in paragraph
(a)(4)(iv) of this section, an FDICsupervised institution may not make
distributions or discretionary bonus
payments during the current calendar
quarter if the FDIC-supervised
institution’s:
(A) Eligible retained income is
negative; and
(B) Capital conservation buffer was
less than 2.5 percent as of the end of the
previous calendar quarter.
(iv) Prior approval. Notwithstanding
the limitations in paragraphs (a)(4)(i)
through (iii) of this section, the FDIC
may permit an FDIC-supervised
institution to make a distribution or
discretionary bonus payment upon a
request of the FDIC-supervised
institution, if the FDIC determines that
the distribution or discretionary bonus
payment would not be contrary to the
purposes of this section, or to the safety
and soundness of the FDIC-supervised
institution. In making such a
determination, the FDIC will consider
the nature and extent of the request and
the particular circumstances giving rise
to the request.
TABLE 1 TO § 324.11—CALCULATION OF MAXIMUM PAYOUT AMOUNT
Maximum payout ratio (as a
percentage of eligible retained
income)
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Capital conservation buffer
Greater than 2.5 percent plus 100 percent of the FDIC-supervised institution’s applicable countercyclical
capital buffer amount.
Less than or equal to 2.5 percent plus 100 percent of the FDIC-supervised institution’s applicable countercyclical capital buffer amount, and greater than 1.875 percent plus 75 percent of the FDIC-supervised institution’s applicable countercyclical capital buffer amount.
Less than or equal to 1.875 percent plus 75 percent of the FDIC-supervised institution’s applicable countercyclical capital buffer amount, and greater than 1.25 percent plus 50 percent of the FDIC-supervised
institution’s applicable countercyclical capital buffer amount.
Less than or equal to 1.25 percent plus 50 percent of the FDIC-supervised institution’s applicable countercyclical capital buffer amount, and greater than 0.625 percent plus 25 percent of the FDIC-supervised institution’s applicable countercyclical capital buffer amount.
Less than or equal to 0.625 percent plus 25 percent of the FDIC-supervised institution’s applicable countercyclical capital buffer amount.
(v) Other limitations on distributions.
Additional limitations on distributions
may apply to an FDIC-supervised
institution under 12 CFR 303.241 and
subpart H of this part.
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(b) Countercyclical capital buffer
amount—(1) General. An advanced
approaches FDIC-supervised institution
must calculate a countercyclical capital
buffer amount in accordance with the
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No payout ratio limitation applies.
60 percent.
40 percent.
20 percent.
0 percent.
following paragraphs for purposes of
determining its maximum payout ratio
under Table 1 to § 324.11.
(i) Extension of capital conservation
buffer. The countercyclical capital
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buffer amount is an extension of the
capital conservation buffer as described
in paragraph (a) of this section.
(ii) Amount. An advanced approaches
FDIC-supervised institution has a
countercyclical capital buffer amount
determined by calculating the weighted
average of the countercyclical capital
buffer amounts established for the
national jurisdictions where the FDICsupervised institution’s private sector
credit exposures are located, as
specified in paragraphs (b)(2) and (3) of
this section.
(iii) Weighting. The weight assigned to
a jurisdiction’s countercyclical capital
buffer amount is calculated by dividing
the total risk-weighted assets for the
FDIC-supervised institution’s private
sector credit exposures located in the
jurisdiction by the total risk-weighted
assets for all of the FDIC-supervised
institution’s private sector credit
exposures. The methodology an FDICsupervised institution uses for
determining risk-weighted assets for
purposes of this paragraph (b) must be
the methodology that determines its
risk-based capital ratios under § 324.10.
Notwithstanding the previous sentence,
the risk-weighted asset amount for a
private sector credit exposure that is a
covered position under subpart F of this
part is its specific risk add-on as
determined under § 324.210 multiplied
by 12.5.
(iv) Location. (A) Except as provided
in paragraphs (b)(1)(iv)(B) and
(b)(1)(iv)(C) of this section, the location
of a private sector credit exposure is the
national jurisdiction where the borrower
is located (that is, where it is
incorporated, chartered, or similarly
established or, if the borrower is an
individual, where the borrower resides).
(B) If, in accordance with subparts D
or E of this part, the FDIC-supervised
institution has assigned to a private
sector credit exposure a risk weight
associated with a protection provider on
a guarantee or credit derivative, the
location of the exposure is the national
jurisdiction where the protection
provider is located.
(C) The location of a securitization
exposure is the location of the
underlying exposures, or, if the
underlying exposures are located in
more than one national jurisdiction, the
national jurisdiction where the
underlying exposures with the largest
aggregate unpaid principal balance are
located. For purposes of this paragraph,
the location of an underlying exposure
shall be the location of the borrower,
determined consistent with paragraph
(b)(1)(iv)(A) of this section.
(2) Countercyclical capital buffer
amount for credit exposures in the
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United States—(i) Initial countercyclical
capital buffer amount with respect to
credit exposures in the United States.
The initial countercyclical capital buffer
amount in the United States is zero.
(ii) Adjustment of the countercyclical
capital buffer amount. The FDIC will
adjust the countercyclical capital buffer
amount for credit exposures in the
United States in accordance with
applicable law.7
(iii) Range of countercyclical capital
buffer amount. The FDIC will adjust the
countercyclical capital buffer amount
for credit exposures in the United States
between zero percent and 2.5 percent of
risk-weighted assets.
(iv) Adjustment determination. The
FDIC will base its decision to adjust the
countercyclical capital buffer amount
under this section on a range of
macroeconomic, financial, and
supervisory information indicating an
increase in systemic risk including, but
not limited to, the ratio of credit to gross
domestic product, a variety of asset
prices, other factors indicative of
relative credit and liquidity expansion
or contraction, funding spreads, credit
condition surveys, indices based on
credit default swap spreads, options
implied volatility, and measures of
systemic risk.
(v) Effective date of adjusted
countercyclical capital buffer amount—
(A) Increase adjustment. A
determination by the FDIC under
paragraph (b)(2)(ii) of this section to
increase the countercyclical capital
buffer amount will be effective 12
months from the date of announcement,
unless the FDIC establishes an earlier
effective date and includes a statement
articulating the reasons for the earlier
effective date.
(B) Decrease adjustment. A
determination by the FDIC to decrease
the established countercyclical capital
buffer amount under paragraph (b)(2)(ii)
of this section will be effective on the
day following announcement of the
final determination or the earliest date
permissible under applicable law or
regulation, whichever is later.
(vi) Twelve month sunset. The
countercyclical capital buffer amount
will return to zero percent 12 months
after the effective date that the adjusted
countercyclical capital buffer amount is
announced, unless the FDIC announces
a decision to maintain the adjusted
countercyclical capital buffer amount or
adjust it again before the expiration of
the 12-month period.
7 The FDIC expects that any adjustment will be
based on a determination made jointly by the
Board, OCC, and FDIC.
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55489
(3) Countercyclical capital buffer
amount for foreign jurisdictions. The
FDIC will adjust the countercyclical
capital buffer amount for private sector
credit exposures to reflect decisions
made by foreign jurisdictions consistent
with due process requirements
described in paragraph (b)(2) of this
section.
§§ 324.12 through 324.19
[Reserved]
Subpart C—Definition of Capital
§ 324.20 Capital components and eligibility
criteria for regulatory capital instruments.
(a) Regulatory capital components. An
FDIC-supervised institution’s regulatory
capital components are:
(1) Common equity tier 1 capital;
(2) Additional tier 1 capital; and
(3) Tier 2 capital.
(b) Common equity tier 1 capital.
Common equity tier 1 capital is the sum
of the common equity tier 1 capital
elements in this paragraph (b), minus
regulatory adjustments and deductions
in § 324.22. The common equity tier 1
capital elements are:
(1) Any common stock instruments
(plus any related surplus) issued by the
FDIC-supervised institution, net of
treasury stock, and any capital
instruments issued by mutual banking
organizations, that meet all the
following criteria:
(i) The instrument is paid-in, issued
directly by the FDIC-supervised
institution, and represents the most
subordinated claim in a receivership,
insolvency, liquidation, or similar
proceeding of the FDIC-supervised
institution;
(ii) The holder of the instrument is
entitled to a claim on the residual assets
of the FDIC-supervised institution that
is proportional with the holder’s share
of the FDIC-supervised institution’s
issued capital after all senior claims
have been satisfied in a receivership,
insolvency, liquidation, or similar
proceeding;
(iii) The instrument has no maturity
date, can only be redeemed via
discretionary repurchases with the prior
approval of the FDIC, and does not
contain any term or feature that creates
an incentive to redeem;
(iv) The FDIC-supervised institution
did not create at issuance of the
instrument through any action or
communication an expectation that it
will buy back, cancel, or redeem the
instrument, and the instrument does not
include any term or feature that might
give rise to such an expectation;
(v) Any cash dividend payments on
the instrument are paid out of the FDICsupervised institution’s net income and
retained earnings and are not subject to
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a limit imposed by the contractual terms
governing the instrument. An FDICsupervised institution must obtain prior
FDIC approval for any dividend
payment involving a reduction or
retirement of capital stock in accordance
with 12 CFR 303.241;
(vi) The FDIC-supervised institution
has full discretion at all times to refrain
from paying any dividends and making
any other distributions on the
instrument without triggering an event
of default, a requirement to make a
payment-in-kind, or an imposition of
any other restrictions on the FDICsupervised institution;
(vii) Dividend payments and any
other distributions on the instrument
may be paid only after all legal and
contractual obligations of the FDICsupervised institution have been
satisfied, including payments due on
more senior claims;
(viii) The holders of the instrument
bear losses as they occur equally,
proportionately, and simultaneously
with the holders of all other common
stock instruments before any losses are
borne by holders of claims on the FDICsupervised institution with greater
priority in a receivership, insolvency,
liquidation, or similar proceeding;
(ix) The paid-in amount is classified
as equity under GAAP;
(x) The FDIC-supervised institution,
or an entity that the FDIC-supervised
institution controls, did not purchase or
directly or indirectly fund the purchase
of the instrument;
(xi) The instrument is not secured, not
covered by a guarantee of the FDICsupervised institution or of an affiliate
of the FDIC-supervised institution, and
is not subject to any other arrangement
that legally or economically enhances
the seniority of the instrument;
(xii) The instrument has been issued
in accordance with applicable laws and
regulations; and
(xiii) The instrument is reported on
the FDIC-supervised institution’s
regulatory financial statements
separately from other capital
instruments.
(2) Retained earnings.
(3) Accumulated other comprehensive
income (AOCI) as reported under
GAAP.8
(4) Any common equity tier 1
minority interest, subject to the
limitations in § 324.21(c).
(5) Notwithstanding the criteria for
common stock instruments referenced
above, an FDIC-supervised institution’s
common stock issued and held in trust
for the benefit of its employees as part
8 See
§ 324.22 for specific adjustments related to
AOCI.
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of an employee stock ownership plan
does not violate any of the criteria in
paragraph (b)(1)(iii), paragraph (b)(1)(iv)
or paragraph (b)(1)(xi) of this section,
provided that any repurchase of the
stock is required solely by virtue of
ERISA for an instrument of an FDICsupervised institution that is not
publicly-traded. In addition, an
instrument issued by an FDICsupervised institution to its employee
stock ownership plan does not violate
the criterion in paragraph (b)(1)(x) of
this section.
(c) Additional tier 1 capital.
Additional tier 1 capital is the sum of
additional tier 1 capital elements and
any related surplus, minus the
regulatory adjustments and deductions
in § 324.22. Additional tier 1 capital
elements are:
(1) Instruments (plus any related
surplus) that meet the following criteria:
(i) The instrument is issued and paidin;
(ii) The instrument is subordinated to
depositors, general creditors, and
subordinated debt holders of the FDICsupervised institution in a receivership,
insolvency, liquidation, or similar
proceeding;
(iii) The instrument is not secured,
not covered by a guarantee of the FDICsupervised institution or of an affiliate
of the FDIC-supervised institution, and
not subject to any other arrangement
that legally or economically enhances
the seniority of the instrument;
(iv) The instrument has no maturity
date and does not contain a dividend
step-up or any other term or feature that
creates an incentive to redeem; and
(v) If callable by its terms, the
instrument may be called by the FDICsupervised institution only after a
minimum of five years following
issuance, except that the terms of the
instrument may allow it to be called
earlier than five years upon the
occurrence of a regulatory event that
precludes the instrument from being
included in additional tier 1 capital, a
tax event, or if the issuing entity is
required to register as an investment
company pursuant to the Investment
Company Act. In addition:
(A) The FDIC-supervised institution
must receive prior approval from the
FDIC to exercise a call option on the
instrument.
(B) The FDIC-supervised institution
does not create at issuance of the
instrument, through any action or
communication, an expectation that the
call option will be exercised.
(C) Prior to exercising the call option,
or immediately thereafter, the FDICsupervised institution must either:
Replace the instrument to be called with
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an equal amount of instruments that
meet the criteria under paragraph (b) of
this section or this paragraph (c); 9 or
demonstrate to the satisfaction of the
FDIC that following redemption, the
FDIC-supervised institution will
continue to hold capital commensurate
with its risk.
(vi) Redemption or repurchase of the
instrument requires prior approval from
the FDIC.
(vii) The FDIC-supervised institution
has full discretion at all times to cancel
dividends or other distributions on the
instrument without triggering an event
of default, a requirement to make a
payment-in-kind, or an imposition of
other restrictions on the FDICsupervised institution except in relation
to any distributions to holders of
common stock or instruments that are
pari passu with the instrument.
(viii) Any cash dividend payments on
the instrument are paid out of the FDICsupervised institution’s net income and
retained earnings and are not subject to
a limit imposed by the contractual terms
governing the instrument. An FDICsupervised institution must obtain prior
FDIC approval for any dividend
payment involving a reduction or
retirement of capital stock in accordance
with 12 CFR 303.241.
(ix) The instrument does not have a
credit-sensitive feature, such as a
dividend rate that is reset periodically
based in whole or in part on the FDICsupervised institution’s credit quality,
but may have a dividend rate that is
adjusted periodically independent of
the FDIC-supervised institution’s credit
quality, in relation to general market
interest rates or similar adjustments.
(x) The paid-in amount is classified as
equity under GAAP.
(xi) The FDIC-supervised institution,
or an entity that the FDIC-supervised
institution controls, did not purchase or
directly or indirectly fund the purchase
of the instrument.
(xii) The instrument does not have
any features that would limit or
discourage additional issuance of
capital by the FDIC-supervised
institution, such as provisions that
require the FDIC-supervised institution
to compensate holders of the instrument
if a new instrument is issued at a lower
price during a specified time frame.
(xiii) If the instrument is not issued
directly by the FDIC-supervised
institution or by a subsidiary of the
FDIC-supervised institution that is an
operating entity, the only asset of the
issuing entity is its investment in the
9 Replacement can be concurrent with
redemption of existing additional tier 1 capital
instruments.
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capital of the FDIC-supervised
institution, and proceeds must be
immediately available without
limitation to the FDIC-supervised
institution or to the FDIC-supervised
institution’s top-tier holding company
in a form which meets or exceeds all of
the other criteria for additional tier 1
capital instruments.10
(xiv) For an advanced approaches
FDIC-supervised institution, the
governing agreement, offering circular,
or prospectus of an instrument issued
after the date upon which the FDICsupervised institution becomes subject
to this part as set forth in § 324.1(f) must
disclose that the holders of the
instrument may be fully subordinated to
interests held by the U.S. government in
the event that the FDIC-supervised
institution enters into a receivership,
insolvency, liquidation, or similar
proceeding.
(2) Tier 1 minority interest, subject to
the limitations in § 324.21(d), that is not
included in the FDIC-supervised
institution’s common equity tier 1
capital.
(3) Any and all instruments that
qualified as tier 1 capital under the
FDIC’s general risk-based capital rules
under 12 CFR part 325, appendix A
(state nonmember banks) and 12 CFR
part 390, subpart Z (state savings
associations) as then in effect, that were
issued under the Small Business Jobs
Act of 2010 11 or prior to October 4,
2010, under the Emergency Economic
Stabilization Act of 2008.12
(4) Notwithstanding the criteria for
additional tier 1 capital instruments
referenced above:
(i) An instrument issued by an FDICsupervised institution and held in trust
for the benefit of its employees as part
of an employee stock ownership plan
does not violate any of the criteria in
paragraph (c)(1)(iii) of this section,
provided that any repurchase is
required solely by virtue of ERISA for an
instrument of an FDIC-supervised
institution that is not publicly-traded. In
addition, an instrument issued by an
FDIC-supervised institution to its
employee stock ownership plan does
not violate the criteria in paragraph
(c)(1)(v) or paragraph (c)(1)(xi) of this
section; and
(ii) An instrument with terms that
provide that the instrument may be
called earlier than five years upon the
occurrence of a rating agency event does
not violate the criterion in paragraph
(c)(1)(v) of this section provided that the
instrument was issued and included in
10 See
77 FR 52856 (August 30, 2012).
11 Public Law 111–240; 124 Stat. 2504 (2010).
12 Public Law 110–343, 122 Stat. 3765 (2008).
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an FDIC-supervised institution’s tier 1
capital prior to the January 1, 2014, and
that such instrument satisfies all other
criteria under this paragraph (c).
(d) Tier 2 Capital. Tier 2 capital is the
sum of tier 2 capital elements and any
related surplus, minus regulatory
adjustments and deductions in § 324.22.
Tier 2 capital elements are:
(1) Instruments (plus related surplus)
that meet the following criteria:
(i) The instrument is issued and paidin;
(ii) The instrument is subordinated to
depositors and general creditors of the
FDIC-supervised institution;
(iii) The instrument is not secured,
not covered by a guarantee of the FDICsupervised institution or of an affiliate
of the FDIC-supervised institution, and
not subject to any other arrangement
that legally or economically enhances
the seniority of the instrument in
relation to more senior claims;
(iv) The instrument has a minimum
original maturity of at least five years.
At the beginning of each of the last five
years of the life of the instrument, the
amount that is eligible to be included in
tier 2 capital is reduced by 20 percent
of the original amount of the instrument
(net of redemptions) and is excluded
from regulatory capital when the
remaining maturity is less than one
year. In addition, the instrument must
not have any terms or features that
require, or create significant incentives
for, the FDIC-supervised institution to
redeem the instrument prior to
maturity; 13 and
(v) The instrument, by its terms, may
be called by the FDIC-supervised
institution only after a minimum of five
years following issuance, except that the
terms of the instrument may allow it to
be called sooner upon the occurrence of
an event that would preclude the
instrument from being included in tier
2 capital, a tax event, or if the issuing
entity is required to register as an
investment company pursuant to the
Investment Company Act. In addition:
(A) The FDIC-supervised institution
must receive the prior approval of the
FDIC to exercise a call option on the
instrument.
(B) The FDIC-supervised institution
does not create at issuance, through
action or communication, an
expectation the call option will be
exercised.
(C) Prior to exercising the call option,
or immediately thereafter, the FDICsupervised institution must either:
13 An instrument that by its terms automatically
converts into a tier 1 capital instrument prior to five
years after issuance complies with the five-year
maturity requirement of this criterion.
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Replace any amount called with an
equivalent amount of an instrument that
meets the criteria for regulatory capital
under this section; 14 or demonstrate to
the satisfaction of the FDIC that
following redemption, the FDICsupervised institution would continue
to hold an amount of capital that is
commensurate with its risk.
(vi) The holder of the instrument must
have no contractual right to accelerate
payment of principal or interest on the
instrument, except in the event of a
receivership, insolvency, liquidation, or
similar proceeding of the FDICsupervised institution.
(vii) The instrument has no creditsensitive feature, such as a dividend or
interest rate that is reset periodically
based in whole or in part on the FDICsupervised institution’s credit standing,
but may have a dividend rate that is
adjusted periodically independent of
the FDIC-supervised institution’s credit
standing, in relation to general market
interest rates or similar adjustments.
(viii) The FDIC-supervised institution,
or an entity that the FDIC-supervised
institution controls, has not purchased
and has not directly or indirectly
funded the purchase of the instrument.
(ix) If the instrument is not issued
directly by the FDIC-supervised
institution or by a subsidiary of the
FDIC-supervised institution that is an
operating entity, the only asset of the
issuing entity is its investment in the
capital of the FDIC-supervised
institution, and proceeds must be
immediately available without
limitation to the FDIC-supervised
institution or the FDIC-supervised
institution’s top-tier holding company
in a form that meets or exceeds all the
other criteria for tier 2 capital
instruments under this section.15
(x) Redemption of the instrument
prior to maturity or repurchase requires
the prior approval of the FDIC.
(xi) For an advanced approaches
FDIC-supervised institution, the
governing agreement, offering circular,
or prospectus of an instrument issued
after the date on which the advanced
approaches FDIC-supervised institution
becomes subject to this part under
§ 324.1(f) must disclose that the holders
of the instrument may be fully
subordinated to interests held by the
U.S. government in the event that the
FDIC-supervised institution enters into
a receivership, insolvency, liquidation,
or similar proceeding.
14 A FDIC-supervised institution may replace tier
2 capital instruments concurrent with the
redemption of existing tier 2 capital instruments.
15 A FDIC-supervised institution may disregard de
minimis assets related to the operation of the
issuing entity for purposes of this criterion.
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(2) Total capital minority interest,
subject to the limitations set forth in
§ 324.21(e), that is not included in the
FDIC-supervised institution’s tier 1
capital.
(3) ALLL up to 1.25 percent of the
FDIC-supervised institution’s
standardized total risk-weighted assets
not including any amount of the ALLL
(and excluding in the case of a market
risk FDIC-supervised institution, its
standardized market risk-weighted
assets).
(4) Any instrument that qualified as
tier 2 capital under the FDIC’s general
risk-based capital rules under 12 CFR
part 325, appendix A (state nonmember
banks) and 12 CFR part 390, appendix
Z (state saving associations) as then in
effect, that were issued under the Small
Business Jobs Act of 2010,16 or prior to
October 4, 2010, under the Emergency
Economic Stabilization Act of 2008.17
(5) For an FDIC-supervised institution
that makes an AOCI opt-out election (as
defined in § 324.22(b)(2), 45 percent of
pretax net unrealized gains on availablefor-sale preferred stock classified as an
equity security under GAAP and
available-for-sale equity exposures.
(6) Notwithstanding the criteria for
tier 2 capital instruments referenced
above, an instrument with terms that
provide that the instrument may be
called earlier than five years upon the
occurrence of a rating agency event does
not violate the criterion in paragraph
(d)(1)(v) of this section provided that the
instrument was issued and included in
an FDIC-supervised institution’s tier 1
or tier 2 capital prior to January 1, 2014,
and that such instrument satisfies all
other criteria under this paragraph (d).
(e) FDIC approval of a capital
element. (1) An FDIC-supervised
institution must receive FDIC prior
approval to include a capital element (as
listed in this section) in its common
equity tier 1 capital, additional tier 1
capital, or tier 2 capital unless the
element:
(i) Was included in an FDICsupervised institution’s tier 1 capital or
tier 2 capital prior to May 19, 2010, in
accordance with the FDIC’s risk-based
capital rules that were effective as of
that date and the underlying instrument
may continue to be included under the
criteria set forth in this section; or
(ii) Is equivalent, in terms of capital
quality and ability to absorb losses with
respect to all material terms, to a
regulatory capital element the FDIC
determined may be included in
regulatory capital pursuant to paragraph
(e)(3) of this section.
16 Public
17 Public
Law 111–240; 124 Stat. 2504 (2010)
Law 110–343, 122 Stat. 3765 (2008)
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(2) When considering whether an
FDIC-supervised institution may
include a regulatory capital element in
its common equity tier 1 capital,
additional tier 1 capital, or tier 2 capital,
the FDIC will consult with the OCC and
the Federal Reserve.
(3) After determining that a regulatory
capital element may be included in an
FDIC-supervised institution’s common
equity tier 1 capital, additional tier 1
capital, or tier 2 capital, the FDIC will
make its decision publicly available,
including a brief description of the
material terms of the regulatory capital
element and the rationale for the
determination.
§ 324.21
Minority interest.
(a) Applicability. For purposes of
§ 324.20, an FDIC-supervised institution
is subject to the minority interest
limitations in this section if:
(1) A consolidated subsidiary of the
FDIC-supervised institution has issued
regulatory capital that is not owned by
the FDIC-supervised institution; and
(2) For each relevant regulatory
capital ratio of the consolidated
subsidiary, the ratio exceeds the sum of
the subsidiary’s minimum regulatory
capital requirements plus its capital
conservation buffer.
(b) Difference in capital adequacy
standards at the subsidiary level. For
purposes of the minority interest
calculations in this section, if the
consolidated subsidiary issuing the
capital is not subject to capital adequacy
standards similar to those of the FDICsupervised institution, the FDICsupervised institution must assume that
the capital adequacy standards of the
FDIC-supervised institution apply to the
subsidiary.
(c) Common equity tier 1 minority
interest includable in the common
equity tier 1 capital of the FDICsupervised institution. For each
consolidated subsidiary of an FDICsupervised institution, the amount of
common equity tier 1 minority interest
the FDIC-supervised institution may
include in common equity tier 1 capital
is equal to:
(1) The common equity tier 1 minority
interest of the subsidiary; minus
(2) The percentage of the subsidiary’s
common equity tier 1 capital that is not
owned by the FDIC-supervised
institution, multiplied by the difference
between the common equity tier 1
capital of the subsidiary and the lower
of:
(i) The amount of common equity tier
1 capital the subsidiary must hold, or
would be required to hold pursuant to
paragraph (b) of this section, to avoid
restrictions on distributions and
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discretionary bonus payments under
§ 324.11 or equivalent standards
established by the subsidiary’s home
country supervisor, or
(ii)(A) The standardized total riskweighted assets of the FDIC-supervised
institution that relate to the subsidiary
multiplied by
(B) The common equity tier 1 capital
ratio the subsidiary must maintain to
avoid restrictions on distributions and
discretionary bonus payments under
§ 324.11 or equivalent standards
established by the subsidiary’s home
country supervisor.
(d) Tier 1 minority interest includable
in the tier 1 capital of the FDICsupervised institution. For each
consolidated subsidiary of the FDICsupervised institution, the amount of
tier 1 minority interest the FDICsupervised institution may include in
tier 1 capital is equal to:
(1) The tier 1 minority interest of the
subsidiary; minus
(2) The percentage of the subsidiary’s
tier 1 capital that is not owned by the
FDIC-supervised institution multiplied
by the difference between the tier 1
capital of the subsidiary and the lower
of:
(i) The amount of tier 1 capital the
subsidiary must hold, or would be
required to hold pursuant to paragraph
(b) of this section, to avoid restrictions
on distributions and discretionary
bonus payments under § 324.11 or
equivalent standards established by the
subsidiary’s home country supervisor,
or
(ii)(A) The standardized total riskweighted assets of the FDIC-supervised
institution that relate to the subsidiary
multiplied by
(B) The tier 1 capital ratio the
subsidiary must maintain to avoid
restrictions on distributions and
discretionary bonus payments under
§ 324.11 or equivalent standards
established by the subsidiary’s home
country supervisor.
(e) Total capital minority interest
includable in the total capital of the
FDIC-supervised institution. For each
consolidated subsidiary of the FDICsupervised institution, the amount of
total capital minority interest the FDICsupervised institution may include in
total capital is equal to:
(1) The total capital minority interest
of the subsidiary; minus
(2) The percentage of the subsidiary’s
total capital that is not owned by the
FDIC-supervised institution multiplied
by the difference between the total
capital of the subsidiary and the lower
of:
(i) The amount of total capital the
subsidiary must hold, or would be
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required to hold pursuant to paragraph
(b) of this section, to avoid restrictions
on distributions and discretionary
bonus payments under § 324.11 or
equivalent standards established by the
subsidiary’s home country supervisor,
or
(ii)(A) The standardized total riskweighted assets of the FDIC-supervised
institution that relate to the subsidiary
multiplied by
(B) The total capital ratio the
subsidiary must maintain to avoid
restrictions on distributions and
discretionary bonus payments under
§ 324.11 or equivalent standards
established by the subsidiary’s home
country supervisor.
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§ 324.22 Regulatory capital adjustments
and deductions.
(a) Regulatory capital deductions from
common equity tier 1 capital. An FDICsupervised institution must deduct from
the sum of its common equity tier 1
capital elements the items set forth in
this paragraph:
(1) Goodwill, net of associated
deferred tax liabilities (DTLs) in
accordance with paragraph (e) of this
section, including goodwill that is
embedded in the valuation of a
significant investment in the capital of
an unconsolidated financial institution
in the form of common stock (and that
is reflected in the consolidated financial
statements of the FDIC-supervised
institution), in accordance with
paragraph (d) of this section;
(2) Intangible assets, other than MSAs,
net of associated DTLs in accordance
with paragraph (e) of this section;
(3) Deferred tax assets (DTAs) that
arise from net operating loss and tax
credit carryforwards net of any related
valuation allowances and net of DTLs in
accordance with paragraph (e) of this
section;
(4) Any gain-on-sale in connection
with a securitization exposure;
(5)(i) Any defined benefit pension
fund net asset, net of any associated
DTL in accordance with paragraph (e) of
this section, held by a depository
institution holding company. With the
prior approval of the FDIC, this
deduction is not required for any
defined benefit pension fund net asset
to the extent the depository institution
holding company has unrestricted and
unfettered access to the assets in that
fund.
(ii) For an insured depository
institution, no deduction is required.
(iii) An FDIC-supervised institution
must risk weight any portion of the
defined benefit pension fund asset that
is not deducted under paragraphs
(a)(5)(i) or (a)(5)(ii) of this section as if
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the FDIC-supervised institution directly
holds a proportional ownership share of
each exposure in the defined benefit
pension fund.
(6) For an advanced approaches FDICsupervised institution that has
completed the parallel run process and
that has received notification from the
FDIC pursuant to § 324.121(d), the
amount of expected credit loss that
exceeds its eligible credit reserves; and
(7) With respect to a financial
subsidiary, the aggregate amount of the
FDIC-supervised institution’s
outstanding equity investment,
including retained earnings, in its
financial subsidiaries (as defined in 12
CFR 362.17). An FDIC-supervised
institution must not consolidate the
assets and liabilities of a financial
subsidiary with those of the parent
bank, and no other deduction is
required under paragraph (c) of this
section for investments in the capital
instruments of financial subsidiaries.
(8) (i) A state savings association must
deduct the aggregate amount of its
outstanding investments, (both equity
and debt) in, and extensions of credit to,
subsidiaries that are not includable
subsidiaries as defined in paragraph
(a)(8)(iv) of this section and may not
consolidate the assets and liabilities of
the subsidiary with those of the state
savings association. Any such
deductions shall be from assets and
common equity tier 1 capital, except as
provided in paragraphs (a)(8)(ii) and (iii)
of this section.
(ii) If a state savings association has
any investments (both debt and equity)
in, or extensions of credit to, one or
more subsidiaries engaged in any
activity that would not fall within the
scope of activities in which includable
subsidiaries as defined in paragraph
(a)(8)(iv) of this section may engage, it
must deduct such investments and
extensions of credit from assets and,
thus, common equity tier 1 capital in
accordance with paragraph (a)(8)(i) of
this section.
(iii) If a state savings association holds
a subsidiary (either directly or through
a subsidiary) that is itself a domestic
depository institution, the FDIC may, in
its sole discretion upon determining
that the amount of common equity tier
1 capital that would be required would
be higher if the assets and liabilities of
such subsidiary were consolidated with
those of the parent state savings
association than the amount that would
be required if the parent state savings
association’s investment were deducted
pursuant to paragraphs (a)(8)(i) and (ii)
of this section, consolidate the assets
and liabilities of that subsidiary with
those of the parent state savings
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association in calculating the capital
adequacy of the parent state savings
association, regardless of whether the
subsidiary would otherwise be an
includable subsidiary as defined in
paragraph (a)(8)(iv) of this section.
(iv) For purposes of this section, the
term includable subsidiary means a
subsidiary of a state savings association
that is:
(A) Engaged solely in activities that
are permissible for a national bank;
(B) Engaged in activities not
permissible for a national bank, but only
if acting solely as agent for its customers
and such agency position is clearly
documented in the state savings
association’s files;
(C) Engaged solely in mortgagebanking activities;
(D)(1) Itself an insured depository
institution or a company the sole
investment of which is an insured
depository institution, and
(2) Was acquired by the parent state
savings association prior to May 1, 1989;
or
(E) A subsidiary of any state savings
association existing as a state savings
association on August 9, 1989 that—
(1) Was chartered prior to October 15,
1982, as a savings bank or a cooperative
bank under state law, or
(2) Acquired its principal assets from
an association that was chartered prior
to October 15, 1982, as a savings bank
or a cooperative bank under state law.
(9) Identified losses. An FDICsupervised institution must deduct
identified losses (to the extent that
common equity tier 1 capital would
have been reduced if the appropriate
accounting entries to reflect the
identified losses had been recorded on
the FDIC-supervised institution’s
books).
(b) Regulatory adjustments to
common equity tier 1 capital. (1) An
FDIC-supervised institution must adjust
the sum of common equity tier 1 capital
elements pursuant to the requirements
set forth in this paragraph. Such
adjustments to common equity tier 1
capital must be made net of the
associated deferred tax effects.
(i) An FDIC-supervised institution
that makes an AOCI opt-out election (as
defined in paragraph (b)(2) of this
section) must make the adjustments
required under § 324.22(b)(2)(i).
(ii) An FDIC-supervised institution
that is an advanced approaches FDICsupervised institution, and an FDICsupervised institution that has not made
an AOCI opt-out election (as defined in
paragraph (b)(2) of this section), must
deduct any accumulated net gains and
add any accumulated net losses on cash
flow hedges included in AOCI that
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relate to the hedging of items that are
not recognized at fair value on the
balance sheet.
(iii) An FDIC-supervised institution
must deduct any net gain and add any
net loss related to changes in the fair
value of liabilities that are due to
changes in the FDIC-supervised
institution’s own credit risk. An
advanced approaches FDIC-supervised
institution also must deduct the credit
spread premium over the risk free rate
for derivatives that are liabilities.
(2) AOCI opt-out election. (i) An
FDIC-supervised institution that is not
an advanced approaches FDICsupervised institution may make a onetime election to opt out of the
requirement to include all components
of AOCI (with the exception of
accumulated net gains and losses on
cash flow hedges related to items that
are not fair-valued on the balance sheet)
in common equity tier 1 capital (AOCI
opt-out election). An FDIC-supervised
institution that makes an AOCI opt-out
election in accordance with this
paragraph (b)(2) must adjust common
equity tier 1 capital as follows:
(A) Subtract any net unrealized gains
and add any net unrealized losses on
available-for-sale securities;
(B) Subtract any net unrealized losses
on available-for-sale preferred stock
classified as an equity security under
GAAP and available-for-sale equity
exposures;
(C) Subtract any accumulated net
gains and add any accumulated net
losses on cash flow hedges;
(D) Subtract any amounts recorded in
AOCI attributed to defined benefit
postretirement plans resulting from the
initial and subsequent application of the
relevant GAAP standards that pertain to
such plans (excluding, at the FDICsupervised institution’s option, the
portion relating to pension assets
deducted under paragraph (a)(5) of this
section); and
(E) Subtract any net unrealized gains
and add any net unrealized losses on
held-to-maturity securities that are
included in AOCI.
(ii) An FDIC-supervised institution
that is not an advanced approaches
FDIC-supervised institution must make
its AOCI opt-out election in its Call
Report filed for the first reporting period
after the date required for such FDICsupervised institution to comply with
subpart A of this part as set forth in
§ 324.1(f).
(iii) With respect to an FDICsupervised institution that is not an
advanced approaches FDIC-supervised
institution, each of its subsidiary
banking organizations that is subject to
regulatory capital requirements issued
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by the Federal Reserve, the FDIC, or the
OCC 18 must elect the same option as the
FDIC-supervised institution pursuant to
this paragraph (b)(2).
(iv) With prior notice to the FDIC, an
FDIC-supervised institution resulting
from a merger, acquisition, or purchase
transaction and that is not an advanced
approaches FDIC-supervised institution
may change its AOCI opt-out election in
its Call Report filed for the first
reporting period after the date required
for such FDIC-supervised institution to
comply with subpart A of this part as set
forth in § 324.1(f) if:
(A) Other than as set forth in
paragraph (b)(2)(iv)(C) of this section,
the merger, acquisition, or purchase
transaction involved the acquisition or
purchase of all or substantially all of
either the assets or voting stock of
another banking organization that is
subject to regulatory capital
requirements issued by the Federal
Reserve, the FDIC, or the OCC;
(B) Prior to the merger, acquisition, or
purchase transaction, only one of the
banking organizations involved in the
transaction made an AOCI opt-out
election under this section; and
(C) An FDIC-supervised institution
may, with the prior approval of the
FDIC, change its AOCI opt-out election
under this paragraph in the case of a
merger, acquisition, or purchase
transaction that meets the requirements
set forth at paragraph (b)(2)(iv)(B) of this
section, but does not meet the
requirements of paragraph (b)(2)(iv)(A).
In making such a determination, the
FDIC may consider the terms of the
merger, acquisition, or purchase
transaction, as well as the extent of any
changes to the risk profile, complexity,
and scope of operations of the FDICsupervised institution resulting from the
merger, acquisition, or purchase
transaction.
(c) Deductions from regulatory capital
related to investments in capital
instruments—19 (1) Investment in the
FDIC-supervised institution’s own
capital instruments. An FDICsupervised institution must deduct an
investment in the FDIC-supervised
institution’s own capital instruments as
follows:
(i) An FDIC-supervised institution
must deduct an investment in the FDICsupervised institution’s own common
18 These rules include the regulatory capital
requirements set forth at 12 CFR part 3 (OCC); 12
CFR part 225 (Board); 12 CFR part 325, and 12 CFR
part 390 (FDIC).
19 The FDIC-supervised institution must calculate
amounts deducted under paragraphs (c) through (f)
of this section after it calculates the amount of
ALLL includable in tier 2 capital under
§ 324.20(d)(3).
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stock instruments from its common
equity tier 1 capital elements to the
extent such instruments are not
excluded from regulatory capital under
§ 324.20(b)(1);
(ii) An FDIC-supervised institution
must deduct an investment in the FDICsupervised institution’s own additional
tier 1 capital instruments from its
additional tier 1 capital elements; and
(iii) An FDIC-supervised institution
must deduct an investment in the FDICsupervised institution’s own tier 2
capital instruments from its tier 2
capital elements.
(2) Corresponding deduction
approach. For purposes of subpart C of
this part, the corresponding deduction
approach is the methodology used for
the deductions from regulatory capital
related to reciprocal cross holdings (as
described in paragraph (c)(3) of this
section), non-significant investments in
the capital of unconsolidated financial
institutions (as described in paragraph
(c)(4) of this section), and non-common
stock significant investments in the
capital of unconsolidated financial
institutions (as described in paragraph
(c)(5) of this section). Under the
corresponding deduction approach, an
FDIC-supervised institution must make
deductions from the component of
capital for which the underlying
instrument would qualify if it were
issued by the FDIC-supervised
institution itself, as described in
paragraphs (c)(2)(i)–(iii) of this section.
If the FDIC-supervised institution does
not have a sufficient amount of a
specific component of capital to effect
the required deduction, the shortfall
must be deducted according to
paragraph (f) of this section.
(i) If an investment is in the form of
an instrument issued by a financial
institution that is not a regulated
financial institution, the FDICsupervised institution must treat the
instrument as:
(A) A common equity tier 1 capital
instrument if it is common stock or
represents the most subordinated claim
in liquidation of the financial
institution; and
(B) An additional tier 1 capital
instrument if it is subordinated to all
creditors of the financial institution and
is senior in liquidation only to common
shareholders.
(ii) If an investment is in the form of
an instrument issued by a regulated
financial institution and the instrument
does not meet the criteria for common
equity tier 1, additional tier 1 or tier 2
capital instruments under § 324.20, the
FDIC-supervised institution must treat
the instrument as:
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(A) A common equity tier 1 capital
instrument if it is common stock
included in GAAP equity or represents
the most subordinated claim in
liquidation of the financial institution;
(B) An additional tier 1 capital
instrument if it is included in GAAP
equity, subordinated to all creditors of
the financial institution, and senior in a
receivership, insolvency, liquidation, or
similar proceeding only to common
shareholders; and
(C) A tier 2 capital instrument if it is
not included in GAAP equity but
considered regulatory capital by the
primary supervisor of the financial
institution.
(iii) If an investment is in the form of
a non-qualifying capital instrument (as
defined in § 324.300(c)), the FDICsupervised institution must treat the
instrument as:
(A) An additional tier 1 capital
instrument if such instrument was
included in the issuer’s tier 1 capital
prior to May 19, 2010; or
(B) A tier 2 capital instrument if such
instrument was included in the issuer’s
tier 2 capital (but not includable in tier
1 capital) prior to May 19, 2010.
(3) Reciprocal cross holdings in the
capital of financial institutions. An
FDIC-supervised institution must
deduct investments in the capital of
other financial institutions it holds
reciprocally, where such reciprocal
cross holdings result from a formal or
informal arrangement to swap,
exchange, or otherwise intend to hold
each other’s capital instruments, by
applying the corresponding deduction
approach.
(4) Non-significant investments in the
capital of unconsolidated financial
institutions. (i) An FDIC-supervised
institution must deduct its nonsignificant investments in the capital of
unconsolidated financial institutions (as
defined in § 324.2) that, in the aggregate,
exceed 10 percent of the sum of the
FDIC-supervised institution’s common
equity tier 1 capital elements minus all
deductions from and adjustments to
common equity tier 1 capital elements
required under paragraphs (a) through
(c)(3) of this section (the 10 percent
threshold for non-significant
investments) by applying the
corresponding deduction approach.20
The deductions described in this section
20 With the prior written approval of the FDIC, for
the period of time stipulated by the FDIC, a FDICsupervised institution is not required to deduct a
non-significant investment in the capital instrument
of an unconsolidated financial institution pursuant
to this paragraph if the financial institution is in
distress and if such investment is made for the
purpose of providing financial support to the
financial institution, as determined by the FDIC.
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are net of associated DTLs in accordance
with paragraph (e) of this section. In
addition, an FDIC-supervised institution
that underwrites a failed underwriting,
with the prior written approval of the
FDIC, for the period of time stipulated
by the FDIC, is not required to deduct
a non-significant investment in the
capital of an unconsolidated financial
institution pursuant to this paragraph to
the extent the investment is related to
the failed underwriting.21
(ii) The amount to be deducted under
this section from a specific capital
component is equal to:
(A) The FDIC-supervised institution’s
non-significant investments in the
capital of unconsolidated financial
institutions exceeding the 10 percent
threshold for non-significant
investments, multiplied by
(B) The ratio of the FDIC-supervised
institution’s non-significant investments
in the capital of unconsolidated
financial institutions in the form of such
capital component to the FDICsupervised institution’s total nonsignificant investments in
unconsolidated financial institutions.
(5) Significant investments in the
capital of unconsolidated financial
institutions that are not in the form of
common stock. An FDIC-supervised
institution must deduct its significant
investments in the capital of
unconsolidated financial institutions
that are not in the form of common
stock by applying the corresponding
deduction approach.22 The deductions
described in this section are net of
associated DTLs in accordance with
paragraph (e) of this section. In
addition, with the prior written
approval of the FDIC, for the period of
time stipulated by the FDIC, an FDICsupervised institution that underwrites
a failed underwriting is not required to
deduct a significant investment in the
capital of an unconsolidated financial
institution pursuant to this paragraph if
such investment is related to such failed
underwriting.
(d) Items subject to the 10 and 15
percent common equity tier 1 capital
deduction thresholds. (1) An FDIC21 Any non-significant investments in the capital
of unconsolidated financial institutions that do not
exceed the 10 percent threshold for non-significant
investments under this section must be assigned the
appropriate risk weight under subparts D, E, or F
of this part, as applicable.
22 With prior written approval of the FDIC, for the
period of time stipulated by the FDIC, a FDICsupervised institution is not required to deduct a
significant investment in the capital instrument of
an unconsolidated financial institution in distress
which is not in the form of common stock pursuant
to this section if such investment is made for the
purpose of providing financial support to the
financial institution as determined by the FDIC.
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supervised institution must deduct from
common equity tier 1 capital elements
the amount of each of the items set forth
in this paragraph that, individually,
exceeds 10 percent of the sum of the
FDIC-supervised institution’s common
equity tier 1 capital elements, less
adjustments to and deductions from
common equity tier 1 capital required
under paragraphs (a) through (c) of this
section (the 10 percent common equity
tier 1 capital deduction threshold).
(i) DTAs arising from temporary
differences that the FDIC-supervised
institution could not realize through net
operating loss carrybacks, net of any
related valuation allowances and net of
DTLs, in accordance with paragraph (e)
of this section. An FDIC-supervised
institution is not required to deduct
from the sum of its common equity tier
1 capital elements DTAs (net of any
related valuation allowances and net of
DTLs, in accordance with § 324.22(e))
arising from timing differences that the
FDIC-supervised institution could
realize through net operating loss
carrybacks. The FDIC-supervised
institution must risk weight these assets
at 100 percent. For an FDIC-supervised
institution that is a member of a
consolidated group for tax purposes, the
amount of DTAs that could be realized
through net operating loss carrybacks
may not exceed the amount that the
FDIC-supervised institution could
reasonably expect to have refunded by
its parent holding company.
(ii) MSAs net of associated DTLs, in
accordance with paragraph (e) of this
section.
(iii) Significant investments in the
capital of unconsolidated financial
institutions in the form of common
stock, net of associated DTLs in
accordance with paragraph (e) of this
section.23 Significant investments in the
capital of unconsolidated financial
institutions in the form of common
stock subject to the 10 percent common
equity tier 1 capital deduction threshold
may be reduced by any goodwill
embedded in the valuation of such
investments deducted by the FDICsupervised institution pursuant to
paragraph (a)(1) of this section. In
addition, with the prior written
approval of the FDIC, for the period of
time stipulated by the FDIC, an FDICsupervised institution that underwrites
23 With the prior written approval of the FDIC, for
the period of time stipulated by the FDIC, a FDICsupervised institution is not required to deduct a
significant investment in the capital instrument of
an unconsolidated financial institution in distress
in the form of common stock pursuant to this
section if such investment is made for the purpose
of providing financial support to the financial
institution as determined by the FDIC.
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a failed underwriting is not required to
deduct a significant investment in the
capital of an unconsolidated financial
institution in the form of common stock
pursuant to this paragraph (d) if such
investment is related to such failed
underwriting.
(2) An FDIC-supervised institution
must deduct from common equity tier 1
capital elements the items listed in
paragraph (d)(1) of this section that are
not deducted as a result of the
application of the 10 percent common
equity tier 1 capital deduction
threshold, and that, in aggregate, exceed
17.65 percent of the sum of the FDICsupervised institution’s common equity
tier 1 capital elements, minus
adjustments to and deductions from
common equity tier 1 capital required
under paragraphs (a) through (c) of this
section, minus the items listed in
paragraph (d)(1) of this section (the 15
percent common equity tier 1 capital
deduction threshold). Any goodwill that
has been deducted under paragraph
(a)(1) of this section can be excluded
from the significant investments in the
capital of unconsolidated financial
institutions in the form of common
stock.24
(3) For purposes of calculating the
amount of DTAs subject to the 10 and
15 percent common equity tier 1 capital
deduction thresholds, an FDICsupervised institution may exclude
DTAs and DTLs relating to adjustments
made to common equity tier 1 capital
under § paragraph (b) of this section. An
FDIC-supervised institution that elects
to exclude DTAs relating to adjustments
under paragraph (b) of this section also
must exclude DTLs and must do so
consistently in all future calculations.
An FDIC-supervised institution may
change its exclusion preference only
after obtaining the prior approval of the
FDIC.
(e) Netting of DTLs against assets
subject to deduction. (1) Except as
described in paragraph (e)(3) of this
section, netting of DTLs against assets
that are subject to deduction under this
section is permitted, but not required, if
the following conditions are met:
(i) The DTL is associated with the
asset; and
(ii) The DTL would be extinguished if
the associated asset becomes impaired
or is derecognized under GAAP.
(2) A DTL may only be netted against
a single asset.
24 The amount of the items in paragraph (d) of
this section that is not deducted from common
equity tier 1 capital pursuant to this section must
be included in the risk-weighted assets of the FDICsupervised institution and assigned a 250 percent
risk weight.
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(3) For purposes of calculating the
amount of DTAs subject to the threshold
deduction in paragraph (d) of this
section, the amount of DTAs that arise
from net operating loss and tax credit
carryforwards, net of any related
valuation allowances, and of DTAs
arising from temporary differences that
the FDIC-supervised institution could
not realize through net operating loss
carrybacks, net of any related valuation
allowances, may be offset by DTLs (that
have not been netted against assets
subject to deduction pursuant to
paragraph (e)(1) of this section) subject
to the conditions set forth in this
paragraph.
(i) Only the DTAs and DTLs that
relate to taxes levied by the same
taxation authority and that are eligible
for offsetting by that authority may be
offset for purposes of this deduction.
(ii) The amount of DTLs that the
FDIC-supervised institution nets against
DTAs that arise from net operating loss
and tax credit carryforwards, net of any
related valuation allowances, and
against DTAs arising from temporary
differences that the FDIC-supervised
institution could not realize through net
operating loss carrybacks, net of any
related valuation allowances, must be
allocated in proportion to the amount of
DTAs that arise from net operating loss
and tax credit carryforwards (net of any
related valuation allowances, but before
any offsetting of DTLs) and of DTAs
arising from temporary differences that
the FDIC-supervised institution could
not realize through net operating loss
carrybacks (net of any related valuation
allowances, but before any offsetting of
DTLs), respectively.
(4) An FDIC-supervised institution
may offset DTLs embedded in the
carrying value of a leveraged lease
portfolio acquired in a business
combination that are not recognized
under GAAP against DTAs that are
subject to paragraph (d) of this section
in accordance with this paragraph (e).
(5) An FDIC-supervised institution
must net DTLs against assets subject to
deduction under this section in a
consistent manner from reporting period
to reporting period. An FDIC-supervised
institution may change its preference
regarding the manner in which it nets
DTLs against specific assets subject to
deduction under § 324.22 only after
obtaining the prior approval of the
FDIC.
(f) Insufficient amounts of a specific
regulatory capital component to effect
deductions. Under the corresponding
deduction approach, if an FDICsupervised institution does not have a
sufficient amount of a specific
component of capital to effect the
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required deduction after completing the
deductions required under paragraph
(d) of this section, the FDIC-supervised
institution must deduct the shortfall
from the next higher (that is, more
subordinated) component of regulatory
capital.
(g) Treatment of assets that are
deducted. An FDIC-supervised
institution must exclude from
standardized total risk-weighted assets
and, as applicable, advanced
approaches total risk-weighted assets
any item deducted from regulatory
capital under paragraphs (a), (c), and (d)
of this section.
(h) Net long position. (1) For purposes
of calculating an investment in the
FDIC-supervised institution’s own
capital instrument and an investment in
the capital of an unconsolidated
financial institution under this section,
the net long position is the gross long
position in the underlying instrument
determined in accordance with
paragraph (h)(2) of this section, as
adjusted to recognize a short position in
the same instrument calculated in
accordance with paragraph (h)(3) of this
section.
(2) Gross long position. The gross long
position is determined as follows:
(i) For an equity exposure that is held
directly, the adjusted carrying value as
that term is defined in § 324.51(b);
(ii) For an exposure that is held
directly and is not an equity exposure
or a securitization exposure, the
exposure amount as that term is defined
in § 324.2;
(iii) For an indirect exposure, the
FDIC-supervised institution’s carrying
value of the investment in the
investment fund, provided that,
alternatively:
(A) An FDIC-supervised institution
may, with the prior approval of the
FDIC, use a conservative estimate of the
amount of its investment in its own
capital instruments or the capital of an
unconsolidated financial institution
held through a position in an index; or
(B) An FDIC-supervised institution
may calculate the gross long position for
the FDIC-supervised institution’s own
capital instruments or the capital of an
unconsolidated financial institution by
multiplying the FDIC-supervised
institution’s carrying value of its
investment in the investment fund by
either:
(1) The highest stated investment
limit (in percent) for investments in the
FDIC-supervised institution’s own
capital instruments or the capital of
unconsolidated financial institutions as
stated in the prospectus, partnership
agreement, or similar contract defining
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permissible investments of the
investment fund or
(2) The investment fund’s actual
holdings of own capital instruments or
the capital of unconsolidated financial
institutions.
(iv) For a synthetic exposure, the
amount of the FDIC-supervised
institution’s loss on the exposure if the
reference capital instrument were to
have a value of zero.
(3) Adjustments to reflect a short
position. In order to adjust the gross
long position to recognize a short
position in the same instrument, the
following criteria must be met:
(i) The maturity of the short position
must match the maturity of the long
position, or the short position has a
residual maturity of at least one year
(maturity requirement), or
(ii) For a position that is a trading
asset or trading liability (whether on- or
off-balance sheet) as reported on the
FDIC-supervised institution’s Call
Report, if the FDIC-supervised
institution has a contractual right or
obligation to sell the long position at a
specific point in time and the
counterparty to the contract has an
obligation to purchase the long position
if the FDIC-supervised institution
exercises its right to sell, this point in
time may be treated as the maturity of
the long position such that the maturity
of the long position and short position
are deemed to match for purposes of the
maturity requirement, even if the
maturity of the short position is less
than one year; and
(iii) For an investment in the FDICsupervised institution’s own capital
instrument under paragraph (c)(1) of
this section or an investment in a capital
of an unconsolidated financial
institution under paragraphs (c)(4),
(c)(5), and (d)(1)(iii) of this section:
(A) An FDIC-supervised institution
may only net a short position against a
long position in the FDIC-supervised
institution’s own capital instrument
under paragraph (c)(1) if the short
position involves no counterparty credit
risk.
(B) A gross long position in an FDICsupervised institution’s own capital
instrument or in a capital instrument of
an unconsolidated financial institution
resulting from a position in an index
may be netted against a short position
in the same index. Long and short
positions in the same index without
maturity dates are considered to have
matching maturities.
(C) A short position in an index that
is hedging a long cash or synthetic
position in an FDIC-supervised
institution’s own capital instrument or
in a capital instrument of an
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unconsolidated financial institution can
be decomposed to provide recognition
of the hedge. More specifically, the
portion of the index that is composed of
the same underlying instrument that is
being hedged may be used to offset the
long position if both the long position
being hedged and the short position in
the index are reported as a trading asset
or trading liability (whether on- or offbalance sheet) on the FDIC-supervised
institution’s Call Report, and the hedge
is deemed effective by the FDICsupervised institution’s internal control
processes, which have not been found to
be inadequate by the FDIC.
§§ 324.23 through 324.29
[Reserved]
Subpart D—Risk-Weighted Assets—
Standardized Approach
§ 324.30
Applicability.
(a) This subpart sets forth
methodologies for determining riskweighted assets for purposes of the
generally applicable risk-based capital
requirements for all FDIC-supervised
institutions.
(b) Notwithstanding paragraph (a) of
this section, a market risk FDICsupervised institution must exclude
from its calculation of risk-weighted
assets under this subpart the riskweighted asset amounts of all covered
positions, as defined in subpart F of this
part (except foreign exchange positions
that are not trading positions, OTC
derivative positions, cleared
transactions, and unsettled
transactions).
Risk-Weighted Assets for General
Credit Risk
§ 324.31 Mechanics for calculating riskweighted assets for general credit risk.
(a) General risk-weighting
requirements. An FDIC-supervised
institution must apply risk weights to its
exposures as follows:
(1) An FDIC-supervised institution
must determine the exposure amount of
each on-balance sheet exposure, each
OTC derivative contract, and each offbalance 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
§ 324.38;
(ii) A cleared transaction subject to
§ 324.35;
(iii) A default fund contribution
subject to § 324.35;
(iv) A securitization exposure subject
to §§ 324.41 through 324.45; or
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55497
(v) An equity exposure (other than an
equity OTC derivative contract) subject
to §§ 324.51 through 324.53.
(2) The FDIC-supervised institution
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.
§ 324.32
General risk weights.
(a) Sovereign exposures—(1)
Exposures to the U.S. government. (i)
Notwithstanding any other requirement
in this subpart, an FDIC-supervised
institution must assign a zero percent
risk weight to:
(A) An exposure to the U.S.
government, its central bank, or a U.S.
government agency; and
(B) The portion of an exposure that is
directly and unconditionally guaranteed
by the U.S. government, its central bank,
or a U.S. government agency. This
includes a deposit or other exposure, or
the portion of a deposit or other
exposure, that is insured or otherwise
unconditionally guaranteed by the FDIC
or National Credit Union
Administration.
(ii) An FDIC-supervised institution
must assign a 20 percent risk weight to
the portion of an exposure that is
conditionally guaranteed by the U.S.
government, its central bank, or a U.S.
government agency. This includes an
exposure, or the portion of an exposure,
that is conditionally guaranteed by the
FDIC or National Credit Union
Administration.
(2) Other sovereign exposures. In
accordance with Table 1 to § 324.32, an
FDIC-supervised institution must assign
a risk weight to a sovereign exposure
based on the CRC applicable to the
sovereign or the sovereign’s OECD
membership status if there is no CRC
applicable to the sovereign.
TABLE 1 TO § 324.32—RISK WEIGHTS
FOR SOVEREIGN EXPOSURES
Risk Weight
(in percent)
CRC ..........................
0–1
2
3
4–6
7
OECD Member with No CRC
Non-OECD Member with No
CRC ..................................
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20
50
100
150
0
100
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TABLE 1 TO § 324.32—RISK WEIGHTS unions. An FDIC-supervised institution
FOR SOVEREIGN EXPOSURES—Con- must assign a 20 percent risk weight to
an exposure to a depository institution
tinued
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Sovereign Default .................
150
(3) Certain sovereign exposures.
Notwithstanding paragraph (a)(2) of this
section, an FDIC-supervised institution
may assign to a sovereign exposure a
risk weight that is lower than the
applicable risk weight in Table 1 to
§ 324.32 if:
(i) The exposure is denominated in
the sovereign’s currency;
(ii) The FDIC-supervised institution
has at least an equivalent amount of
liabilities in that currency; and
(iii) The risk weight is not lower than
the risk weight that the home country
supervisor allows FDIC-supervised
institutions under its jurisdiction to
assign to the same exposures to the
sovereign.
(4) Exposures to a non-OECD member
sovereign with no CRC. Except as
provided in paragraphs (a)(3), (a)(5) and
(a)(6) of this section, an FDICsupervised institution must assign a 100
percent risk weight to an exposure to a
sovereign if the sovereign does not have
a CRC.
(5) Exposures to an OECD member
sovereign with no CRC. Except as
provided in paragraph (a)(6) of this
section, an FDIC-supervised institution
must assign a 0 percent risk weight to
an exposure to a sovereign that is a
member of the OECD if the sovereign
does not have a CRC.
(6) Sovereign default. An FDICsupervised institution must assign a 150
percent risk weight to a sovereign
exposure immediately upon
determining that an event of sovereign
default has occurred, or if an event of
sovereign default has occurred during
the previous five years.
(b) Certain supranational entities and
multilateral development banks (MDBs).
An FDIC-supervised institution must
assign a zero percent risk weight to an
exposure to the Bank for International
Settlements, the European Central Bank,
the European Commission, the
International Monetary Fund, or an
MDB.
(c) Exposures to GSEs. (1) An FDICsupervised institution must assign a 20
percent risk weight to an exposure to a
GSE other than an equity exposure or
preferred stock.
(2) An FDIC-supervised institution
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
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or credit union that is organized under
the laws of the United States or any
state thereof, except as otherwise
provided under paragraph (d)(3) of this
section.
(2) Exposures to foreign banks. (i)
Except as otherwise provided under
paragraphs (d)(2)(iv) and (d)(3) of this
section, an FDIC-supervised institution
must assign a risk weight to an exposure
to a foreign bank, in accordance with
Table 2 to § 324.32, based on the CRC
that corresponds to the foreign bank’s
home country or the OECD membership
status of the foreign bank’s home
country if there is no CRC applicable to
the foreign bank’s home country.
TABLE 2 TO § 324.32—RISK WEIGHTS
FOR EXPOSURES TO FOREIGN BANKS
Risk Weight
(in percent)
CRC ..........................
0–1
2
3
4–7
OECD Member with No CRC
Non-OECD Member with No
CRC ..................................
Sovereign Default .................
20
50
100
150
20
100
150
(ii) An FDIC-supervised institution
must assign a 20 percent risk weight to
an exposure to a foreign bank whose
home country is a member of the OECD
and does not have a CRC.
(iii) An FDIC-supervised institution
must assign a 100 percent risk weight to
an exposure to a foreign bank whose
home country is not a member of the
OECD and does not have a CRC, with
the exception of self-liquidating, traderelated contingent items that arise from
the movement of goods, and that have
a maturity of three months or less,
which may be assigned a 20 percent risk
weight.
(iv) An FDIC-supervised institution
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) An FDIC-supervised institution
must assign a 100 percent risk weight to
an exposure to a financial institution if
the exposure may be included in that
financial institution’s capital unless the
exposure is:
(i) An equity exposure;
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(ii) A significant investment in the
capital of an unconsolidated financial
institution in the form of common stock
pursuant to § 324.22(d)(iii);
(iii) Deducted from regulatory capital
under § 324.22; or
(iv) Subject to a 150 percent risk
weight under paragraph (d)(2)(iv) or
Table 2 of paragraph (d)(2) of this
section.
(e) Exposures to public sector entities
(PSEs)—(1) Exposures to U.S. PSEs. (i)
An FDIC-supervised institution 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) An FDIC-supervised institution
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, an FDICsupervised institution must assign a risk
weight to a general obligation exposure
to a PSE, in accordance with Table 3 to
§ 324.32, based on the CRC that
corresponds to the PSE’s home country
or the OECD membership status of the
PSE’s home country if there is no CRC
applicable to the PSE’s home country.
(ii) Except as provided in paragraphs
(e)(1) and (e)(3) of this section, an FDICsupervised institution must assign a risk
weight to a revenue obligation exposure
to a PSE, in accordance with Table 4 to
§ 324.32, based on the CRC that
corresponds to the PSE’s home country;
or the OECD membership status of the
PSE’s home country if there is no CRC
applicable to the PSE’s home country.
(3) An FDIC-supervised institution
may assign a lower risk weight than
would otherwise apply under Tables 3
or 4 to § 324.32 to an exposure to a
foreign PSE if:
(i) The PSE’s home country supervisor
allows banks under its jurisdiction to
assign a lower risk weight to such
exposures; and
(ii) The risk weight is not lower than
the risk weight that corresponds to the
PSE’s home country in accordance with
Table 1 to § 324.32.
TABLE 3 TO § 324.32—RISK WEIGHTS
FOR NON-U.S. PSE GENERAL OBLIGATIONS
Risk Weight
(in percent)
CRC ..........................
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20
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(iii) Is not 90 days or more past due
TABLE 3 TO § 324.32—RISK WEIGHTS
FOR NON-U.S. PSE GENERAL OBLI- or carried in nonaccrual status; and
(iv) Is not restructured or modified.
GATIONS—Continued
(2) An FDIC-supervised institution
must assign a 100 percent risk weight to
a first-lien residential mortgage
OECD Member with No CRC
20
exposure that does not meet the criteria
Non-OECD Member with No
in paragraph (g)(1) of this section, and
CRC ..................................
100
to junior-lien residential mortgage
Sovereign Default .................
150
exposures.
(3) For the purpose of this paragraph
TABLE 4 TO § 324.32—RISK WEIGHTS (g), if an FDIC-supervised institution
FOR NON-U.S. PSE REVENUE OBLI- holds the first-lien and junior-lien(s)
residential mortgage exposures, and no
GATIONS
other party holds an intervening lien,
the FDIC-supervised institution must
Risk Weight
combine the exposures and treat them
(in percent)
as a single first-lien residential mortgage
CRC .......................... 0–1
50
exposure.
2–3
50
(4) A loan modified or restructured
4–7
150
solely pursuant to the U.S. Treasury’s
OECD Member with No CRC
50
Home Affordable Mortgage Program is
Non-OECD Member with No
not modified or restructured for
CRC ..................................
100
purposes of this section.
Sovereign Default .................
150
(h) Pre-sold construction loans. An
FDIC-supervised institution must assign
(4) Exposures to PSEs from an OECD
a 50 percent risk weight to a pre-sold
member sovereign with no CRC. (i) An
construction loan unless the purchase
FDIC-supervised institution must assign
contract is cancelled, in which case an
a 20 percent risk weight to a general
FDIC-supervised institution must assign
obligation exposure to a PSE whose
a 100 percent risk weight.
home country is an OECD member
(i) Statutory multifamily mortgages.
sovereign with no CRC.
An FDIC-supervised institution must
(ii) An FDIC-supervised institution
assign a 50 percent risk weight to a
must assign a 50 percent risk weight to
statutory multifamily mortgage.
a revenue obligation exposure to a PSE
(j) High-volatility commercial real
whose home country is an OECD
estate (HVCRE) exposures. An FDICmember sovereign with no CRC.
supervised institution must assign a 150
(5) Exposures to PSEs whose home
percent risk weight to an HVCRE
country is not an OECD member
exposure.
sovereign with no CRC. An FDIC(k) Past due exposures. Except for a
supervised institution must assign a 100 sovereign exposure or a residential
percent risk weight to an exposure to a
mortgage exposure, an FDIC-supervised
PSE whose home country is not a
institution must determine a risk weight
member of the OECD and does not have for an exposure that is 90 days or more
a CRC.
past due or on nonaccrual according to
(6) An FDIC-supervised institution
the requirements set forth in this
must assign a 150 percent risk weight to paragraph.
a PSE exposure immediately upon
(1) An FDIC-supervised institution
determining that an event of sovereign
must assign a 150 percent risk weight to
default has occurred in a PSE’s home
the portion of the exposure that is not
country or if an event of sovereign
guaranteed or that is unsecured.
default has occurred in the PSE’s home
(2) An FDIC-supervised institution
country during the previous five years.
may assign a risk weight to the
(f) Corporate exposures. An FDICguaranteed portion of a past due
supervised institution must assign a 100 exposure based on the risk weight that
percent risk weight to all its corporate
applies under § 324.36 if the guarantee
exposures.
or credit derivative meets the
(g) Residential mortgage exposures.
requirements of that section.
(1) An FDIC-supervised institution must
(3) An FDIC-supervised institution
assign a 50 percent risk weight to a first- may assign a risk weight to the
lien residential mortgage exposure that:
collateralized portion of a past due
(i) Is secured by a property that is
exposure based on the risk weight that
either owner-occupied or rented;
applies under § 324.37 if the collateral
(ii) Is made in accordance with
meets the requirements of that section.
prudent underwriting standards,
(l) Other assets. (1) An FDICincluding standards relating to the loan
supervised institution must assign a
amount as a percent of the appraised
zero percent risk weight to cash owned
value of the property;
and held in all offices of the FDIC-
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supervised institution or in transit; to
gold bullion held in the FDICsupervised 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; 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) An FDIC-supervised institution
must assign a 20 percent risk weight to
cash items in the process of collection.
(3) An FDIC-supervised institution
must assign a 100 percent risk weight to
DTAs arising from temporary
differences that the FDIC-supervised
institution could realize through net
operating loss carrybacks.
(4) An FDIC-supervised institution
must assign a 250 percent risk weight to
the portion of each of the following
items that is not deducted from common
equity tier 1 capital pursuant to
§ 324.22(d):
(i) MSAs; and
(ii) DTAs arising from temporary
differences that the FDIC-supervised
institution could not realize through net
operating loss carrybacks.
(5) An FDIC-supervised institution
must assign a 100 percent risk weight to
all assets not specifically assigned a
different risk weight under this subpart
and that are not deducted from tier 1 or
tier 2 capital pursuant to § 324.22.
(6) Notwithstanding the requirements
of this section, an FDIC-supervised
institution 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 FDIC-supervised institution 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.
§ 324.33
Off-balance sheet exposures.
(a) General. (1) An FDIC-supervised
institution must calculate the exposure
amount of an off-balance sheet exposure
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using the credit conversion factors
(CCFs) in paragraph (b) of this section.
(2) Where an FDIC-supervised
institution commits to provide a
commitment, the FDIC-supervised
institution may apply the lower of the
two applicable CCFs.
(3) Where an FDIC-supervised
institution provides a commitment
structured as a syndication or
participation, the FDIC-supervised
institution is only required to calculate
the exposure amount for its pro rata
share of the commitment.
(4) Where an FDIC-supervised
institution provides a commitment,
enters into a repurchase agreement, or
provides a credit-enhancing
representation and warranty, and such
commitment, repurchase agreement, or
credit-enhancing representation and
warranty is not a securitization
exposure, the exposure amount shall be
no greater than the maximum
contractual amount of the commitment,
repurchase agreement, or creditenhancing representation and warranty,
as applicable.
(b) Credit conversion factors—(1) Zero
percent CCF. An FDIC-supervised
institution must apply a zero percent
CCF to the unused portion of a
commitment that is unconditionally
cancelable by the FDIC-supervised
institution.
(2) 20 percent CCF. An FDICsupervised institution must apply a 20
percent CCF to the amount of:
(i) Commitments with an original
maturity of one year or less that are not
unconditionally cancelable by the FDICsupervised institution; and
(ii) Self-liquidating, trade-related
contingent items that arise from the
movement of goods, with an original
maturity of one year or less.
(3) 50 percent CCF. An FDICsupervised institution must apply a 50
percent CCF to the amount of:
(i) Commitments with an original
maturity of more than one year that are
not unconditionally cancelable by the
FDIC-supervised institution; and
(ii) Transaction-related contingent
items, including performance bonds, bid
bonds, warranties, and performance
standby letters of credit.
(4) 100 percent CCF. An FDICsupervised institution must apply a 100
percent CCF to the amount of the
following off-balance-sheet items and
other similar transactions:
(i) Guarantees;
(ii) Repurchase agreements (the offbalance sheet component of which
equals the sum of the current fair values
of all positions the FDIC-supervised
institution has sold subject to
repurchase);
(iii) Credit-enhancing representations
and warranties that are not
securitization exposures;
(iv) Off-balance sheet securities
lending transactions (the off-balance
sheet component of which equals the
sum of the current fair values of all
positions the FDIC-supervised
institution has lent under the
transaction);
(v) Off-balance sheet securities
borrowing transactions (the off-balance
sheet component of which equals the
sum of the current fair values of all noncash positions the FDIC-supervised
institution has posted as collateral
under the transaction);
(vi) Financial standby letters of credit;
and
(vii) Forward agreements.
§ 324.34
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 FDIC-supervised
institution’s current credit exposure and
potential future credit exposure (PFE)
on the OTC derivative contract.
(i) Current credit exposure. The
current credit exposure for a single OTC
derivative contract is the greater of the
mark-to-fair value of the OTC derivative
contract or zero.
(ii) PFE. (A) The PFE for a single OTC
derivative contract, including an OTC
derivative contract with a negative
mark-to-fair value, is calculated by
multiplying the notional principal
amount of the OTC derivative contract
by the appropriate conversion factor in
Table 1 to § 324.34.
(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 1 to
§ 324.34, the PFE must be calculated
using the appropriate ‘‘other’’
conversion factor.
(D) An FDIC-supervised institution
must use an OTC derivative contract’s
effective notional principal amount (that
is, the apparent or stated notional
principal amount multiplied by any
multiplier in the OTC derivative
contract) rather than the apparent or
stated notional principal amount in
calculating PFE.
(E) The PFE of the protection provider
of a credit derivative is capped at the
net present value of the amount of
unpaid premiums.
TABLE 1 TO § 324.34—CONVERSION FACTOR MATRIX FOR DERIVATIVE CONTRACTS 1
Remaining maturity 2
Foreign
exchange rate
and gold
Interest rate
One year or less ...........................................
Greater than one year and less than or
equal to five years .....................................
Greater than five years .................................
Credit (investment grade reference asset) 3
Credit (non-investment-grade
reference asset)
Precious metals
(except gold)
Equity
Other
0.00
0.01
0.05
0.10
0.06
0.07
0.10
0.005
0.015
0.05
0.075
0.05
0.05
0.10
0.10
0.08
0.10
0.07
0.08
0.12
0.15
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1 For
a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract.
2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of the contract is zero, the
remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum
conversion factor is 0.005.
3 An FDIC-supervised institution must use the column labeled ‘‘Credit (investment-grade reference asset)’’ for a credit derivative whose reference asset is an outstanding unsecured longterm debt security without credit enhancement that is investment grade. An FDIC-supervised institution 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
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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
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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
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negative mark-to-fair values of the
individual OTC derivative contracts
subject to the qualifying master netting
agreement or zero.
(ii) Adjusted sum of the PFE amounts.
The adjusted sum of the PFE amounts,
Anet, is calculated as Anet = (0.4 ×
Agross) + (0.6 × NGR × Agross), where:
(A) Agross equals 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) equals
the ratio of the net current credit
exposure to the gross current credit
exposure. In calculating the NGR, the
gross current credit exposure equals the
sum of the positive current credit
exposures (as determined under
paragraph (a)(1)(i) of this section) of all
individual derivative contracts subject
to the qualifying master netting
agreement.
(b) Recognition of credit risk
mitigation of collateralized OTC
derivative contracts. (1) An FDICsupervised institution 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 § 324.37(b).
(2) As an alternative to the simple
approach, an FDIC-supervised
institution may recognize the credit risk
mitigation benefits of financial collateral
that secures such a contract or netting
set if the financial collateral is markedto-fair value on a daily basis and subject
to a daily margin maintenance
requirement by applying a risk weight to
the exposure as if it were
uncollateralized and adjusting the
exposure amount calculated under
paragraph (a)(1) or (2) of this section
using the collateral haircut approach in
§ 324.37(c). The FDIC-supervised
institution must substitute the exposure
amount calculated under paragraph
(a)(1) or (2) of this section for èE in the
equation in § 324.37(c)(2).
(c) Counterparty credit risk for OTC
credit derivatives—(1) Protection
purchasers. An FDIC-supervised
institution that purchases an OTC credit
derivative that is recognized under
§ 324.36 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 § 324.32
provided that the FDIC-supervised
institution does so consistently for all
such credit derivatives. The FDIC-
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supervised institution 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) An FDICsupervised institution 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 FDICsupervised institution is not required to
compute a counterparty credit risk
capital requirement for the OTC credit
derivative under § 324.32, provided that
this treatment is applied consistently for
all such OTC credit derivatives. The
FDIC-supervised institution must either
include all or exclude all such OTC
credit derivatives that are subject to a
qualifying master netting agreement
from any measure used to determine
counterparty credit risk exposure.
(ii) The provisions of this paragraph
(c)(2) apply to all relevant
counterparties for risk-based capital
purposes unless the FDIC-supervised
institution is treating the OTC credit
derivative as a covered position under
subpart F, in which case the FDICsupervised institution must compute a
supplemental counterparty credit risk
capital requirement under this section.
(d) Counterparty credit risk for OTC
equity derivatives. (1) An FDICsupervised institution must treat an
OTC equity derivative contract as an
equity exposure and compute a riskweighted asset amount for the OTC
equity derivative contract under
§§ 324.51 through 324.53 (unless the
FDIC-supervised institution is treating
the contract as a covered position under
subpart F of this part).
(2) In addition, the FDIC-supervised
institution must also calculate a riskbased capital requirement for the
counterparty credit risk of an OTC
equity derivative contract under this
section if the FDIC-supervised
institution is treating the contract as a
covered position under subpart F of this
part.
(3) If the FDIC-supervised institution
risk weights the contract under the
Simple Risk-Weight Approach (SRWA)
in § 324.52, the FDIC-supervised
institution may choose not to hold riskbased 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, an
FDIC-supervised institution using the
SRWA must either include all or
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55501
exclude all of the contracts from any
measure used to determine counterparty
credit risk exposure.
(e) Clearing member FDIC-supervised
institution’s exposure amount. A
clearing member FDIC-supervised
institution’s exposure amount for an
OTC derivative contract or netting set of
OTC derivative contracts where the
FDIC-supervised institution is either
acting as a financial intermediary and
enters into an offsetting transaction with
a QCCP or where the FDIC-supervised
institution provides a guarantee to the
QCCP on the performance of the client
equals the exposure amount calculated
according to paragraph (a)(1) or (2) of
this section multiplied by the scaling
factor 0.71. If the FDIC-supervised
institution determines that a longer
period is appropriate, the FDICsupervised institution must use a larger
scaling factor to adjust for a longer
holding period as follows:
where H equals the holding period
greater than five days. Additionally, the
FDIC may require the FDIC-supervised
institution to set a longer holding period
if the FDIC determines that a longer
period is appropriate due to the nature,
structure, or characteristics of the
transaction or is commensurate with the
risks associated with the transaction.
§ 324.35
Cleared transactions.
(a) General requirements—(1)
Clearing member clients. An FDICsupervised institution that is a clearing
member client must use the
methodologies described in paragraph
(b) of this section to calculate riskweighted assets for a cleared
transaction.
(2) Clearing members. An FDICsupervised institution that is a clearing
member must use the methodologies
described in paragraph (c) of this
section to calculate its risk-weighted
assets for a cleared transaction and
paragraph (d) of this section to calculate
its risk-weighted assets for its default
fund contribution to a CCP.
(b) Clearing member client FDICsupervised institutions—(1) Riskweighted assets for cleared transactions.
(i) To determine the risk-weighted asset
amount for a cleared transaction, an
FDIC-supervised institution 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
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in accordance with paragraph (b)(3) of
this section.
(ii) A clearing member client FDICsupervised institution’s total riskweighted assets for cleared transactions
is the sum of the risk-weighted asset
amounts for all its cleared transactions.
(2) Trade exposure amount. (i) For a
cleared transaction that is either a
derivative contract or a netting set of
derivative contracts, the trade exposure
amount equals:
(A) The exposure amount for the
derivative contract or netting set of
derivative contracts, calculated using
the methodology used to calculate
exposure amount for OTC derivative
contracts under § 324.34, plus
(B) The fair value of the collateral
posted by the clearing member client
FDIC-supervised institution and held by
the CCP, clearing member, or custodian
in a manner that is not bankruptcy
remote.
(ii) For a cleared transaction that is a
repo-style transaction or netting set of
repo-style transactions, the trade
exposure amount equals:
(A) The exposure amount for the repostyle transaction calculated using the
methodologies under § 324.37(c), plus
(B) The fair value of the collateral
posted by the clearing member client
FDIC-supervised institution and held by
the CCP, clearing member, or custodian
in a manner that is not bankruptcy
remote.
(3) Cleared transaction risk weights.
(i) For a cleared transaction with a
QCCP, a clearing member client FDICsupervised institution must apply a risk
weight of:
(A) 2 percent if the collateral posted
by the FDIC-supervised institution to
the QCCP or clearing member is subject
to an arrangement that prevents any
losses to the clearing member client
FDIC-supervised institution 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
FDIC-supervised institution has
conducted sufficient legal review to
conclude with a well-founded basis
(and maintains sufficient written
documentation of that legal review) that
in the event of a legal challenge
(including one resulting from an event
of default or from liquidation,
insolvency, or receivership proceedings)
the relevant court and administrative
authorities would find the arrangements
to be legal, valid, binding and
enforceable under the law of the
relevant jurisdictions; or
(B) 4 percent if the requirements of
§ 324.35(b)(3)(A) are not met.
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(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member client FDIC-supervised
institution must apply the risk weight
appropriate for the CCP according to
§ 324.32.
(4) Collateral. (i) Notwithstanding any
other requirements in this section,
collateral posted by a clearing member
client FDIC-supervised institution that
is held by a custodian (in its capacity as
custodian) in a manner that is
bankruptcy remote from the CCP, the
custodian, clearing member and other
clearing member clients of the clearing
member, is not subject to a capital
requirement under this section.
(ii) A clearing member client FDICsupervised institution must calculate a
risk-weighted asset amount for any
collateral provided to a CCP, clearing
member, or custodian in connection
with a cleared transaction in accordance
with the requirements under § 324.32.
(c) Clearing member FDIC-supervised
institutions—(1) Risk-weighted assets
for cleared transactions. (i) To
determine the risk-weighted asset
amount for a cleared transaction, a
clearing member FDIC-supervised
institution 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 FDICsupervised institution’s total riskweighted 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 FDIC-supervised
institution must calculate its trade
exposure amount for a cleared
transaction as follows:
(i) For a cleared transaction that is
either a derivative contract or a netting
set of derivative contracts, the trade
exposure amount equals:
(A) The exposure amount for the
derivative contract, calculated using the
methodology to calculate exposure
amount for OTC derivative contracts
under § 324.34, plus
(B) The fair value of the collateral
posted by the clearing member FDICsupervised institution and held by the
CCP in a manner that is not bankruptcy
remote.
(ii) For a cleared transaction that is a
repo-style transaction or netting set of
repo-style transactions, trade exposure
amount equals:
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(A) The exposure amount for repostyle transactions calculated using
methodologies under § 324.37(c), plus
(B) The fair value of the collateral
posted by the clearing member FDICsupervised institution and held by the
CCP in a manner that is not bankruptcy
remote.
(3) Cleared transaction risk weight. (i)
A clearing member FDIC-supervised
institution must apply a risk weight of
2 percent to the trade exposure amount
for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member FDIC-supervised institution
must apply the risk weight appropriate
for the CCP according to § 324.32.
(4) Collateral. (i) Notwithstanding any
other requirement in this section,
collateral posted by a clearing member
FDIC-supervised institution that is held
by a custodian in a manner that is
bankruptcy remote from the CCP is not
subject to a capital requirement under
this section.
(ii) A clearing member FDICsupervised institution 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 § 324.32.
(d) Default fund contributions—(1)
General requirement. A clearing
member FDIC-supervised institution
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 FDICsupervised institution or the FDIC, there
is a material change in the financial
condition of the CCP.
(2) Risk-weighted asset amount for
default fund contributions to nonqualifying CCPs. A clearing member
FDIC-supervised institution’s riskweighted asset amount for default fund
contributions to CCPs that are not
QCCPs equals the sum of such default
fund contributions multiplied by 1,250
percent, or an amount determined by
the FDIC, based on factors such as size,
structure and membership
characteristics of the CCP and riskiness
of its transactions, in cases where such
default fund contributions may be
unlimited.
(3) Risk-weighted asset amount for
default fund contributions to QCCPs. A
clearing member FDIC-supervised
institution’s risk-weighted asset amount
for default fund contributions to QCCPs
equals the sum of its capital
requirement, KCM for each QCCP, as
calculated under the methodology set
forth in paragraphs (d)(3)(i) through (iii)
of this section (Method 1), multiplied by
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55503
1,250 percent or in paragraph (d)(3)(iv)
of this section (Method 2).
(i) Method 1. The hypothetical capital
requirement of a QCCP (KCCP) equals:
Where
(A) EBRMi equals the exposure amount for
each transaction cleared through the
QCCP by clearing member i, calculated
in accordance with § 324.34 for OTC
derivative contracts and § 324.37(c)(2)
for repo-style transactions, provided that:
(1) For purposes of this section, in
calculating the exposure amount the
FDIC-supervised institution may replace
the formula provided in § 324.34(a)(2)(ii)
with the following: Anet = (0.15 ×
Agross) + (0.85 × NGR × Agross); and
(2) For option derivative contracts that are
cleared transactions, the PFE described
in § 324.34(a)(1)(ii) must be adjusted by
multiplying the notional principal
amount of the derivative contract by the
appropriate conversion factor in Table 1
to § 324.34 and the absolute value of the
option’s delta, that is, the ratio of the
change in the value of the derivative
contract to the corresponding change in
the price of the underlying asset.
(3) For repo-style transactions, when
applying § 324.37(c)(2), the FDICsupervised institution must use the
methodology in § 324.37(c)(3);
(B) VMi equals any collateral posted by
clearing member i to the QCCP that it is
entitled to receive from the QCCP, but
has not yet received, and any collateral
that the QCCP has actually received from
clearing member i;
(C) IMi equals the collateral posted as initial
margin by clearing member i to the
QCCP;
(D) DFi equals the funded portion of clearing
member i’s default fund contribution
that will be applied to reduce the QCCP’s
loss upon a default by clearing member
i;
(E) RW equals 20 percent, except when the
FDIC has determined that a higher risk
weight is more appropriate based on the
specific characteristics of the QCCP and
its clearing members; and
(F) Where a QCCP has provided its KCCP, an
FDIC-supervised institution must rely on
such disclosed figure instead of
calculating KCCP under this paragraph,
unless the FDIC-supervised institution
determines that a more conservative
figure is appropriate based on the nature,
structure, or characteristics of the QCCP.
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
§ 324.34(a)(2)(ii) and for repo-style
transactions, ANet means the exposure
amount as defined in § 324.37(c)(2)
using the methodology in § 324.37(c)(3);
(B) N equals the number of clearing
members in the QCCP;
(C) DFCCP equals 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 equals 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);
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(ii) For an FDIC-supervised institution
that is a clearing member of a QCCP
with a default fund supported by
funded commitments, KCM equals:
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(B) For an FDIC-supervised institution
that is a clearing member of a QCCP
with a default fund supported by
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unfunded commitments and is unable to
calculate KCM using the methodology
described in paragraph (d)(3)(iii) of this
section, KCM equals:
Where
(1) IMi = the FDIC-supervised institution’s
initial margin posted to the QCCP;
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(2) IMCM equals the total of initial margin
posted to the QCCP; and
(3) K*CM as defined in paragraph (d)(3)(ii) of
this section.
(iv) Method 2. A clearing member
FDIC-supervised institution’s riskweighted asset amount for its default
fund contribution to a QCCP, RWADF,
equals:
RWADF = Min {12.5 * DF; 0.18 * TE}
Where
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Where
(1) DFi equals the FDIC-supervised
institution’s unfunded commitment to
the default fund;
(2) DFCM equals the total of all clearing
members’ unfunded commitment to the
default fund; and
(3) K*CM as defined in paragraph (d)(3)(ii) of
this section.
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(A) TE equals the FDIC-supervised
institution’s trade exposure amount to
the QCCP, calculated according to
§ 324.35(c)(2);
(B) DF equals the funded portion of the FDICsupervised institution’s default fund
contribution to the QCCP.
(4) Total risk-weighted assets for
default fund contributions. Total riskweighted assets for default fund
contributions is the sum of a clearing
member FDIC-supervised institution’s
risk-weighted assets for all of its default
fund contributions to all CCPs of which
the FDIC-supervised institution is a
clearing member.
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.36 Guarantees and credit
derivatives: Substitution treatment.
(a) Scope. (1) General. An FDICsupervised institution 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
FDIC-supervised institution 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 §§ 324.41 through 324.45.
(4) If multiple eligible guarantees or
eligible credit derivatives cover a single
exposure described in this section, an
FDIC-supervised institution 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, an FDICsupervised institution 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) An FDICsupervised institution may only
recognize the credit risk mitigation
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benefits of eligible guarantees and
eligible credit derivatives.
(2) An FDIC-supervised institution
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 crossdefault 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, an
FDIC-supervised institution may
recognize the guarantee or credit
derivative in determining the riskweighted asset amount for the hedged
exposure by substituting the risk weight
applicable to the guarantor or credit
derivative protection provider under
§ 324.32 for the risk weight assigned to
the exposure.
(2) Partial coverage. If an eligible
guarantee or eligible credit derivative
meets the conditions in paragraphs(a)
and (b) of this section and the protection
amount (P) of the guarantee or credit
derivative is less than the exposure
amount of the hedged exposure, the
FDIC-supervised institution 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 FDIC-supervised institution
may calculate the risk-weighted asset
amount for the protected exposure
under § 324.32, where the applicable
risk weight is the risk weight applicable
to the guarantor or credit derivative
protection provider.
(ii) The FDIC-supervised institution
must calculate the risk-weighted asset
amount for the unprotected exposure
under § 324.32, where the applicable
risk weight is that of the unprotected
portion of the hedged exposure.
(iii) The treatment provided in this
section is applicable when the credit
risk of an exposure is covered on a
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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)
An FDIC-supervised institution 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 FDICsupervised institution (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 FDIC-supervised
institution (protection purchaser), but
the terms of the arrangement at
origination of the credit risk mitigant
contain a positive incentive for the
FDIC-supervised institution 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 FDIC-supervised institution must
apply the following adjustment to
reduce the effective notional amount of
the credit risk mitigant: Pm = E × (t0.25)/(T-0.25), where:
(i) Pm equals effective notional
amount of the credit risk mitigant,
adjusted for maturity mismatch;
(ii) E equals effective notional amount
of the credit risk mitigant;
(iii) t equals the lesser of T or the
residual maturity of the credit risk
mitigant, expressed in years; and
(iv) T equals 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.
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If an FDIC-supervised institution
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 chargeoff, specific provision, or other similar
debit to the profit and loss account), the
FDIC-supervised institution must apply
the following adjustment to reduce the
effective notional amount of the credit
derivative: Pr = Pm × 0.60, where:
(1) Pr equals effective notional
amount of the credit risk mitigant,
adjusted for lack of restructuring event
(and maturity mismatch, if applicable);
and
(2) Pm equals effective notional
amount of the credit risk mitigant
(adjusted for maturity mismatch, if
applicable).
(f) Currency mismatch adjustment. (1)
If an FDIC-supervised institution
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 FDIC-supervised
institution must apply the following
formula to the effective notional amount
of the guarantee or credit derivative: Pc
= Pr × (1–HFX), where:
(i) Pc equals effective notional amount
of the credit risk mitigant, adjusted for
currency mismatch (and maturity
mismatch and lack of restructuring
event, if applicable);
(ii) Pr equals effective notional
amount of the credit risk mitigant
(adjusted for maturity mismatch and
lack of restructuring event, if
applicable); and
(iii) HFX equals haircut appropriate for
the currency mismatch between the
credit risk mitigant and the hedged
exposure.
(2) An FDIC-supervised institution
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 tenbusiness-day holding period. An FDICsupervised institution 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 § 324.37(c)(4).
(3) An FDIC-supervised institution
must adjust HFX calculated in paragraph
(f)(2) of this section upward if the FDICsupervised institution revalues the
guarantee or credit derivative less
frequently than once every 10 business
days using the following square root of
time formula:
§ 324.37
risk weight to the portion of an exposure
that is secured by the fair value of
financial collateral (that meets the
requirements of paragraph (b)(1) of this
section) based on the risk weight
assigned to the collateral under
§ 324.32. For repurchase agreements,
reverse repurchase agreements, and
securities lending and borrowing
transactions, the collateral is the
instruments, gold, and cash the FDICsupervised institution 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) An FDIC-supervised institution
must apply a risk weight to the
unsecured portion of the exposure based
on the risk weight applicable to the
exposure under this subpart.
(3) Exceptions to the 20 percent riskweight floor and other requirements.
Notwithstanding paragraph (b)(2)(i) of
this section:
(i) An FDIC-supervised institution
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) An FDIC-supervised institution
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
§ 324.32.
(iii) An FDIC-supervised institution
may assign a zero percent risk weight to
the collateralized portion of an exposure
where:
(A) The financial collateral is cash on
deposit; or
(B) The financial collateral is an
exposure to a sovereign that qualifies for
a zero percent risk weight under
§ 324.32, and the FDIC-supervised
institution has discounted the fair value
of the collateral by 20 percent.
(c) Collateral haircut approach—(1)
General. An FDIC-supervised institution
may recognize the credit risk mitigation
benefits of financial collateral that
secures an eligible margin loan, repostyle 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 FDICsupervised institution’s VaR-based
measure under subpart F of this part by
using the collateral haircut approach in
this section. An FDIC-supervised
Collateralized transactions.
(a) General. (1) To recognize the riskmitigating effects of financial collateral,
an FDIC-supervised institution may use:
(i) The simple approach in paragraph
(b) of this section for any exposure; or
(ii) The collateral haircut approach in
paragraph (c) of this section for repostyle transactions, eligible margin loans,
collateralized derivative contracts, and
single-product netting sets of such
transactions.
(2) An FDIC-supervised institution
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) An FDIC-supervised
institution may recognize the credit risk
mitigation benefits of financial collateral
that secures any exposure.
(ii) To qualify for the simple
approach, the financial collateral must
meet the following requirements:
(A) The collateral must be subject to
a collateral agreement for at least the life
of the exposure;
(B) The collateral must be revalued at
least every six months; and
(C) The collateral (other than gold)
and the exposure must be denominated
in the same currency.
(2) Risk weight substitution. (i) An
FDIC-supervised institution may apply a
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institution may use the standard
supervisory haircuts in paragraph (c)(3)
of this section or, with prior written
approval of the FDIC, its own estimates
of haircuts according to paragraph (c)(4)
of this section.
(2) Exposure amount equation. An
FDIC-supervised institution 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, [(èE
¥ èC) + è(Es × Hs) + è(Efx × Hfx)]},
where:
(i)(A) For eligible margin loans and
repo-style transactions and netting sets
thereof, èE equals the value of the
exposure (the sum of the current fair
values of all instruments, gold, and cash
the FDIC-supervised institution 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, èE
equals the exposure amount of the OTC
derivative contract (or netting set)
calculated under § 324.34 (a)(1) or (2).
(ii) èC equals the value of the
collateral (the sum of the current fair
values of all instruments, gold and cash
the FDIC-supervised institution has
borrowed, purchased subject to resale,
or taken as collateral from the
counterparty under the transaction (or
netting set));
(iii) Es equals the absolute value of
the net position in a given instrument or
in gold (where the net position in the
instrument or gold equals the sum of the
current fair values of the instrument or
gold the FDIC-supervised institution has
lent, sold subject to repurchase, or
posted as collateral to the counterparty
minus the sum of the current fair values
of that same instrument or gold the
FDIC-supervised institution 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;
55507
(v) Efx equals the absolute value of
the net position of instruments and cash
in a currency that is different from the
settlement currency (where the net
position in a given currency equals the
sum of the current fair values of any
instruments or cash in the currency the
FDIC-supervised institution has lent,
sold subject to repurchase, or posted as
collateral to the counterparty minus the
sum of the current fair values of any
instruments or cash in the currency the
FDIC-supervised institution 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)
An FDIC-supervised institution must
use the haircuts for market price
volatility (Hs) provided in Table 1 to
§ 324.37, as adjusted in certain
circumstances in accordance with the
requirements of paragraphs (c)(3)(iii)
and (iv) of this section.
TABLE 1 TO § 324.37—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS1
Haircut (in percent) assigned based on:
Sovereign issuers risk weight
under § 324.32
(in percent) 2
Residual maturity
Zero
Less than or equal to 1 year .....................
Greater than 1 year and less than or
equal to 5 years .....................................
Greater than 5 years ..................................
20 or 50
Non-sovereign issuers risk weight
under § 324.32
(in percent)
100
Investment grade
securitization
exposures
(in percent)
20
0.5
1.0
15.0
1.0
2.0
4.0
4.0
2.0
4.0
3.0
6.0
15.0
15.0
4.0
8.0
6.0
12.0
8.0
16.0
12.0
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
Other exposure types ..................................................................................................
25.0
1 The
market price volatility haircuts in Table 1 to § 324.37 are based on a 10 business-day holding period.
a foreign PSE that receives a zero percent risk weight.
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2 Includes
(ii) For currency mismatches, an
FDIC-supervised institution 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, an
FDIC-supervised institution may
multiply the standard supervisory
haircuts provided in paragraphs (c)(3)(i)
and (ii) of this section by the square root
of 1⁄2 (which equals 0.707107).
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(iv) If the number of trades in a
netting set exceeds 5,000 at any time
during a quarter, an FDIC-supervised
institution 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 § 324.35. If a
netting set contains one or more trades
involving illiquid collateral or an OTC
derivative that cannot be easily
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replaced, an FDIC-supervised institution
must adjust the supervisory haircuts
upward on the basis of a holding period
of twenty business days. If over the two
previous quarters more than two margin
disputes on a netting set have occurred
that lasted more than the holding
period, then the FDIC-supervised
institution 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. An FDIC-
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(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.
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(v) If the instrument an FDICsupervised institution has lent, sold
subject to repurchase, or posted as
collateral does not meet the definition of
financial collateral, the FDIC-supervised
institution 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 FDIC, an FDICsupervised institution may calculate
haircuts (Hs and Hfx) using its own
internal estimates of the volatilities of
market prices and foreign exchange
rates:
(i) To receive FDIC approval to use its
own internal estimates, an FDICsupervised institution must satisfy the
following minimum standards:
(A) An FDIC-supervised institution
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 an FDIC-supervised
institution 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:
(1) TM equals 5 for repo-style transactions
and 10 for eligible margin loans;
(2) TN equals the holding period used by the
FDIC-supervised institution 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, an FDIC-supervised institution
must calculate the haircut using a
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minimum holding period of twenty
business days for the following quarter
except in the calculation of the exposure
amount for purposes of § 324.35. If a
netting set contains one or more trades
involving illiquid collateral or an OTC
derivative that cannot be easily
replaced, an FDIC-supervised institution
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 FDIC-supervised institution
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) An FDIC-supervised institution is
required to calculate its own internal
estimates with inputs calibrated to
historical data from a continuous 12month period that reflects a period of
significant financial stress appropriate
to the security or category of securities.
(E) An FDIC-supervised institution
must have policies and procedures that
describe how it determines the period of
significant financial stress used to
calculate the FDIC-supervised
institution’s own internal estimates for
haircuts under this section and must be
able to provide empirical support for the
period used. The FDIC-supervised
institution must obtain the prior
approval of the FDIC for, and notify the
FDIC if the FDIC-supervised institution
makes any material changes to, these
policies and procedures.
(F) Nothing in this section prevents
the FDIC from requiring an FDICsupervised institution to use a different
period of significant financial stress in
the calculation of own internal
estimates for haircuts.
(G) An FDIC-supervised institution
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, an FDICsupervised institution may calculate
haircuts for categories of securities. For
a category of securities, the FDICsupervised institution 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 FDICsupervised institution has lent, sold
subject to repurchase, posted as
collateral, borrowed, purchased subject
to resale, or taken as collateral. In
determining relevant categories, the
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FDIC-supervised institution 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, an FDIC-supervised
institution 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 FDIC-supervised
institution 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) An FDIC-supervised institution’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
§ 324.38
Unsettled transactions.
(a) Definitions. For purposes of this
section:
(1) Delivery-versus-payment (DvP)
transaction means a securities or
commodities transaction in which the
buyer is obligated to make payment only
if the seller has made delivery of the
securities or commodities and the seller
is obligated to deliver the securities or
commodities only if the buyer has made
payment.
(2) Payment-versus-payment (PvP)
transaction means a foreign exchange
transaction in which each counterparty
is obligated to make a final transfer of
one or more currencies only if the other
counterparty has made a final transfer of
one or more currencies.
(3) A transaction has a normal
settlement period if the contractual
settlement period for the transaction is
equal to or less than the market standard
for the instrument underlying the
transaction and equal to or less than five
business days.
(4) Positive current exposure of an
FDIC-supervised institution for a
transaction is the difference between the
transaction value at the agreed
settlement price and the current market
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supervised institution must adjust the
standard supervisory haircuts upward
using the following formula:
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price of the transaction, if the difference
results in a credit exposure of the FDICsupervised institution to the
counterparty.
(b) Scope. This section applies to all
transactions involving securities, foreign
exchange instruments, and commodities
that have a risk of delayed settlement or
delivery. This section does not apply to:
(1) Cleared transactions that are
marked-to-market daily and subject to
daily receipt and payment of variation
margin;
(2) Repo-style transactions, including
unsettled repo-style transactions;
(3) One-way cash payments on OTC
derivative contracts; or
(4) Transactions with a contractual
settlement period that is longer than the
normal settlement period (which are
treated as OTC derivative contracts as
provided in § 324.34).
(c) System-wide failures. In the case of
a system-wide failure of a settlement,
clearing system or central counterparty,
the FDIC 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. An FDIC-supervised
institution must hold risk-based capital
against any DvP or PvP transaction with
a normal settlement period if the FDICsupervised institution’s counterparty
has not made delivery or payment
within five business days after the
settlement date. The FDIC-supervised
institution must determine its riskweighted asset amount for such a
transaction by multiplying the positive
current exposure of the transaction for
the FDIC-supervised institution by the
appropriate risk weight in Table 1 to
§ 324.38.
TABLE 1 TO § 324.38—RISK WEIGHTS
FOR UNSETTLED DVP AND PVP
TRANSACTIONS
Number of business days
after contractual settlement
date
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From
From
From
46 or
5 to 15 .........................
16 to 30 .......................
31 to 45 .......................
more ............................
Risk weight to
be applied to
positive current exposure
(in percent)
100.0
625.0
937.5
1,250.0
(e) Non-DvP/non-PvP (non-deliveryversus-payment/non-payment-versuspayment) transactions. (1) An FDICsupervised institution must hold riskbased capital against any non-DvP/nonPvP transaction with a normal
settlement period if the FDIC-supervised
institution has delivered cash,
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securities, commodities, or currencies to
its counterparty but has not received its
corresponding deliverables by the end
of the same business day. The FDICsupervised institution must continue to
hold risk-based capital against the
transaction until the FDIC-supervised
institution has received its
corresponding deliverables.
(2) From the business day after the
FDIC-supervised institution has made
its delivery until five business days after
the counterparty delivery is due, the
FDIC-supervised institution must
calculate the risk-weighted asset amount
for the transaction by treating the
current fair value of the deliverables
owed to the FDIC-supervised institution
as an exposure to the counterparty and
using the applicable counterparty risk
weight under § 324.32.
(3) If the FDIC-supervised institution
has not received its deliverables by the
fifth business day after counterparty
delivery was due, the FDIC-supervised
institution must assign a 1,250 percent
risk weight to the current fair value of
the deliverables owed to the FDICsupervised institution.
(f) Total risk-weighted assets for
unsettled transactions. Total riskweighted assets for unsettled
transactions is the sum of the riskweighted asset amounts of all DvP, PvP,
and non-DvP/non-PvP transactions.
§§ 324.39 through 324.40
[Reserved]
Risk-Weighted Assets for Securitization
Exposures
§ 324.41 Operational requirements for
securitization exposures.
(a) Operational criteria for traditional
securitizations. An FDIC-supervised
institution 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. An
FDIC-supervised institution that meets
these conditions must hold risk-based
capital against any credit risk it retains
in connection with the securitization.
An FDIC-supervised institution 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 aftertax gain-on-sale resulting from the
transaction. The conditions are:
(1) The exposures are not reported on
the FDIC-supervised institution’s
consolidated balance sheet under
GAAP;
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(2) The FDIC-supervised institution
has transferred to one or more third
parties credit risk associated with the
underlying exposures;
(3) Any clean-up calls relating to the
securitization are eligible clean-up calls;
and
(4) The securitization does not:
(i) Include one or more underlying
exposures in which the borrower is
permitted to vary the drawn amount
within an agreed limit under a line of
credit; and
(ii) Contain an early amortization
provision.
(b) Operational criteria for synthetic
securitizations. For synthetic
securitizations, an FDIC-supervised
institution 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. An FDIC-supervised
institution that meets these conditions
must hold risk-based capital against any
credit risk of the exposures it retains in
connection with the synthetic
securitization. An FDIC-supervised
institution that fails to meet these
conditions or chooses not to recognize
the credit risk mitigant for purposes of
this section must instead hold riskbased capital against the underlying
exposures as if they had not been
synthetically securitized. The
conditions are:
(1) The credit risk mitigant is:
(i) Financial collateral;
(ii) A guarantee that meets all criteria
as set forth in the definition of ‘‘eligible
guarantee’’ in § 324.2, except for the
criteria in paragraph (3) of that
definition; or
(iii) A credit derivative that meets all
criteria as set forth in the definition of
‘‘eligible credit derivative’’ in § 324.2,
except for the criteria in paragraph (3)
of the definition of ‘‘eligible guarantee’’
in § 324.2.
(2) The FDIC-supervised institution
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 FDIC-supervised
institution to alter or replace the
underlying exposures to improve the
credit quality of the underlying
exposures;
(iii) Increase the FDIC-supervised
institution’s cost of credit protection in
response to deterioration in the credit
quality of the underlying exposures;
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(iv) Increase the yield payable to
parties other than the FDIC-supervised
institution 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 FDIC-supervised
institution after the inception of the
securitization;
(3) The FDIC-supervised institution
obtains a well-reasoned opinion from
legal counsel that confirms the
enforceability of the credit risk mitigant
in all relevant jurisdictions; and
(4) Any clean-up calls relating to the
securitization are eligible clean-up calls.
(c) Due diligence requirements for
securitization exposures. (1) Except for
exposures that are deducted from
common equity tier 1 capital and
exposures subject to § 324.42(h), if an
FDIC-supervised institution is unable to
demonstrate to the satisfaction of the
FDIC a comprehensive understanding of
the features of a securitization exposure
that would materially affect the
performance of the exposure, the FDICsupervised institution must assign the
securitization exposure a risk weight of
1,250 percent. The FDIC-supervised
institution’s analysis must be
commensurate with the complexity of
the securitization exposure and the
materiality of the exposure in relation to
its capital.
(2) An FDIC-supervised institution
must demonstrate its comprehensive
understanding of a securitization
exposure under paragraph (c)(1) of this
section, for each securitization exposure
by:
(i) Conducting an analysis of the risk
characteristics of a securitization
exposure prior to acquiring the
exposure, and documenting such
analysis within three business days after
acquiring the exposure, considering:
(A) Structural features of the
securitization that would materially
impact the performance of the exposure,
for example, the contractual cash flow
waterfall, waterfall-related triggers,
credit enhancements, liquidity
enhancements, fair value triggers, the
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);
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(C) Relevant market data of the
securitization, for example, bid-ask
spread, most recent sales price and
historic price volatility, trading volume,
implied market rating, and size, depth
and concentration level of the market
for the securitization; and
(D) For resecuritization exposures,
performance information on the
underlying securitization exposures, for
example, the issuer name and credit
quality, and the characteristics and
performance of the exposures
underlying the securitization exposures;
and
(ii) On an on-going basis (no less
frequently than quarterly), evaluating,
reviewing, and updating as appropriate
the analysis required under paragraph
(c)(1) of this section for each
securitization exposure.
§ 324.42 Risk-weighted assets for
securitization exposures.
(a) Securitization risk weight
approaches. Except as provided
elsewhere in this section or in § 324.41:
(1) An FDIC-supervised institution
must deduct from common equity tier 1
capital any after-tax gain-on-sale
resulting from a securitization and
apply a 1,250 percent risk weight to the
portion of a CEIO that does not
constitute after-tax gain-on-sale.
(2) If a securitization exposure does
not require deduction under paragraph
(a)(1) of this section, an FDICsupervised institution may assign a risk
weight to the securitization exposure
using the simplified supervisory
formula approach (SSFA) in accordance
with §§ 324.43(a) through 324.43(d) and
subject to the limitation under
paragraph (e) of this section.
Alternatively, an FDIC-supervised
institution that is not subject to subpart
F of this part may assign a risk weight
to the securitization exposure using the
gross-up approach in accordance with
§ 324.43(e), provided, however, that
such FDIC-supervised institution must
apply either the SSFA or the gross-up
approach consistently across all of its
securitization exposures, except as
provided in paragraphs (a)(1), (a)(3), and
(a)(4) of this section.
(3) If a securitization exposure does
not require deduction under paragraph
(a)(1) of this section and the FDICsupervised institution cannot, or
chooses not to apply the SSFA or the
gross-up approach to the exposure, the
FDIC-supervised institution must assign
a risk weight to the exposure as
described in § 324.44.
(4) If a securitization exposure is a
derivative contract (other than
protection provided by an FDICsupervised institution in the form of a
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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), an FDICsupervised institution 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. An FDICsupervised institution’s total riskweighted assets for securitization
exposures equals the sum of the riskweighted asset amount for securitization
exposures that the FDIC-supervised
institution risk weights under
§§ 324.41(c), 324.42(a)(1), and 324.43,
324.44, or 324.45, and paragraphs (e)
through (j) of this section, as applicable.
(c) Exposure amount of a
securitization exposure—(1) On-balance
sheet securitization exposures. The
exposure amount of an on-balance sheet
securitization exposure (excluding an
available-for-sale or held-to-maturity
security where the FDIC-supervised
institution has made an AOCI opt-out
election under § 324.22(b)(2), a repostyle transaction, eligible margin loan,
OTC derivative contract, or cleared
transaction) is equal to the carrying
value of the exposure.
(2) On-balance sheet securitization
exposures held by an FDIC-supervised
institution that has made an AOCI optout election. The exposure amount of an
on-balance sheet securitization exposure
that is an available-for-sale or held-tomaturity security held by an FDICsupervised institution that has made an
AOCI opt-out election under
§ 324.22(b)(2) is the FDIC-supervised
institution’s carrying value (including
net accrued but unpaid interest and
fees), less any net unrealized gains on
the exposure and plus any net
unrealized losses on the exposure.
(3) Off-balance sheet securitization
exposures. (i) Except as provided in
paragraph (j) of this section, the
exposure amount of an off-balance sheet
securitization exposure that is not a
repo-style transaction, eligible margin
loan, cleared transaction (other than a
credit derivative), or an OTC derivative
contract (other than a credit derivative)
is the notional amount of the exposure.
For an off-balance sheet securitization
exposure to an ABCP program, such as
an eligible ABCP liquidity facility, the
notional amount may be reduced to the
maximum potential amount that the
FDIC-supervised institution could be
required to fund given the ABCP
program’s current underlying assets
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(calculated without regard to the current
credit quality of those assets).
(ii) An FDIC-supervised institution
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) An FDIC-supervised institution
must determine the exposure amount of
an eligible ABCP liquidity facility for
which the SSFA applies by multiplying
the notional amount of the exposure by
a CCF of 100 percent.
(4) Repo-style transactions, eligible
margin loans, and derivative contracts.
The exposure amount of a securitization
exposure that is a repo-style transaction,
eligible margin loan, or derivative
contract (other than a credit derivative)
is the exposure amount of the
transaction as calculated under § 324.34
or § 324.37, as applicable.
(d) Overlapping exposures. If an
FDIC-supervised institution has
multiple securitization exposures that
provide duplicative coverage to the
underlying exposures of a securitization
(such as when an FDIC-supervised
institution provides a program-wide
credit enhancement and multiple poolspecific liquidity facilities to an ABCP
program), the FDIC-supervised
institution is not required to hold
duplicative risk-based capital against
the overlapping position. Instead, the
FDIC-supervised institution 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 an FDICsupervised institution provides support
to a securitization in excess of the FDICsupervised institution’s contractual
obligation to provide credit support to
the securitization (implicit support):
(1) The FDIC-supervised institution
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 FDIC-supervised institution
must disclose publicly:
(i) That it has provided implicit
support to the securitization; and
(ii) The risk-based capital impact to
the FDIC-supervised institution of
providing such implicit support.
(f) Undrawn portion of a servicer cash
advance facility. (1) Notwithstanding
any other provision of this subpart, an
FDIC-supervised institution that is a
servicer under an eligible servicer cash
advance facility is not required to hold
risk-based capital against potential
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future cash advance payments that it
may be required to provide under the
contract governing the facility.
(2) For an FDIC-supervised institution
that acts as a servicer, the exposure
amount for a servicer cash advance
facility that is not an eligible servicer
cash advance facility is equal to the
amount of all potential future cash
advance payments that the FDICsupervised institution may be
contractually required to provide during
the subsequent 12 month period under
the contract governing the facility.
(g) Interest-only mortgage-backed
securities. Regardless of any other
provisions in this subpart, the risk
weight for a non-credit-enhancing
interest-only mortgage-backed security
may not be less than 100 percent.
(h) Small-business loans and leases
on personal property transferred with
retained contractual exposure. (1)
Regardless of any other provision of this
subpart, an FDIC-supervised institution
that has transferred small-business loans
and leases on personal property (smallbusiness obligations) with recourse
must include in risk-weighted assets
only its contractual exposure to the
small-business obligations if all the
following conditions are met:
(i) The transaction must be treated as
a sale under GAAP.
(ii) The FDIC-supervised institution
establishes and maintains, pursuant to
GAAP, a non-capital reserve sufficient
to meet the FDIC-supervised
institution’s reasonably estimated
liability under the contractual
obligation.
(iii) The small-business obligations
are to businesses that meet the criteria
for a small-business concern established
by the Small Business Administration
under section 3(a) of the Small Business
Act (15 U.S.C. 632 et seq.).
(iv) The FDIC-supervised institution
is well capitalized, as defined in subpart
H of this part. For purposes of
determining whether an FDICsupervised institution is well
capitalized for purposes of this
paragraph, the FDIC-supervised
institution’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 an
FDIC-supervised institution on transfers
of small-business obligations receiving
the capital treatment specified in
paragraph (h)(1) of this section cannot
exceed 15 percent of the FDICsupervised institution’s total capital.
(3) If an FDIC-supervised institution
ceases to be well capitalized under
subpart H of this part or exceeds the 15
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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 FDIC-supervised institution was
well capitalized and did not exceed the
capital limit.
(4) The risk-based capital ratios of the
FDIC-supervised institution 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 an FDICsupervised institution is adequately
capitalized, undercapitalized,
significantly undercapitalized, or
critically undercapitalized under
subpart H of this part; and
(ii) Reclassifying a well-capitalized
FDIC-supervised institution to
adequately capitalized and requiring an
adequately capitalized FDIC-supervised
institution to comply with certain
mandatory or discretionary supervisory
actions as if the FDIC-supervised
institution were in the next lower
prompt-corrective-action category.
(i) Nth-to-default credit derivatives—
(1) Protection provider. An FDICsupervised institution may assign a risk
weight using the SSFA in § 324.43 to an
nth-to-default credit derivative in
accordance with this paragraph. An
FDIC-supervised institution must
determine its exposure in the nth-todefault credit derivative as the largest
notional amount of all the underlying
exposures.
(2) For purposes of determining the
risk weight for an nth-to-default credit
derivative using the SSFA, the FDICsupervised institution 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 FDICsupervised institution’s exposure to the
total notional amount of all underlying
exposures. The ratio is expressed as a
decimal value between zero and one. In
the case of a first-to-default credit
derivative, there are no underlying
exposures that are subordinated to the
FDIC-supervised institution’s exposure.
In the case of a second-or-subsequent-todefault credit derivative, the smallest (n1) notional amounts of the underlying
exposure(s) are subordinated to the
FDIC-supervised institution’s exposure.
(ii) The detachment point (parameter
D) equals the sum of parameter A plus
the ratio of the notional amount of the
FDIC-supervised institution’s exposure
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in the nth-to-default credit derivative to
the total notional amount of all
underlying exposures. The ratio is
expressed as a decimal value between
zero and one.
(3) An FDIC-supervised institution
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-todefault credit derivatives. An FDICsupervised institution that obtains
credit protection on a group of
underlying exposures through a first-todefault credit derivative that meets the
rules of recognition of § 324.36(b) must
determine its risk-based capital
requirement for the underlying
exposures as if the FDIC-supervised
institution synthetically securitized the
underlying exposure with the smallest
risk-weighted asset amount and had
obtained no credit risk mitigant on the
other underlying exposures. An FDICsupervised institution must calculate a
risk-based capital requirement for
counterparty credit risk according to
§ 324.34 for a first-to-default credit
derivative that does not meet the rules
of recognition of § 324.36(b).
(ii) Second-or-subsequent-to-default
credit derivatives. (A) An FDICsupervised institution that obtains
credit protection on a group of
underlying exposures through a nth-todefault credit derivative that meets the
rules of recognition of § 324.36(b) (other
than a first-to-default credit derivative)
may recognize the credit risk mitigation
benefits of the derivative only if:
(1) The FDIC-supervised institution
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 an FDIC-supervised institution
satisfies the requirements of paragraph
(i)(4)(ii)(A) of this section, the FDICsupervised institution must determine
its risk-based capital requirement for the
underlying exposures as if the FDICsupervised institution had only
synthetically securitized the underlying
exposure with the nth smallest riskweighted asset amount and had
obtained no credit risk mitigant on the
other underlying exposures.
(C) An FDIC-supervised institution
must calculate a risk-based capital
requirement for counterparty credit risk
according to § 324.34 for a nth-to-default
credit derivative that does not meet the
rules of recognition of § 324.36(b).
(j) Guarantees and credit derivatives
other than nth-to-default credit
derivatives—(1) Protection provider. For
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a guarantee or credit derivative (other
than an nth-to-default credit derivative)
provided by an FDIC-supervised
institution that covers the full amount
or a pro rata share of a securitization
exposure’s principal and interest, the
FDIC-supervised institution 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) An FDICsupervised institution that purchases a
guarantee or OTC credit derivative
(other than an nth-to-default credit
derivative) that is recognized under
§ 324.45 as a credit risk mitigant
(including via collateral recognized
under § 324.37) is not required to
compute a separate counterparty credit
risk capital requirement under § 324.31,
in accordance with § 324.34(c).
(ii) If an FDIC-supervised institution
cannot, or chooses not to, recognize a
purchased credit derivative as a credit
risk mitigant under § 324.45, the FDICsupervised institution must determine
the exposure amount of the credit
derivative under § 324.34.
(A) If the FDIC-supervised institution
purchases credit protection from a
counterparty that is not a securitization
SPE, the FDIC-supervised institution
must determine the risk weight for the
exposure according to general risk
weights under § 324.32.
(B) If the FDIC-supervised institution
purchases the credit protection from a
counterparty that is a securitization
SPE, the FDIC-supervised institution
must determine the risk weight for the
exposure according to section § 324.42,
including § 324.42(a)(4) for a credit
derivative that has a first priority claim
on the cash flows from the underlying
exposures of the securitization SPE
(notwithstanding amounts due under
interest rate or currency derivative
contracts, fees due, or other similar
payments).
§ 324.43 Simplified supervisory formula
approach (SSFA) and the gross-up
approach.
(a) General requirements for the
SSFA. To use the SSFA to determine the
risk weight for a securitization
exposure, an FDIC-supervised
institution must have data that enables
it to assign accurately the parameters
described in paragraph (b) of this
section. Data used to assign the
parameters described in paragraph (b) of
this section must be the most currently
available data; if the contracts governing
the underlying exposures of the
securitization require payments on a
monthly or quarterly basis, the data
used to assign the parameters described
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in paragraph (b) of this section must be
no more than 91 calendar days old. An
FDIC-supervised institution that does
not have the appropriate data to assign
the parameters described in paragraph
(b) of this section must assign a risk
weight of 1,250 percent to the exposure.
(b) SSFA parameters. To calculate the
risk weight for a securitization exposure
using the SSFA, an FDIC-supervised
institution must have accurate
information on the following five inputs
to the SSFA calculation:
(1) KG is the weighted-average (with
unpaid principal used as the weight for
each exposure) total capital requirement
of the underlying exposures calculated
using this subpart. KG is expressed as a
decimal value between zero and one
(that is, an average risk weight of 100
percent represents a value of KG equal
to 0.08).
(2) Parameter W is expressed as a
decimal value between zero and one.
Parameter W is the ratio of the sum of
the dollar amounts of any underlying
exposures of the securitization that meet
any of the criteria as set forth in
paragraphs (b)(2)(i) through (vi) of this
section to the balance, measured in
dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or
insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred
payments for 90 days or more, other
than principal or interest payments
deferred on:
(A) Federally-guaranteed student
loans, in accordance with the terms of
those guarantee programs; or
(B) Consumer loans, including nonfederally-guaranteed student loans,
provided that such payments are
deferred pursuant to provisions
included in the contract at the time
funds are disbursed that provide for
period(s) of deferral that are not
initiated based on changes in the
creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment
point for the exposure, which represents
the threshold at which credit losses will
first be allocated to the exposure. Except
as provided in § 324.42(i) for nth-todefault credit derivatives, parameter A
equals the ratio of the current dollar
amount of underlying exposures that are
subordinated to the exposure of the
FDIC-supervised institution 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 FDIC-supervised
institution’s securitization exposure
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emcdonald on DSK67QTVN1PROD with RULES2
may be included in the calculation of
parameter A to the extent that cash is
present in the account. Parameter A is
expressed as a decimal value between
zero and one.
(4) Parameter D is the detachment
point for the exposure, which represents
the threshold at which credit losses of
principal allocated to the exposure
would result in a total loss of principal.
Except as provided in § 324.42(i) for nthto-default credit derivatives, parameter
D equals parameter A plus the ratio of
the current dollar amount of the
securitization exposures that are pari
passu with the exposure (that is, have
equal seniority with respect to credit
risk) to the current dollar amount of the
underlying exposures. Parameter D is
expressed as a decimal value between
zero and one.
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(5) A supervisory calibration
parameter, p, is equal to 0.5 for
securitization exposures that are not
resecuritization exposures and equal to
1.5 for resecuritization exposures.
(c) Mechanics of the SSFA. KG and W
are used to calculate KA, the augmented
value of KG, which reflects the observed
credit quality of the underlying
exposures. KA is defined in paragraph
(d) of this section. The values of
parameters A and D, relative to KA
determine the risk weight assigned to a
securitization exposure as described in
paragraph (d) of this section. The risk
weight assigned to a securitization
exposure, or portion of a securitization
exposure, as appropriate, is the larger of
the risk weight determined in
accordance with this paragraph or
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paragraph (d) of this section and a risk
weight of 20 percent.
(1) When the detachment point,
parameter D, for a securitization
exposure is less than or equal to KA, the
exposure must be assigned a risk weight
of 1,250 percent.
(2) When the attachment point,
parameter A, for a securitization
exposure is greater than or equal to KA,
the FDIC-supervised institution must
calculate the risk weight in accordance
with paragraph (d) of this section.
(3) When A is less than KA and D is
greater than KA, the risk weight is a
weighted-average of 1,250 percent and
1,250 percent times KSSFA calculated in
accordance with paragraph (d) of this
section. For the purpose of this
weighted-average calculation:
BILLING CODE 6714–01–P
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BILLING CODE 6714–01–C
(e) Gross-up approach—(1)
Applicability. An FDIC-supervised
institution that is not subject to subpart
F of this part may apply the gross-up
approach set forth in this section
instead of the SSFA to determine the
risk weight of its securitization
exposures, provided that it applies the
gross-up approach to all of its
securitization exposures, except as
otherwise provided for certain
securitization exposures in §§ 324.44
and 324.45.
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(2) To use the gross-up approach, an
FDIC-supervised institution must
calculate the following four inputs:
(i) Pro rata share, which is the par
value of the FDIC-supervised
institution’s securitization exposure as a
percent of the par value of the tranche
in which the securitization exposure
resides;
(ii) Enhanced amount, which is the
par value of tranches that are more
senior to the tranche in which the FDICsupervised institution’s securitization
resides;
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(iii) Exposure amount of the FDICsupervised institution’s securitization
exposure calculated under § 324.42(c);
and
(iv) Risk weight, which is the
weighted-average risk weight of
underlying exposures of the
securitization as calculated under this
subpart.
(3) Credit equivalent amount. The
credit equivalent amount of a
securitization exposure under this
section equals the sum of:
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(i) The exposure amount of the FDICsupervised institution’s securitization
exposure and
(ii) The pro rata share multiplied by
the enhanced amount, each calculated
in accordance with paragraph (e)(2) of
this section.
(4) Risk-weighted assets. To calculate
risk-weighted assets for a securitization
exposure under the gross-up approach,
an FDIC-supervised institution must
apply the risk weight required under
paragraph (e)(2) of this section to the
credit equivalent amount calculated in
paragraph (e)(3) of this section.
(f) Limitations. Notwithstanding any
other provision of this section, an FDICsupervised institution must assign a risk
weight of not less than 20 percent to a
securitization exposure.
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.44 Securitization exposures to which
the SSFA and gross-up approach do not
apply.
(a) General Requirement. An FDICsupervised institution must assign a
1,250 percent risk weight to all
securitization exposures to which the
FDIC-supervised institution does not
apply the SSFA or the gross-up
approach under § 324.43, except as set
forth in this section.
(b) Eligible ABCP liquidity facilities.
An FDIC-supervised institution 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. An
FDIC-supervised institution 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 FDIC-supervised institution
holding the exposure must not retain or
provide protection to the first loss
position.
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§ 324.45 Recognition of credit risk
mitigants for securitization exposures.
(a) General. (1) An originating FDICsupervised institution that has obtained
a credit risk mitigant to hedge its
exposure to a synthetic or traditional
securitization that satisfies the
operational criteria provided in § 324.41
may recognize the credit risk mitigant
under §§ 324.36 or 324.37, but only as
provided in this section.
(2) An investing FDIC-supervised
institution that has obtained a credit
risk mitigant to hedge a securitization
exposure may recognize the credit risk
mitigant under §§ 324.36 or 324.37, but
only as provided in this section.
(b) Mismatches. An FDIC-supervised
institution must make any applicable
adjustment to the protection amount of
an eligible guarantee or credit derivative
as required in § 324.36(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 FDIC-supervised
institution must use the longest residual
maturity of any of the hedged exposures
as the residual maturity of all hedged
exposures.
§§ 324.46 through 324.50
[Reserved]
Risk-Weighted Assets for Equity
Exposures
§ 324.51 Introduction and exposure
measurement.
(a) General. (1) To calculate its riskweighted asset amounts for equity
exposures that are not equity exposures
to an investment fund, an FDICsupervised institution must use the
Simple Risk-Weight Approach (SRWA)
provided in § 324.52. An FDICsupervised institution must use the
look-through approaches provided in
§ 324.53 to calculate its risk-weighted
asset amounts for equity exposures to
investment funds.
(2) An FDIC-supervised institution
must treat an investment in a separate
account (as defined in § 324.2) as if it
were an equity exposure to an
investment fund as provided in
§ 324.53.
(3) Stable value protection. (i) Stable
value protection means a contract where
the provider of the contract is obligated
to pay:
(A) The policy owner of a separate
account an amount equal to the shortfall
between the fair value and cost basis of
the separate account when the policy
owner of the separate account
surrenders the policy, or
(B) The beneficiary of the contract an
amount equal to the shortfall between
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the fair value and book value of a
specified portfolio of assets.
(ii) An FDIC-supervised institution
that purchases stable value protection
on its investment in a separate account
must treat the portion of the carrying
value of its investment in the separate
account attributable to the stable value
protection as an exposure to the
provider of the protection and the
remaining portion of the carrying value
of its separate account as an equity
exposure to an investment fund.
(iii) An FDIC-supervised institution
that provides stable value protection
must treat the exposure as an equity
derivative with an adjusted carrying
value determined as the sum of
paragraphs (b)(1) and (3) of this section.
(b) Adjusted carrying value. For
purposes of §§ 324.51 through 324.53,
the adjusted carrying value of an equity
exposure is:
(1) For the on-balance sheet
component of an equity exposure (other
than an equity exposure that is
classified as available-for-sale where the
FDIC-supervised institution has made
an AOCI opt-out election under
§ 324.22(b)(2)), the FDIC-supervised
institution’s carrying value of the
exposure;
(2) For the on-balance sheet
component of an equity exposure that is
classified as available-for-sale where the
FDIC-supervised institution has made
an AOCI opt-out election under
§ 324.22(b)(2), the FDIC-supervised
institution’s carrying value of the
exposure less any net unrealized gains
on the exposure that are reflected in
such carrying value but excluded from
the FDIC-supervised institution’s
regulatory capital components;
(3) For the off-balance sheet
component of an equity exposure that is
not an equity commitment, the effective
notional principal amount of the
exposure, the size of which is
equivalent to a hypothetical on-balance
sheet position in the underlying equity
instrument that would evidence the
same change in fair value (measured in
dollars) given a small change in the
price of the underlying equity
instrument, minus the adjusted carrying
value of the on-balance sheet
component of the exposure as
calculated in paragraph (b)(1) of this
section; and
(4) For a commitment to acquire an
equity exposure (an equity
commitment), the effective notional
principal amount of the exposure is
multiplied 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.
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(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.
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.52 Simple risk-weight approach
(SRWA).
(a) General. Under the SRWA, an
FDIC-supervised institution’s total riskweighted assets for equity exposures
equals the sum of the risk-weighted
asset amounts for each of the FDICsupervised institution’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 FDIC-supervised institution’s
individual equity exposures to an
investment fund as determined under
§ 324.53.
(b) SRWA computation for individual
equity exposures. An FDIC-supervised
institution must determine the riskweighted asset amount for an individual
equity exposure (other than an equity
exposure to an investment fund) by
multiplying the adjusted carrying value
of the equity exposure or the effective
portion and ineffective portion of a
hedge pair (as defined in paragraph (c)
of this section) by the lowest applicable
risk weight in this paragraph (b).
(1) Zero percent risk weight equity
exposures. An equity exposure to a
sovereign, the Bank for International
Settlements, the European Central Bank,
the European Commission, the
International Monetary Fund, an MDB,
and any other entity whose credit
exposures receive a zero percent risk
weight under § 324.32 may be assigned
a zero percent risk weight.
(2) 20 percent risk weight equity
exposures. An equity exposure to a PSE,
Federal Home Loan Bank or the Federal
Agricultural Mortgage Corporation
(Farmer Mac) must be assigned a 20
percent risk weight.
(3) 100 percent risk weight equity
exposures. The equity exposures set
forth in this paragraph (b)(3) must be
assigned a 100 percent risk weight.
(i) Community development equity
exposures. An equity exposure that
qualifies as a community development
investment under section 24 (Eleventh)
of the National Bank Act, excluding
equity exposures to an unconsolidated
small business investment company and
equity exposures held through a
consolidated small business investment
company described in section 302 of the
Small Business Investment Act.
(ii) Effective portion of hedge pairs.
The effective portion of a hedge pair.
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(iii) Non-significant equity exposures.
Equity exposures, excluding significant
investments in the capital of an
unconsolidated financial institution in
the form of common stock and
exposures to an investment firm that
would meet the definition of a
traditional securitization were it not for
the application of paragraph (8) of that
definition in § 324.2 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 FDIC-supervised
institution’s total capital.
(A) To compute the aggregate adjusted
carrying value of an FDIC-supervised
institution’s equity exposures for
purposes of this section, the FDICsupervised institution 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 an FDIC-supervised
institution does not know the actual
holdings of the investment fund, the
FDIC-supervised institution 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 FDIC-supervised institution
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 an
FDIC-supervised institution’s equity
exposures qualify for a 100 percent risk
weight under this paragraph (b), an
FDIC-supervised institution first must
include equity exposures to
unconsolidated small business
investment companies or held through
consolidated small business investment
companies described in section 302 of
the Small Business Investment Act, then
must include publicly traded equity
exposures (including those held
indirectly through investment funds),
and then must include non-publicly
traded equity exposures (including
those held indirectly through
investment funds).
(4) 250 percent risk weight equity
exposures. Significant investments in
the capital of unconsolidated financial
institutions in the form of common
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stock that are not deducted from capital
pursuant to § 324.22(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 FDICsupervised institution acquires at least
one of the equity exposures); the
documentation specifies the measure of
effectiveness (E) the FDIC-supervised
institution 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. An
FDIC-supervised institution must
measure E at least quarterly and must
use one of three alternative measures of
E as set forth in this paragraph (c).
(i) Under the dollar-offset method of
measuring effectiveness, the FDICsupervised institution 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.
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(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.
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.53
funds.
Equity exposures to investment
(a) Available approaches. (1) Unless
the exposure meets the requirements for
a community development equity
exposure under § 324.52(b)(3)(i), an
FDIC-supervised institution must
determine the risk-weighted asset
amount of an equity exposure to an
investment fund under the full lookthrough approach described in
paragraph (b) of this section, the simple
modified look-through approach
described in paragraph (c) of this
section, or the alterative modified lookthrough approach described paragraph
(d) of this section, provided, however,
that the minimum risk weight that may
be assigned to an equity exposure under
this section is 20 percent.
(2) The risk-weighted asset amount of
an equity exposure to an investment
fund that meets the requirements for a
community development equity
exposure in § 324.52(b)(3)(i) is its
adjusted carrying value.
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(3) If an equity exposure to an
investment fund is part of a hedge pair
and the FDIC-supervised institution
does not use the full look-through
approach, the FDIC-supervised
institution must use the ineffective
portion of the hedge pair as determined
under § 324.52(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. An
FDIC-supervised institution that is able
to calculate a risk-weighted asset
amount for its proportional ownership
share of each exposure held by the
investment fund (as calculated under
this subpart as if the proportional
ownership share of the adjusted
carrying value of each exposure were
held directly by the FDIC-supervised
institution) may set the risk-weighted
asset amount of the FDIC-supervised
institution’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
FDIC-supervised institution; and
(2) The FDIC-supervised institution’s
proportional ownership share of the
fund.
(c) Simple modified look-through
approach. Under the simple modified
look-through approach, the riskweighted asset amount for an FDICsupervised institution’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
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(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, an
FDIC-supervised institution 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 riskweighted asset amount for the FDICsupervised institution’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 FDIC-supervised institution 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 FDIC-supervised
institution must use the highest
applicable risk weight. An FDICsupervised institution 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.
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(ii) Under the variability-reduction
method of measuring effectiveness:
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§§ 324.54 through 324.60
[Reserved]
Disclosures
§ 324.61
Purpose and scope.
Sections 324.61–324.63 of this
subpart establish public disclosure
requirements related to the capital
requirements described in subpart B of
this part for an FDIC-supervised
institution with total consolidated assets
of $50 billion or more as reported on the
FDIC-supervised institution’s most
recent year-end Call Report that is not
an advanced approaches FDICsupervised institution making public
disclosures pursuant to § 324.172. An
advanced approaches FDIC-supervised
institution that has not received
approval from the FDIC to exit parallel
run pursuant to § 324.121(d) is subject
to the disclosure requirements described
in §§ 324.62 and 324.63. Such an FDICsupervised institution must comply
with § 324.62 unless it is a consolidated
subsidiary of a bank holding company,
savings and loan holding company, or
depository institution that is subject to
these disclosure requirements or a
subsidiary of a non-U.S. banking
organization that is subject to
comparable public disclosure
requirements in its home jurisdiction.
For purposes of this section, total
consolidated assets are determined
based on the average of the FDICsupervised institution’s total
consolidated assets in the four most
recent quarters as reported on the Call
Report; or the average of the FDICsupervised institution’s total
consolidated assets in the most recent
consecutive quarters as reported
quarterly on the FDIC-supervised
institution’s Call Report if the FDICsupervised institution has not filed such
a report for each of the most recent four
quarters.
§ 324.62
Disclosure requirements.
(a) An FDIC-supervised institution
described in § 324.61 must provide
timely public disclosures each calendar
quarter of the information in the
applicable tables in § 324.63. If a
significant change occurs, such that the
most recent reported amounts are no
longer reflective of the FDIC-supervised
institution’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
FDIC-supervised institution’s risk
management objectives and policies,
reporting system, and definitions) may
be disclosed annually after the end of
the fourth calendar quarter, provided
that any significant changes are
disclosed in the interim. The FDICsupervised institution’s management
may provide all of the disclosures
required by §§ 324.61 through 324.63 in
one place on the FDIC-supervised
institution’s public Web site or may
provide the disclosures in more than
one public financial report or other
regulatory reports, provided that the
FDIC-supervised institution publicly
provides a summary table specifically
indicating the location(s) of all such
disclosures.
(b) An FDIC-supervised institution
described in § 324.61 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 FDICsupervised institution must attest that
the disclosures meet the requirements of
this subpart.
(c) If an FDIC-supervised institution
described in § 324.61 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
FDIC under the Freedom of Information
Act (5 U.S.C. 552), then the FDICsupervised institution 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.
§ 324.63 Disclosures by FDIC-supervised
institutions described in § 324.61.
(a) Except as provided in § 324.62, an
FDIC-supervised institution described
in § 324.61 must make the disclosures
described in Tables 1 through 10 of this
section. The FDIC-supervised institution
must make these disclosures publicly
available for each of the last three years
(that is, twelve quarters) or such shorter
period beginning on January 1, 2014.
(b) An FDIC-supervised institution
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 1 TO § 324.63—SCOPE OF APPLICATION
Qualitative Disclosures ..........................
(a) ................................
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(c) ................................
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(d) ................................
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The name of the top corporate entity in the group to which subpart D of this
part applies.
A brief description of the differences in the basis for consolidating entities 1
for accounting and regulatory purposes, with a description of those entities:
(1) That are fully consolidated;
(2) That are deconsolidated and deducted from total capital;
(3) For which the total capital requirement is deducted; and
(4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this
subpart).
Any restrictions, or other major impediments, on transfer of funds or total
capital within the group.
The aggregate amount of surplus capital of insurance subsidiaries included in
the total capital of the consolidated group.
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TABLE 1 TO § 324.63—SCOPE OF APPLICATION—Continued
(e) ................................
The aggregate amount by which actual total capital is less than the minimum
total capital requirement in all subsidiaries, with total capital requirements
and the name(s) of the subsidiaries with such deficiencies.
1 Entities include securities, insurance and other financial subsidiaries, commercial subsidiaries (where permitted), and significant minority equity investments in insurance, financial and commercial entities.
TABLE 2 TO § 324.63—CAPITAL STRUCTURE
Qualitative Disclosures ..........................
(a) ................................
Quantitative Disclosures .......................
(b) ................................
(c) ................................
(d) ................................
Summary information on the terms and conditions of the main features of all
regulatory capital instruments.
The amount of common equity tier 1 capital, with separate disclosure of:
(1) Common stock and related surplus;
(2) Retained earnings;
(3) Common equity minority interest;
(4) AOCI; and
(5) Regulatory adjustments and deductions made to common equity tier 1
capital.
The amount of tier 1 capital, with separate disclosure of:
(1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest not included in common equity tier 1 capital; and
(2) Regulatory adjustments and deductions made to tier 1 capital.
The amount of total capital, with separate disclosure of:
(1) Tier 2 capital elements, including tier 2 capital instruments and total capital minority interest not included in tier 1 capital; and
(2) Regulatory adjustments and deductions made to total capital.
TABLE 3 TO § 324.63—CAPITAL ADEQUACY
Qualitative disclosures ..........................
(a) ................................
Quantitative disclosures ........................
(b) ................................
(c) ................................
(d) ................................
(e) ................................
A summary discussion of the FDIC-supervised institution’s approach to assessing the adequacy of its capital to support current and future activities.
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.
Standardized market risk-weighted assets as calculated under subpart F of
this part.
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.
Total standardized risk-weighted assets.
TABLE 4 TO § 324.63—CAPITAL CONSERVATION BUFFER
Quantitative Disclosures .......................
(a) ................................
(b) ................................
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(c) ................................
(c) General qualitative disclosure
requirement. For each separate risk area
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At least quarterly, the FDIC-supervised institution must calculate and publicly
disclose the capital conservation buffer as described under § 324.11.
At least quarterly, the FDIC-supervised institution must calculate and publicly
disclose the eligible retained income of the FDIC-supervised institution, as
described under § 324.11.
At least quarterly, the FDIC-supervised institution must calculate and publicly
disclose any limitations it has on distributions and discretionary bonus payments resulting from the capital conservation buffer framework described
under § 324.11, including the maximum payout amount for the quarter.
described in Tables 5 through 10, the
FDIC-supervised institution must
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describe its risk management objectives
and policies, including: strategies and
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processes; the structure and
organization of the relevant risk
management function; the scope and
nature of risk reporting and/or
measurement systems; policies for
hedging and/or mitigating risk and
strategies and processes for monitoring
the continuing effectiveness of hedges/
mitigants.
TABLE 5 TO § 324.63—CREDIT RISK: GENERAL DISCLOSURES
Qualitative Disclosures ..........................
(a) ................................
Quantitative Disclosures .......................
(b) ................................
(c) ................................
(d) ................................
(e) ................................
(f) .................................
(g) ................................
(h) ................................
The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 6 to
§ 324.63), 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 FDIC-supervised institution uses
to estimate its allowance for loan and lease losses, including statistical
methods used where applicable;
(6) Policy for charging-off uncollectible amounts; and
(7) Discussion of the FDIC-supervised institution’s credit risk management
policy.
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, FDIC-supervised institutions could use categories similar to that used for financial statement purposes. Such categories might include, for instance:
(1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures;
(2) Debt securities; and
(3) OTC derivatives.2
Geographic distribution of exposures, categorized in significant areas by
major types of credit exposure.3
Industry or counterparty type distribution of exposures, categorized by major
types of credit exposure.
By major industry or counterparty type:
(1) Amount of impaired loans for which there was a related allowance under
GAAP;
(2) Amount of impaired loans for which there was no related allowance under
GAAP;
(3) Amount of loans past due 90 days and on nonaccrual;
(4) Amount of loans past due 90 days and still accruing; 4
(5) The balance in the allowance for loan and lease losses at the end of
each period, disaggregated on the basis of the FDIC-supervised institution’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.
Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic areas including, if practical, the amounts
of allowances related to each geographical area 5, further categorized as
required by GAAP.
Reconciliation of changes in ALLL.6
Remaining contractual maturity delineation (for example, one year or less) of
the whole portfolio, categorized by credit exposure.
1 Table
5 to § 324.63 does not cover equity exposures, which should be reported in Table 9 to § 324.63.
for example, ASC Topic 815–10 and 210, as they may be amended from time to time.
3 Geographical areas may consist of individual countries, groups of countries, or regions within countries. An FDIC-supervised institution might
choose to define the geographical areas based on the way the FDIC-supervised institution’s portfolio is geographically managed. The criteria
used to allocate the loans to geographical areas must be specified.
4 An FDIC-supervised institution is encouraged also to provide an analysis of the aging of past-due loans.
5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately.
6 The reconciliation should include the following: a description of the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between
allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement
should be disclosed separately.
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55521
TABLE 6 TO § 324.63—GENERAL DISCLOSURE FOR COUNTERPARTY CREDIT RISK-RELATED EXPOSURES
Qualitative Disclosures ..........................
(a) ................................
Quantitative Disclosures .......................
(b) ................................
(c) ................................
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 FDIC-supervised institution
would have to provide given a deterioration in the FDIC-supervised institution’s own creditworthiness.
Gross positive fair value of contracts, collateral held (including type, for example, cash, government securities), and net unsecured credit exposure.1
An FDIC-supervised institution also must disclose the notional value of
credit derivative hedges purchased for counterparty credit risk protection
and the distribution of current credit exposure by exposure type.2
Notional amount of purchased and sold credit derivatives, segregated between use for the FDIC-supervised institution’s own credit portfolio and in
its intermediation activities, including the distribution of the credit derivative
products used, categorized further by protection bought and sold within
each product group.
1 Net unsecured credit exposure is the credit exposure after considering both the benefits from legally enforceable netting agreements and collateral arrangements without taking into account haircuts for price volatility, liquidity, etc.
2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.
TABLE 7 TO § 324.63—CREDIT RISK MITIGATION 1 2
Qualitative Disclosures ..........................
(a) ................................
Quantitative Disclosures .......................
(b) ................................
(c) ................................
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 FDIC-supervised
institution;
(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.
For each separately disclosed credit risk portfolio, the total exposure that is
covered by eligible financial collateral, and after the application of haircuts.
For each separately disclosed portfolio, the total exposure that is covered by
guarantees/credit derivatives and the risk-weighted asset amount associated with that exposure.
1 At a minimum, an FDIC-supervised institution must provide the disclosures in Table 7 in relation to credit risk mitigation that has been recognized for the purposes of reducing capital requirements under this subpart. Where relevant, FDIC-supervised institutions are encouraged to give
further information about mitigants that have not been recognized for that purpose.
2 Credit derivatives that are treated, for the purposes of this subpart, as synthetic securitization exposures should be excluded from the credit
risk mitigation disclosures and included within those relating to securitization (Table 8 to § 324.63).
TABLE 8 TO § 324.63—SECURITIZATION
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(a) ....................................
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The general qualitative disclosure requirement with respect to a
securitization (including synthetic securitizations), including a discussion of:
(1) The FDIC-supervised institution’s objectives for securitizing assets, including the extent to which these activities transfer credit
risk of the underlying exposures away from the FDIC-supervised institution to other entities and including the type of risks assumed
and retained with resecuritization activity;1
(2) The nature of the risks (e.g. liquidity risk) inherent in the
securitized assets;
(3) The roles played by the FDIC-supervised institution in the
securitization process 2 and an indication of the extent of the FDICsupervised institution’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 FDIC-supervised institution’s policy for mitigating the credit
risk retained through securitization and resecuritization exposures;
and
(6) The risk-based capital approaches that the FDIC-supervised institution follows for its securitization exposures including the type of
securitization exposure to which each approach applies.
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TABLE 8 TO § 324.63—SECURITIZATION—Continued
(b) ....................................
(c) .....................................
(d) ....................................
Quantitative Disclosures ...............................
(e) ....................................
(f) .....................................
(g) ....................................
(h) ....................................
(i) ......................................
(j) ......................................
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(k) .....................................
A list of:
(1) The type of securitization SPEs that the FDIC-supervised institution, as sponsor, uses to securitize third-party exposures. The
FDIC-supervised institution must indicate whether it has exposure
to these SPEs, either on- or off-balance sheet; and
(2) Affiliated entities:
(i) That the FDIC-supervised institution manages or advises; and
(ii) That invest either in the securitization exposures that the FDIC-supervised institution has securitized or in securitization SPEs that the
FDIC-supervised institution sponsors.3
Summary of the FDIC-supervised institution’s accounting policies for
securitization activities, including:
(1) Whether the transactions are treated as sales or financings;
(2) Recognition of gain-on-sale;
(3) Methods and key assumptions applied in valuing retained or purchased interests;
(4) Changes in methods and key assumptions from the previous period for valuing retained interests and impact of the changes;
(5) Treatment of synthetic securitizations;
(6) How exposures intended to be securitized are valued and whether
they are recorded under subpart D of this part; and
(7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the FDIC-supervised institution to provide
financial support for securitized assets.
An explanation of significant changes to any quantitative information
since the last reporting period.
The total outstanding exposures securitized by the FDIC-supervised
institution in securitizations that meet the operational criteria provided in § 324.41 (categorized into traditional and synthetic
securitizations), by exposure type, separately for securitizations of
third-party exposures for which the FDIC-supervised institution acts
only as sponsor.4
For exposures securitized by the FDIC-supervised institution in
securitizations that meet the operational criteria in § 324.41:
(1) Amount of securitized assets that are impaired/past due categorized by exposure type; 5 and
(2) Losses recognized by the FDIC-supervised institution during the
current period categorized by exposure type.6
The total amount of outstanding exposures intended to be securitized
categorized by exposure type.
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.
(1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight
bands and by risk-based capital approach (e.g., SSFA); and
(2) Exposures that have been deducted entirely from tier 1 capital,
CEIOs deducted from total capital (as described in § 324.42(a)(1)),
and other exposures deducted from total capital should be disclosed separately by exposure type.
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.
Aggregate amount of resecuritization exposures retained or purchased categorized according to:
(1) Exposures to which credit risk mitigation is applied and those not
applied; and
(2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name.
1 The FDIC-supervised institution 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 FDIC-supervised institution is active.
2 For example, these roles may include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity provider, or swap provider.
3 Such affiliated entities may include, for example, money market funds, to be listed individually, and personal and private trusts, to be noted
collectively.
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4 ‘‘Exposures securitized’’ include underlying exposures originated by the FDIC-supervised institution, 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 FDIC-supervised institution’s balance sheet and underlying exposures acquired by
the FDIC-supervised institution 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. FDIC-supervised institutions are required to disclose exposures regardless
of whether there is a capital charge under this part.
5 Include credit-related other than temporary impairment (OTTI).
6 For example, charge-offs/allowances (if the assets remain on the FDIC-supervised institution’s balance sheet) or credit-related OTTI of interest-only strips and other retained residual interests, as well as recognition of liabilities for probable future financial support required of the FDICsupervised institution with respect to securitized assets.
TABLE 9 TO § 324.63—EQUITIES NOT SUBJECT TO SUBPART F OF THIS PART
Qualitative Disclosures ..........................
(a) ................................
Quantitative Disclosures .......................
(b) ................................
(c) ................................
(d) ................................
(e) ................................
(f) .................................
1
2
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.
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.
The types and nature of investments, including the amount that is:
(1) Publicly traded; and
(2) Non publicly traded.
The cumulative realized gains (losses) arising from sales and liquidations in
the reporting period.
(1) Total unrealized gains (losses).1
(2) Total latent revaluation gains (losses).2
(3) Any amounts of the above included in tier 1 or tier 2 capital.
Capital requirements categorized by appropriate equity groupings, consistent
with the FDIC-supervised institution’s methodology, as well as the aggregate amounts and the type of equity investments subject to any supervisory transition regarding regulatory capital requirements.
Unrealized gains (losses) recognized on the balance sheet but not through earnings.
Unrealized gains (losses) not recognized either on the balance sheet or through earnings.
TABLE 10 TO § 324.63—INTEREST RATE RISK FOR NON-TRADING ACTIVITIES
Qualitative disclosures ..........................
(a) ................................
Quantitative disclosures ........................
(b) ................................
§§ 324.64 through 324.99
[Reserved]
Subpart E—Risk-Weighted Assets—
Internal Ratings-Based and Advanced
Measurement Approaches
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§ 324.100 Purpose, applicability, and
principle of conservatism.
(a) Purpose. This subpart E
establishes:
(1) Minimum qualifying criteria for
FDIC-supervised institutions using
institution-specific internal risk
measurement and management
processes for calculating risk-based
capital requirements; and
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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.
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).
(2) Methodologies for such FDICsupervised institutions to calculate their
total risk-weighted assets.
(b) Applicability. (1) This subpart
applies to an FDIC-supervised
institution that:
(i) Has consolidated total assets, as
reported on its most recent year-end
Call Report equal to $250 billion or
more;
(ii) Has consolidated total on-balance
sheet foreign exposure on its most
recent year-end Call Report equal to $10
billion or more (where total on-balance
sheet foreign exposure equals total
cross-border claims less claims with a
head office or guarantor located in
another country plus redistributed
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guaranteed amounts to the country of
head office or guarantor plus local
country claims on local residents plus
revaluation gains on foreign exchange
and derivative products, calculated in
accordance with the Federal Financial
Institutions Examination Council
(FFIEC) 009 Country Exposure Report);
(iii) Is a subsidiary of a depository
institution that uses this subpart or the
advanced approaches pursuant to
subpart E of 12 CFR part 3 (OCC), or 12
CFR part 217 (Federal Reserve) to
calculate its total risk-weighted assets;
(iv) Is a subsidiary of a bank holding
company or savings and loan holding
company that uses the advanced
approaches pursuant to 12 CFR part 217
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to calculate its total risk-weighted
assets; or
(v) Elects to use this subpart to
calculate its total risk-weighted assets.
(2) An FDIC-supervised institution
that is subject to this subpart shall
remain subject to this subpart unless the
FDIC determines in writing that
application of this subpart is not
appropriate in light of the FDICsupervised institution’s asset size, level
of complexity, risk profile, or scope of
operations. In making a determination
under this paragraph (b), the FDIC will
apply notice and response procedures in
the same manner and to the same extent
as the notice and response procedures
in § 324.5.
(3) A market risk FDIC-supervised
institution 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-thecounter derivative positions, cleared
transactions, and unsettled
transactions).
(c) Principle of conservatism.
Notwithstanding the requirements of
this subpart, an FDIC-supervised
institution may choose not to apply a
provision of this subpart to one or more
exposures provided that:
(1) The FDIC-supervised institution
can demonstrate on an ongoing basis to
the satisfaction of the FDIC that not
applying the provision would, in all
circumstances, unambiguously generate
a risk-based capital requirement for each
such exposure greater than that which
would otherwise be required under this
subpart;
(2) The FDIC-supervised institution
appropriately manages the risk of each
such exposure;
(3) The FDIC-supervised institution
notifies the FDIC in writing prior to
applying this principle to each such
exposure; and
(4) The exposures to which the FDICsupervised institution applies this
principle are not, in the aggregate,
material to the FDIC-supervised
institution.
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§ 324.101
Definitions.
(a) Terms that are set forth in § 324.2
and used in this subpart have the
definitions assigned thereto in § 324.2.
(b) For the purposes of this subpart,
the following terms are defined as
follows:
Advanced internal ratings-based (IRB)
systems means an advanced approaches
FDIC-supervised institution’s internal
risk rating and segmentation system;
risk parameter quantification system;
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data management and maintenance
system; and control, oversight, and
validation system for credit risk of
wholesale and retail exposures.
Advanced systems means an
advanced approaches FDIC-supervised
institution’s advanced IRB systems,
operational risk management processes,
operational risk data and assessment
systems, operational risk quantification
systems, and, to the extent used by the
FDIC-supervised institution, the internal
models methodology, advanced CVA
approach, double default excessive
correlation detection process, and
internal models approach (IMA) for
equity exposures.
Backtesting means the comparison of
an FDIC-supervised institution’s
internal estimates with actual outcomes
during a sample period not used in
model development. In this context,
backtesting is one form of out-of-sample
testing.
Benchmarking means the comparison
of an FDIC-supervised institution’s
internal estimates with relevant internal
and external data or with estimates
based on other estimation techniques.
Bond option contract means a bond
option, bond future, or any other
instrument linked to a bond that gives
rise to similar counterparty credit risk.
Business environment and internal
control factors means the indicators of
an FDIC-supervised institution’s
operational risk profile that reflect a
current and forward-looking assessment
of the FDIC-supervised institution’s
underlying business risk factors and
internal control environment.
Credit default swap (CDS) means a
financial contract executed under
standard industry documentation that
allows one party (the protection
purchaser) to transfer the credit risk of
one or more exposures (reference
exposure(s)) to another party (the
protection provider) for a certain period
of time.
Credit valuation adjustment (CVA)
means the fair value adjustment to
reflect counterparty credit risk in
valuation of OTC derivative contracts.
Default—For the purposes of
calculating capital requirements under
this subpart:
(1) Retail. (i) A retail exposure of an
FDIC-supervised institution is in default
if:
(A) The exposure is 180 days past
due, in the case of a residential
mortgage exposure or revolving
exposure;
(B) The exposure is 120 days past due,
in the case of retail exposures that are
not residential mortgage exposures or
revolving exposures; or
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(C) The FDIC-supervised institution
has taken a full or partial charge-off,
write-down of principal, or material
negative fair value adjustment of
principal on the exposure for creditrelated reasons.
(ii) Notwithstanding paragraph (1)(i)
of this definition, for a retail exposure
held by a non-U.S. subsidiary of the
FDIC-supervised institution that is
subject to an internal ratings-based
approach to capital adequacy consistent
with the Basel Committee on Banking
Supervision’s ‘‘International
Convergence of Capital Measurement
and Capital Standards: A Revised
Framework’’ in a non-U.S. jurisdiction,
the FDIC-supervised institution may
elect to use the definition of default that
is used in that jurisdiction, provided
that the FDIC-supervised institution has
obtained prior approval from the FDIC
to use the definition of default in that
jurisdiction.
(iii) A retail exposure in default
remains in default until the FDICsupervised institution has reasonable
assurance of repayment and
performance for all contractual
principal and interest payments on the
exposure.
(2) Wholesale. (i) An FDIC-supervised
institution’s wholesale obligor is in
default if:
(A) The FDIC-supervised institution
determines that the obligor is unlikely
to pay its credit obligations to the FDICsupervised institution in full, without
recourse by the FDIC-supervised
institution to actions such as realizing
collateral (if held); or
(B) The obligor is past due more than
90 days on any material credit
obligation(s) to the FDIC-supervised
institution.25
(ii) An obligor in default remains in
default until the FDIC-supervised
institution has reasonable assurance of
repayment and performance for all
contractual principal and interest
payments on all exposures of the FDICsupervised institution to the obligor
(other than exposures that have been
fully written-down or charged-off).
Dependence means a measure of the
association among operational losses
across and within units of measure.
Economic downturn conditions
means, with respect to an exposure held
by the FDIC-supervised institution,
those conditions in which the aggregate
default rates for that exposure’s
wholesale or retail exposure subcategory
(or subdivision of such subcategory
selected by the FDIC-supervised
25 Overdrafts are past due once the obligor has
breached an advised limit or been advised of a limit
smaller than the current outstanding balance.
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institution) in the exposure’s national
jurisdiction (or subdivision of such
jurisdiction selected by the FDICsupervised institution) are significantly
higher than average.
Effective maturity (M) of a wholesale
exposure means:
(1) For wholesale exposures other
than repo-style transactions, eligible
margin loans, and OTC derivative
contracts described in paragraph (2) or
(3) of this definition:
(i) The weighted-average remaining
maturity (measured in years, whole or
fractional) of the expected contractual
cash flows from the exposure, using the
undiscounted amounts of the cash flows
as weights; or
(ii) The nominal remaining maturity
(measured in years, whole or fractional)
of the exposure.
(2) For repo-style transactions, eligible
margin loans, and OTC derivative
contracts subject to a qualifying master
netting agreement for which the FDICsupervised institution does not apply
the internal models approach in
§ 324.132(d), the weighted-average
remaining maturity (measured in years,
whole or fractional) of the individual
transactions subject to the qualifying
master netting agreement, with the
weight of each individual transaction
set equal to the notional amount of the
transaction.
(3) For repo-style transactions, eligible
margin loans, and OTC derivative
contracts for which the FDIC-supervised
institution applies the internal models
approach in § 324.132(d), the value
determined in § 324.132(d)(4).
Eligible double default guarantor,
with respect to a guarantee or credit
derivative obtained by an FDICsupervised institution, means:
(1) U.S.-based entities. A depository
institution, a bank holding company, a
savings and loan holding company, or a
securities broker or dealer registered
with the SEC under the Securities
Exchange Act, if at the time the
guarantee is issued or anytime
thereafter, has issued and outstanding
an unsecured debt security without
credit enhancement that is investment
grade.
(2) Non-U.S.-based entities. A foreign
bank, or a non-U.S.-based securities firm
if the FDIC-supervised institution
demonstrates that the guarantor is
subject to consolidated supervision and
regulation comparable to that imposed
on U.S. depository institutions (or
securities broker-dealers), if at the time
the guarantee is issued or anytime
thereafter, has issued and outstanding
an unsecured debt security without
credit enhancement that is investment
grade.
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Eligible operational risk offsets means
amounts, not to exceed expected
operational loss, that:
(1) Are generated by internal business
practices to absorb highly predictable
and reasonably stable operational losses,
including reserves calculated consistent
with GAAP; and
(2) Are available to cover expected
operational losses with a high degree of
certainty over a one-year horizon.
Eligible purchased wholesale
exposure means a purchased wholesale
exposure that:
(1) The FDIC-supervised institution or
securitization SPE purchased from an
unaffiliated seller and did not directly
or indirectly originate;
(2) Was generated on an arm’s-length
basis between the seller and the obligor
(intercompany accounts receivable and
receivables subject to contra-accounts
between firms that buy and sell to each
other do not satisfy this criterion);
(3) Provides the FDIC-supervised
institution or securitization SPE with a
claim on all proceeds from the exposure
or a pro rata interest in the proceeds
from the exposure;
(4) Has an M of less than one year;
and
(5) When consolidated by obligor,
does not represent a concentrated
exposure relative to the portfolio of
purchased wholesale exposures.
Expected exposure (EE) means the
expected value of the probability
distribution of non-negative credit risk
exposures to a counterparty at any
specified future date before the maturity
date of the longest term transaction in
the netting set. Any negative fair values
in the probability distribution of fair
values to a counterparty at a specified
future date are set to zero to convert the
probability distribution of fair values to
the probability distribution of credit risk
exposures.
Expected operational loss (EOL)
means the expected value of the
distribution of potential aggregate
operational losses, as generated by the
FDIC-supervised institution’s
operational risk quantification system
using a one-year horizon.
Expected positive exposure (EPE)
means the weighted average over time of
expected (non-negative) exposures to a
counterparty where the weights are the
proportion of the time interval that an
individual expected exposure
represents. When calculating risk-based
capital requirements, the average is
taken over a one-year horizon.
Exposure at default (EAD) means:
(1) For the on-balance sheet
component of a wholesale exposure or
segment of retail exposures (other than
an OTC derivative contract, a repo-style
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transaction or eligible margin loan for
which the FDIC-supervised institution
determines EAD under § 324.132, a
cleared transaction, or default fund
contribution), EAD means the FDICsupervised institution’s carrying value
(including net accrued but unpaid
interest and fees) for the exposure or
segment less any allocated transfer risk
reserve for the exposure or segment.
(2) For the off-balance sheet
component of a wholesale exposure or
segment of retail exposures (other than
an OTC derivative contract, a repo-style
transaction or eligible margin loan for
which the FDIC-supervised institution
determines EAD under § 324.132,
cleared transaction, or default fund
contribution) in the form of a loan
commitment, line of credit, trade-related
letter of credit, or transaction-related
contingency, EAD means the FDICsupervised institution’s best estimate of
net additions to the outstanding amount
owed the FDIC-supervised institution,
including estimated future additional
draws of principal and accrued but
unpaid interest and fees, that are likely
to occur over a one-year horizon
assuming the wholesale exposure or the
retail exposures in the segment were to
go into default. This estimate of net
additions must reflect what would be
expected during economic downturn
conditions. For the purposes of this
definition:
(i) Trade-related letters of credit are
short-term, self-liquidating instruments
that are used to finance the movement
of goods and are collateralized by the
underlying goods.
(ii) Transaction-related contingencies
relate to a particular transaction and
include, among other things,
performance bonds and performancebased letters of credit.
(3) For the off-balance sheet
component of a wholesale exposure or
segment of retail exposures (other than
an OTC derivative contract, a repo-style
transaction, or eligible margin loan for
which the FDIC-supervised institution
determines EAD under § 324.132,
cleared transaction, or default fund
contribution) in the form of anything
other than a loan commitment, line of
credit, trade-related letter of credit, or
transaction-related contingency, EAD
means the notional amount of the
exposure or segment.
(4) EAD for OTC derivative contracts
is calculated as described in § 324.132.
An FDIC-supervised institution also
may determine EAD for repo-style
transactions and eligible margin loans as
described in § 324.132.
Exposure category means any of the
wholesale, retail, securitization, or
equity exposure categories.
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External operational loss event data
means, with respect to an FDICsupervised institution, gross operational
loss amounts, dates, recoveries, and
relevant causal information for
operational loss events occurring at
organizations other than the FDICsupervised institution.
IMM exposure means a repo-style
transaction, eligible margin loan, or
OTC derivative for which an FDICsupervised institution calculates its
EAD using the internal models
methodology of § 324.132(d).
Internal operational loss event data
means, with respect to an FDICsupervised institution, gross operational
loss amounts, dates, recoveries, and
relevant causal information for
operational loss events occurring at the
FDIC-supervised institution.
Loss given default (LGD) means:
(1) For a wholesale exposure, the
greatest of:
(i) Zero;
(ii) The FDIC-supervised institution’s
empirically based best estimate of the
long-run default-weighted average
economic loss, per dollar of EAD, the
FDIC-supervised institution would
expect to incur if the obligor (or a
typical obligor in the loss severity grade
assigned by the FDIC-supervised
institution to the exposure) were to
default within a one-year horizon over
a mix of economic conditions, including
economic downturn conditions; or
(iii) The FDIC-supervised institution’s
empirically based best estimate of the
economic loss, per dollar of EAD, the
FDIC-supervised institution would
expect to incur if the obligor (or a
typical obligor in the loss severity grade
assigned by the FDIC-supervised
institution to the exposure) were to
default within a one-year horizon
during economic downturn conditions.
(2) For a segment of retail exposures,
the greatest of:
(i) Zero;
(ii) The FDIC-supervised institution’s
empirically based best estimate of the
long-run default-weighted average
economic loss, per dollar of EAD, the
FDIC-supervised institution would
expect to incur if the exposures in the
segment were to default within a oneyear horizon over a mix of economic
conditions, including economic
downturn conditions; or
(iii) The FDIC-supervised institution’s
empirically based best estimate of the
economic loss, per dollar of EAD, the
FDIC-supervised institution would
expect to incur if the exposures in the
segment were to default within a oneyear horizon during economic downturn
conditions.
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(3) The economic loss on an exposure
in the event of default is all material
credit-related losses on the exposure
(including accrued but unpaid interest
or fees, losses on the sale of collateral,
direct workout costs, and an appropriate
allocation of indirect workout costs).
Where positive or negative cash flows
on a wholesale exposure to a defaulted
obligor or a defaulted retail exposure
(including proceeds from the sale of
collateral, workout costs, additional
extensions of credit to facilitate
repayment of the exposure, and drawdowns of unused credit lines) occur
after the date of default, the economic
loss must reflect the net present value
of cash flows as of the default date using
a discount rate appropriate to the risk of
the defaulted exposure.
Obligor means the legal entity or
natural person contractually obligated
on a wholesale exposure, except that an
FDIC-supervised institution may treat
the following exposures as having
separate obligors:
(1) Exposures to the same legal entity
or natural person denominated in
different currencies;
(2)(i) An income-producing real estate
exposure for which all or substantially
all of the repayment of the exposure is
reliant on the cash flows of the real
estate serving as collateral for the
exposure; the FDIC-supervised
institution, in economic substance, does
not have recourse to the borrower
beyond the real estate collateral; and no
cross-default or cross-acceleration
clauses are in place other than clauses
obtained solely out of an abundance of
caution; and
(ii) Other credit exposures to the same
legal entity or natural person; and
(3)(i) A wholesale exposure
authorized under section 364 of the U.S.
Bankruptcy Code (11 U.S.C. 364) to a
legal entity or natural person who is a
debtor-in-possession for purposes of
Chapter 11 of the Bankruptcy Code; and
(ii) Other credit exposures to the same
legal entity or natural person.
Operational loss means a loss
(excluding insurance or tax effects)
resulting from an operational loss event.
Operational loss includes all expenses
associated with an operational loss
event except for opportunity costs,
forgone revenue, and costs related to
risk management and control
enhancements implemented to prevent
future operational losses.
Operational loss event means an event
that results in loss and is associated
with any of the following seven
operational loss event type categories:
(1) Internal fraud, which means the
operational loss event type category that
comprises operational losses resulting
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from an act involving at least one
internal party of a type intended to
defraud, misappropriate property, or
circumvent regulations, the law, or
company policy excluding diversityand discrimination-type events.
(2) External fraud, which means the
operational loss event type category that
comprises operational losses resulting
from an act by a third party of a type
intended to defraud, misappropriate
property, or circumvent the law. Retail
credit card losses arising from noncontractual, third-party-initiated fraud
(for example, identity theft) are external
fraud operational losses. All other thirdparty-initiated credit losses are to be
treated as credit risk losses.
(3) Employment practices and
workplace safety, which means the
operational loss event type category that
comprises operational losses resulting
from an act inconsistent with
employment, health, or safety laws or
agreements, payment of personal injury
claims, or payment arising from
diversity- and discrimination-type
events.
(4) Clients, products, and business
practices, which means the operational
loss event type category that comprises
operational losses resulting from the
nature or design of a product or from an
unintentional or negligent failure to
meet a professional obligation to
specific clients (including fiduciary and
suitability requirements).
(5) Damage to physical assets, which
means the operational loss event type
category that comprises operational
losses resulting from the loss of or
damage to physical assets from natural
disaster or other events.
(6) Business disruption and system
failures, which means the operational
loss event type category that comprises
operational losses resulting from
disruption of business or system
failures.
(7) Execution, delivery, and process
management, which means the
operational loss event type category that
comprises operational losses resulting
from failed transaction processing or
process management or losses arising
from relations with trade counterparties
and vendors.
Operational risk means the risk of loss
resulting from inadequate or failed
internal processes, people, and systems
or from external events (including legal
risk but excluding strategic and
reputational risk).
Operational risk exposure means the
99.9th percentile of the distribution of
potential aggregate operational losses, as
generated by the FDIC-supervised
institution’s operational risk
quantification system over a one-year
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horizon (and not incorporating eligible
operational risk offsets or qualifying
operational risk mitigants).
Other retail exposure means an
exposure (other than a securitization
exposure, an equity exposure, a
residential mortgage exposure, a presold construction loan, a qualifying
revolving exposure, or the residual
value portion of a lease exposure) that
is managed as part of a segment of
exposures with homogeneous risk
characteristics, not on an individualexposure basis, and is either:
(1) An exposure to an individual for
non-business purposes; or
(2) An exposure to an individual or
company for business purposes if the
FDIC-supervised institution’s
consolidated business credit exposure to
the individual or company is $1 million
or less.
Probability of default (PD) means:
(1) For a wholesale exposure to a nondefaulted obligor, the FDIC-supervised
institution’s empirically based best
estimate of the long-run average oneyear default rate for the rating grade
assigned by the FDIC-supervised
institution to the obligor, capturing the
average default experience for obligors
in the rating grade over a mix of
economic conditions (including
economic downturn conditions)
sufficient to provide a reasonable
estimate of the average one-year default
rate over the economic cycle for the
rating grade.
(2) For a segment of non-defaulted
retail exposures, the FDIC-supervised
institution’s empirically based best
estimate of the long-run average oneyear default rate for the exposures in the
segment, capturing the average default
experience for exposures in the segment
over a mix of economic conditions
(including economic downturn
conditions) sufficient to provide a
reasonable estimate of the average oneyear default rate over the economic
cycle for the segment.
(3) For a wholesale exposure to a
defaulted obligor or segment of
defaulted retail exposures, 100 percent.
Qualifying cross-product master
netting agreement means a qualifying
master netting agreement that provides
for termination and close-out netting
across multiple types of financial
transactions or qualifying master netting
agreements in the event of a
counterparty’s default, provided that the
underlying financial transactions are
OTC derivative contracts, eligible
margin loans, or repo-style transactions.
In order to treat an agreement as a
qualifying cross-product master netting
agreement for purposes of this subpart,
an FDIC-supervised institution must
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comply with the requirements of
§ 324.3(c) of this part with respect to
that agreement.
Qualifying revolving exposure (QRE)
means an exposure (other than a
securitization exposure or equity
exposure) to an individual that is
managed as part of a segment of
exposures with homogeneous risk
characteristics, not on an individualexposure basis, and:
(1) Is revolving (that is, the amount
outstanding fluctuates, determined
largely by a borrower’s decision to
borrow and repay up to a preestablished maximum amount, except
for an outstanding amount that the
borrower is required to pay in full every
month);
(2) Is unsecured and unconditionally
cancelable by the FDIC-supervised
institution to the fullest extent
permitted by Federal law; and
(3)(i) Has a maximum contractual
exposure amount (drawn plus undrawn)
of up to $100,000; or
(ii) With respect to a product with an
outstanding amount that the borrower is
required to pay in full every month, the
total outstanding amount does not in
practice exceed $100,000.
(4) A segment of exposures that
contains one or more exposures that
fails to meet paragraph (3)(ii) of this
definition must be treated as a segment
of other retail exposures for the 24
month period following the month in
which the total outstanding amount of
one or more exposures individually
exceeds $100,000.
Retail exposure means a residential
mortgage exposure, a qualifying
revolving exposure, or an other retail
exposure.
Retail exposure subcategory means
the residential mortgage exposure,
qualifying revolving exposure, or other
retail exposure subcategory.
Risk parameter means a variable used
in determining risk-based capital
requirements for wholesale and retail
exposures, specifically probability of
default (PD), loss given default (LGD),
exposure at default (EAD), or effective
maturity (M).
Scenario analysis means a systematic
process of obtaining expert opinions
from business managers and risk
management experts to derive reasoned
assessments of the likelihood and loss
impact of plausible high-severity
operational losses. Scenario analysis
may include the well-reasoned
evaluation and use of external
operational loss event data, adjusted as
appropriate to ensure relevance to an
FDIC-supervised institution’s
operational risk profile and control
structure.
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Total wholesale and retail riskweighted assets means the sum of:
(1) Risk-weighted assets for wholesale
exposures that are not IMM exposures,
cleared transactions, or default fund
contributions to non-defaulted obligors
and segments of non-defaulted retail
exposures;
(2) Risk-weighted assets for wholesale
exposures to defaulted obligors and
segments of defaulted retail exposures;
(3) Risk-weighted assets for assets not
defined by an exposure category;
(4) Risk-weighted assets for nonmaterial portfolios of exposures;
(5) Risk-weighted assets for IMM
exposures (as determined in
§ 324.132(d));
(6) Risk-weighted assets for cleared
transactions and risk-weighted assets for
default fund contributions (as
determined in § 324.133); and
(7) Risk-weighted assets for unsettled
transactions (as determined in
§ 324.136).
Unexpected operational loss (UOL)
means the difference between the FDICsupervised institution’s operational risk
exposure and the FDIC-supervised
institution’s expected operational loss.
Unit of measure means the level (for
example, organizational unit or
operational loss event type) at which the
FDIC-supervised institution’s
operational risk quantification system
generates a separate distribution of
potential operational losses.
Wholesale exposure means a credit
exposure to a company, natural person,
sovereign, or governmental entity (other
than a securitization exposure, retail
exposure, pre-sold construction loan, or
equity exposure).
Wholesale exposure subcategory
means the HVCRE or non-HVCRE
wholesale exposure subcategory.
§§ 324.102 through 324.120
[Reserved]
Qualification
§ 324.121
Qualification process.
(a) Timing. (1) An FDIC-supervised
institution that is described in
§ 324.100(b)(1)(i) through (iv) must
adopt a written implementation plan no
later than six months after the date the
FDIC-supervised institution meets a
criterion in that section. The
implementation plan must incorporate
an explicit start date no later than 36
months after the date the FDICsupervised institution meets at least one
criterion under § 324.100(b)(1)(i)
through (iv). The FDIC may extend the
start date.
(2) An FDIC-supervised institution
that elects to be subject to this subpart
under § 324.100(b)(1)(v) must adopt a
written implementation plan.
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(b) Implementation plan. (1) The
FDIC-supervised institution’s
implementation plan must address in
detail how the FDIC-supervised
institution complies, or plans to
comply, with the qualification
requirements in § 324.122. The FDICsupervised institution also must
maintain a comprehensive and sound
planning and governance process to
oversee the implementation efforts
described in the plan. At a minimum,
the plan must:
(i) Comprehensively address the
qualification requirements in § 324.122
for the FDIC-supervised institution and
each consolidated subsidiary (U.S. and
foreign-based) of the FDIC-supervised
institution with respect to all portfolios
and exposures of the FDIC-supervised
institution and each of its consolidated
subsidiaries;
(ii) Justify and support any proposed
temporary or permanent exclusion of
business lines, portfolios, or exposures
from the application of the advanced
approaches in this subpart (which
business lines, portfolios, and exposures
must be, in the aggregate, immaterial to
the FDIC-supervised institution);
(iii) Include the FDIC-supervised
institution’s self-assessment of:
(A) The FDIC-supervised institution’s
current status in meeting the
qualification requirements in § 324.122;
and
(B) The consistency of the FDICsupervised institution’s current
practices with the FDIC’s supervisory
guidance on the qualification
requirements;
(iv) Based on the FDIC-supervised
institution’s self-assessment, identify
and describe the areas in which the
FDIC-supervised institution proposes to
undertake additional work to comply
with the qualification requirements in
§ 324.122 or to improve the consistency
of the FDIC-supervised institution’s
current practices with the FDIC’s
supervisory guidance on the
qualification requirements (gap
analysis);
(v) Describe what specific actions the
FDIC-supervised institution will take to
address the areas identified in the gap
analysis required by paragraph (b)(1)(iv)
of this section;
(vi) Identify objective, measurable
milestones, including delivery dates and
a date when the FDIC-supervised
institution’s implementation of the
methodologies described in this subpart
will be fully operational;
(vii) Describe resources that have been
budgeted and are available to
implement the plan; and
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(viii) Receive approval of the FDICsupervised institution’s board of
directors.
(2) The FDIC-supervised institution
must submit the implementation plan,
together with a copy of the minutes of
the board of directors’ approval, to the
FDIC at least 60 days before the FDICsupervised institution proposes to begin
its parallel run, unless the FDIC waives
prior notice.
(c) Parallel run. Before determining its
risk-weighted assets under this subpart
and following adoption of the
implementation plan, the FDICsupervised institution must conduct a
satisfactory parallel run. A satisfactory
parallel run is a period of no less than
four consecutive calendar quarters
during which the FDIC-supervised
institution complies with the
qualification requirements in § 324.122
to the satisfaction of the FDIC. During
the parallel run, the FDIC-supervised
institution must report to the FDIC on
a calendar quarterly basis its risk-based
capital ratios determined in accordance
with § 324.10(b)(1) through (3) and
§ 324.10(c)(1) through (3). During this
period, the FDIC-supervised
institution’s minimum risk-based
capital ratios are determined as set forth
in subpart D of this part.
(d) Approval to calculate risk-based
capital requirements under this subpart.
The FDIC will notify the FDICsupervised institution of the date that
the FDIC-supervised institution must
begin to use this subpart for purposes of
§ 324.10 if the FDIC determines that:
(1) The FDIC-supervised institution
fully complies with all the qualification
requirements in § 324.122;
(2) The FDIC-supervised institution
has conducted a satisfactory parallel run
under paragraph (c) of this section; and
(3) The FDIC-supervised institution
has an adequate process to ensure
ongoing compliance with the
qualification requirements in § 324.122.
§ 324.122
Qualification requirements.
(a) Process and systems requirements.
(1) An FDIC-supervised institution must
have a rigorous process for assessing its
overall capital adequacy in relation to
its risk profile and a comprehensive
strategy for maintaining an appropriate
level of capital.
(2) The systems and processes used by
an FDIC-supervised institution for riskbased capital purposes under this
subpart must be consistent with the
FDIC-supervised institution’s internal
risk management processes and
management information reporting
systems.
(3) Each FDIC-supervised institution
must have an appropriate infrastructure
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with risk measurement and management
processes that meet the qualification
requirements of this section and are
appropriate given the FDIC-supervised
institution’s size and level of
complexity. Regardless of whether the
systems and models that generate the
risk parameters necessary for calculating
an FDIC-supervised institution’s riskbased capital requirements are located
at any affiliate of the FDIC-supervised
institution, the FDIC-supervised
institution itself must ensure that the
risk parameters and reference data used
to determine its risk-based capital
requirements are representative of its
own credit risk and operational risk
exposures.
(b) Risk rating and segmentation
systems for wholesale and retail
exposures. (1) An FDIC-supervised
institution must have an internal risk
rating and segmentation system that
accurately and reliably differentiates
among degrees of credit risk for the
FDIC-supervised institution’s wholesale
and retail exposures.
(2) For wholesale exposures:
(i) An FDIC-supervised institution
must have an internal risk rating system
that accurately and reliably assigns each
obligor to a single rating grade
(reflecting the obligor’s likelihood of
default). An FDIC-supervised institution
may elect, however, not to assign to a
rating grade an obligor to whom the
FDIC-supervised institution extends
credit based solely on the financial
strength of a guarantor, provided that all
of the FDIC-supervised institution’s
exposures to the obligor are fully
covered by eligible guarantees, the
FDIC-supervised institution applies the
PD substitution approach in
§ 324.134(c)(1) to all exposures to that
obligor, and the FDIC-supervised
institution immediately assigns the
obligor to a rating grade if a guarantee
can no longer be recognized under this
part. The FDIC-supervised institution’s
wholesale obligor rating system must
have at least seven discrete rating grades
for non-defaulted obligors and at least
one rating grade for defaulted obligors.
(ii) Unless the FDIC-supervised
institution has chosen to directly assign
LGD estimates to each wholesale
exposure, the FDIC-supervised
institution must have an internal risk
rating system that accurately and
reliably assigns each wholesale
exposure to a loss severity rating grade
(reflecting the FDIC-supervised
institution’s estimate of the LGD of the
exposure). An FDIC-supervised
institution employing loss severity
rating grades must have a sufficiently
granular loss severity grading system to
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avoid grouping together exposures with
widely ranging LGDs.
(3) For retail exposures, an FDICsupervised institution must have an
internal system that groups retail
exposures into the appropriate retail
exposure subcategory, groups the retail
exposures in each retail exposure
subcategory into separate segments with
homogeneous risk characteristics, and
assigns accurate and reliable PD and
LGD estimates for each segment on a
consistent basis. The FDIC-supervised
institution’s system must identify and
group in separate segments by
subcategories exposures identified in
§ 324.131(c)(2)(ii) and (iii).
(4) The FDIC-supervised institution’s
internal risk rating policy for wholesale
exposures must describe the FDICsupervised institution’s rating
philosophy (that is, must describe how
wholesale obligor rating assignments are
affected by the FDIC-supervised
institution’s choice of the range of
economic, business, and industry
conditions that are considered in the
obligor rating process).
(5) The FDIC-supervised institution’s
internal risk rating system for wholesale
exposures must provide for the review
and update (as appropriate) of each
obligor rating and (if applicable) each
loss severity rating whenever the FDICsupervised institution receives new
material information, but no less
frequently than annually. The FDICsupervised institution’s retail exposure
segmentation system must provide for
the review and update (as appropriate)
of assignments of retail exposures to
segments whenever the FDIC-supervised
institution receives new material
information, but generally no less
frequently than quarterly.
(c) Quantification of risk parameters
for wholesale and retail exposures. (1)
The FDIC-supervised institution must
have a comprehensive risk parameter
quantification process that produces
accurate, timely, and reliable estimates
of the risk parameters for the FDICsupervised institution’s wholesale and
retail exposures.
(2) Data used to estimate the risk
parameters must be relevant to the
FDIC-supervised institution’s actual
wholesale and retail exposures, and of
sufficient quality to support the
determination of risk-based capital
requirements for the exposures.
(3) The FDIC-supervised institution’s
risk parameter quantification process
must produce appropriately
conservative risk parameter estimates
where the FDIC-supervised institution
has limited relevant data, and any
adjustments that are part of the
quantification process must not result in
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a pattern of bias toward lower risk
parameter estimates.
(4) The FDIC-supervised institution’s
risk parameter estimation process
should not rely on the possibility of U.S.
government financial assistance, except
for the financial assistance that the U.S.
government has a legally binding
commitment to provide.
(5) Where the FDIC-supervised
institution’s quantifications of LGD
directly or indirectly incorporate
estimates of the effectiveness of its
credit risk management practices in
reducing its exposure to troubled
obligors prior to default, the FDICsupervised institution must support
such estimates with empirical analysis
showing that the estimates are
consistent with its historical experience
in dealing with such exposures during
economic downturn conditions.
(6) PD estimates for wholesale
obligors and retail segments must be
based on at least five years of default
data. LGD estimates for wholesale
exposures must be based on at least
seven years of loss severity data, and
LGD estimates for retail segments must
be based on at least five years of loss
severity data. EAD estimates for
wholesale exposures must be based on
at least seven years of exposure amount
data, and EAD estimates for retail
segments must be based on at least five
years of exposure amount data.
(7) Default, loss severity, and
exposure amount data must include
periods of economic downturn
conditions, or the FDIC-supervised
institution must adjust its estimates of
risk parameters to compensate for the
lack of data from periods of economic
downturn conditions.
(8) The FDIC-supervised institution’s
PD, LGD, and EAD estimates must be
based on the definition of default in
§ 324.101.
(9) The FDIC-supervised institution
must review and update (as appropriate)
its risk parameters and its risk
parameter quantification process at least
annually.
(10) The FDIC-supervised institution
must, at least annually, conduct a
comprehensive review and analysis of
reference data to determine relevance of
reference data to the FDIC-supervised
institution’s exposures, quality of
reference data to support PD, LGD, and
EAD estimates, and consistency of
reference data to the definition of
default in § 324.101.
(d) Counterparty credit risk model. An
FDIC-supervised institution must obtain
the prior written approval of the FDIC
under § 324.132 to use the internal
models methodology for counterparty
credit risk and the advanced CVA
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approach for the CVA capital
requirement.
(e) Double default treatment. An
FDIC-supervised institution must obtain
the prior written approval of the FDIC
under § 324.135 to use the double
default treatment.
(f) Equity exposures model. An FDICsupervised institution must obtain the
prior written approval of the FDIC
under § 324.153 to use the internal
models approach for equity exposures.
(g) Operational risk. (1) Operational
risk management processes. An FDICsupervised institution must:
(i) Have an operational risk
management function that:
(A) Is independent of business line
management; and
(B) Is responsible for designing,
implementing, and overseeing the FDICsupervised institution’s operational risk
data and assessment systems,
operational risk quantification systems,
and related processes;
(ii) Have and document a process
(which must capture business
environment and internal control factors
affecting the FDIC-supervised
institution’s operational risk profile) to
identify, measure, monitor, and control
operational risk in the FDIC-supervised
institution’s products, activities,
processes, and systems; and
(iii) Report operational risk exposures,
operational loss events, and other
relevant operational risk information to
business unit management, senior
management, and the board of directors
(or a designated committee of the
board).
(2) Operational risk data and
assessment systems. An FDICsupervised institution must have
operational risk data and assessment
systems that capture operational risks to
which the FDIC-supervised institution
is exposed. The FDIC-supervised
institution’s operational risk data and
assessment systems must:
(i) Be structured in a manner
consistent with the FDIC-supervised
institution’s current business activities,
risk profile, technological processes,
and risk management processes; and
(ii) Include credible, transparent,
systematic, and verifiable processes that
incorporate the following elements on
an ongoing basis:
(A) Internal operational loss event
data. The FDIC-supervised institution
must have a systematic process for
capturing and using internal operational
loss event data in its operational risk
data and assessment systems.
(1) The FDIC-supervised institution’s
operational risk data and assessment
systems must include a historical
observation period of at least five years
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for internal operational loss event data
(or such shorter period approved by the
FDIC to address transitional situations,
such as integrating a new business line).
(2) The FDIC-supervised institution
must be able to map its internal
operational loss event data into the
seven operational loss event type
categories.
(3) The FDIC-supervised institution
may refrain from collecting internal
operational loss event data for
individual operational losses below
established dollar threshold amounts if
the FDIC-supervised institution can
demonstrate to the satisfaction of the
FDIC that the thresholds are reasonable,
do not exclude important internal
operational loss event data, and permit
the FDIC-supervised institution to
capture substantially all the dollar value
of the FDIC-supervised institution’s
operational losses.
(B) External operational loss event
data. The FDIC-supervised institution
must have a systematic process for
determining its methodologies for
incorporating external operational loss
event data into its operational risk data
and assessment systems.
(C) Scenario analysis. The FDICsupervised institution must have a
systematic process for determining its
methodologies for incorporating
scenario analysis into its operational
risk data and assessment systems.
(D) Business environment and
internal control factors. The FDICsupervised institution must incorporate
business environment and internal
control factors into its operational risk
data and assessment systems. The FDICsupervised institution must also
periodically compare the results of its
prior business environment and internal
control factor assessments against its
actual operational losses incurred in the
intervening period.
(3) Operational risk quantification
systems. (i) The FDIC-supervised
institution’s operational risk
quantification systems:
(A) Must generate estimates of the
FDIC-supervised institution’s
operational risk exposure using its
operational risk data and assessment
systems;
(B) Must employ a unit of measure
that is appropriate for the FDICsupervised institution’s range of
business activities and the variety of
operational loss events to which it is
exposed, and that does not combine
business activities or operational loss
events with demonstrably different risk
profiles within the same loss
distribution;
(C) Must include a credible,
transparent, systematic, and verifiable
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approach for weighting each of the four
elements, described in paragraph
(g)(2)(ii) of this section, that an FDICsupervised institution is required to
incorporate into its operational risk data
and assessment systems;
(D) May use internal estimates of
dependence among operational losses
across and within units of measure if
the FDIC-supervised institution can
demonstrate to the satisfaction of the
FDIC that its process for estimating
dependence is sound, robust to a variety
of scenarios, and implemented with
integrity, and allows for uncertainty
surrounding the estimates. If the FDICsupervised institution has not made
such a demonstration, it must sum
operational risk exposure estimates
across units of measure to calculate its
total operational risk exposure; and
(E) Must be reviewed and updated (as
appropriate) whenever the FDICsupervised institution becomes aware of
information that may have a material
effect on the FDIC-supervised
institution’s estimate of operational risk
exposure, but the review and update
must occur no less frequently than
annually.
(ii) With the prior written approval of
the FDIC, an FDIC-supervised
institution may generate an estimate of
its operational risk exposure using an
alternative approach to that specified in
paragraph (g)(3)(i) of this section. An
FDIC-supervised institution proposing
to use such an alternative operational
risk quantification system must submit
a proposal to the FDIC. In determining
whether to approve an FDIC-supervised
institution’s proposal to use an
alternative operational risk
quantification system, the FDIC will
consider the following principles:
(A) Use of the alternative operational
risk quantification system will be
allowed only on an exception basis,
considering the size, complexity, and
risk profile of the FDIC-supervised
institution;
(B) The FDIC-supervised institution
must demonstrate that its estimate of its
operational risk exposure generated
under the alternative operational risk
quantification system is appropriate and
can be supported empirically; and
(C) An FDIC-supervised institution
must not use an allocation of
operational risk capital requirements
that includes entities other than
depository institutions or the benefits of
diversification across entities.
(h) Data management and
maintenance. (1) An FDIC-supervised
institution must have data management
and maintenance systems that
adequately support all aspects of its
advanced systems and the timely and
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accurate reporting of risk-based capital
requirements.
(2) An FDIC-supervised institution
must retain data using an electronic
format that allows timely retrieval of
data for analysis, validation, reporting,
and disclosure purposes.
(3) An FDIC-supervised institution
must retain sufficient data elements
related to key risk drivers to permit
adequate monitoring, validation, and
refinement of its advanced systems.
(i) Control, oversight, and validation
mechanisms. (1) The FDIC-supervised
institution’s senior management must
ensure that all components of the FDICsupervised institution’s advanced
systems function effectively and comply
with the qualification requirements in
this section.
(2) The FDIC-supervised institution’s
board of directors (or a designated
committee of the board) must at least
annually review the effectiveness of,
and approve, the FDIC-supervised
institution’s advanced systems.
(3) An FDIC-supervised institution
must have an effective system of
controls and oversight that:
(i) Ensures ongoing compliance with
the qualification requirements in this
section;
(ii) Maintains the integrity, reliability,
and accuracy of the FDIC-supervised
institution’s advanced systems; and
(iii) Includes adequate governance
and project management processes.
(4) The FDIC-supervised institution
must validate, on an ongoing basis, its
advanced systems. The FDIC-supervised
institution’s validation process must be
independent of the advanced systems’
development, implementation, and
operation, or the validation process
must be subjected to an independent
review of its adequacy and
effectiveness. Validation must include:
(i) An evaluation of the conceptual
soundness of (including developmental
evidence supporting) the advanced
systems;
(ii) An ongoing monitoring process
that includes verification of processes
and benchmarking; and
(iii) An outcomes analysis process
that includes backtesting.
(5) The FDIC-supervised institution
must have an internal audit function
independent of business-line
management that at least annually
assesses the effectiveness of the controls
supporting the FDIC-supervised
institution’s advanced systems and
reports its findings to the FDICsupervised institution’s board of
directors (or a committee thereof).
(6) The FDIC-supervised institution
must periodically stress test its
advanced systems. The stress testing
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must include a consideration of how
economic cycles, especially downturns,
affect risk-based capital requirements
(including migration across rating
grades and segments and the credit risk
mitigation benefits of double default
treatment).
(j) Documentation. The FDICsupervised institution must adequately
document all material aspects of its
advanced systems.
§ 324.123
Ongoing qualification.
(a) Changes to advanced systems. An
FDIC-supervised institution must meet
all the qualification requirements in
§ 324.122 on an ongoing basis. An FDICsupervised institution must notify the
FDIC when the FDIC-supervised
institution makes any change to an
advanced system that would result in a
material change in the FDIC-supervised
institution’s advanced approaches total
risk-weighted asset amount for an
exposure type or when the FDICsupervised institution makes any
significant change to its modeling
assumptions.
(b) Failure to comply with
qualification requirements. (1) If the
FDIC determines that an FDICsupervised institution that uses this
subpart and that has conducted a
satisfactory parallel run fails to comply
with the qualification requirements in
§ 324.122, the FDIC will notify the
FDIC-supervised institution in writing
of the FDIC-supervised institution’s
failure to comply.
(2) The FDIC-supervised institution
must establish and submit a plan
satisfactory to the FDIC to return to
compliance with the qualification
requirements.
(3) In addition, if the FDIC determines
that the FDIC-supervised institution’s
advanced approaches total riskweighted assets are not commensurate
with the FDIC-supervised institution’s
credit, market, operational, or other
risks, the FDIC may require such an
FDIC-supervised institution to calculate
its advanced approaches total riskweighted assets with any modifications
provided by the FDIC.
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§ 324.124 Merger and acquisition
transitional arrangements.
(a) Mergers and acquisitions of
companies without advanced systems. If
an FDIC-supervised institution merges
with or acquires a company that does
not calculate its risk-based capital
requirements using advanced systems,
the FDIC-supervised institution may use
subpart D of this part to determine the
risk-weighted asset amounts for the
merged or acquired company’s
exposures for up to 24 months after the
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calendar quarter during which the
merger or acquisition consummates. The
FDIC may extend this transition period
for up to an additional 12 months.
Within 90 days of consummating the
merger or acquisition, the FDICsupervised institution must submit to
the FDIC an implementation plan for
using its advanced systems for the
acquired company. During the period in
which subpart D of this part applies to
the merged or acquired company, any
ALLL, net of allocated transfer risk
reserves established pursuant to 12
U.S.C. 3904, associated with the merged
or acquired company’s exposures may
be included in the acquiring FDICsupervised institution’s tier 2 capital up
to 1.25 percent of the acquired
company’s risk-weighted assets. All
general allowances of the merged or
acquired company must be excluded
from the FDIC-supervised institution’s
eligible credit reserves. In addition, the
risk-weighted assets of the merged or
acquired company are not included in
the FDIC-supervised institution’s creditrisk-weighted assets but are included in
total risk-weighted assets. If an FDICsupervised institution relies on this
paragraph, the FDIC-supervised
institution must disclose publicly the
amounts of risk-weighted assets and
qualifying capital calculated under this
subpart for the acquiring FDICsupervised institution and under
subpart D of this part for the acquired
company.
(b) Mergers and acquisitions of
companies with advanced systems. (1) If
an FDIC-supervised institution merges
with or acquires a company that
calculates its risk-based capital
requirements using advanced systems,
the FDIC-supervised institution may use
the acquired company’s advanced
systems to determine total risk-weighted
assets for the merged or acquired
company’s exposures for up to 24
months after the calendar quarter during
which the acquisition or merger
consummates. The FDIC may extend
this transition period for up to an
additional 12 months. Within 90 days of
consummating the merger or
acquisition, the FDIC-supervised
institution must submit to the FDIC an
implementation plan for using its
advanced systems for the merged or
acquired company.
(2) If the acquiring FDIC-supervised
institution is not subject to the
advanced approaches in this subpart at
the time of acquisition or merger, during
the period when subpart D of this part
applies to the acquiring FDICsupervised institution, the ALLL
associated with the exposures of the
merged or acquired company may not
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be directly included in tier 2 capital.
Rather, any excess eligible credit
reserves associated with the merged or
acquired company’s exposures may be
included in the FDIC-supervised
institution’s tier 2 capital up to 0.6
percent of the credit-risk-weighted
assets associated with those exposures.
§§ 324.125 through 324.130
[Reserved]
Risk-Weighted Assets for General
Credit Risk
§ 324.131 Mechanics for calculating total
wholesale and retail risk-weighted assets.
(a) Overview. An FDIC-supervised
institution must calculate its total
wholesale and retail risk-weighted asset
amount in four distinct phases:
(1) Phase 1—categorization of
exposures;
(2) Phase 2—assignment of wholesale
obligors and exposures to rating grades
and segmentation of retail exposures;
(3) Phase 3—assignment of risk
parameters to wholesale exposures and
segments of retail exposures; and
(4) Phase 4—calculation of riskweighted asset amounts.
(b) Phase 1—Categorization. The
FDIC-supervised institution must
determine which of its exposures are
wholesale exposures, retail exposures,
securitization exposures, or equity
exposures. The FDIC-supervised
institution must categorize each retail
exposure as a residential mortgage
exposure, a QRE, or an other retail
exposure. The FDIC-supervised
institution must identify which
wholesale exposures are HVCRE
exposures, sovereign exposures, OTC
derivative contracts, repo-style
transactions, eligible margin loans,
eligible purchased wholesale exposures,
cleared transactions, default fund
contributions, unsettled transactions to
which § 324.136 applies, and eligible
guarantees or eligible credit derivatives
that are used as credit risk mitigants.
The FDIC-supervised institution must
identify any on-balance sheet asset that
does not meet the definition of a
wholesale, retail, equity, or
securitization exposure, as well as any
non-material portfolio of exposures
described in paragraph (e)(4) of this
section.
(c) Phase 2—Assignment of wholesale
obligors and exposures to rating grades
and retail exposures to segments—(1)
Assignment of wholesale obligors and
exposures to rating grades.
(i) The FDIC-supervised institution
must assign each obligor of a wholesale
exposure to a single obligor rating grade
and must assign each wholesale
exposure to which it does not directly
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assign an LGD estimate to a loss severity
rating grade.
(ii) The FDIC-supervised institution
must identify which of its wholesale
obligors are in default.
(2) Segmentation of retail exposures.
(i) The FDIC-supervised institution must
group the retail exposures in each retail
subcategory into segments that have
homogeneous risk characteristics.
(ii) The FDIC-supervised institution
must identify which of its retail
exposures are in default. The FDICsupervised institution must segment
defaulted retail exposures separately
from non-defaulted retail exposures.
(iii) If the FDIC-supervised institution
determines the EAD for eligible margin
loans using the approach in
§ 324.132(b), the FDIC-supervised
institution must identify which of its
retail exposures are eligible margin
loans for which the FDIC-supervised
institution uses this EAD approach and
must segment such eligible margin loans
separately from other retail exposures.
(3) Eligible purchased wholesale
exposures. An FDIC-supervised
institution may group its eligible
purchased wholesale exposures into
segments that have homogeneous risk
characteristics. An FDIC-supervised
institution must use the wholesale
exposure formula in Table 1 of this
section to determine the risk-based
capital requirement for each segment of
eligible purchased wholesale exposures.
(d) Phase 3—Assignment of risk
parameters to wholesale exposures and
segments of retail exposures. (1)
Quantification process. Subject to the
limitations in this paragraph (d), the
FDIC-supervised institution must:
(i) Associate a PD with each
wholesale obligor rating grade;
(ii) Associate an LGD with each
wholesale loss severity rating grade or
assign an LGD to each wholesale
exposure;
(iii) Assign an EAD and M to each
wholesale exposure; and
(iv) Assign a PD, LGD, and EAD to
each segment of retail exposures.
(2) Floor on PD assignment. The PD
for each wholesale obligor or retail
segment may not be less than 0.03
percent, except for exposures to or
directly and unconditionally guaranteed
by a sovereign entity, the Bank for
International Settlements, the
International Monetary Fund, the
European Commission, the European
Central Bank, or a multilateral
development bank, to which the FDICsupervised institution assigns a rating
grade associated with a PD of less than
0.03 percent.
(3) Floor on LGD estimation. The LGD
for each segment of residential mortgage
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exposures may not be less than 10
percent, except for segments of
residential mortgage exposures for
which all or substantially all of the
principal of each exposure is either:
(i) Directly and unconditionally
guaranteed by the full faith and credit
of a sovereign entity; or
(ii) Guaranteed by a contingent
obligation of the U.S. government or its
agencies, the enforceability of which is
dependent upon some affirmative action
on the part of the beneficiary of the
guarantee or a third party (for example,
meeting servicing requirements).
(4) Eligible purchased wholesale
exposures. An FDIC-supervised
institution must assign a PD, LGD, EAD,
and M to each segment of eligible
purchased wholesale exposures. If the
FDIC-supervised institution can
estimate ECL (but not PD or LGD) for a
segment of eligible purchased wholesale
exposures, the FDIC-supervised
institution must assume that the LGD of
the segment equals 100 percent and that
the PD of the segment equals ECL
divided by EAD. The estimated ECL
must be calculated for the exposures
without regard to any assumption of
recourse or guarantees from the seller or
other parties.
(5) Credit risk mitigation: credit
derivatives, guarantees, and collateral.
(i) An FDIC-supervised institution may
take into account the risk reducing
effects of eligible guarantees and eligible
credit derivatives in support of a
wholesale exposure by applying the PD
substitution or LGD adjustment
treatment to the exposure as provided in
§ 324.134 or, if applicable, applying
double default treatment to the exposure
as provided in § 324.135. An FDICsupervised institution may decide
separately for each wholesale exposure
that qualifies for the double default
treatment under § 324.135 whether to
apply the double default treatment or to
use the PD substitution or LGD
adjustment treatment without
recognizing double default effects.
(ii) An FDIC-supervised institution
may take into account the risk reducing
effects of guarantees and credit
derivatives in support of retail
exposures in a segment when
quantifying the PD and LGD of the
segment.
(iii) Except as provided in paragraph
(d)(6) of this section, an FDICsupervised institution may take into
account the risk reducing effects of
collateral in support of a wholesale
exposure when quantifying the LGD of
the exposure, and may take into account
the risk reducing effects of collateral in
support of retail exposures when
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quantifying the PD and LGD of the
segment.
(6) EAD for OTC derivative contracts,
repo-style transactions, and eligible
margin loans. An FDIC-supervised
institution must calculate its EAD for an
OTC derivative contract as provided in
§ 324.132 (c) and (d). An FDICsupervised institution may take into
account the risk-reducing effects of
financial collateral in support of a repostyle transaction or eligible margin loan
and of any collateral in support of a
repo-style transaction that is included in
the FDIC-supervised institution’s VaRbased measure under subpart F of this
part through an adjustment to EAD as
provided in § 324.132(b) and (d). An
FDIC-supervised institution that takes
collateral into account through such an
adjustment to EAD under § 324.132 may
not reflect such collateral in LGD.
(7) Effective maturity. An exposure’s
M must be no greater than five years and
no less than one year, except that an
exposure’s M must be no less than one
day if the exposure is a trade related
letter of credit, or if the exposure has an
original maturity of less than one year
and is not part of an FDIC-supervised
institution’s ongoing financing of the
obligor. An exposure is not part of an
FDIC-supervised institution’s ongoing
financing of the obligor if the FDICsupervised institution:
(i) Has a legal and practical ability not
to renew or roll over the exposure in the
event of credit deterioration of the
obligor;
(ii) Makes an independent credit
decision at the inception of the
exposure and at every renewal or roll
over; and
(iii) Has no substantial commercial
incentive to continue its credit
relationship with the obligor in the
event of credit deterioration of the
obligor.
(8) EAD for exposures to certain
central counterparties. An FDICsupervised institution may attribute an
EAD of zero to exposures that arise from
the settlement of cash transactions (such
as equities, fixed income, spot foreign
exchange, and spot commodities) with a
central counterparty where there is no
assumption of ongoing counterparty
credit risk by the central counterparty
after settlement of the trade and
associated default fund contributions.
(e) Phase 4—Calculation of riskweighted assets. (1) Non-defaulted
exposures.
(i) An FDIC-supervised institution
must calculate the dollar risk-based
capital requirement for each of its
wholesale exposures to a non-defaulted
obligor (except for eligible guarantees
and eligible credit derivatives that
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hedge another wholesale exposure, IMM
exposures, cleared transactions, default
fund contributions, unsettled
transactions, and exposures to which
the FDIC-supervised institution applies
the double default treatment in
§ 324.135) and segments of nondefaulted retail exposures by inserting
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the assigned risk parameters for the
wholesale obligor and exposure or retail
segment into the appropriate risk-based
capital formula specified in Table 1 to
§ 324.131 and multiplying the output of
the formula (K) by the EAD of the
exposure or segment. Alternatively, an
FDIC-supervised institution may apply a
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300 percent risk weight to the EAD of
an eligible margin loan if the FDICsupervised institution is not able to
meet the FDIC’s requirements for
estimation of PD and LGD for the
margin loan.
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BILLING CODE 6714–01–P
(ii) The sum of all the dollar riskbased capital requirements for each
wholesale exposure to a non-defaulted
obligor and segment of non-defaulted
retail exposures calculated in paragraph
(e)(1)(i) of this section and in
§ 324.135(e) equals the total dollar riskbased capital requirement for those
exposures and segments.
(iii) The aggregate risk-weighted asset
amount for wholesale exposures to nondefaulted obligors and segments of nondefaulted retail exposures equals the
total dollar risk-based capital
requirement in paragraph (e)(1)(ii) of
this section multiplied by 12.5.
(2) Wholesale exposures to defaulted
obligors and segments of defaulted retail
exposures—(i) Not covered by an
eligible U.S. government guarantee: The
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dollar risk-based capital requirement for
each wholesale exposure not covered by
an eligible guarantee from the U.S.
government to a defaulted obligor and
each segment of defaulted retail
exposures not covered by an eligible
guarantee from the U.S. government
equals 0.08 multiplied by the EAD of
the exposure or segment.
(ii) Covered by an eligible U.S.
government guarantee: The dollar riskbased capital requirement for each
wholesale exposure to a defaulted
obligor covered by an eligible guarantee
from the U.S. government and each
segment of defaulted retail exposures
covered by an eligible guarantee from
the U.S. government equals the sum of:
(A) The sum of the EAD of the portion
of each wholesale exposure to a
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defaulted obligor covered by an eligible
guarantee from the U.S. government
plus the EAD of the portion of each
segment of defaulted retail exposures
that is covered by an eligible guarantee
from the U.S. government and the
resulting sum is multiplied by 0.016,
and
(B) The sum of the EAD of the portion
of each wholesale exposure to a
defaulted obligor not covered by an
eligible guarantee from the U.S.
government plus the EAD of the portion
of each segment of defaulted retail
exposures that is not covered by an
eligible guarantee from the U.S.
government and the resulting sum is
multiplied by 0.08.
(iii) The sum of all the dollar riskbased capital requirements for each
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wholesale exposure to a defaulted
obligor and each segment of defaulted
retail exposures calculated in paragraph
(e)(2)(i) of this section plus the dollar
risk-based capital requirements each
wholesale exposure to a defaulted
obligor and for each segment of
defaulted retail exposures calculated in
paragraph (e)(2)(ii) of this section equals
the total dollar risk-based capital
requirement for those exposures and
segments.
(iv) The aggregate risk-weighted asset
amount for wholesale exposures to
defaulted obligors and segments of
defaulted retail exposures equals the
total dollar risk-based capital
requirement calculated in paragraph
(e)(2)(iii) of this section multiplied by
12.5.
(3) Assets not included in a defined
exposure category. (i) An FDICsupervised institution may assign a riskweighted asset amount of zero to cash
owned and held in all offices of the
FDIC-supervised institution or in transit
and for gold bullion held in the FDICsupervised 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) An FDIC-supervised institution
must assign a risk-weighted asset
amount equal to 20 percent of the
carrying value of cash items in the
process of collection.
(iii) An FDIC-supervised institution
must assign a risk-weighted asset
amount equal to 50 percent of the
carrying value to a pre-sold construction
loan unless the purchase contract is
cancelled, in which case an FDICsupervised institution must assign a
risk-weighted asset amount equal to a
100 percent of the carrying value of the
pre-sold construction loan.
(iv) The risk-weighted asset amount
for the residual value of a retail lease
exposure equals such residual value.
(v) The risk-weighted asset amount for
DTAs arising from temporary
differences that the FDIC-supervised
institution could realize through net
operating loss carrybacks equals the
carrying value, netted in accordance
with § 324.22.
(vi) The risk-weighted asset amount
for MSAs, DTAs arising from temporary
timing differences that the FDICsupervised institution could not realize
through net operating loss carrybacks,
and significant investments in the
capital of unconsolidated financial
institutions in the form of common
stock that are not deducted pursuant to
§ 324.22(a)(7) equals the amount not
subject to deduction multiplied by 250
percent.
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(vii) The risk-weighted asset amount
for any other on-balance-sheet asset that
does not meet the definition of a
wholesale, retail, securitization, IMM, or
equity exposure, cleared transaction, or
default fund contribution and is not
subject to deduction under § 324.22(a),
(c), or (d) equals the carrying value of
the asset.
(4) Non-material portfolios of
exposures. The risk-weighted asset
amount of a portfolio of exposures for
which the FDIC-supervised institution
has demonstrated to the FDIC’s
satisfaction that the portfolio (when
combined with all other portfolios of
exposures that the FDIC-supervised
institution seeks to treat under this
paragraph) is not material to the FDICsupervised institution is the sum of the
carrying values of on-balance sheet
exposures plus the notional amounts of
off-balance sheet exposures in the
portfolio. For purposes of this paragraph
(e)(4), the notional amount of an OTC
derivative contract that is not a credit
derivative is the EAD of the derivative
as calculated in § 324.132.
§ 324.132 Counterparty credit risk of repostyle transactions, eligible margin loans,
and OTC derivative contracts.
(a) Methodologies for collateral
recognition. (1) Instead of an LGD
estimation methodology, an FDICsupervised institution may use the
following methodologies to recognize
the benefits of financial collateral in
mitigating the counterparty credit risk of
repo-style transactions, eligible margin
loans, collateralized OTC derivative
contracts and single product netting sets
of such transactions, and to recognize
the benefits of any collateral in
mitigating the counterparty credit risk of
repo-style transactions that are included
in an FDIC-supervised institution’s VaRbased measure under subpart F of this
part:
(i) The collateral haircut approach set
forth in paragraph (b)(2) of this section;
(ii) The internal models methodology
set forth in paragraph (d) of this section;
and
(iii) For single product netting sets of
repo-style transactions and eligible
margin loans, the simple VaR
methodology set forth in paragraph
(b)(3) of this section.
(2) An FDIC-supervised institution
may use any combination of the three
methodologies for collateral recognition;
however, it must use the same
methodology for transactions in the
same category.
(3) An FDIC-supervised institution
must use the methodology in paragraph
(c) of this section, or with prior written
approval of the FDIC, the internal model
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methodology in paragraph (d) of this
section, to calculate EAD for an OTC
derivative contract or a set of OTC
derivative contracts subject to a
qualifying master netting agreement. To
estimate EAD for qualifying crossproduct master netting agreements, an
FDIC-supervised institution may only
use the internal models methodology in
paragraph (d) of this section.
(4) An FDIC-supervised institution
must also use the methodology in
paragraph (e) of this section to calculate
the risk-weighted asset amounts for
CVA for OTC derivatives.
(b) EAD for eligible margin loans and
repo-style transactions. (1) General. An
FDIC-supervised institution may
recognize the credit risk mitigation
benefits of financial collateral that
secures an eligible margin loan, repostyle transaction, or single-product
netting set of such transactions by
factoring the collateral into its LGD
estimates for the exposure.
Alternatively, an FDIC-supervised
institution may estimate an unsecured
LGD for the exposure, as well as for any
repo-style transaction that is included in
the FDIC-supervised institution’s VaRbased measure under subpart F of this
part, and determine the EAD of the
exposure using:
(i) The collateral haircut approach
described in paragraph (b)(2) of this
section;
(ii) For netting sets only, the simple
VaR methodology described in
paragraph (b)(3) of this section; or
(iii) The internal models methodology
described in paragraph (d) of this
section.
(2) Collateral haircut approach—(i)
EAD equation. An FDIC-supervised
institution may determine EAD for an
eligible margin loan, repo-style
transaction, or netting set by setting
EAD equal to max {0, [(SE¥SC) + S(Es
× Hs) + S(Efx × Hfx)]}, where:
(A) SE equals the value of the
exposure (the sum of the current fair
values of all instruments, gold, and cash
the FDIC-supervised institution has lent,
sold subject to repurchase, or posted as
collateral to the counterparty under the
transaction (or netting set));
(B) SC equals the value of the
collateral (the sum of the current fair
values of all instruments, gold, and cash
the FDIC-supervised institution has
borrowed, purchased subject to resale,
or taken as collateral from the
counterparty under the transaction (or
netting set));
(C) Es equals the absolute value of the
net position in a given instrument or in
gold (where the net position in a given
instrument or in gold equals the sum of
the current fair values of the instrument
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or gold the FDIC-supervised institution
has lent, sold subject to repurchase, or
posted as collateral to the counterparty
minus the sum of the current fair values
of that same instrument or gold the
FDIC-supervised institution has
borrowed, purchased subject to resale,
or taken as collateral from the
counterparty);
(D) Hs equals the market price
volatility haircut appropriate to the
instrument or gold referenced in Es;
(E) Efx equals the absolute value of the
net position of instruments and cash in
a currency that is different from the
settlement currency (where the net
position in a given currency equals the
sum of the current fair values of any
instruments or cash in the currency the
FDIC-supervised institution has lent,
sold subject to repurchase, or posted as
collateral to the counterparty minus the
sum of the current fair values of any
instruments or cash in the currency the
FDIC-supervised institution has
borrowed, purchased subject to resale,
or taken as collateral from the
counterparty); and
55537
(F) Hfx equals the haircut appropriate
to the mismatch between the currency
referenced in Efx and the settlement
currency.
(ii) Standard supervisory haircuts. (A)
Under the standard supervisory haircuts
approach:
(1) An FDIC-supervised institution
must use the haircuts for market price
volatility (Hs) in Table 1 to § 324.132, as
adjusted in certain circumstances as
provided in paragraphs (b)(2)(ii)(A)(3)
and (4) of this section;
TABLE 1 TO § 324.132—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1
Haircut (in percent) assigned based on:
Sovereign issuers risk weight under
this section 2
(in percent)
Residual maturity
Zero
Less than or equal to 1 year .....................
Greater than 1 year and less than or
equal to 5 years .....................................
Greater than 5 years ..................................
20 or 50
100
Non-sovereign issuers risk weight
under this section
(in percent)
20
50
Investment grade
securitization
exposures
(in percent)
100
0.5
1.0
15.0
1.0
2.0
4.0
4.0
2.0
4.0
3.0
6.0
15.0
15.0
4.0
8.0
6.0
12.0
8.0
16.0
12.0
24.0
Main index equities (including convertible bonds) and gold .......................................
15.0
Other publicly traded equities (including convertible bonds) .......................................
Mutual funds ................................................................................................................
25.0
Highest haircut applicable to any security in which the fund
can invest.
Zero
25.0
Cash collateral held .....................................................................................................
Other exposure types ..................................................................................................
1 The
market price volatility haircuts in Table 1 to § 324.132 are based on a 10 business-day holding period.
a foreign PSE that receives a zero percent risk weight.
(2) For currency mismatches, an
FDIC-supervised institution must use a
haircut for foreign exchange rate
volatility (Hfx) of 8 percent, as adjusted
in certain circumstances as provided in
paragraphs (b)(2)(ii)(A)(3) and (4) of this
section.
(3) For repo-style transactions, an
FDIC-supervised institution may
multiply the supervisory haircuts
provided in paragraphs (b)(2)(ii)(A)(1)
and (2) of this section by the square root
of 1⁄2 (which equals 0.707107).
(4) An FDIC-supervised institution
must adjust the supervisory haircuts
upward on the basis of a holding period
longer than ten business days (for
eligible margin loans) or five business
days (for repo-style transactions) where
the following conditions apply. If the
number of trades in a netting set
exceeds 5,000 at any time during a
quarter, an FDIC-supervised institution
must adjust the supervisory haircuts
upward on the basis of a holding period
of twenty business days for the
following quarter (except when an
FDIC-supervised institution is
calculating EAD for a cleared
transaction under § 324.133). If a netting
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set contains one or more trades
involving illiquid collateral or an OTC
derivative that cannot be easily
replaced, an FDIC-supervised institution
must adjust the supervisory haircuts
upward on the basis of a holding period
of twenty business days. If over the two
previous quarters more than two margin
disputes on a netting set have occurred
that lasted more than the holding
period, then the FDIC-supervised
institution 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. An FDICsupervised institution must adjust the
standard supervisory haircuts upward
using the following formula:
(i) TM equals a holding period of longer than
10 business days for eligible margin
loans and derivative contracts or longer
than 5 business days for repo-style
transactions;
(ii) Hs equals the standard supervisory
haircut; and
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(iii) Ts equals 10 business days for eligible
margin loans and derivative contracts or
5 business days for repo-style
transactions.
(5) If the instrument an FDICsupervised institution has lent, sold
subject to repurchase, or posted as
collateral does not meet the definition of
financial collateral, the FDIC-supervised
institution must use a 25.0 percent
haircut for market price volatility (Hs).
(iii) Own internal estimates for
haircuts. With the prior written
approval of the FDIC, an FDICsupervised institution may calculate
haircuts (Hs and Hfx) using its own
internal estimates of the volatilities of
market prices and foreign exchange
rates.
(A) To receive FDIC approval to use
its own internal estimates, an FDICsupervised institution must satisfy the
following minimum quantitative
standards:
(1) An FDIC-supervised institution
must use a 99th percentile one-tailed
confidence interval.
(2) The minimum holding period for
a repo-style transaction is five business
days and for an eligible margin loan is
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ten business days except for
transactions or netting sets for which
paragraph (b)(2)(iii)(A)(3) of this section
applies. When an FDIC-supervised
institution 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:
emcdonald on DSK67QTVN1PROD with RULES2
(i) TM equals 5 for repo-style transactions and
10 for eligible margin loans;
(ii) TN equals the holding period used by the
FDIC-supervised institution to derive HN;
and
(iii) HN equals the haircut based on the
holding period TN.
(3) If the number of trades in a netting
set exceeds 5,000 at any time during a
quarter, an FDIC-supervised institution
must calculate the haircut using a
minimum holding period of twenty
business days for the following quarter
(except when an FDIC-supervised
institution is calculating EAD for a
cleared transaction under § 324.133). If
a netting set contains one or more trades
involving illiquid collateral or an OTC
derivative that cannot be easily
replaced, an FDIC-supervised institution
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 FDIC-supervised institution
must calculate the haircut for
transactions in that netting set on the
basis of a holding period that is at least
two times the minimum holding period
for that netting set.
(4) An FDIC-supervised institution is
required to calculate its own internal
estimates with inputs calibrated to
historical data from a continuous 12month period that reflects a period of
significant financial stress appropriate
to the security or category of securities.
(5) An FDIC-supervised institution
must have policies and procedures that
describe how it determines the period of
significant financial stress used to
calculate the FDIC-supervised
institution’s own internal estimates for
haircuts under this section and must be
able to provide empirical support for the
period used. The FDIC-supervised
institution must obtain the prior
approval of the FDIC for, and notify the
FDIC if the FDIC-supervised institution
makes any material changes to, these
policies and procedures.
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(6) Nothing in this section prevents
the FDIC from requiring an FDICsupervised institution to use a different
period of significant financial stress in
the calculation of own internal
estimates for haircuts.
(7) An FDIC-supervised institution
must update its data sets and calculate
haircuts no less frequently than
quarterly and must also reassess data
sets and haircuts whenever market
prices change materially.
(B) With respect to debt securities that
are investment grade, an FDICsupervised institution may calculate
haircuts for categories of securities. For
a category of securities, the FDICsupervised institution 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 FDICsupervised institution has lent, sold
subject to repurchase, posted as
collateral, borrowed, purchased subject
to resale, or taken as collateral. In
determining relevant categories, the
FDIC-supervised institution must at a
minimum take into account:
(1) The type of issuer of the security;
(2) The credit quality of the security;
(3) The maturity of the security; and
(4) The interest rate sensitivity of the
security.
(C) With respect to debt securities that
are not investment grade and equity
securities, an FDIC-supervised
institution must calculate a separate
haircut for each individual security.
(D) Where an exposure or collateral
(whether in the form of cash or
securities) is denominated in a currency
that differs from the settlement
currency, the FDIC-supervised
institution must calculate a separate
currency mismatch haircut for its net
position in each mismatched currency
based on estimated volatilities of foreign
exchange rates between the mismatched
currency and the settlement currency.
(E) An FDIC-supervised institution’s
own estimates of market price and
foreign exchange rate volatilities may
not take into account the correlations
among securities and foreign exchange
rates on either the exposure or collateral
side of a transaction (or netting set) or
the correlations among securities and
foreign exchange rates between the
exposure and collateral sides of the
transaction (or netting set).
(3) Simple VaR methodology. With
the prior written approval of the FDIC,
an FDIC-supervised institution may
estimate EAD for a netting set using a
VaR model that meets the requirements
in paragraph (b)(3)(iii) of this section. In
such event, the FDIC-supervised
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institution must set EAD equal to max
{0, [(SE¥SC) + PFE]}, where:
(i) SE equals the value of the exposure
(the sum of the current fair values of all
instruments, gold, and cash the FDICsupervised institution has lent, sold
subject to repurchase, or posted as
collateral to the counterparty under the
netting set);
(ii) SC equals the value of the
collateral (the sum of the current fair
values of all instruments, gold, and cash
the FDIC-supervised institution has
borrowed, purchased subject to resale,
or taken as collateral from the
counterparty under the netting set); and
(iii) PFE (potential future exposure)
equals the FDIC-supervised institution’s
empirically based best estimate of the
99th percentile, one-tailed confidence
interval for an increase in the value of
(SE¥SC) over a five-business-day
holding period for repo-style
transactions, or over a ten-business-day
holding period for eligible margin loans
except for netting sets for which
paragraph (b)(3)(iv) of this section
applies using a minimum one-year
historical observation period of price
data representing the instruments that
the FDIC-supervised institution has lent,
sold subject to repurchase, posted as
collateral, borrowed, purchased subject
to resale, or taken as collateral. The
FDIC-supervised institution must
validate its VaR model by establishing
and maintaining a rigorous and regular
backtesting regime.
(iv) If the number of trades in a
netting set exceeds 5,000 at any time
during a quarter, an FDIC-supervised
institution must use a twenty-businessday holding period for the following
quarter (except when an FDICsupervised institution is calculating
EAD for a cleared transaction under
§ 324.133). If a netting set contains one
or more trades involving illiquid
collateral, an FDIC-supervised
institution must use a twenty-businessday holding period. If over the two
previous quarters more than two margin
disputes on a netting set have occurred
that lasted more than the holding
period, then the FDIC-supervised
institution must set its PFE for that
netting set equal to an estimate over a
holding period that is at least two times
the minimum holding period for that
netting set.
(c) EAD for OTC derivative contracts.
(1) OTC derivative contracts not subject
to a qualifying master netting
agreement. An FDIC-supervised
institution must determine the EAD for
an OTC derivative contract that is not
subject to a qualifying master netting
agreement using the current exposure
methodology in paragraph (c)(5) of this
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section or using the internal models
methodology described in paragraph (d)
of this section.
(2) OTC derivative contracts subject to
a qualifying master netting agreement.
An FDIC-supervised institution must
determine the EAD for multiple OTC
derivative contracts that are subject to a
qualifying master netting agreement
using the current exposure methodology
in paragraph (c)(6) of this section or
using the internal models methodology
described in paragraph (d) of this
section.
(3) Credit derivatives.
Notwithstanding paragraphs (c)(1) and
(c)(2) of this section:
(i) An FDIC-supervised institution
that purchases a credit derivative that is
recognized under § 324.134 or § 324.135
as a credit risk mitigant for an exposure
that is not a covered position under
subpart F of this part is not required to
calculate a separate counterparty credit
risk capital requirement under this
section so long as the FDIC-supervised
institution does so consistently for all
such credit derivatives and either
includes or excludes all such credit
derivatives that are subject to a master
netting agreement from any measure
used to determine counterparty credit
risk exposure to all relevant
counterparties for risk-based capital
purposes.
(ii) An FDIC-supervised institution
that is the protection provider in a
credit derivative must treat the credit
derivative as a wholesale exposure to
the reference obligor and is not required
to calculate a counterparty credit risk
capital requirement for the credit
derivative under this section, so long as
it does so consistently for all such credit
derivatives and either includes all or
excludes all such credit derivatives that
are subject to a master netting agreement
from any measure used to determine
counterparty credit risk exposure to all
relevant counterparties for risk-based
capital purposes (unless the FDICsupervised institution is treating the
credit derivative as a covered position
under subpart F of this part, in which
case the FDIC-supervised institution
must calculate a supplemental
counterparty credit risk capital
requirement under this section).
(4) Equity derivatives. An FDICsupervised institution must treat an
equity derivative contract as an equity
exposure and compute a risk-weighted
asset amount for the equity derivative
contract under §§ 324.151–324.155
(unless the FDIC-supervised institution
is treating the contract as a covered
position under subpart F of this part). In
addition, if the FDIC-supervised
institution is treating the contract as a
covered position under subpart F of this
part, and under certain other
circumstances described in § 324.155,
the FDIC-supervised institution must
also calculate a risk-based capital
requirement for the counterparty credit
risk of an equity derivative contract
under this section.
(5) Single OTC derivative contract.
Except as modified by paragraph (c)(7)
of this section, the EAD for a single OTC
derivative contract that is not subject to
a qualifying master netting agreement is
equal to the sum of the FDIC-supervised
institution’s current credit exposure and
55539
potential future credit exposure (PFE)
on the derivative contract.
(i) Current credit exposure. The
current credit exposure for a single OTC
derivative contract is the greater of the
mark-to-fair value of the derivative
contract or zero; and
(ii) PFE. The PFE for a single OTC
derivative contract, including an OTC
derivative contract with a negative
mark-to-fair value, is calculated by
multiplying the notional principal
amount of the derivative contract by the
appropriate conversion factor in Table 2
to § 324.132. For purposes of calculating
either the PFE under paragraph (c)(5) of
this section or the gross PFE under
paragraph (c)(6) of this section for
exchange rate contracts and other
similar contracts in which the notional
principal amount is equivalent to the
cash flows, the notional principal
amount is the net receipts to each party
falling due on each value date in each
currency. For any OTC derivative
contract that does not fall within one of
the specified categories in Table 2 to
§ 324.132, the PFE must be calculated
using the ‘‘other’’ conversion factors. An
FDIC-supervised institution must use an
OTC derivative contract’s effective
notional principal amount (that is, its
apparent or stated notional principal
amount multiplied by any multiplier in
the OTC derivative contract) rather than
its apparent or stated notional principal
amount in calculating PFE. PFE of the
protection provider of a credit
derivative is capped at the net present
value of the amount of unpaid
premiums.
TABLE 2 TO § 324.132—CONVERSION FACTOR MATRIX FOR OTC DERIVATIVE CONTRACTS 1
Interest
rate
Remaining maturity 2
One year or less ..................................
Over one to five years .........................
Over five years .....................................
Foreign
exchange rate
and gold
Credit (investment-grade
reference
asset) 3
Credit (non-investmentgrade reference asset)
0.01
0.05
0.075
0.05
0.05
0.05
0.10
0.10
0.10
0.00
0.005
0.015
Equity
0.06
0.08
0.10
Precious
metals (except
gold)
0.07
0.07
0.08
Other
0.10
0.12
0.15
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1 For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments
in the derivative contract.
2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so
that the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
3 An FDIC-supervised institution 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. An FDIC-supervised institution must use the column labeled ‘‘Credit (non-investment-grade reference asset)’’ for all other credit derivatives.
(6) Multiple OTC derivative contracts
subject to a qualifying master netting
agreement. Except as modified by
paragraph (c)(7) of this section, the EAD
for multiple OTC derivative contracts
subject to a qualifying master netting
agreement is equal to the sum of the net
current credit exposure and the adjusted
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sum of the PFE exposure for all OTC
derivative contracts subject to the
qualifying master netting agreement.
(i) Net current credit exposure. The
net current credit exposure is the greater
of:
(A) The net sum of all positive and
negative fair values of the individual
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OTC derivative contracts subject to the
qualifying master netting agreement; or
(B) Zero; and
(ii) Adjusted sum of the PFE. The
adjusted sum of the PFE, Anet, is
calculated as Anet = (0.4 × Agross) + (0.6
× NGR × Agross), where:
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(that is, effective EPE is the timeweighted average of effective EE where
the weights are the proportion that an
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QCCP on the performance of the client
equals the exposure amount calculated
according to paragraph (c)(5) or (6) of
this section multiplied by the scaling
factor 0.71. If the FDIC-supervised
institution determines that a longer
period is appropriate, it must use a
larger scaling factor to adjust for a
longer holding period as follows:
where H equals the holding period
greater than five days. Additionally, the
FDIC may require the FDIC-supervised
institution to set a longer holding period
if the FDIC determines that a longer
period is appropriate due to the nature,
structure, or characteristics of the
transaction or is commensurate with the
risks associated with the transaction.
(d) Internal models methodology.
(1)(i) With prior written approval from
the FDIC, an FDIC-supervised
institution may use the internal models
methodology in this paragraph (d) to
determine EAD for counterparty credit
risk for derivative contracts
(collateralized or uncollateralized) and
single-product netting sets thereof, for
eligible margin loans and single-product
netting sets thereof, and for repo-style
transactions and single-product netting
sets thereof.
(ii) An FDIC-supervised institution
that uses the internal models
methodology for a particular transaction
type (derivative contracts, eligible
margin loans, or repo-style transactions)
must use the internal models
methodology for all transactions of that
transaction type. An FDIC-supervised
institution may choose to use the
internal models methodology for one or
two of these three types of exposures
and not the other types.
(iii) An FDIC-supervised institution
may also use the internal models
methodology for derivative contracts,
eligible margin loans, and repo-style
transactions subject to a qualifying
cross-product netting agreement if:
(A) The FDIC-supervised institution
effectively integrates the risk mitigating
effects of cross-product netting into its
risk management and other information
technology systems; and
individual effective EE represents in a
one-year time interval) where:
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(B) The FDIC-supervised institution
obtains the prior written approval of the
FDIC.
(iv) An FDIC-supervised institution
that uses the internal models
methodology for a transaction type must
receive approval from the FDIC to cease
using the methodology for that
transaction type or to make a material
change to its internal model.
(2) Risk-weighted assets using IMM.
Under the IMM, an FDIC-supervised
institution uses an internal model to
estimate the expected exposure (EE) for
a netting set and then calculates EAD
based on that EE. An FDIC-supervised
institution must calculate two EEs and
two EADs (one stressed and one
unstressed) for each netting set as
follows:
(i) EADunstressed is calculated using an
EE estimate based on the most recent
data meeting the requirements of
paragraph (d)(3)(vii) of this section;
(ii) EADstressed is calculated using an
EE estimate based on a historical period
that includes a period of stress to the
credit default spreads of the FDICsupervised institution’s counterparties
according to paragraph (d)(3)(viii) of
this section;
(iii) The FDIC-supervised institution
must use its internal model’s probability
distribution for changes in the fair value
of a netting set that are attributable to
changes in market variables to
determine EE; and
(iv) Under the internal models
methodology, EAD = Max (0, a ×
effective EPE¥CVA), or, subject to the
prior written approval of FDIC as
provided in paragraph (d)(10) of this
section, a more conservative measure of
EAD.
(A) CVA equals the credit valuation
adjustment that the FDIC-supervised
institution has recognized in its balance
sheet valuation of any OTC derivative
contracts in the netting set. For
purposes of this paragraph, CVA does
not include any adjustments to common
equity tier 1 capital attributable to
changes in the fair value of the FDICsupervised institution’s liabilities that
are due to changes in its own credit risk
since the inception of the transaction
with the counterparty.
(1) EffectiveEEtk = max(Effective EEtk−1,
EEtk) (that is, for a specific date tk,
effective EE is the greater of EE at that
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(A) Agross equals the gross PFE (that is,
the sum of the PFE amounts (as
determined under paragraph (c)(5)(ii) of
this section) for each individual
derivative contract subject to the
qualifying master netting agreement);
and
(B) NGR equals the net to gross ratio
(that is, the ratio of the net current
credit exposure to the gross current
credit exposure). In calculating the
NGR, the gross current credit exposure
equals the sum of the positive current
credit exposures (as determined under
paragraph (c)(6)(i) of this section) of all
individual derivative contracts subject
to the qualifying master netting
agreement.
(7) Collateralized OTC derivative
contracts. An FDIC-supervised
institution may recognize the credit risk
mitigation benefits of financial collateral
that secures an OTC derivative contract
or single-product netting set of OTC
derivatives by factoring the collateral
into its LGD estimates for the contract
or netting set. Alternatively, an FDICsupervised institution may recognize
the credit risk mitigation benefits of
financial collateral that secures such a
contract or netting set that is marked-tomarket on a daily basis and subject to
a daily margin maintenance requirement
by estimating an unsecured LGD for the
contract or netting set and adjusting the
EAD calculated under paragraph (c)(5)
or (c)(6) of this section using the
collateral haircut approach in paragraph
(b)(2) of this section. The FDICsupervised institution must substitute
the EAD calculated under paragraph
(c)(5) or (c)(6) of this section for SE in
the equation in paragraph (b)(2)(i) of
this section and must use a ten-business
day minimum holding period (TM = 10)
unless a longer holding period is
required by paragraph (b)(2)(iii)(A)(3) of
this section.
(8) Clearing member FDIC-supervised
institution’s EAD. A clearing member
FDIC-supervised institution’s EAD for
an OTC derivative contract or netting set
of OTC derivative contracts where the
FDIC-supervised institution is either
acting as a financial intermediary and
enters into an offsetting transaction with
a QCCP or where the FDIC-supervised
institution provides a guarantee to the
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(ii) The model must estimate expected
exposure at enough future dates to
reflect accurately all the future cash
flows of contracts in the netting set;
(iii) The model must account for the
possible non-normality of the exposure
distribution, where appropriate;
(iv) The FDIC-supervised institution
must measure, monitor, and control
current counterparty exposure and the
exposure to the counterparty over the
whole life of all contracts in the netting
set;
(v) The FDIC-supervised institution
must be able to measure and manage
current exposures gross and net of
collateral held, where appropriate. The
FDIC-supervised institution must
estimate expected exposures for OTC
derivative contracts both with and
without the effect of collateral
agreements;
(vi) The FDIC-supervised institution
must have procedures to identify,
monitor, and control wrong-way risk
throughout the life of an exposure. The
procedures must include stress testing
and scenario analysis;
(vii) The model must use current
market data to compute current
exposures. The FDIC-supervised
institution must estimate model
parameters using historical data from
the most recent three-year period and
update the data quarterly or more
frequently if market conditions warrant.
The FDIC-supervised institution should
consider using model parameters based
on forward-looking measures, where
appropriate;
(viii) When estimating model
parameters based on a stress period, the
FDIC-supervised institution must use at
least three years of historical data that
include a period of stress to the credit
default spreads of the FDIC-supervised
institution’s counterparties. The FDICsupervised institution must review the
data set and update the data as
necessary, particularly for any material
changes in its counterparties. The FDICsupervised institution must
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demonstrate, at least quarterly, and
maintain documentation of such
demonstration, that the stress period
coincides with increased CDS or other
credit spreads of the FDIC-supervised
institution’s counterparties. The FDICsupervised institution must have
procedures to evaluate the effectiveness
of its stress calibration that include a
process for using benchmark portfolios
that are vulnerable to the same risk
factors as the FDIC-supervised
institution’s portfolio. The FDIC may
require the FDIC-supervised institution
to modify its stress calibration to better
reflect actual historic losses of the
portfolio;
(ix) An FDIC-supervised institution
must subject its internal model to an
initial validation and annual model
review process. The model review
should consider whether the inputs and
risk factors, as well as the model
outputs, are appropriate. As part of the
model review process, the FDICsupervised institution must have a
backtesting program for its model that
includes a process by which
unacceptable model performance will
be determined and remedied;
(x) An FDIC-supervised institution
must have policies for the measurement,
management and control of collateral
and margin amounts; and
(xi) An FDIC-supervised institution
must have a comprehensive stress
testing program that captures all credit
exposures to counterparties, and
incorporates stress testing of principal
market risk factors and creditworthiness
of counterparties.
(4) Calculating the maturity of
exposures. (i) If the remaining maturity
of the exposure or the longest-dated
contract in the netting set is greater than
one year, the FDIC-supervised
institution must set M for the exposure
or netting set equal to the lower of five
years or M(EPE), where:
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emcdonald on DSK67QTVN1PROD with RULES2
date or the effective EE at the previous
date); and
(2) tk represents the kth future time
period in the model and there are n time
periods represented in the model over
the first year, and
(C) a = 1.4 except as provided in
paragraph (d)(5) of this section, or when
the FDIC has determined that the FDICsupervised institution must set a higher
based on the FDIC-supervised
institution’s specific characteristics of
counterparty credit risk or model
performance.
(v) An FDIC-supervised institution
may include financial collateral
currently posted by the counterparty as
collateral (but may not include other
forms of collateral) when calculating EE.
(vi) If an FDIC-supervised institution
hedges some or all of the counterparty
credit risk associated with a netting set
using an eligible credit derivative, the
FDIC-supervised institution may take
the reduction in exposure to the
counterparty into account when
estimating EE. If the FDIC-supervised
institution recognizes this reduction in
exposure to the counterparty in its
estimate of EE, it must also use its
internal model to estimate a separate
EAD for the FDIC-supervised
institution’s exposure to the protection
provider of the credit derivative.
(3) Prior approval relating to EAD
calculation. To obtain FDIC approval to
calculate the distributions of exposures
upon which the EAD calculation is
based, the FDIC-supervised institution
must demonstrate to the satisfaction of
the FDIC that it has been using for at
least one year an internal model that
broadly meets the following minimum
standards, with which the FDICsupervised institution must maintain
compliance:
(i) The model must have the systems
capability to estimate the expected
exposure to the counterparty on a daily
basis (but is not expected to estimate or
report expected exposure on a daily
basis);
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Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Rules and Regulations
(ii) If the remaining maturity of the
exposure or the longest-dated contract
in the netting set is one year or less, the
FDIC-supervised institution must set M
for the exposure or netting set equal to
one year, except as provided in
§ 324.131(d)(7).
(iii) Alternatively, an FDIC-supervised
institution that uses an internal model
to calculate a one-sided credit valuation
adjustment may use the effective credit
duration estimated by the model as
M(EPE) in place of the formula in
paragraph (d)(4)(i) of this section.
(5) Effects of collateral agreements on
EAD. An FDIC-supervised institution
may capture the effect on EAD of a
collateral agreement that requires
receipt of collateral when exposure to
the counterparty increases, but may not
capture the effect on EAD of a collateral
agreement that requires receipt of
collateral when counterparty credit
quality deteriorates. Two methods are
available to capture the effect of a
collateral agreement, as set forth in
paragraphs (d)(5)(i) and (ii) of this
section:
(i) With prior written approval from
the FDIC, an FDIC-supervised
institution may include the effect of a
collateral agreement within its internal
model used to calculate EAD. The FDICsupervised institution may set EAD
equal to the expected exposure at the
end of the margin period of risk. The
margin period of risk means, with
respect to a netting set subject to a
collateral agreement, the time period
from the most recent exchange of
collateral with a counterparty until the
next required exchange of collateral,
plus the period of time required to sell
and realize the proceeds of the least
liquid collateral that can be delivered
under the terms of the collateral
agreement and, where applicable, the
period of time required to re-hedge the
resulting market risk upon the default of
the counterparty. The minimum margin
period of risk is set according to
paragraph (d)(5)(iii) of this section; or
(ii) As an alternative to paragraph
(d)(5)(i) of this section, an FDICsupervised institution that can model
EPE without collateral agreements but
cannot achieve the higher level of
modeling sophistication to model EPE
with collateral agreements can set
effective EPE for a collateralized netting
set equal to the lesser of:
(A) An add-on that reflects the
potential increase in exposure of the
netting set over the margin period of
risk, plus the larger of:
(1) The current exposure of the
netting set reflecting all collateral held
or posted by the FDIC-supervised
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institution excluding any collateral
called or in dispute; or
(2) The largest net exposure including
all collateral held or posted under the
margin agreement that would not trigger
a collateral call. For purposes of this
section, the add-on is computed as the
expected increase in the netting set’s
exposure over the margin period of risk
(set in accordance with paragraph
(d)(5)(iii) of this section); or
(B) Effective EPE without a collateral
agreement plus any collateral the FDICsupervised institution posts to the
counterparty that exceeds the required
margin amount.
(iii) For purposes of this part,
including paragraphs (d)(5)(i) and (ii) of
this section, the margin period of risk
for a netting set subject to a collateral
agreement is:
(A) Five business days for repo-style
transactions subject to daily remargining
and daily marking-to-market, and ten
business days for other transactions
when liquid financial collateral is
posted under a daily margin
maintenance requirement, or
(B) Twenty business days if the
number of trades in a netting set
exceeds 5,000 at any time during the
previous quarter or contains one or
more trades involving illiquid collateral
or any derivative contract that cannot be
easily replaced (except if the FDICsupervised institution is calculating
EAD for a cleared transaction under
§ 324.133). If over the two previous
quarters more than two margin disputes
on a netting set have occurred that
lasted more than the margin period of
risk, then the FDIC-supervised
institution must use a margin period of
risk for that netting set that is at least
two times the minimum margin period
of risk for that netting set. If the
periodicity of the receipt of collateral is
N-days, the minimum margin period of
risk is the minimum margin period of
risk under this paragraph plus N minus
1. This period should be extended to
cover any impediments to prompt rehedging of any market risk.
(C) Five business days for an OTC
derivative contract or netting set of OTC
derivative contracts where the FDICsupervised institution is either acting as
a financial intermediary and enters into
an offsetting transaction with a CCP or
where the FDIC-supervised institution
provides a guarantee to the CCP on the
performance of the client. An FDICsupervised institution must use a longer
holding period if the FDIC-supervised
institution determines that a longer
period is appropriate. Additionally, the
FDIC may require the FDIC-supervised
institution to set a longer holding period
if the FDIC determines that a longer
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period is appropriate due to the nature,
structure, or characteristics of the
transaction or is commensurate with the
risks associated with the transaction.
(6) Own estimate of alpha. With prior
written approval of the FDIC, an FDICsupervised institution may calculate
alpha as the ratio of economic capital
from a full simulation of counterparty
exposure across counterparties that
incorporates a joint simulation of
market and credit risk factors
(numerator) and economic capital based
on EPE (denominator), subject to a floor
of 1.2. For purposes of this calculation,
economic capital is the unexpected
losses for all counterparty credit risks
measured at a 99.9 percent confidence
level over a one-year horizon. To receive
approval, the FDIC-supervised
institution must meet the following
minimum standards to the satisfaction
of the FDIC:
(i) The FDIC-supervised institution’s
own estimate of alpha must capture in
the numerator the effects of:
(A) The material sources of stochastic
dependency of distributions of fair
values of transactions or portfolios of
transactions across counterparties;
(B) Volatilities and correlations of
market risk factors used in the joint
simulation, which must be related to the
credit risk factor used in the simulation
to reflect potential increases in volatility
or correlation in an economic downturn,
where appropriate; and
(C) The granularity of exposures (that
is, the effect of a concentration in the
proportion of each counterparty’s
exposure that is driven by a particular
risk factor).
(ii) The FDIC-supervised institution
must assess the potential model
uncertainty in its estimates of alpha.
(iii) The FDIC-supervised institution
must calculate the numerator and
denominator of alpha in a consistent
fashion with respect to modeling
methodology, parameter specifications,
and portfolio composition.
(iv) The FDIC-supervised institution
must review and adjust as appropriate
its estimates of the numerator and
denominator of alpha on at least a
quarterly basis and more frequently
when the composition of the portfolio
varies over time.
(7) Risk-based capital requirements
for transactions with specific wrong-way
risk. An FDIC-supervised institution
must determine if a repo-style
transaction, eligible margin loan, bond
option, or equity derivative contract or
purchased credit derivative to which the
FDIC-supervised institution applies the
internal models methodology under this
paragraph (d) has specific wrong-way
risk. If a transaction has specific wrong-
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way risk, the FDIC-supervised
institution must treat the transaction as
its own netting set and exclude it from
the model described in paragraph (d)(2)
of this section and instead calculate the
risk-based capital requirement for the
transaction as follows:
(i) For an equity derivative contract,
by multiplying:
(A) K, calculated using the
appropriate risk-based capital formula
specified in Table 1 of § 324.131 using
the PD of the counterparty and LGD
equal to 100 percent, by
(B) The maximum amount the FDICsupervised institution could lose on the
equity derivative.
(ii) For a purchased credit derivative
by multiplying:
(A) K, calculated using the
appropriate risk-based capital formula
specified in Table 1 of § 324.131 using
the PD of the counterparty and LGD
equal to 100 percent, by
(B) The fair value of the reference
asset of the credit derivative.
(iii) For a bond option, by
multiplying:
(A) K, calculated using the
appropriate risk-based capital formula
specified in Table 1 of § 324.131 using
the PD of the counterparty and LGD
equal to 100 percent, by
(B) The smaller of the notional
amount of the underlying reference
asset and the maximum potential loss
under the bond option contract.
(iv) For a repo-style transaction or
eligible margin loan by multiplying:
(A) K, calculated using the
appropriate risk-based capital formula
specified in Table 1 of § 324.131 using
the PD of the counterparty and LGD
equal to 100 percent, by
(B) The EAD of the transaction
determined according to the EAD
equation in § 324.131(b)(2), substituting
the estimated value of the collateral
assuming a default of the counterparty
for the value of the collateral in SC of
the equation.
(8) Risk-weighted asset amount for
IMM exposures with specific wrong-way
risk. The aggregate risk-weighted asset
amount for IMM exposures with specific
wrong-way risk is the sum of an FDICsupervised institution’s risk-based
capital requirement for purchased credit
derivatives that are not bond options
with specific wrong-way risk as
calculated under paragraph (d)(7)(ii) of
this section, an FDIC-supervised
institution’s risk-based capital
requirement for equity derivatives with
specific wrong-way risk as calculated
under paragraph (d)(7)(i) of this section,
an FDIC-supervised institution’s riskbased capital requirement for bond
options with specific wrong-way risk as
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calculated under paragraph (d)(7)(iii) of
this section, and an FDIC-supervised
institution’s risk-based capital
requirement for repo-style transactions
and eligible margin loans with specific
wrong-way risk as calculated under
paragraph (d)(7)(iv) of this section,
multiplied by 12.5.
(9) Risk-weighted assets for IMM
exposures. (i) The FDIC-supervised
institution must insert the assigned risk
parameters for each counterparty and
netting set into the appropriate formula
specified in Table 1 of § 324.131 and
multiply the output of the formula by
the EADunstressed of the netting set to
obtain the unstressed capital
requirement for each netting set. An
FDIC-supervised institution that uses an
advanced CVA approach that captures
migrations in credit spreads under
paragraph (e)(3) of this section must set
the maturity adjustment (b) in the
formula equal to zero. The sum of the
unstressed capital requirement
calculated for each netting set equals
Kunstressed.
(ii) The FDIC-supervised institution
must insert the assigned risk parameters
for each wholesale obligor and netting
set into the appropriate formula
specified in Table 1 of § 324.131 and
multiply the output of the formula by
the EADstressed of the netting set to obtain
the stressed capital requirement for each
netting set. An FDIC-supervised
institution that uses an advanced CVA
approach that captures migrations in
credit spreads under paragraph (e)(3) of
this section must set the maturity
adjustment (b) in the formula equal to
zero. The sum of the stressed capital
requirement calculated for each netting
set equals Kstressed.
(iii) The FDIC-supervised institution’s
dollar risk-based capital requirement
under the internal models methodology
equals the larger of Kunstressed and Kstressed.
An FDIC-supervised institution’s riskweighted assets amount for IMM
exposures is equal to the capital
requirement multiplied by 12.5, plus
risk-weighted assets for IMM exposures
with specific wrong-way risk in
paragraph (d)(8) of this section and
those in paragraph (d)(10) of this
section.
(10) Other measures of counterparty
exposure. (i) With prior written
approval of the FDIC, an FDICsupervised institution may set EAD
equal to a measure of counterparty
credit risk exposure, such as peak EAD,
that is more conservative than an alpha
of 1.4 (or higher under the terms of
paragraph (d)(7)(iv)(C) of this section)
times the larger of EPEunstressed and
EPEstressed for every counterparty whose
EAD will be measured under the
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55543
alternative measure of counterparty
exposure. The FDIC-supervised
institution must demonstrate the
conservatism of the measure of
counterparty credit risk exposure used
for EAD. With respect to paragraph
(d)(10)(i) of this section:
(A) For material portfolios of new
OTC derivative products, the FDICsupervised institution may assume that
the current exposure methodology in
paragraphs (c)(5) and (c)(6) of this
section meets the conservatism
requirement of this section for a period
not to exceed 180 days.
(B) For immaterial portfolios of OTC
derivative contracts, the FDICsupervised institution generally may
assume that the current exposure
methodology in paragraphs (c)(5) and
(c)(6) of this section meets the
conservatism requirement of this
section.
(ii) To calculate risk-weighted assets
for purposes of the approach in
paragraph (d)(10)(i) of this section, the
FDIC-supervised institution must insert
the assigned risk parameters for each
counterparty and netting set into the
appropriate formula specified in Table 1
of § 324.131, multiply the output of the
formula by the EAD for the exposure as
specified above, and multiply by 12.5.
(e) Credit valuation adjustment (CVA)
risk-weighted assets. (1) In general. With
respect to its OTC derivative contracts,
an FDIC-supervised institution must
calculate a CVA risk-weighted asset
amount for its portfolio of OTC
derivative transactions that are subject
to the CVA capital requirement using
the simple CVA approach described in
paragraph (e)(5) of this section or, with
prior written approval of the FDIC, the
advanced CVA approach described in
paragraph (e)(6) of this section. An
FDIC-supervised institution that
receives prior FDIC approval to
calculate its CVA risk-weighted asset
amounts for a class of counterparties
using the advanced CVA approach must
continue to use that approach for that
class of counterparties until it notifies
the FDIC in writing that the FDICsupervised institution expects to begin
calculating its CVA risk-weighted asset
amount using the simple CVA approach.
Such notice must include an
explanation of the FDIC-supervised
institution’s rationale and the date upon
which the FDIC-supervised institution
will begin to calculate its CVA riskweighted asset amount using the simple
CVA approach.
(2) Market risk FDIC-supervised
institutions. Notwithstanding the prior
approval requirement in paragraph
(e)(1) of this section, a market risk FDICsupervised institution may calculate its
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CVA risk-weighted asset amount using
the advanced CVA approach if the
FDIC-supervised institution has FDIC
approval to:
(i) Determine EAD for OTC derivative
contracts using the internal models
methodology described in paragraph (d)
of this section; and
(ii) Determine its specific risk add-on
for debt positions issued by the
counterparty using a specific risk model
described in § 324.207(b).
(3) Recognition of hedges. (i) An
FDIC-supervised institution may
recognize a single name CDS, single
name contingent CDS, any other
equivalent hedging instrument that
references the counterparty directly, and
index credit default swaps (CDSind) as a
CVA hedge under paragraph (e)(5)(ii) of
this section or paragraph (e)(6) of this
section, provided that the position is
managed as a CVA hedge in accordance
with the FDIC-supervised institution’s
hedging policies.
(ii) An FDIC-supervised institution
shall not recognize as a CVA hedge any
tranched or nth-to-default credit
derivative.
(4) Total CVA risk-weighted assets.
Total CVA risk-weighted assets is the
CVA capital requirement, KCVA,
calculated for an FDIC-supervised
institution’s entire portfolio of OTC
derivative counterparties that are
subject to the CVA capital requirement,
multiplied by 12.5.
(5) Simple CVA approach. (i) Under
the simple CVA approach, the CVA
capital requirement, KCVA, is calculated
according to the following formula:
(A) wi equals the weight applicable to
counterparty i under Table 3 to
§ 324.132;
(B) Mi equals the EAD-weighted
average of the effective maturity of each
netting set with counterparty i (where
each netting set’s effective maturity can
be no less than one year.)
(C) EADi total equals the sum of the
EAD for all netting sets of OTC
derivative contracts with counterparty i
calculated using the current exposure
methodology described in paragraph (c)
of this section or the internal models
methodology described in paragraph (d)
of this section. When the FDICsupervised institution calculates EAD
under paragraph (c) of this section, such
EAD may be adjusted for purposes of
calculating EADi total by multiplying
EAD by (1-exp(-0.05 × Mi))/(0.05 × Mi),
where ‘‘exp’’ is the exponential
function. When the FDIC-supervised
institution calculates EAD under
paragraph (d) of this section, EADi total
equals EADunstressed.
(D) M i hedge equals the notional
weighted average maturity of the hedge
instrument.
(E) Bi equals the sum of the notional
amounts of any purchased single name
CDS referencing counterparty i that is
used to hedge CVA risk to counterparty
i multiplied by (1-exp(-0.05 × Mi hedge))/
(0.05 × Mi hedge).
(F) Mind equals the maturity of the
CDSind or the notional weighted average
maturity of any CDSind purchased to
hedge CVA risk of counterparty i.
(G) Bind equals the notional amount of
one or more CDSind purchased to hedge
CVA risk for counterparty i multiplied
by (1-exp(-0.05 × Mind))/(0.05 × Mind)
(H) wind equals the weight applicable
to the CDSind based on the average
weight of the underlying reference
names that comprise the index under
Table 3 to § 324.132.
(ii) The FDIC-supervised institution
may treat the notional amount of the
index attributable to a counterparty as a
single name hedge of counterparty i (Bi,)
when calculating KCVA, and subtract the
notional amount of Bi from the notional
amount of the CDSind. An FDICsupervised institution must treat the
CDSind hedge with the notional amount
reduced by Bi as a CVA hedge.
VaR model that it uses to determine
specific risk under § 324.207(b) or
another VaR model that meets the
quantitative requirements of
§ 324.205(b) and § 324.207(b)(1) to
calculate its CVA capital requirement
for a counterparty by modeling the
impact of changes in the counterparties’
credit spreads, together with any
recognized CVA hedges, on the CVA for
the counterparties, subject to the
following requirements:
(A) The VaR model must incorporate
only changes in the counterparties’
credit spreads, not changes in other risk
factors. The VaR model does not need
to capture jump-to-default risk;
(B) An FDIC-supervised institution
that qualifies to use the advanced CVA
approach must include in that approach
any immaterial OTC derivative
portfolios for which it uses the current
exposure methodology in paragraph (c)
of this section according to paragraph
(e)(6)(viii) of this section; and
(C) An FDIC-supervised institution
must have the systems capability to
calculate the CVA capital requirement
for a counterparty on a daily basis (but
is not required to calculate the CVA
capital requirement on a daily basis).
(ii) Under the advanced CVA
approach, the CVA capital requirement,
KCVA, is calculated according to the
following formulas:
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TABLE 3 TO § 324.132—ASSIGNMENT
OF COUNTERPARTY WEIGHT
Internal PD
(in percent)
Weight wi
(in percent)
0.00–0.07 ............................
>0.070–0.15 ........................
>0.15–0.40 ..........................
>0.40–2.00 ..........................
>2.00—6.00 ........................
>6.00 ...................................
0.70
0.80
1.00
2.00
3.00
10.00
(6) Advanced CVA approach. (i) An
FDIC-supervised institution may use the
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counterparty. Where no market
information and no reliable proxy based
on the credit quality, industry, and
region of the counterparty are available
to determine LGDMKT, an FDICsupervised institution may use a
conservative estimate when determining
LGDMKT, subject to approval by the
FDIC.
(E) EEi equals the sum of the expected
exposures for all netting sets with the
counterparty at revaluation time ti,
calculated according to paragraphs
(e)(6)(iv)(A) and (e)(6)(v)(A) of this
section.
(F) Di equals the risk-free discount factor at
time ti, where D0 = 1.
(G) Exp is the exponential function.
(H) The subscript j refers either to a stressed
or an unstressed calibration as described
(B) If the VaR model uses credit
spread sensitivities to parallel shifts in
credit spreads, the FDIC-supervised
institution must calculate each credit
in paragraphs (e)(6)(iv) and (v) of this
section.
(iii) Notwithstanding paragraphs
(e)(6)(i) and (e)(6)(ii) of this section, an
FDIC-supervised institution must use
the formulas in paragraphs (e)(6)(iii)(A)
or (e)(6)(iii)(B) of this section to
calculate credit spread sensitivities if its
VaR model is not based on full
repricing.
(A) If the VaR model is based on
credit spread sensitivities for specific
tenors, the FDIC-supervised institution
must calculate each credit spread
sensitivity according to the following
formula:
spread sensitivity according to the
following formula:
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Where
(A) ti equals the time of the i-th revaluation
time bucket starting from t0 = 0.
(B) tT equals the longest contractual maturity
across the OTC derivative contracts with
the counterparty.
(C) si equals the CDS spread for the
counterparty at tenor ti used to calculate
the CVA for the counterparty. If a CDS
spread is not available, the FDICsupervised institution must use a proxy
spread based on the credit quality,
industry and region of the counterparty.
(D) LGDMKT equals the loss given default of
the counterparty based on the spread of
a publicly traded debt instrument of the
counterparty, or, where a publicly traded
debt instrument spread is not available,
a proxy spread based on the credit
quality, industry, and region of the
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(iv) To calculate the CVAUnstressed
measure for purposes of paragraph
(e)(6)(ii) of this section, the FDICsupervised institution must:
(A) Use the EEi calculated using the
calibration of paragraph (d)(3)(vii) of
this section, except as provided in
§ 324.132 (e)(6)(vi), and
(B) Use the historical observation
period required under § 324.205(b)(2).
(v) To calculate the CVAStressed
measure for purposes of paragraph
(e)(6)(ii) of this section, the FDICsupervised institution must:
(A) Use the EEi calculated using the
stress calibration in paragraph
(d)(3)(viii) of this section except as
provided in paragraph (e)(6)(vi) of this
section.
(B) Calibrate VaR model inputs to
historical data from the most severe
twelve-month stress period contained
within the three-year stress period used
to calculate EEi. The FDIC may require
an FDIC-supervised institution to use a
different period of significant financial
stress in the calculation of the
CVAStressed measure.
(vi) If an FDIC-supervised institution
captures the effect of a collateral
agreement on EAD using the method
described in paragraph (d)(5)(ii) of this
section, for purposes of paragraph
(e)(6)(ii) of this section, the FDICsupervised institution must calculate
EEi using the method in paragraph
(d)(5)(ii) of this section and keep that EE
constant with the maturity equal to the
maximum of:
(A) Half of the longest maturity of a
transaction in the netting set, and
(B) The notional weighted average
maturity of all transactions in the
netting set.
(vii) For purposes of paragraph (e)(6)
of this section, the FDIC-supervised
institution’s VaR model must capture
the basis between the spreads of any
CDSind that is used as the hedging
instrument and the hedged counterparty
exposure over various time periods,
including benign and stressed
environments. If the VaR model does
not capture that basis, the FDICsupervised institution must reflect only
50 percent of the notional amount of the
CDSind hedge in the VaR model.
(viii) If an FDIC-supervised institution
uses the current exposure methodology
described in paragraphs (c)(5) and (c)(6)
of this section to calculate the EAD for
any immaterial portfolios of OTC
derivative contracts, the FDICsupervised institution must use that
EAD as a constant EE in the formula for
the calculation of CVA with the
maturity equal to the maximum of:
(A) Half of the longest maturity of a
transaction in the netting set, and
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(B) The notional weighted average
maturity of all transactions in the
netting set.
§ 324.133
Cleared transactions.
(a) General requirements. (1) An
FDIC-supervised institution that is a
clearing member client must use the
methodologies described in paragraph
(b) of this section to calculate riskweighted assets for a cleared
transaction.
(2) An FDIC-supervised institution
that is a clearing member must use the
methodologies described in paragraph
(c) of this section to calculate its riskweighted 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 FDICsupervised institutions—(1) Riskweighted assets for cleared transactions.
(i) To determine the risk-weighted asset
amount for a cleared transaction, an
FDIC-supervised institution 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 FDICsupervised institution’s total riskweighted assets for cleared transactions
is the sum of the risk-weighted asset
amounts for all of its cleared
transactions.
(2) Trade exposure amount. (i) For a
cleared transaction that is a derivative
contract or a netting set of derivative
contracts, trade exposure amount equals
the EAD for the derivative contract or
netting set of derivative contracts
calculated using the methodology used
to calculate EAD for OTC derivative
contracts set forth in § 324.132(c) or (d),
plus the fair value of the collateral
posted by the clearing member client
FDIC-supervised institution and held by
the CCP or a clearing member in a
manner that is not bankruptcy remote.
When the FDIC-supervised institution
calculates EAD for the cleared
transaction using the methodology in
§ 324.132(d), EAD equals EADunstressed.
(ii) For a cleared transaction that is a
repo-style transaction or netting set of
repo-style transactions, trade exposure
amount equals the EAD for the repostyle transaction calculated using the
methodology set forth in § 324.132(b)(2),
(b)(3), or (d), plus the fair value of the
collateral posted by the clearing member
client FDIC-supervised institution and
held by the CCP or a clearing member
in a manner that is not bankruptcy
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remote. When the FDIC-supervised
institution calculates EAD for the
cleared transaction under § 324.132(d),
EAD equals EADunstressed.
(3) Cleared transaction risk weights.
(i) For a cleared transaction with a
QCCP, a clearing member client FDICsupervised institution must apply a risk
weight of:
(A) 2 percent if the collateral posted
by the FDIC-supervised institution to
the QCCP or clearing member is subject
to an arrangement that prevents any loss
to the clearing member client FDICsupervised institution 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
FDIC-supervised institution has
conducted sufficient legal review to
conclude with a well-founded basis
(and maintains sufficient written
documentation of that legal review) that
in the event of a legal challenge
(including one resulting from an event
of default or from liquidation,
insolvency or receivership proceedings)
the relevant court and administrative
authorities would find the arrangements
to be legal, valid, binding and
enforceable under the law of the
relevant jurisdictions.
(B) 4 percent, if the requirements of
§ 324.132(b)(3)(i)(A) are not met.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member client FDIC-supervised
institution must apply the risk weight
applicable to the CCP under § 324.32.
(4) Collateral. (i) Notwithstanding any
other requirement of this section,
collateral posted by a clearing member
client FDIC-supervised institution that
is held by a custodian (in its capacity as
custodian) in a manner that is
bankruptcy remote from the CCP, the
custodian, clearing member, and other
clearing member clients of the clearing
member, is not subject to a capital
requirement under this section.
(ii) A clearing member client FDICsupervised institution 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 § 324.131.
(c) Clearing member FDIC-supervised
institution—(1) Risk-weighted assets for
cleared transactions. (i) To determine
the risk-weighted asset amount for a
cleared transaction, a clearing member
FDIC-supervised institution 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
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posted by the clearing member FDICsupervised institution and held by the
CCP in a manner that is not bankruptcy
remote. When the clearing member
FDIC-supervised institution calculates
EAD for the cleared transaction under
§ 324.132(d), EAD equals EADunstressed.
(3) Cleared transaction risk weights.
(i) A clearing member FDIC-supervised
institution must apply a risk weight of
2 percent to the trade exposure amount
for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member FDIC-supervised institution
must apply the risk weight applicable to
the CCP according to § 324.32.
(4) Collateral. (i) Notwithstanding any
other requirement of this section,
collateral posted by a clearing member
FDIC-supervised institution that is held
by a custodian in a manner that is
bankruptcy remote from the CCP is not
subject to a capital requirement under
this section.
(ii) A clearing member FDICsupervised institution 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 § 324.131
(d) Default fund contributions—(1)
General requirement. A clearing
member FDIC-supervised institution
must determine the risk-weighted asset
Where
(A) EBRMi equals the EAD for each
transaction cleared through the QCCP by
clearing member i, calculated using the
methodology used to calculate EAD for
OTC derivative contracts set forth in
§ 324.132(c)(5) and § 324.132.(c)(6) or the
methodology used to calculate EAD for
repo-style transactions set forth in
§ 324.132(b)(2) for repo-style
transactions, provided that:
(2) For option derivative contracts that are
cleared transactions, the PFE described in
§ 324.132(c)(5) must be adjusted by
multiplying the notional principal amount of
the derivative contract by the appropriate
conversion factor in Table 2 to § 324.132 and
the absolute value of the option’s delta, that
is, the ratio of the change in the value of the
derivative contract to the corresponding
change in the price of the underlying asset.
(3) For repo-style transactions, when
applying § 324.132(b)(2), the FDICsupervised institution must use the
methodology in § 324.132(b)(2)(ii).
(B) VMi equals any collateral posted by
clearing member i to the QCCP that it is
entitled to receive from the QCCP but has not
yet received, and any collateral that the
QCCP has actually received from clearing
member i;
(C) IMi equals the collateral posted as
initial margin by clearing member i to the
QCCP;
(D) DFi equals 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 equals 20 percent, except when the
FDIC has determined that a higher risk
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amount for a default fund contribution
to a CCP at least quarterly, or more
frequently if, in the opinion of the FDICsupervised institution or the FDIC, there
is a material change in the financial
condition of the CCP.
(2) Risk-weighted asset amount for
default fund contributions to nonqualifying CCPs. A clearing member
FDIC-supervised institution’s riskweighted asset amount for default fund
contributions to CCPs that are not
QCCPs equals the sum of such default
fund contributions multiplied by 1,250
percent or an amount determined by the
FDIC, based on factors such as size,
structure and membership
characteristics of the CCP and riskiness
of its transactions, in cases where such
default fund contributions may be
unlimited.
(3) Risk-weighted asset amount for
default fund contributions to QCCPs. A
clearing member FDIC-supervised
institution’s risk-weighted asset amount
for default fund contributions to QCCPs
equals the sum of its capital
requirement, KCM for each QCCP, as
calculated under the methodology set
forth in paragraph (d)(3)(i) of this
section (Method 1), multiplied by 1,250
percent or paragraph (d)(3)(iv) of this
section (Method 2).
(i) Method 1. The hypothetical capital
requirement of a QCCP (KCCP) equals:
(1) For purposes of this section, when
calculating the EAD, the FDICsupervised institution may replace the
formula provided in § 324.132 (c)(6)(ii)
with the following formula:
weight is more appropriate based on the
specific characteristics of the QCCP and its
clearing members; and
(F) Where a QCCP has provided its KCCP,
an FDIC-supervised institution must rely on
such disclosed figure instead of calculating
KCCP under this paragraph, unless the FDICsupervised institution determines that a more
conservative figure is appropriate based on
the nature, structure, or characteristics of the
QCCP.
(ii) For an FDIC-supervised institution that
is a clearing member of a QCCP with a
default fund supported by funded
commitments, KCM equals:
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for the cleared transaction, determined
in accordance with paragraph (c)(3) of
this section.
(ii) A clearing member FDICsupervised institution’s total riskweighted 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 FDIC-supervised
institution must calculate its trade
exposure amount for a cleared
transaction as follows:
(i) For a cleared transaction that is a
derivative contract or a netting set of
derivative contracts, trade exposure
amount equals the EAD calculated using
the methodology used to calculate EAD
for OTC derivative contracts set forth in
§ 324.132(c) or § 324.132(d), plus the
fair value of the collateral posted by the
clearing member FDIC-supervised
institution and held by the CCP in a
manner that is not bankruptcy remote.
When the clearing member FDICsupervised institution calculates EAD
for the cleared transaction using the
methodology in § 324.132(d), EAD
equals EADunstressed.
(ii) For a cleared transaction that is a
repo-style transaction or netting set of
repo-style transactions, trade exposure
amount equals the EAD calculated
under §§ 324.132(b)(2), (b)(3), or (d),
plus the fair value of the collateral
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described above in this paragraph
(d)(3)(iii), KCM equals:
Where
(1) IMi equals the FDIC-supervised
institution’s initial margin posted to the
QCCP;
(2) IMCM = the total of initial margin posted
to the QCCP; and
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(3) K*CM as defined above in this paragraph
(d)(3)(iii).
(iv) Method 2. A clearing member FDICsupervised institution’s risk-weighted
asset amount for its default fund
contribution to a QCCP, RWADF, equals:
RWADF = Min {12.5 * DF; 0.18 * TE}
Where
(A) TE equals the FDIC-supervised
institution’s trade exposure amount to
the QCCP calculated according to section
133(c)(2);
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Where
(A) DFi equals the FDIC-supervised
institution’s unfunded commitment to
the default fund;
(B) DFCM equals the total of all clearing
members’ unfunded commitments to the
default fund; and
(C) K*CM as defined in paragraph (d)(3)(ii) of
this section.
(D) For an FDIC-supervised institution that is
a clearing member of a QCCP with a
default fund supported by unfunded
commitments and that is unable to
calculate KCM using the methodology
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(B) DF equals the funded portion of the FDICsupervised institution’s default fund
contribution to the QCCP.
(v) Total risk-weighted assets for
default fund contributions. Total riskweighted assets for default fund
contributions is the sum of a clearing
member FDIC-supervised institution’s
risk-weighted assets for all of its default
fund contributions to all CCPs of which
the FDIC-supervised institution is a
clearing member.
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§ 324.134 Guarantees and credit
derivatives: PD substitution and LGD
adjustment approaches.
(a) Scope. (1) This section applies to
wholesale exposures for which:
(i) Credit risk is fully covered by an
eligible guarantee or eligible credit
derivative; or
(ii) Credit risk is covered on a pro rata
basis (that is, on a basis in which the
FDIC-supervised institution and the
protection provider share losses
proportionately) by an eligible guarantee
or eligible credit derivative.
(2) Wholesale exposures on which
there is a tranching of credit risk
(reflecting at least two different levels of
seniority) are securitization exposures
subject to §§ 324.141 through 324.145.
(3) An FDIC-supervised institution
may elect to recognize the credit risk
mitigation benefits of an eligible
guarantee or eligible credit derivative
covering an exposure described in
paragraph (a)(1) of this section by using
the PD substitution approach or the LGD
adjustment approach in paragraph (c) of
this section or, if the transaction
qualifies, using the double default
treatment in § 324.135. An FDICsupervised institution’s PD and LGD for
the hedged exposure may not be lower
than the PD and LGD floors described in
§ 324.131(d)(2) and (d)(3).
(4) If multiple eligible guarantees or
eligible credit derivatives cover a single
exposure described in paragraph (a)(1)
of this section, an FDIC-supervised
institution may treat the hedged
exposure as multiple separate exposures
each covered by a single eligible
guarantee or eligible credit derivative
and may calculate a separate risk-based
capital requirement for each separate
exposure as described in paragraph
(a)(3) of this section.
(5) If a single eligible guarantee or
eligible credit derivative covers multiple
hedged wholesale exposures described
in paragraph (a)(1) of this section, an
FDIC-supervised institution must treat
each hedged exposure as covered by a
separate eligible guarantee or eligible
credit derivative and must calculate a
separate risk-based capital requirement
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for each exposure as described in
paragraph (a)(3) of this section.
(6) An FDIC-supervised institution
must use the same risk parameters for
calculating ECL as it uses for calculating
the risk-based capital requirement for
the exposure.
(b) Rules of recognition. (1) An FDICsupervised institution may only
recognize the credit risk mitigation
benefits of eligible guarantees and
eligible credit derivatives.
(2) An FDIC-supervised institution
may only recognize the credit risk
mitigation benefits of an eligible credit
derivative to hedge an exposure that is
different from the credit derivative’s
reference exposure used for determining
the derivative’s cash settlement value,
deliverable obligation, or occurrence of
a credit event if:
(i) The reference exposure ranks pari
passu (that is, equally) with or is junior
to the hedged exposure; and
(ii) The reference exposure and the
hedged exposure are exposures to the
same legal entity, and legally
enforceable cross-default or crossacceleration clauses are in place to
assure payments under the credit
derivative are triggered when the obligor
fails to pay under the terms of the
hedged exposure.
(c) Risk parameters for hedged
exposures—(1) PD substitution
approach—(i) Full coverage. If an
eligible guarantee or eligible credit
derivative meets the conditions in
paragraphs (a) and (b) of this section
and the protection amount (P) of the
guarantee or credit derivative is greater
than or equal to the EAD of the hedged
exposure, an FDIC-supervised
institution may recognize the guarantee
or credit derivative in determining the
FDIC-supervised institution’s risk-based
capital requirement for the hedged
exposure by substituting the PD
associated with the rating grade of the
protection provider for the PD
associated with the rating grade of the
obligor in the risk-based capital formula
applicable to the guarantee or credit
derivative in Table 1 of § 324.131 and
using the appropriate LGD as described
in paragraph (c)(1)(iii) of this section. If
the FDIC-supervised institution
determines that full substitution of the
protection provider’s PD leads to an
inappropriate degree of risk mitigation,
the FDIC-supervised institution may
substitute a higher PD than that of the
protection provider.
(ii) Partial coverage. If an eligible
guarantee or eligible credit derivative
meets the conditions in paragraphs (a)
and (b) of this section and P of the
guarantee or credit derivative is less
than the EAD of the hedged exposure,
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the FDIC-supervised institution must
treat the hedged exposure as two
separate exposures (protected and
unprotected) in order to recognize the
credit risk mitigation benefit of the
guarantee or credit derivative.
(A) The FDIC-supervised institution
must calculate its risk-based capital
requirement for the protected exposure
under § 324.131, where PD is the
protection provider’s PD, LGD is
determined under paragraph (c)(1)(iii) of
this section, and EAD is P. If the FDICsupervised institution determines that
full substitution leads to an
inappropriate degree of risk mitigation,
the FDIC-supervised institution may use
a higher PD than that of the protection
provider.
(B) The FDIC-supervised institution
must calculate its risk-based capital
requirement for the unprotected
exposure under § 324.131, where PD is
the obligor’s PD, LGD is the hedged
exposure’s LGD (not adjusted to reflect
the guarantee or credit derivative), and
EAD is the EAD of the original hedged
exposure minus P.
(C) The treatment in paragraph
(c)(1)(ii) of this section is applicable
when the credit risk of a wholesale
exposure is covered on a partial pro rata
basis or when an adjustment is made to
the effective notional amount of the
guarantee or credit derivative under
paragraphs (d), (e), or (f) of this section.
(iii) LGD of hedged exposures. The
LGD of a hedged exposure under the PD
substitution approach is equal to:
(A) The lower of the LGD of the
hedged exposure (not adjusted to reflect
the guarantee or credit derivative) and
the LGD of the guarantee or credit
derivative, if the guarantee or credit
derivative provides the FDIC-supervised
institution with the option to receive
immediate payout upon triggering the
protection; or
(B) The LGD of the guarantee or credit
derivative, if the guarantee or credit
derivative does not provide the FDICsupervised institution with the option to
receive immediate payout upon
triggering the protection.
(2) LGD adjustment approach—(i)
Full coverage. If an eligible guarantee or
eligible credit derivative meets the
conditions in paragraphs (a) and (b) of
this section and the protection amount
(P) of the guarantee or credit derivative
is greater than or equal to the EAD of the
hedged exposure, the FDIC-supervised
institution’s risk-based capital
requirement for the hedged exposure is
the greater of:
(A) The risk-based capital
requirement for the exposure as
calculated under § 324.131, with the
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LGD of the exposure adjusted to reflect
the guarantee or credit derivative; or
(B) The risk-based capital requirement
for a direct exposure to the protection
provider as calculated under § 324.131,
using the PD for the protection provider,
the LGD for the guarantee or credit
derivative, and an EAD equal to the
EAD of the hedged exposure.
(ii) Partial coverage. If an eligible
guarantee or eligible credit derivative
meets the conditions in paragraphs (a)
and (b) of this section and the protection
amount (P) of the guarantee or credit
derivative is less than the EAD of the
hedged exposure, the FDIC-supervised
institution must treat the hedged
exposure as two separate exposures
(protected and unprotected) in order to
recognize the credit risk mitigation
benefit of the guarantee or credit
derivative.
(A) The FDIC-supervised institution’s
risk-based capital requirement for the
protected exposure would be the greater
of:
(1) The risk-based capital requirement
for the protected exposure as calculated
under § 324.131, with the LGD of the
exposure adjusted to reflect the
guarantee or credit derivative and EAD
set equal to P; or
(2) The risk-based capital requirement
for a direct exposure to the guarantor as
calculated under § 324.131, using the
PD for the protection provider, the LGD
for the guarantee or credit derivative,
and an EAD set equal to P.
(B) The FDIC-supervised institution
must calculate its risk-based capital
requirement for the unprotected
exposure under § 324.131, where PD is
the obligor’s PD, LGD is the hedged
exposure’s LGD (not adjusted to reflect
the guarantee or credit derivative), and
EAD is the EAD of the original hedged
exposure minus P.
(3) M of hedged exposures. For
purposes of this paragraph (c), the M of
the hedged exposure is the same as the
M of the exposure if it were unhedged.
(d) Maturity mismatch. (1) An FDICsupervised institution that recognizes an
eligible guarantee or eligible credit
derivative in determining its risk-based
capital requirement for a hedged
exposure must adjust the effective
notional amount of the credit risk
mitigant to reflect any maturity
mismatch between the hedged exposure
and the credit risk mitigant.
(2) A maturity mismatch occurs when
the residual maturity of a credit risk
mitigant is less than that of the hedged
exposure(s).
(3) The residual maturity of a hedged
exposure is the longest possible
remaining time before the obligor is
scheduled to fulfil its obligation on the
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exposure. If a credit risk mitigant has
embedded options that may reduce its
term, the FDIC-supervised institution
(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 FDICsupervised institution (protection
purchaser), but the terms of the
arrangement at origination of the credit
risk mitigant contain a positive
incentive for the FDIC-supervised
institution to call the transaction before
contractual maturity, the remaining time
to the first call date is the residual
maturity of the credit risk mitigant.26
(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 FDIC-supervised institution must
apply the following adjustment to the
effective notional amount of the credit
risk mitigant: Pm = E × (t¥0.25)/
(T¥0.25), where:
(i) Pm equals effective notional
amount of the credit risk mitigant,
adjusted for maturity mismatch;
(ii) E equals effective notional amount
of the credit risk mitigant;
(iii) t equals the lesser of T or the
residual maturity of the credit risk
mitigant, expressed in years; and
(iv) T equals the lesser of five or the
residual maturity of the hedged
exposure, expressed in years.
(e) Credit derivatives without
restructuring as a credit event. If an
FDIC-supervised institution 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 chargeoff, specific provision, or other similar
debit to the profit and loss account), the
FDIC-supervised institution must apply
the following adjustment to the effective
notional amount of the credit derivative:
Pr = Pm × 0.60, where:
(1) Pr equals effective notional amount
of the credit risk mitigant, adjusted for
lack of restructuring event (and maturity
mismatch, if applicable); and
(2) Pm equals effective notional
amount of the credit risk mitigant
26 For example, where there is a step-up in cost
in conjunction with a call feature or where the
effective cost of protection increases over time even
if credit quality remains the same or improves, the
residual maturity of the credit risk mitigant will be
the remaining time to the first call.
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adjusted for maturity mismatch (if
applicable).
(f) Currency mismatch. (1) If an FDICsupervised institution 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 FDIC-supervised institution must
apply the following formula to the
effective notional amount of the
guarantee or credit derivative: Pc = Pr ×
(1¥HFX), where:
(i) Pc equals effective notional amount
of the credit risk mitigant, adjusted for
currency mismatch (and maturity
mismatch and lack of restructuring
event, if applicable);
(ii) Pr equals effective notional
amount of the credit risk mitigant
(adjusted for maturity mismatch and
lack of restructuring event, if
applicable); and
(iii) HFX equals haircut appropriate for
the currency mismatch between the
credit risk mitigant and the hedged
exposure.
(2) An FDIC-supervised institution
must set HFX equal to 8 percent unless
it qualifies for the use of and uses its
own internal estimates of foreign
exchange volatility based on a tenbusiness-day holding period and daily
marking-to-market and remargining. An
FDIC-supervised institution qualifies for
the use of its own internal estimates of
foreign exchange volatility if it qualifies
for:
(i) The own-estimates haircuts in
§ 324.132(b)(2)(iii);
(ii) The simple VaR methodology in
§ 324.132(b)(3); or
(iii) The internal models methodology
in § 324.132(d).
(3) An FDIC-supervised institution
must adjust HFX calculated in paragraph
(f)(2) of this section upward if the FDICsupervised institution revalues the
guarantee or credit derivative less
frequently than once every ten business
days using the square root of time
formula provided in
§ 324.132(b)(2)(iii)(A)(2).
§ 324.135 Guarantees and credit
derivatives: Double default treatment.
(a) Eligibility and operational criteria
for double default treatment. An FDICsupervised institution may recognize
the credit risk mitigation benefits of a
guarantee or credit derivative covering
an exposure described in § 324.134(a)(1)
by applying the double default
treatment in this section if all the
following criteria are satisfied:
(1) The hedged exposure is fully
covered or covered on a pro rata basis
by:
(i) An eligible guarantee issued by an
eligible double default guarantor; or
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(ii) An eligible credit derivative that
meets the requirements of
§ 324.134(b)(2) and that is issued by an
eligible double default guarantor.
(2) The guarantee or credit derivative
is:
(i) An uncollateralized guarantee or
uncollateralized credit derivative (for
example, a credit default swap) that
provides protection with respect to a
single reference obligor; or
(ii) An nth-to-default credit derivative
(subject to the requirements of
§ 324.142(m)).
(3) The hedged exposure is a
wholesale exposure (other than a
sovereign exposure).
(4) The obligor of the hedged
exposure is not:
(i) An eligible double default
guarantor or an affiliate of an eligible
double default guarantor; or
(ii) An affiliate of the guarantor.
(5) The FDIC-supervised institution
does not recognize any credit risk
mitigation benefits of the guarantee or
credit derivative for the hedged
exposure other than through application
of the double default treatment as
provided in this section.
(6) The FDIC-supervised institution
has implemented a process (which has
received the prior, written approval of
the FDIC) to detect excessive correlation
between the creditworthiness of the
obligor of the hedged exposure and the
protection provider. If excessive
correlation is present, the FDICsupervised institution may not use the
double default treatment for the hedged
exposure.
(b) Full coverage. If a transaction
meets the criteria in paragraph (a) of this
section and the protection amount (P) of
the guarantee or credit derivative is at
least equal to the EAD of the hedged
exposure, the FDIC-supervised
institution may determine its riskweighted asset amount for the hedged
exposure under paragraph (e) of this
section.
(c) Partial coverage. If a transaction
meets the criteria in paragraph (a) of this
section and the protection amount (P) of
the guarantee or credit derivative is less
than the EAD of the hedged exposure,
the FDIC-supervised institution must
treat the hedged exposure as two
separate exposures (protected and
unprotected) in order to recognize
double default treatment on the
protected portion of the exposure:
(1) For the protected exposure, the
FDIC-supervised institution must set
EAD equal to P and calculate its riskweighted asset amount as provided in
paragraph (e) of this section; and
(2) For the unprotected exposure, the
FDIC-supervised institution must set
EAD equal to the EAD of the original
exposure minus P and then calculate its
risk-weighted asset amount as provided
in § 324.131.
(d) Mismatches. For any hedged
exposure to which an FDIC-supervised
institution applies double default
treatment under this part, the FDICsupervised institution must make
applicable adjustments to the protection
amount as required in §§ 324.134(d), (e),
and (f).
(e) The double default dollar riskbased capital requirement. The dollar
risk-based capital requirement for a
hedged exposure to which an FDICsupervised institution has applied
double default treatment is KDD
multiplied by the EAD of the exposure.
KDD is calculated according to the
following formula: KDD = Ko × (0.15 +
160 × PDg),
(2) PDg equals PD of the protection provider.
(3) PDo equals PD of the obligor of the hedged
exposure.
(4) LGDg equals:
(i) The lower of the LGD of the hedged
exposure (not adjusted to reflect the
guarantee or credit derivative) and the
LGD of the guarantee or credit derivative,
if the guarantee or credit derivative
provides the FDIC-supervised institution
with the option to receive immediate
payout on triggering the protection; or
(ii) The LGD of the guarantee or credit
derivative, if the guarantee or credit
derivative does not provide the FDICsupervised institution with the option to
receive immediate payout on triggering
the protection; and
(5) ros (asset value correlation of the obligor)
is calculated according to the
appropriate formula for (R) provided in
Table 1 in § 324.131, with PD equal to
PDo.
(6) b (maturity adjustment coefficient) is
calculated according to the formula for b
provided in Table 1 in § 324.131, with
PD equal to the lesser of PDo and PDg;
and
(7) M (maturity) is the effective maturity of
the guarantee or credit derivative, which
may not be less than one year or greater
than five years.
§ 324.136
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 FDICsupervised institution to the
counterparty.
(b) Scope. This section applies to all
transactions involving securities, foreign
exchange instruments, and commodities
that have a risk of delayed settlement or
delivery. This section does not apply to:
(1) Cleared transactions that are
subject to daily marking-to-market and
daily receipt and payment of variation
margin;
(2) Repo-style transactions, including
unsettled repo-style transactions (which
are addressed in §§ 324.131 and
324.132);
(3) One-way cash payments on OTC
derivative contracts (which are
addressed in §§ 324.131 and 324.132);
or
(4) Transactions with a contractual
settlement period that is longer than the
normal settlement period (which are
treated as OTC derivative contracts and
addressed in §§ 324.131 and 324.132).
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Unsettled transactions.
(a) Definitions. For purposes of this
section:
(1) Delivery-versus-payment (DvP)
transaction means a securities or
commodities transaction in which the
buyer is obligated to make payment only
if the seller has made delivery of the
securities or commodities and the seller
is obligated to deliver the securities or
commodities only if the buyer has made
payment.
(2) Payment-versus-payment (PvP)
transaction means a foreign exchange
transaction in which each counterparty
is obligated to make a final transfer of
one or more currencies only if the other
counterparty has made a final transfer of
one or more currencies.
(3) A transaction has a normal
settlement period if the contractual
settlement period for the transaction is
equal to or less than the market standard
for the instrument underlying the
transaction and equal to or less than five
business days.
(4) The positive current exposure of
an FDIC-supervised institution for a
transaction is the difference between the
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where:
(1)
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(c) System-wide failures. In the case of
a system-wide failure of a settlement or
clearing system, or a central
counterparty, the FDIC may waive riskbased capital requirements for unsettled
and failed transactions until the
situation is rectified.
(d) Delivery-versus-payment (DvP)
and payment-versus-payment (PvP)
transactions. An FDIC-supervised
institution must hold risk-based capital
against any DvP or PvP transaction with
a normal settlement period if the FDICsupervised institution’s counterparty
has not made delivery or payment
within five business days after the
settlement date. The FDIC-supervised
institution must determine its riskweighted asset amount for such a
transaction by multiplying the positive
current exposure of the transaction for
the FDIC-supervised institution by the
appropriate risk weight in Table 1 to
§ 324.136.
for the transaction provided the FDICsupervised institution uses the 45
percent LGD for all transactions
described in § 324.135(e)(1) and (e)(2).
(ii) An FDIC-supervised institution
may use a 100 percent risk weight for
the transaction provided the FDICsupervised institution uses this risk
weight for all transactions described in
§§ 324.135(e)(1) and (e)(2).
(3) If the FDIC-supervised institution
has not received its deliverables by the
fifth business day after the counterparty
delivery was due, the FDIC-supervised
institution must apply a 1,250 percent
risk weight to the current fair value of
the deliverables owed to the FDICsupervised institution.
(f) Total risk-weighted assets for
unsettled transactions. Total riskweighted assets for unsettled
transactions is the sum of the riskweighted asset amounts of all DvP, PvP,
and non-DvP/non-PvP transactions.
§§ 324.137 through 324.140 [Reserved]
TABLE 1 TO § 324.136—RISK
WEIGHTS FOR UNSETTLED DVP AND Risk-Weighted Assets for Securitization
PVP TRANSACTIONS
Exposures
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Number of business
days after contractual
settlement date
Risk weight to be
applied to positive
current exposure
(in percent)
§ 324.141 Operational criteria for
recognizing the transfer of risk.
(a) Operational criteria for traditional
securitizations. An FDIC-supervised
institution that transfers exposures it
From 5 to 15 ...............
100
has originated or purchased to a
From 16 to 30 .............
625
From 31 to 45 .............
937.5 securitization SPE or other third party
46 or more ..................
1,250
in connection with a traditional
securitization may exclude the
(e) Non-DvP/non-PvP (non-deliveryexposures from the calculation of its
versus-payment/non-payment-versusrisk-weighted assets only if each of the
payment) transactions. (1) An FDICconditions in this paragraph (a) is
supervised institution must hold risksatisfied. An FDIC-supervised
based capital against any non-DvP/non- institution that meets these conditions
PvP transaction with a normal
must hold risk-based capital against any
settlement period if the FDIC-supervised securitization exposures it retains in
institution has delivered cash,
connection with the securitization. An
securities, commodities, or currencies to FDIC-supervised institution that fails to
its counterparty but has not received its meet these conditions must hold riskcorresponding deliverables by the end
based capital against the transferred
of the same business day. The FDICexposures as if they had not been
supervised institution must continue to
securitized and must deduct from
hold risk-based capital against the
common equity tier 1 capital any aftertransaction until the FDIC-supervised
tax gain-on-sale resulting from the
institution has received its
transaction. The conditions are:
corresponding deliverables.
(1) The exposures are not reported on
(2) From the business day after the
the FDIC-supervised institution’s
FDIC-supervised institution has made
consolidated balance sheet under
its delivery until five business days after GAAP;
the counterparty delivery is due, the
(2) The FDIC-supervised institution
FDIC-supervised institution must
has transferred to one or more third
calculate its risk-based capital
parties credit risk associated with the
requirement for the transaction by
underlying exposures;
treating the current fair value of the
(3) Any clean-up calls relating to the
deliverables owed to the FDICsecuritization are eligible clean-up calls;
supervised institution as a wholesale
and
exposure.
(4) The securitization does not:
(i) An FDIC-supervised institution
(i) Include one or more underlying
may use a 45 percent LGD for the
exposures in which the borrower is
transaction rather than estimating LGD
permitted to vary the drawn amount
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55553
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, an FDIC-supervised
institution may recognize for risk-based
capital purposes under this subpart the
use of a credit risk mitigant to hedge
underlying exposures only if each of the
conditions in this paragraph (b) is
satisfied. An FDIC-supervised
institution that meets these conditions
must hold risk-based capital against any
credit risk of the exposures it retains in
connection with the synthetic
securitization. An FDIC-supervised
institution that fails to meet these
conditions or chooses not to recognize
the credit risk mitigant for purposes of
this section must hold risk-based capital
under this subpart against the
underlying exposures as if they had not
been synthetically securitized. The
conditions are:
(1) The credit risk mitigant is:
(i) Financial collateral; or
(ii) A guarantee that meets all of the
requirements of an eligible guarantee in
§ 324.2 except for paragraph (3) of the
definition; or
(iii) A credit derivative that meets all
of the requirements of an eligible credit
derivative except for paragraph (3) of
the definition of eligible guarantee in
§ 324.2.
(2) The FDIC-supervised institution
transfers credit risk associated with the
underlying exposures to third parties,
and the terms and conditions in the
credit risk mitigants employed do not
include provisions that:
(i) Allow for the termination of the
credit protection due to deterioration in
the credit quality of the underlying
exposures;
(ii) Require the FDIC-supervised
institution to alter or replace the
underlying exposures to improve the
credit quality of the underlying
exposures;
(iii) Increase the FDIC-supervised
institution’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 FDIC-supervised
institution 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 FDIC-supervised
institution after the inception of the
securitization;
(3) The FDIC-supervised institution
obtains a well-reasoned opinion from
legal counsel that confirms the
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enforceability of the credit risk mitigant
in all relevant jurisdictions; and
(4) Any clean-up calls relating to the
securitization are eligible clean-up calls.
(c) Due diligence requirements for
securitization exposures. (1) Except for
exposures that are deducted from
common equity tier 1 capital and
exposures subject to § 324.142(k), if an
FDIC-supervised institution is unable to
demonstrate to the satisfaction of the
FDIC a comprehensive understanding of
the features of a securitization exposure
that would materially affect the
performance of the exposure, the FDICsupervised institution must assign a
1,250 percent risk weight to the
securitization exposure. The FDICsupervised institution’s analysis must
be commensurate with the complexity
of the securitization exposure and the
materiality of the position in relation to
regulatory capital according to this part.
(2) An FDIC-supervised institution
must demonstrate its comprehensive
understanding of a securitization
exposure under paragraph (c)(1) of this
section, for each securitization exposure
by:
(i) Conducting an analysis of the risk
characteristics of a securitization
exposure prior to acquiring the exposure
and document such analysis within
three business days after acquiring the
exposure, considering:
(A) Structural features of the
securitization that would materially
impact the performance of the exposure,
for example, the contractual cash flow
waterfall, waterfall-related triggers,
credit enhancements, liquidity
enhancements, fair value triggers, the
performance of organizations that
service the position, and deal-specific
definitions of default;
(B) Relevant information regarding the
performance of the underlying credit
exposure(s), for example, the percentage
of loans 30, 60, and 90 days past due;
default rates; prepayment rates; loans in
foreclosure; property types; occupancy;
average credit score or other measures of
creditworthiness; average loan-to-value
ratio; and industry and geographic
diversification data on the underlying
exposure(s);
(C) Relevant market data of the
securitization, for example, bid-ask
spreads, most recent sales price and
historical price volatility, trading
volume, implied market rating, and size,
depth and concentration level of the
market for the securitization; and
(D) For resecuritization exposures,
performance information on the
underlying securitization exposures, for
example, the issuer name and credit
quality, and the characteristics and
performance of the exposures
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underlying the securitization exposures;
and
(ii) On an on-going basis (no less
frequently than quarterly), evaluating,
reviewing, and updating as appropriate
the analysis required under this section
for each securitization exposure.
§ 324.142 Risk-weighted assets for
securitization exposures.
(a) Hierarchy of approaches. Except as
provided elsewhere in this section and
in § 324.141:
(1) An FDIC-supervised institution
must deduct from common equity tier 1
capital any after-tax gain-on-sale
resulting from a securitization and must
apply a 1,250 percent risk weight to the
portion of any CEIO that does not
constitute after tax gain-on-sale;
(2) If a securitization exposure does
not require deduction or a 1,250 percent
risk weight under paragraph (a)(1) of
this section, the FDIC-supervised
institution must apply the supervisory
formula approach in § 324.143 to the
exposure if the FDIC-supervised
institution and the exposure qualify for
the supervisory formula approach
according to § 324.143(a);
(3) If a securitization exposure does
not require deduction or a 1,250 percent
risk weight under paragraph (a)(1) of
this section and does not qualify for the
supervisory formula approach, the
FDIC-supervised institution may apply
the simplified supervisory formula
approach under § 324.144;
(4) If a securitization exposure does
not require deduction or a 1,250 percent
risk weight under paragraph (a)(1) of
this section, does not qualify for the
supervisory formula approach in
§ 324.143, and the FDIC-supervised
institution does not apply the simplified
supervisory formula approach in
§ 324.144, the FDIC-supervised
institution must apply a 1,250 percent
risk weight to the exposure; and
(5) If a securitization exposure is a
derivative contract (other than
protection provided by an FDICsupervised institution in the form of a
credit derivative) that has a first priority
claim on the cash flows from the
underlying exposures (notwithstanding
amounts due under interest rate or
currency derivative contracts, fees due,
or other similar payments), an FDICsupervised institution may choose to set
the risk-weighted asset amount of the
exposure equal to the amount of the
exposure as determined in paragraph (e)
of this section rather than apply the
hierarchy of approaches described in
paragraphs (a)(1) through (4) of this
section.
(b) Total risk-weighted assets for
securitization exposures. An FDIC-
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supervised institution’s total riskweighted assets for securitization
exposures is equal to the sum of its riskweighted assets calculated using
§§ 324.141 through 146.
(c) Deductions. An FDIC-supervised
institution may calculate any deduction
from common equity tier 1 capital for a
securitization exposure net of any DTLs
associated with the securitization
exposure.
(d) Maximum risk-based capital
requirement. Except as provided in
§ 324.141(c), unless one or more
underlying exposures does not meet the
definition of a wholesale, retail,
securitization, or equity exposure, the
total risk-based capital requirement for
all securitization exposures held by a
single FDIC-supervised institution
associated with a single securitization
(excluding any risk-based capital
requirements that relate to the FDICsupervised institution’s gain-on-sale or
CEIOs associated with the
securitization) may not exceed the sum
of:
(1) The FDIC-supervised institution’s
total risk-based capital requirement for
the underlying exposures calculated
under this subpart as if the FDICsupervised institution directly held the
underlying exposures; and
(2) The total ECL of the underlying
exposures calculated under this subpart.
(e) Exposure amount of a
securitization exposure. (1) The
exposure amount of an on-balance sheet
securitization exposure that is not a
repo-style transaction, eligible margin
loan, OTC derivative contract, or cleared
transaction is the FDIC-supervised
institution’s carrying value.
(2) Except as provided in paragraph
(m) of this section, the exposure amount
of an off-balance sheet securitization
exposure that is not an OTC derivative
contract (other than a credit derivative),
repo-style transaction, eligible margin
loan, or cleared transaction (other than
a credit derivative) is the notional
amount of the exposure. For an offbalance-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
FDIC-supervised institution could be
required to fund given the ABCP
program’s current underlying assets
(calculated without regard to the current
credit quality of those assets).
(3) The exposure amount of a
securitization exposure that is a repostyle transaction, eligible margin loan,
or OTC derivative contract (other than a
credit derivative) or cleared transaction
(other than a credit derivative) is the
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EAD of the exposure as calculated in
§ 324.132 or § 324.133.
(f) Overlapping exposures. If an FDICsupervised institution has multiple
securitization exposures that provide
duplicative coverage of the underlying
exposures of a securitization (such as
when an FDIC-supervised institution
provides a program-wide credit
enhancement and multiple pool-specific
liquidity facilities to an ABCP program),
the FDIC-supervised institution is not
required to hold duplicative risk-based
capital against the overlapping position.
Instead, the FDIC-supervised institution
may assign to the overlapping
securitization exposure the applicable
risk-based capital treatment under this
subpart that results in the highest riskbased capital requirement.
(g) Securitizations of non-IRB
exposures. Except as provided in
§ 324.141(c), if an FDIC-supervised
institution has a securitization exposure
where any underlying exposure is not a
wholesale exposure, retail exposure,
securitization exposure, or equity
exposure, the FDIC-supervised
institution:
(1) Must deduct from common equity
tier 1 capital any after-tax gain-on-sale
resulting from the securitization and
apply a 1,250 percent risk weight to the
portion of any CEIO that does not
constitute gain-on-sale, if the FDICsupervised institution is an originating
FDIC-supervised institution;
(2) May apply the simplified
supervisory formula approach in
§ 324.144 to the exposure, if the
securitization exposure does not require
deduction or a 1,250 percent risk weight
under paragraph (g)(1) of this section;
(3) Must assign a 1,250 percent risk
weight to the exposure if the
securitization exposure does not require
deduction or a 1,250 percent risk weight
under paragraph (g)(1) of this section,
does not qualify for the supervisory
formula approach in § 324.143, and the
FDIC-supervised institution does not
apply the simplified supervisory
formula approach in § 324.144 to the
exposure.
(h) Implicit support. If an FDICsupervised institution provides support
to a securitization in excess of the FDICsupervised institution’s contractual
obligation to provide credit support to
the securitization (implicit support):
(1) The FDIC-supervised institution
must calculate a risk-weighted asset
amount for underlying exposures
associated with the securitization as if
the exposures had not been securitized
and must deduct from common equity
tier 1 capital any after-tax gain-on-sale
resulting from the securitization; and
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(2) The FDIC-supervised institution
must disclose publicly:
(i) That it has provided implicit
support to the securitization; and
(ii) The regulatory capital impact to
the FDIC-supervised institution of
providing such implicit support.
(i) Undrawn portion of a servicer cash
advance facility. (1) Notwithstanding
any other provision of this subpart, an
FDIC-supervised institution that is a
servicer under an eligible servicer cash
advance facility is not required to hold
risk-based capital against potential
future cash advance payments that it
may be required to provide under the
contract governing the facility.
(2) For an FDIC-supervised institution
that acts as a servicer, the exposure
amount for a servicer cash advance
facility that is not an eligible servicer
cash advance facility is equal to the
amount of all potential future cash
advance payments that the FDICsupervised institution may be
contractually required to provide during
the subsequent 12 month period under
the contract governing the facility.
(j) Interest-only mortgage-backed
securities. Regardless of any other
provisions in this part, the risk weight
for a non-credit-enhancing interest-only
mortgage-backed security may not be
less than 100 percent.
(k) Small-business loans and leases
on personal property transferred with
recourse. (1) Notwithstanding any other
provisions of this subpart E, an FDICsupervised institution that has
transferred small-business loans and
leases on personal property (smallbusiness obligations) with recourse
must include in risk-weighted assets
only the contractual amount of retained
recourse if all the following conditions
are met:
(i) The transaction is a sale under
GAAP.
(ii) The FDIC-supervised institution
establishes and maintains, pursuant to
GAAP, a non-capital reserve sufficient
to meet the FDIC-supervised
institution’s reasonably estimated
liability under the recourse
arrangement.
(iii) The loans and leases are to
businesses that meet the criteria for a
small-business concern established by
the Small Business Administration
under section 3(a) of the Small Business
Act (15 U.S.C. 632 et seq.); and
(iv) The FDIC-supervised institution
is well-capitalized, as defined in subpart
H of this part. For purposes of
determining whether an FDICsupervised institution is well
capitalized for purposes of this
paragraph, the FDIC-supervised
institution’s capital ratios must be
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calculated without regard to the capital
treatment for transfers of small-business
obligations with recourse specified in
paragraph (k)(1) of this section.
(2) The total outstanding amount of
recourse retained by an FDIC-supervised
institution on transfers of smallbusiness obligations subject to
paragraph (k)(1) of this section cannot
exceed 15 percent of the FDICsupervised institution’s total capital.
(3) If an FDIC-supervised institution
ceases to be well capitalized or exceeds
the 15 percent capital limitation in
paragraph (k)(2) of this section, the
preferential capital treatment specified
in paragraph (k)(1) of this section will
continue to apply to any transfers of
small-business obligations with recourse
that occurred during the time that the
FDIC-supervised institution was well
capitalized and did not exceed the
capital limit.
(4) The risk-based capital ratios of an
FDIC-supervised institution must be
calculated without regard to the capital
treatment for transfers of small-business
obligations with recourse specified in
paragraph (k)(1) of this section.
(l) Nth-to-default credit derivatives—
(1) Protection provider. An FDICsupervised institution must determine a
risk weight using the supervisory
formula approach (SFA) pursuant to
§ 324.143 or the simplified supervisory
formula approach (SSFA) pursuant to
§ 324.144 for an nth-to-default credit
derivative in accordance with this
paragraph. In the case of credit
protection sold, an FDIC-supervised
institution must determine its exposure
in the nth-to-default credit derivative as
the largest notional amount of all the
underlying exposures.
(2) For purposes of determining the
risk weight for an nth-to-default credit
derivative using the SFA or the SSFA,
the FDIC-supervised institution 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 FDICsupervised institution’s exposure to the
total notional amount of all underlying
exposures. For purposes of the SSFA,
parameter A is expressed as a decimal
value between zero and one. For
purposes of using the SFA to calculate
the risk weight for its exposure in an nthto-default credit derivative, parameter A
must be set equal to the credit
enhancement level (L) input to the SFA
formula. In the case of a first-to-default
credit derivative, there are no
underlying exposures that are
subordinated to the FDIC-supervised
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institution’s exposure. In the case of a
second-or-subsequent-to-default credit
derivative, the smallest (n-1) riskweighted asset amounts of the
underlying exposure(s) are subordinated
to the FDIC-supervised institution’s
exposure.
(ii) The detachment point (parameter
D) equals the sum of parameter A plus
the ratio of the notional amount of the
FDIC-supervised institution’s exposure
in the nth-to-default credit derivative to
the total notional amount of all
underlying exposures. For purposes of
the SSFA, parameter W is expressed as
a decimal value between zero and one.
For purposes of the SFA, parameter D
must be set to equal L plus the thickness
of tranche T input to the SFA formula.
(3) An FDIC-supervised institution
that does not use the SFA or the SSFA
to determine a risk weight for its
exposure in an nth-to-default credit
derivative must assign a risk weight of
1,250 percent to the exposure.
(4) Protection purchaser—(i) First-todefault credit derivatives. An FDICsupervised institution that obtains
credit protection on a group of
underlying exposures through a first-todefault credit derivative that meets the
rules of recognition of § 324.134(b) must
determine its risk-based capital
requirement under this subpart for the
underlying exposures as if the FDICsupervised institution synthetically
securitized the underlying exposure
with the lowest risk-based capital
requirement and had obtained no credit
risk mitigant on the other underlying
exposures. An FDIC-supervised
institution must calculate a risk-based
capital requirement for counterparty
credit risk according to § 324.132 for a
first-to-default credit derivative that
does not meet the rules of recognition of
§ 324.134(b).
(ii) Second-or-subsequent-to-default
credit derivatives. (A) An FDICsupervised institution that obtains
credit protection on a group of
underlying exposures through a nth-todefault credit derivative that meets the
rules of recognition of § 324.134(b)
(other than a first-to-default credit
derivative) may recognize the credit risk
mitigation benefits of the derivative
only if:
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(1) The FDIC-supervised institution
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 an FDIC-supervised institution
satisfies the requirements of paragraph
(l)(3)(ii)(A) of this section, the FDICsupervised institution must determine
its risk-based capital requirement for the
underlying exposures as if the bank had
only synthetically securitized the
underlying exposure with the nth
smallest risk-based capital requirement
and had obtained no credit risk mitigant
on the other underlying exposures.
(C) An FDIC-supervised institution
must calculate a risk-based capital
requirement for counterparty credit risk
according to § 324.132 for a nth-todefault credit derivative that does not
meet the rules of recognition of
§ 324.134(b).
(m) Guarantees and credit derivatives
other than nth-to-default credit
derivatives—(1) Protection provider. For
a guarantee or credit derivative (other
than an nth-to-default credit derivative)
provided by an FDIC-supervised
institution that covers the full amount
or a pro rata share of a securitization
exposure’s principal and interest, the
FDIC-supervised institution 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) An FDICsupervised institution that purchases an
OTC credit derivative (other than an nthto-default credit derivative) that is
recognized under § 324.145 as a credit
risk mitigant (including via recognized
collateral) is not required to compute a
separate counterparty credit risk capital
requirement under § 324.131 in
accordance with § 324.132(c)(3).
(ii) If an FDIC-supervised institution
cannot, or chooses not to, recognize a
purchased credit derivative as a credit
risk mitigant under § 324.145, the FDICsupervised institution must determine
the exposure amount of the credit
derivative under § 324.132(c).
(A) If the FDIC-supervised institution
purchases credit protection from a
counterparty that is not a securitization
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SPE, the FDIC-supervised institution
must determine the risk weight for the
exposure according to § 324.131.
(B) If the FDIC-supervised institution
purchases the credit protection from a
counterparty that is a securitization
SPE, the FDIC-supervised institution
must determine the risk weight for the
exposure according to this § 324.142,
including paragraph (a)(5) of this
section for a credit derivative that has a
first priority claim on the cash flows
from the underlying exposures of the
securitization SPE (notwithstanding
amounts due under interest rate or
currency derivative contracts, fees due,
or other similar payments.
§ 324.143
(SFA).
Supervisory formula approach
(a) Eligibility requirements. An FDICsupervised institution must use the SFA
to determine its risk-weighted asset
amount for a securitization exposure if
the FDIC-supervised institution can
calculate on an ongoing basis each of
the SFA parameters in paragraph (e) of
this section.
(b) Mechanics. The risk-weighted
asset amount for a securitization
exposure equals its SFA risk-based
capital requirement as calculated under
paragraph (c) and (d) of this section,
multiplied by 12.5.
(c) The SFA risk-based capital
requirement. (1) If KIRB is greater than
or equal to L+T, an exposure’s SFA riskbased capital requirement equals the
exposure amount.
(2) If KIRB is less than or equal to L,
an exposure’s SFA risk-based capital
requirement is UE multiplied by TP
multiplied by the greater of:
(i) F · T (where F is 0.016 for all
securitization exposures); or
(ii) S[L + T] ¥ S[L].
(3) If KIRB is greater than L and less
than L +T, the FDIC-supervised
institution must apply a 1,250 percent
risk weight to an amount equal to UE ·
TP · (KIRB ¥ L), and the exposure’s SFA
risk-based capital requirement is UE
multiplied by TP multiplied by the
greater of:
(i) F · (T ¥ (KIRB ¥ L)) (where F is
0.016 for all other securitization
exposures); or
(ii) S[L + T] ¥ S[KIRB].
(d) The supervisory formula:
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(e) SFA parameters. For purposes of
the calculations in paragraphs (c) and
(d) of this section:
(1) Amount of the underlying
exposures (UE). UE is the EAD of any
underlying exposures that are wholesale
and retail exposures (including the
amount of any funded spread accounts,
cash collateral accounts, and other
similar funded credit enhancements)
plus the amount of any underlying
exposures that are securitization
exposures (as defined in § 324.142(e))
plus the adjusted carrying value of any
underlying exposures that are equity
exposures (as defined in § 324.151(b)).
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(2) Tranche percentage (TP). TP is the
ratio of the amount of the FDICsupervised institution’s securitization
exposure to the amount of the tranche
that contains the securitization
exposure.
(3) Capital requirement on underlying
exposures (KIRB). (i) KIRB is the ratio of:
(A) The sum of the risk-based capital
requirements for the underlying
exposures plus the expected credit
losses of the underlying exposures (as
determined under this subpart E as if
the underlying exposures were directly
held by the FDIC-supervised
institution); to
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(B) UE.
(ii) The calculation of KIRB must
reflect the effects of any credit risk
mitigant applied to the underlying
exposures (either to an individual
underlying exposure, to a group of
underlying exposures, or to all of the
underlying exposures).
(iii) All assets related to the
securitization are treated as underlying
exposures, including assets in a reserve
account (such as a cash collateral
account).
(4) Credit enhancement level (L). (i) L
is the ratio of:
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where:
(i) Cm is the ratio of the sum of the amounts
of the ‘m’ largest underlying exposures to
UE; and
(ii) The level of m is to be selected by the
FDIC-supervised institution.
(4) Alternatively, if only C1 is
available and C1 is no more than 0.03,
the FDIC-supervised institution may set
EWALGD = 0.50 if none of the
underlying exposures is a securitization
exposure, or may set EWALGD = 1 if
one or more of the underlying exposures
is a securitization exposure and may set
N = 1/C1.
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§ 324.144 Simplified supervisory formula
approach (SSFA).
(a) General requirements for the
SSFA. To use the SSFA to determine the
risk weight for a securitization
exposure, an FDIC-supervised
institution 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
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provides credit enhancement for the
securitization exposure.
(5) Thickness of tranche (T). T is the
ratio of:
(i) The amount of the tranche that
contains the FDIC-supervised
institution’s securitization exposure; to
(ii) UE.
(6) Effective number of exposures (N).
(i) Unless the FDIC-supervised
institution elects to use the formula
provided in paragraph (f) of this section,
where EADi represents the EAD
associated with the ith instrument in the
underlying exposures.
(ii) Multiple exposures to one obligor
must be treated as a single underlying
exposure.
(iii) In the case of a resecuritization,
the FDIC-supervised institution must
treat each underlying exposure as a
single underlying exposure and must
not look through to the originally
securitized underlying exposures.
(7) Exposure-weighted average loss
given default (EWALGD). EWALGD is
calculated as:
where LGDi represents the average
LGD associated with all exposures to the
ith obligor. In the case of a
resecuritization, an LGD of 100 percent
must be assumed for the underlying
exposures that are themselves
securitization exposures.
(f) Simplified method for computing N
and EWALGD. (1) If all underlying
exposures of a securitization are retail
exposures, an FDIC-supervised
institution may apply the SFA using the
following simplifications:
(i) h = 0; and
(ii) v = 0.
(2) Under the conditions in
§§ 324.143(f)(3) and (f)(4), an FDICsupervised institution may employ a
simplified method for calculating N and
EWALGD.
(3) If C1 is no more than 0.03, an
FDIC-supervised institution may set
EWALGD = 0.50 if none of the
underlying exposures is a securitization
exposure, or may set EWALGD = 1 if
one or more of the underlying exposures
is a securitization exposure, and may set
N equal to the following amount:
this section must be the most currently
available data; if the contracts governing
the underlying exposures of the
securitization require payments on a
monthly or quarterly basis, the data
used to assign the parameters described
in paragraph (b) of this section must be
no more than 91 calendar days old. An
FDIC-supervised institution that does
not have the appropriate data to assign
the parameters described in paragraph
(b) of this section must assign a risk
weight of 1,250 percent to the exposure.
(b) SSFA parameters. To calculate the
risk weight for a securitization exposure
using the SSFA, an FDIC-supervised
institution must have accurate
information on the following five inputs
to the SSFA calculation:
(1) KG is the weighted-average (with
unpaid principal used as the weight for
each exposure) total capital requirement
of the underlying exposures calculated
using subpart D of this part. KG is
expressed as a decimal value between
zero and one (that is, an average risk
weight of 100 percent represents a value
of KG equal to 0.08).
(2) Parameter W is expressed as a
decimal value between zero and one.
Parameter W is the ratio of the sum of
the dollar amounts of any underlying
exposures of the securitization that meet
any of the criteria as set forth in
paragraphs (b)(2)(i) through (vi) of this
section to the balance, measured in
dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or
insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred
payments for 90 days or more, other
than principal or interest payments
deferred on:
(A) Federally-guaranteed student
loans, in accordance with the terms of
those guarantee programs; or
(B) Consumer loans, including nonfederally-guaranteed student loans,
provided that such payments are
deferred pursuant to provisions
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(A) The amount of all securitization
exposures subordinated to the tranche
that contains the FDIC-supervised
institution’s securitization exposure; to
(B) UE.
(ii) An FDIC-supervised institution
must determine L before considering the
effects of any tranche-specific credit
enhancements.
(iii) Any gain-on-sale or CEIO
associated with the securitization may
not be included in L.
(iv) Any reserve account funded by
accumulated cash flows from the
underlying exposures that is
subordinated to the tranche that
contains the FDIC-supervised
institution’s securitization exposure
may be included in the numerator and
denominator of L to the extent cash has
accumulated in the account. Unfunded
reserve accounts (that is, reserve
accounts that are to be funded from
future cash flows from the underlying
exposures) may not be included in the
calculation of L.
(v) In some cases, the purchase price
of receivables will reflect a discount that
provides credit enhancement (for
example, first loss protection) for all or
certain tranches of the securitization.
When this arises, L should be calculated
inclusive of this discount if the discount
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included in the contract at the time
funds are disbursed that provide for
period(s) of deferral that are not
initiated based on changes in the
creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment
point for the exposure, which represents
the threshold at which credit losses will
first be allocated to the exposure. Except
as provided in § 324.142(l) for nth-todefault credit derivatives, parameter A
equals the ratio of the current dollar
amount of underlying exposures that are
subordinated to the exposure of the
FDIC-supervised institution 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 FDIC-supervised
institution’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.
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(4) Parameter D is the detachment
point for the exposure, which represents
the threshold at which credit losses of
principal allocated to the exposure
would result in a total loss of principal.
Except as provided in § 324.142(l) for
nth-to-default credit derivatives,
parameter D equals parameter A plus
the ratio of the current dollar amount of
the securitization exposures that are
pari passu with the exposure (that is,
have equal seniority with respect to
credit risk) to the current dollar amount
of the underlying exposures. Parameter
D is expressed as a decimal value
between zero and one.
(5) A supervisory calibration
parameter, p, is equal to 0.5 for
securitization exposures that are not
resecuritization exposures and equal to
1.5 for resecuritization exposures.
(c) Mechanics of the SSFA. KG and W
are used to calculate KA, the augmented
value of KG, which reflects the observed
credit quality of the underlying
exposures. KA is defined in paragraph
(d) of this section. The values of
parameters A and D, relative to KA
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determine the risk weight assigned to a
securitization exposure as described in
paragraph (d) of this section. The risk
weight assigned to a securitization
exposure, or portion of a securitization
exposure, as appropriate, is the larger of
the risk weight determined in
accordance with this paragraph,
paragraph (d) of this section, and a risk
weight of 20 percent.
(1) When the detachment point,
parameter D, for a securitization
exposure is less than or equal to KA, the
exposure must be assigned a risk weight
of 1,250 percent;
(2) When the attachment point,
parameter A, for a securitization
exposure is greater than or equal to KA,
the FDIC-supervised institution must
calculate the risk weight in accordance
with paragraph (d) of this section;
(3) When A is less than KA and D is
greater than KA, the risk weight is a
weighted-average of 1,250 percent and
1,250 percent times KSSFA calculated in
accordance with paragraph (d) of this
section. For the purpose of this
weighted-average calculation:
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§ 324.145 Recognition of credit risk
mitigants for securitization exposures.
(a) General. An originating FDICsupervised institution that has obtained
a credit risk mitigant to hedge its
securitization exposure to a synthetic or
traditional securitization that satisfies
the operational criteria in § 324.141 may
recognize the credit risk mitigant, but
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only as provided in this section. An
investing FDIC-supervised institution
that has obtained a credit risk mitigant
to hedge a securitization exposure may
recognize the credit risk mitigant, but
only as provided in this section.
(b) Collateral—(1) Rules of
recognition. An FDIC-supervised
institution may recognize financial
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collateral in determining the FDICsupervised institution’s risk-weighted
asset amount for a securitization
exposure (other than a repo-style
transaction, an eligible margin loan, or
an OTC derivative contract for which
the FDIC-supervised institution has
reflected collateral in its determination
of exposure amount under § 324.132) as
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follows. The FDIC-supervised
institution’s risk-weighted asset amount
for the collateralized securitization
exposure is equal to the risk-weighted
asset amount for the securitization
exposure as calculated under the SSFA
in § 324.144 or under the SFA in
§ 324.143 multiplied by the ratio of
adjusted exposure amount (SE*) to
original exposure amount (SE), where:
(i) SE* equals max {0, [SE ¥ C × (1¥
Hs ¥ Hfx)]};
(ii) SE equals the amount of the
securitization exposure calculated
under § 324.142(e);
(iii) C equals the current fair value of
the collateral;
(iv) Hs equals the haircut appropriate
to the collateral type; and
(v) Hfx equals the haircut appropriate
for any currency mismatch between the
collateral and the exposure.
(3) Standard supervisory haircuts.
Unless an FDIC-supervised institution
qualifies for use of and uses ownestimates haircuts in paragraph (b)(4) of
this section:
(i) An FDIC-supervised institution
must use the collateral type haircuts (Hs)
in Table 1 to § 324.132 of this subpart;
(ii) An FDIC-supervised institution
must use a currency mismatch haircut
(Hfx) of 8 percent if the exposure and the
collateral are denominated in different
currencies;
(iii) An FDIC-supervised institution
must multiply the supervisory haircuts
obtained in paragraphs (b)(3)(i) and (ii)
of this section by the square root of 6.5
(which equals 2.549510); and
(iv) An FDIC-supervised institution
must adjust the supervisory haircuts
upward on the basis of a holding period
longer than 65 business days where and
as appropriate to take into account the
illiquidity of the collateral.
(4) Own estimates for haircuts. With
the prior written approval of the FDIC,
an FDIC-supervised institution may
calculate haircuts using its own internal
estimates of market price volatility and
foreign exchange volatility, subject to
§ 324.132(b)(2)(iii). The minimum
holding period (TM) for securitization
exposures is 65 business days.
(c) Guarantees and credit
derivatives—(1) Limitations on
recognition. An FDIC-supervised
institution may only recognize an
eligible guarantee or eligible credit
derivative provided by an eligible
guarantor in determining the FDICsupervised institution’s risk-weighted
asset amount for a securitization
exposure.
(2) ECL for securitization exposures.
When an FDIC-supervised institution
recognizes an eligible guarantee or
eligible credit derivative provided by an
eligible guarantor in determining the
FDIC-supervised institution’s riskweighted asset amount for a
securitization exposure, the FDICsupervised institution must also:
(i) Calculate ECL for the protected
portion of the exposure using the same
risk parameters that it uses for
calculating the risk-weighted asset
amount of the exposure as described in
paragraph (c)(3) of this section; and
(ii) Add the exposure’s ECL to the
FDIC-supervised institution’s total ECL.
(3) Rules of recognition. An FDICsupervised institution may recognize an
eligible guarantee or eligible credit
derivative provided by an eligible
guarantor in determining the FDICsupervised institution’s risk-weighted
asset amount for the securitization
exposure as follows:
(i) Full coverage. If the protection
amount of the eligible guarantee or
eligible credit derivative equals or
exceeds the amount of the securitization
exposure, the FDIC-supervised
institution may set the risk-weighted
asset amount for the securitization
exposure equal to the risk-weighted
asset amount for a direct exposure to the
eligible guarantor (as determined in the
wholesale risk weight function
described in § 324.131), using the FDICsupervised institution’s PD for the
guarantor, the FDIC-supervised
institution’s LGD for the guarantee or
credit derivative, and an EAD equal to
the amount of the securitization
exposure (as determined in
§ 324.142(e)).
(ii) Partial coverage. If the protection
amount of the eligible guarantee or
eligible credit derivative is less than the
amount of the securitization exposure,
the FDIC-supervised institution may set
the risk-weighted asset amount for the
securitization exposure equal to the sum
of:
(A) Covered portion. The riskweighted asset amount for a direct
exposure to the eligible guarantor (as
determined in the wholesale risk weight
function described in § 324.131), using
the FDIC-supervised institution’s PD for
the guarantor, the FDIC-supervised
institution’s LGD for the guarantee or
credit derivative, and an EAD equal to
the protection amount of the credit risk
mitigant; and
(B) Uncovered portion. (1) 1.0 minus
the ratio of the protection amount of the
eligible guarantee or eligible credit
derivative to the amount of the
securitization exposure); multiplied by
(2) The risk-weighted asset amount for
the securitization exposure without the
credit risk mitigant (as determined in
§§ 324.142 through 324.146).
(4) Mismatches. The FDIC-supervised
institution must make applicable
adjustments to the protection amount as
required in § 324.134(d), (e), and (f) for
any hedged securitization exposure and
any more senior securitization exposure
that benefits from the hedge. In the
context of a synthetic securitization,
when an eligible guarantee or eligible
credit derivative covers multiple hedged
exposures that have different residual
maturities, the FDIC-supervised
institution must use the longest residual
maturity of any of the hedged exposures
as the residual maturity of all the
hedged exposures.
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§§ 324.146 through 324.150
[Reserved]
Risk-Weighted Assets for Equity
Exposures
§ 324.151 Introduction and exposure
measurement.
(a) General. (1) To calculate its riskweighted asset amounts for equity
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exposures that are not equity exposures
to investment funds, an FDICsupervised institution may apply either
the Simple Risk Weight Approach
(SRWA) in § 324.152 or, if it qualifies to
do so, the Internal Models Approach
(IMA) in § 324.153. An FDIC-supervised
institution must use the look-through
approaches provided in § 324.154 to
calculate its risk-weighted asset
amounts for equity exposures to
investment funds.
(2) An FDIC-supervised institution
must treat an investment in a separate
account (as defined in § 324.2), as if it
were an equity exposure to an
investment fund as provided in
§ 324.154.
(3) Stable value protection. (i) Stable
value protection means a contract where
the provider of the contract is obligated
to pay:
(A) The policy owner of a separate
account an amount equal to the shortfall
between the fair value and cost basis of
the separate account when the policy
owner of the separate account
surrenders the policy, or
(B) The beneficiary of the contract an
amount equal to the shortfall between
the fair value and book value of a
specified portfolio of assets.
(ii) An FDIC-supervised institution
that purchases stable value protection
on its investment in a separate account
must treat the portion of the carrying
value of its investment in the separate
account attributable to the stable value
protection as an exposure to the
provider of the protection and the
remaining portion of the carrying value
of its separate account as an equity
exposure to an investment fund.
(iii) An FDIC-supervised institution
that provides stable value protection
must treat the exposure as an equity
derivative with an adjusted carrying
value determined as the sum of
§ 324.151(b)(1) and (2).
(b) Adjusted carrying value. For
purposes of this subpart, the adjusted
carrying value of an equity exposure is:
(1) For the on-balance sheet
component of an equity exposure, the
FDIC-supervised institution’s carrying
value of the exposure;
(2) For the off-balance sheet
component of an equity exposure, the
effective notional principal amount of
the exposure, the size of which is
equivalent to a hypothetical on-balance
sheet position in the underlying equity
instrument that would evidence the
same change in fair value (measured in
dollars) for a given small change in the
price of the underlying equity
instrument, minus the adjusted carrying
value of the on-balance sheet
component of the exposure as
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calculated in paragraph (b)(1) of this
section.
(3) For unfunded equity commitments
that are unconditional, the effective
notional principal amount is the
notional amount of the commitment.
For unfunded equity commitments that
are conditional, the effective notional
principal amount is the FDICsupervised institution’s best estimate of
the amount that would be funded under
economic downturn conditions.
§ 324.152
(SRWA).
Simple risk weight approach
(a) General. Under the SRWA, an
FDIC-supervised institution’s aggregate
risk-weighted asset amount for its equity
exposures is equal to the sum of the
risk-weighted asset amounts for each of
the FDIC-supervised institution’s
individual equity exposures (other than
equity exposures to an investment fund)
as determined in this section and the
risk-weighted asset amounts for each of
the FDIC-supervised institution’s
individual equity exposures to an
investment fund as determined in
§ 324.154.
(b) SRWA computation for individual
equity exposures. An FDIC-supervised
institution must determine the riskweighted asset amount for an individual
equity exposure (other than an equity
exposure to an investment fund) by
multiplying the adjusted carrying value
of the equity exposure or the effective
portion and ineffective portion of a
hedge pair (as defined in paragraph (c)
of this section) by the lowest applicable
risk weight in this section.
(1) Zero percent risk weight equity
exposures. An equity exposure to an
entity whose credit exposures are
exempt from the 0.03 percent PD floor
in § 324.131(d)(2) is assigned a zero
percent risk weight.
(2) 20 percent risk weight equity
exposures. An equity exposure to a
Federal Home Loan Bank or the Federal
Agricultural Mortgage Corporation
(Farmer Mac) is assigned a 20 percent
risk weight.
(3) 100 percent risk weight equity
exposures. The following equity
exposures are assigned a 100 percent
risk weight:
(i) Community development equity
exposures. An equity exposure that
qualifies as a community development
investment under section 24 (Eleventh)
of the National Bank Act, excluding
equity exposures to an unconsolidated
small business investment company and
equity exposures held through a
consolidated small business investment
company described in section 302 of the
Small Business Investment Act.
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(ii) Effective portion of hedge pairs.
The effective portion of a hedge pair.
(iii) Non-significant equity exposures.
Equity exposures, excluding significant
investments in the capital of an
unconsolidated institution in the form
of common stock and exposures to an
investment firm that would meet the
definition of a traditional securitization
were it not for the FDIC’s application of
paragraph (8) of that definition in
§ 324.2 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 FDICsupervised institution’s total capital.
(A) To compute the aggregate adjusted
carrying value of an FDIC-supervised
institution’s equity exposures for
purposes of this section, the FDICsupervised institution 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 an FDIC-supervised
institution does not know the actual
holdings of the investment fund, the
FDIC-supervised institution 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 FDIC-supervised institution
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 an
FDIC-supervised institution’s equity
exposures qualifies for a 100 percent
risk weight under this section, an FDICsupervised institution first must include
equity exposures to unconsolidated
small business investment companies or
held through consolidated small
business investment companies
described in section 302 of the Small
Business Investment Act, then must
include publicly traded equity
exposures (including those held
indirectly through investment funds),
and then must include non-publicly
traded equity exposures (including
those held indirectly through
investment funds).
(4) 250 percent risk weight equity
exposures. Significant investments in
the capital of unconsolidated financial
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institutions in the form of common
stock that are not deducted from capital
pursuant to § 324.22(b)(4) are assigned a
250 percent risk weight.
(5) 300 percent risk weight equity
exposures. A publicly traded equity
exposure (other than an equity exposure
described in paragraph (b)(6) of this
section and including the ineffective
portion of a hedge pair) is assigned a
300 percent risk weight.
(6) 400 percent risk weight equity
exposures. An equity exposure (other
than an equity exposure described in
paragraph (b)(6) of this section) that is
not publicly traded is assigned a 400
percent risk weight.
(7) 600 percent risk weight equity
exposures. An equity exposure to an
investment firm that:
(i) Would meet the definition of a
traditional securitization were it not for
the FDIC’s application of paragraph (8)
of that definition in § 324.2; and
(ii) Has greater than immaterial
leverage is assigned a 600 percent risk
weight.
(c) Hedge transactions—(1) Hedge
pair. A hedge pair is two equity
exposures that form an effective hedge
so long as each equity exposure is
publicly traded or has a return that is
primarily based on a publicly traded
equity exposure.
(2) Effective hedge. Two equity
exposures form an effective hedge if the
exposures either have the same
remaining maturity or each has a
remaining maturity of at least three
months; the hedge relationship is
formally documented in a prospective
manner (that is, before the FDICsupervised institution acquires at least
one of the equity exposures); the
documentation specifies the measure of
effectiveness (E) the FDIC-supervised
institution 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. An
FDIC-supervised institution 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 FDICsupervised institution must determine
the ratio of value change (RVC). The
RVC is the ratio of the cumulative sum
of the periodic changes in value of one
equity exposure to the cumulative sum
of the periodic changes in the value of
the other equity exposure. If RVC is
positive, the hedge is not effective and
E equals zero. If RVC is negative and
greater than or equal to -1 (that is,
between zero and -1), then E equals the
absolute value of RVC. If RVC is
negative and less than -1, then E equals
2 plus RVC.
(ii) Under the variability-reduction
method of measuring effectiveness:
(iii) Under the regression method of
measuring effectiveness, E equals the
coefficient of determination of a
regression in which the change in value
of one exposure in a hedge pair is the
dependent variable and the change in
value of the other exposure in a hedge
pair is the independent variable.
However, if the estimated regression
coefficient is positive, then the value of
E is zero.
(3) The effective portion of a hedge
pair is E multiplied by the greater of the
adjusted carrying values of the equity
exposures forming a hedge pair.
(4) The ineffective portion of a hedge
pair is (1–E) multiplied by the greater of
the adjusted carrying values of the
equity exposures forming a hedge pair.
publicly traded and non-publicly traded
equity exposures (in accordance with
paragraph (c) of this section) or by
modeling only publicly traded equity
exposures (in accordance with
paragraphs (c) and (d) of this section).
(b) Qualifying criteria. To qualify to
use the IMA to calculate risk-weighted
assets for equity exposures, an FDICsupervised institution must receive
prior written approval from the FDIC.
To receive such approval, the FDICsupervised institution must demonstrate
to the FDIC’s satisfaction that the FDICsupervised institution meets the
following criteria:
(1) The FDIC-supervised institution
must have one or more models that:
(i) Assess the potential decline in
value of its modeled equity exposures;
(ii) Are commensurate with the size,
complexity, and composition of the
FDIC-supervised institution’s modeled
equity exposures; and
(iii) Adequately capture both general
market risk and idiosyncratic risk.
(2) The FDIC-supervised institution’s
model must produce an estimate of
potential losses for its modeled equity
exposures that is no less than the
estimate of potential losses produced by
a VaR methodology employing a 99th
percentile one-tailed confidence interval
of the distribution of quarterly returns
for a benchmark portfolio of equity
exposures comparable to the FDICsupervised institution’s modeled equity
exposures using a long-term sample
period.
(3) The number of risk factors and
exposures in the sample and the data
period used for quantification in the
FDIC-supervised institution’s model and
benchmarking exercise must be
sufficient to provide confidence in the
accuracy and robustness of the FDICsupervised institution’s estimates.
(4) The FDIC-supervised institution’s
model and benchmarking process must
§ 324.153
Internal models approach (IMA).
(a) General. An FDIC-supervised
institution may calculate its riskweighted asset amount for equity
exposures using the IMA by modeling
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incorporate data that are relevant in
representing the risk profile of the FDICsupervised institution’s modeled equity
exposures, and must include data from
at least one equity market cycle
containing adverse market movements
relevant to the risk profile of the FDICsupervised institution’s modeled equity
exposures. In addition, the FDICsupervised institution’s benchmarking
exercise must be based on daily market
prices for the benchmark portfolio. If the
FDIC-supervised institution’s model
uses a scenario methodology, the FDICsupervised institution must demonstrate
that the model produces a conservative
estimate of potential losses on the FDICsupervised institution’s modeled equity
exposures over a relevant long-term
market cycle. If the FDIC-supervised
institution employs risk factor models,
the FDIC-supervised institution must
demonstrate through empirical analysis
the appropriateness of the risk factors
used.
(5) The FDIC-supervised institution
must be able to demonstrate, using
theoretical arguments and empirical
evidence, that any proxies used in the
modeling process are comparable to the
FDIC-supervised institution’s modeled
equity exposures and that the FDICsupervised institution has made
appropriate adjustments for differences.
The FDIC-supervised institution must
derive any proxies for its modeled
equity exposures and benchmark
portfolio using historical market data
that are relevant to the FDIC-supervised
institution’s modeled equity exposures
and benchmark portfolio (or, where not,
must use appropriately adjusted data),
and such proxies must be robust
estimates of the risk of the FDICsupervised institution’s modeled equity
exposures.
(c) Risk-weighted assets calculation
for an FDIC-supervised institution using
the IMA for publicly traded and nonpublicly traded equity exposures. If an
FDIC-supervised institution models
publicly traded and non-publicly traded
equity exposures, the FDIC-supervised
institution’s aggregate risk-weighted
asset amount for its equity exposures is
equal to the sum of:
(1) The risk-weighted asset amount of
each equity exposure that qualifies for a
0 percent, 20 percent, or 100 percent
risk weight under § 324.152(b)(1)
through (b)(3)(i) (as determined under
§ 324.152) and each equity exposure to
an investment fund (as determined
under § 324.154); and
(2) The greater of:
(i) The estimate of potential losses on
the FDIC-supervised institution’s equity
exposures (other than equity exposures
referenced in paragraph (c)(1) of this
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section) generated by the FDICsupervised institution’s internal equity
exposure model multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the
aggregate adjusted carrying value of the
FDIC-supervised institution’s publicly
traded equity exposures that do not
belong to a hedge pair, do not qualify for
a 0 percent, 20 percent, or 100 percent
risk weight under § 324.152(b)(1)
through (b)(3)(i), and are not equity
exposures to an investment fund;
(B) 200 percent multiplied by the
aggregate ineffective portion of all hedge
pairs; and
(C) 300 percent multiplied by the
aggregate adjusted carrying value of the
FDIC-supervised institution’s equity
exposures that are not publicly traded,
do not qualify for a 0 percent, 20
percent, or 100 percent risk weight
under § 324.152(b)(1) through (b)(3)(i),
and are not equity exposures to an
investment fund.
(d) Risk-weighted assets calculation
for an FDIC-supervised institution using
the IMA only for publicly traded equity
exposures. If an FDIC-supervised
institution models only publicly traded
equity exposures, the FDIC-supervised
institution’s aggregate risk-weighted
asset amount for its equity exposures is
equal to the sum of:
(1) The risk-weighted asset amount of
each equity exposure that qualifies for a
0 percent, 20 percent, or 100 percent
risk weight under §§ 324.152(b)(1)
through (b)(3)(i) (as determined under
§ 324.152), each equity exposure that
qualifies for a 400 percent risk weight
under § 324.152(b)(5) or a 600 percent
risk weight under § 324.152(b)(6) (as
determined under § 324.152), and each
equity exposure to an investment fund
(as determined under § 324.154); and
(2) The greater of:
(i) The estimate of potential losses on
the FDIC-supervised institution’s equity
exposures (other than equity exposures
referenced in paragraph (d)(1) of this
section) generated by the FDICsupervised institution’s internal equity
exposure model multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the
aggregate adjusted carrying value of the
FDIC-supervised institution’s publicly
traded equity exposures that do not
belong to a hedge pair, do not qualify for
a 0 percent, 20 percent, or 100 percent
risk weight under § 324.152(b)(1)
through (b)(3)(i), and are not equity
exposures to an investment fund; and
(B) 200 percent multiplied by the
aggregate ineffective portion of all hedge
pairs.
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§ 324.154
funds.
Equity exposures to investment
(a) Available approaches. (1) Unless
the exposure meets the requirements for
a community development equity
exposure in § 324.152(b)(3)(i), an FDICsupervised institution must determine
the risk-weighted asset amount of an
equity exposure to an investment fund
under the full look-through approach in
paragraph (b) of this section, the simple
modified look-through approach in
paragraph (c) of this section, or the
alternative modified look-through
approach in paragraph (d) of this
section.
(2) The risk-weighted asset amount of
an equity exposure to an investment
fund that meets the requirements for a
community development equity
exposure in § 324.152(b)(3)(i) is its
adjusted carrying value.
(3) If an equity exposure to an
investment fund is part of a hedge pair
and the FDIC-supervised institution
does not use the full look-through
approach, the FDIC-supervised
institution may use the ineffective
portion of the hedge pair as determined
under § 324.152(c) as the adjusted
carrying value for the equity exposure to
the investment fund. The risk-weighted
asset amount of the effective portion of
the hedge pair is equal to its adjusted
carrying value.
(b) Full look-through approach. An
FDIC-supervised institution that is able
to calculate a risk-weighted asset
amount for its proportional ownership
share of each exposure held by the
investment fund (as calculated under
this subpart E of this part as if the
proportional ownership share of each
exposure were held directly by the
FDIC-supervised institution) may either:
(1) Set the risk-weighted asset amount
of the FDIC-supervised institution’s
exposure to the fund equal to the
product of:
(i) The aggregate risk-weighted asset
amounts of the exposures held by the
fund as if they were held directly by the
FDIC-supervised institution; and
(ii) The FDIC-supervised institution’s
proportional ownership share of the
fund; or
(2) Include the FDIC-supervised
institution’s proportional ownership
share of each exposure held by the fund
in the FDIC-supervised institution’s
IMA.
(c) Simple modified look-through
approach. Under this approach, the
risk-weighted asset amount for an FDICsupervised institution’s equity exposure
to an investment fund equals the
adjusted carrying value of the equity
exposure multiplied by the highest risk
weight assigned according to subpart D
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of this part that applies to any exposure
the fund is permitted to hold under its
prospectus, partnership agreement, or
similar contract that defines the fund’s
permissible investments (excluding
derivative contracts that are used for
hedging rather than speculative
purposes and that do not constitute a
material portion of the fund’s
exposures).
(d) Alternative modified look-through
approach. Under this approach, an
FDIC-supervised institution may assign
the adjusted carrying value of an equity
exposure to an investment fund on a pro
rata basis to different risk weight
categories assigned according to subpart
D of this part based on the investment
limits in the fund’s prospectus,
partnership agreement, or similar
contract that defines the fund’s
permissible investments. The riskweighted asset amount for the FDICsupervised institution’s equity exposure
to the investment fund equals the sum
of each portion of the adjusted carrying
value assigned to an exposure class
multiplied by the applicable risk
weight. If the sum of the investment
limits for all exposure types within the
fund exceeds 100 percent, the FDICsupervised institution must assume that
the fund invests to the maximum extent
permitted under its investment limits in
the exposure type with the highest risk
weight under subpart D of this part, and
continues to make investments in order
of the exposure type with the next
highest risk weight under subpart D of
this part until the maximum total
investment level is reached. If more
than one exposure type applies to an
exposure, the FDIC-supervised
institution must use the highest
applicable risk weight. An FDICsupervised institution 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.
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§ 324.155
Equity derivative contracts.
(a) Under the IMA, in addition to
holding risk-based capital against an
equity derivative contract under this
part, an FDIC-supervised institution
must hold risk-based capital against the
counterparty credit risk in the equity
derivative contract by also treating the
equity derivative contract as a wholesale
exposure and computing a
supplemental risk-weighted asset
amount for the contract under § 324.132.
(b) Under the SRWA, an FDICsupervised institution may choose not
to hold risk-based capital against the
counterparty credit risk of equity
derivative contracts, as long as it does
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so for all such contracts. Where the
equity derivative contracts are subject to
a qualified master netting agreement, an
FDIC-supervised institution using the
SRWA must either include all or
exclude all of the contracts from any
measure used to determine counterparty
credit risk exposure.
§§ 324.161 through 324.160
[Reserved]
Risk-Weighted Assets for Operational
Risk
§ 324.161 Qualification requirements for
incorporation of operational risk mitigants.
(a) Qualification to use operational
risk mitigants. An FDIC-supervised
institution may adjust its estimate of
operational risk exposure to reflect
qualifying operational risk mitigants if:
(1) The FDIC-supervised institution’s
operational risk quantification system is
able to generate an estimate of the FDICsupervised institution’s operational risk
exposure (which does not incorporate
qualifying operational risk mitigants)
and an estimate of the FDIC-supervised
institution’s operational risk exposure
adjusted to incorporate qualifying
operational risk mitigants; and
(2) The FDIC-supervised institution’s
methodology for incorporating the
effects of insurance, if the FDICsupervised institution uses insurance as
an operational risk mitigant, captures
through appropriate discounts to the
amount of risk mitigation:
(i) The residual term of the policy,
where less than one year;
(ii) The cancellation terms of the
policy, where less than one year;
(iii) The policy’s timeliness of
payment;
(iv) The uncertainty of payment by
the provider of the policy; and
(v) Mismatches in coverage between
the policy and the hedged operational
loss event.
(b) Qualifying operational risk
mitigants. Qualifying operational risk
mitigants are:
(1) Insurance that:
(i) Is provided by an unaffiliated
company that the FDIC-supervised
institution deems to have strong
capacity to meet its claims payment
obligations and the obligor rating
category to which the FDIC-supervised
institution assigns the company is
assigned a PD equal to or less than 10
basis points;
(ii) Has an initial term of at least one
year and a residual term of more than
90 days;
(iii) Has a minimum notice period for
cancellation by the provider of 90 days;
(iv) Has no exclusions or limitations
based upon regulatory action or for the
receiver or liquidator of a failed
depository institution; and
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(v) Is explicitly mapped to a potential
operational loss event;
(2) Operational risk mitigants other
than insurance for which the FDIC has
given prior written approval. In
evaluating an operational risk mitigant
other than insurance, the FDIC will
consider whether the operational risk
mitigant covers potential operational
losses in a manner equivalent to holding
total capital.
§ 324.162 Mechanics of risk-weighted
asset calculation.
(a) If an FDIC-supervised institution
does not qualify to use or does not have
qualifying operational risk mitigants,
the FDIC-supervised institution’s dollar
risk-based capital requirement for
operational risk is its operational risk
exposure minus eligible operational risk
offsets (if any).
(b) If an FDIC-supervised institution
qualifies to use operational risk
mitigants and has qualifying operational
risk mitigants, the FDIC-supervised
institution’s dollar risk-based capital
requirement for operational risk is the
greater of:
(1) The FDIC-supervised institution’s
operational risk exposure adjusted for
qualifying operational risk mitigants
minus eligible operational risk offsets (if
any); or
(2) 0.8 multiplied by the difference
between:
(i) The FDIC-supervised institution’s
operational risk exposure; and
(ii) Eligible operational risk offsets (if
any).
(c) The FDIC-supervised institution’s
risk-weighted asset amount for
operational risk equals the FDICsupervised institution’s dollar riskbased capital requirement for
operational risk determined under
sections 162(a) or (b) multiplied by 12.5.
§§ 324.163 through 324.170
[ Reserved]
Disclosures
§ 324.171
Purpose and scope.
§§ 324.171 through 324.173 establish
public disclosure requirements related
to the capital requirements of an FDICsupervised institution that is an
advanced approaches FDIC-supervised
institution.
§ 324.172
Disclosure requirements.
(a) An FDIC-supervised institution
that is an advanced approaches FDICsupervised institution that has
completed the parallel run process and
that has received notification from the
FDIC pursuant to § 324.121(d) must
publicly disclose each quarter its total
and tier 1 risk-based capital ratios and
their components as calculated under
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this subpart (that is, common equity tier
1 capital, additional tier 1 capital, tier
2 capital, total qualifying capital, and
total risk-weighted assets).
(b) An FDIC-supervised institution
that is an advanced approaches FDICsupervised institution that has
completed the parallel run process and
that has received notification from the
FDIC pursuant to section § 324.121(d)
must comply with paragraph (c) of this
section unless it is a consolidated
subsidiary of a bank holding company,
savings and loan holding company, or
depository institution that is subject to
these disclosure requirements or a
subsidiary of a non-U.S. banking
organization that is subject to
comparable public disclosure
requirements in its home jurisdiction.
(c)(1) An FDIC-supervised institution
described in paragraph (b) of this
section must provide timely public
disclosures each calendar quarter of the
information in the applicable tables in
§ 324.173. If a significant change occurs,
such that the most recent reported
amounts are no longer reflective of the
FDIC-supervised institution’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 FDIC-supervised
institution’s risk management objectives
and policies, reporting system, and
definitions) may be disclosed annually
after the end of the fourth calendar
quarter, provided that any significant
changes to these are disclosed in the
interim. Management may provide all of
the disclosures required by this subpart
in one place on the FDIC-supervised
institution’s public Web site or may
provide the disclosures in more than
one public financial report or other
regulatory reports, provided that the
FDIC-supervised institution publicly
provides a summary table specifically
indicating the location(s) of all such
disclosures.
(2) An FDIC-supervised institution
described in paragraph (b) of this
section must have a formal disclosure
policy approved by the board of
directors that addresses its approach for
determining the disclosures it makes.
The policy must address the associated
internal controls and disclosure controls
and procedures. The board of directors
and senior management are responsible
for establishing and maintaining an
effective internal control structure over
financial reporting, including the
disclosures required by this subpart,
and must ensure that appropriate review
of the disclosures takes place. One or
more senior officers of the FDICsupervised institution must attest that
the disclosures meet the requirements of
this subpart.
(3) If an FDIC-supervised institution
described in paragraph (b) of this
section believes that disclosure of
specific commercial or financial
information would prejudice seriously
its position by making public
information that is either proprietary or
confidential in nature, the FDICsupervised institution is not required to
disclose those specific items, but must
disclose more general information about
the subject matter of the requirement,
together with the fact that, and the
reason why, the specific items of
information have not been disclosed.
§ 324.173 Disclosures by certain advanced
approaches FDIC-supervised institutions.
(a) Except as provided in § 324.172(b),
an FDIC-supervised institution
described in § 324.172(b) must make the
disclosures described in Tables 1
through 12 to § 324.173. The FDICsupervised institution must make these
disclosures publicly available for each
of the last three years (that is, twelve
quarters) or such shorter period
beginning on January 1, 2014.
TABLE 1 TO § 324.173—SCOPE OF APPLICATION
Qualitative disclosures ..........................
(a) ................................
(b) ................................
(c) ................................
Quantitative disclosures ........................
(d) ................................
((e) ..............................
The name of the top corporate entity in the group to which subpart E of this
part applies.
A brief description of the differences in the basis for consolidating entities 1
for accounting and regulatory purposes, with a description of those entities:
(1) That are fully consolidated;
(2) That are deconsolidated and deducted from total capital;
(3) For which the total capital requirement is deducted; and
(4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this
subpart E).
Any restrictions, or other major impediments, on transfer of funds or total
capital within the group.
The aggregate amount of surplus capital of insurance subsidiaries included in
the total capital of the consolidated group.
The aggregate amount by which actual total capital is less than the minimum
total capital requirement in all subsidiaries, with total capital requirements
and the name(s) of the subsidiaries with such deficiencies.
1 Such entities include securities, insurance and other financial subsidiaries, commercial subsidiaries (where permitted), and significant minority
equity investments in insurance, financial and commercial entities.
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TABLE 2 TO § 324.173—CAPITAL STRUCTURE
Qualitative disclosures ..........................
(a) ................................
Quantitative disclosures ........................
(b) ................................
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Summary information on the terms and conditions of the main features of all
regulatory capital instruments.
The amount of common equity tier 1 capital, with separate disclosure of:
(1) Common stock and related surplus;
(2) Retained earnings;
(3) Common equity minority interest;
(4) AOCI (net of tax) and other reserves; and
(5) Regulatory adjustments and deductions made to common equity tier 1
capital.
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TABLE 2 TO § 324.173—CAPITAL STRUCTURE—Continued
(c) ................................
(d) ................................
The amount of tier 1 capital, with separate disclosure of:
(1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest not included in common equity tier 1 capital; and
(2) Regulatory adjustments and deductions made to tier 1 capital.
The amount of total capital, with separate disclosure of:
(1) Tier 2 capital elements, including tier 2 capital instruments and total capital minority interest not included in tier 1 capital; and
(2) Regulatory adjustments and deductions made to total capital.
TABLE 3 TO § 324.173—CAPITAL ADEQUACY
Qualitative disclosures ..........................
(a) ................................
Quantitative disclosures ........................
(b) ................................
(c) ................................
(d) ................................
(e) ................................
(f) .................................
A summary discussion of the FDIC-supervised institution’s approach to assessing the adequacy of its capital to support current and future activities.
Risk-weighted assets for credit risk from:
(1) Wholesale exposures;
(2) Residential mortgage exposures;
(3) Qualifying revolving exposures;
(4) Other retail exposures;
(5) Securitization exposures;
(6) Equity exposures:
(7) Equity exposures subject to the simple risk weight approach; and
(8) Equity exposures subject to the internal models approach.
Standardized market risk-weighted assets and advanced market risk-weighted assets as calculated under subpart F of this part:
(1) Standardized approach for specific risk; and
(2) Internal models approach for specific risk.
Risk-weighted assets for operational risk.
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.
Total risk-weighted assets.
TABLE 4 TO § 324.173—CAPITAL CONSERVATION AND COUNTERCYCLICAL CAPITAL BUFFERS
Qualitative disclosures ..........................
(a) ................................
Quantitative disclosures ........................
(b) ................................
(c) ................................
(d) ................................
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(b) General qualitative disclosure
requirement. For each separate risk area
described in Tables 5 through 12 to
§ 324.173, the FDIC-supervised
institution must describe its risk
management objectives and policies,
including:
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The FDIC-supervised institution must publicly disclose the geographic breakdown of its private sector credit exposures used in the calculation of the
countercyclical capital buffer.
At least quarterly, the FDIC-supervised institution must calculate and publicly
disclose the capital conservation buffer and the countercyclical capital buffer as described under § 324.11 of subpart B.
At least quarterly, the FDIC-supervised institution must calculate and publicly
disclose the buffer retained income of the FDIC-supervised institution, as
described under § 324.11 of subpart B.
At least quarterly, the FDIC-supervised institution must calculate and publicly
disclose any limitations it has on distributions and discretionary bonus payments resulting from the capital conservation buffer and the countercyclical
capital buffer framework described under § 324.11 of subpart B, including
the maximum payout amount for the quarter.
(1) Strategies and processes;
(2) The structure and organization of
the relevant risk management function;
(3) The scope and nature of risk
reporting and/or measurement systems;
and
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(4) Policies for hedging and/or
mitigating risk and strategies and
processes for monitoring the continuing
effectiveness of hedges/mitigants.
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TABLE 51 TO § 324.173—CREDIT RISK: GENERAL DISCLOSURES
Qualitative disclosures ..........................
(a) ................................
Quantitative disclosures ........................
(b) ................................
(c) ................................
(d) ................................
(e) ................................
(f) .................................
(g) ................................
(h) ................................
The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 7 to
§ 324.173), including:
(1) Policy for determining past due or delinquency status;
(2) Policy for placing loans on nonaccrual;
(3) Policy for returning loans to accrual status;
(4) Definition of and policy for identifying impaired loans (for financial accounting purposes).
(5) Description of the methodology that the entity uses to estimate its allowance for loan and lease losses, including statistical methods used where
applicable;
(6) Policy for charging-off uncollectible amounts; and
(7) Discussion of the FDIC-supervised institution’s credit risk management
policy
Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP,2 without taking into account the effects of credit risk mitigation techniques (for example, collateral and netting
not permitted under GAAP), over the period categorized by major types of
credit exposure. For example, FDIC-supervised institutions 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.
Geographic 3 distribution of exposures, categorized in significant areas by
major types of credit exposure.
Industry or counterparty type distribution of exposures, categorized by major
types of credit exposure.
By major industry or counterparty type:
(1) Amount of impaired loans for which there was a related allowance under
GAAP;
(2) Amount of impaired loans for which there was no related allowance under
GAAP;
(3) Amount of loans past due 90 days and on nonaccrual;
(4) Amount of loans past due 90 days and still accruing; 4
(5) The balance in the allowance for loan and lease losses at the end of
each period, disaggregated on the basis of the entity’s impairment method.
To disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and
(6) Charge-offs during the period.
Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic areas including, if practical, the amounts
of allowances related to each geographical area,5 further categorized as
required by GAAP.
Reconciliation of changes in ALLL.6
Remaining contractual maturity breakdown (for example, one year or less) of
the whole portfolio, categorized by credit exposure.
1 Table
5 to § 324.173 does not cover equity exposures, which should be reported in Table 9 to § 324.173.
for example, ASC Topic 815–10 and 210–20, as they may be amended from time to time.
areas may comprise individual countries, groups of countries, or regions within countries. An FDIC-supervised institution might
choose to define the geographical areas based on the way the company’s portfolio is geographically managed. The criteria used to allocate the
loans to geographical areas must be specified.
4 An FDIC-supervised institution is encouraged also to provide an analysis of the aging of past-due loans.
5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately.
6 The reconciliation should include the following: a description of the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between
allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement
should be disclosed separately.
2 See,
3 Geographical
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TABLE 6 TO § 324.173—CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO IRB RISK-BASED CAPITAL FORMULAS
Qualitative disclosures ..........................
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Explanation and review of the:
(1) Structure of internal rating systems and relation between internal and external ratings;
(2) Use of risk parameter estimates other than for regulatory capital purposes;
(3) Process for managing and recognizing credit risk mitigation (see Table 8
to § 324.173); and
(4) Control mechanisms for the rating system, including discussion of independence, accountability, and rating systems review.
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TABLE 6 TO § 324.173—CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO IRB RISK-BASED CAPITAL
FORMULAS—Continued
(b) ................................
Quantitative disclosures: risk assessment.
(c) ................................
Quantitative disclosures: historical results.
(d) ................................
(e) ................................
(1) Description of the internal ratings process, provided separately for the following:
(i) Wholesale category;
(ii) Retail subcategories;
(iii) Residential mortgage exposures;
(iv) Qualifying revolving exposures; and
(v) Other retail exposures.
(2) For each category and subcategory above the description should include:
(i) The types of exposure included in the category/subcategories; and
(ii) The definitions, methods and data for estimation and validation of PD,
LGD, and EAD, including assumptions employed in the derivation of these
variables.1
(1) For wholesale exposures, present the following information across a sufficient number of PD grades (including default) to allow for a meaningful differentiation of credit risk: 2
(i) Total EAD; 3
(ii) Exposure-weighted average LGD (percentage);
(iii) Exposure-weighted average risk weight; and
(iv) Amount of undrawn commitments and exposure-weighted average EAD
including average drawdowns prior to default for wholesale exposures.
(2) For each retail subcategory, present the disclosures outlined above
across a sufficient number of segments to allow for a meaningful differentiation of credit risk.
Actual losses in the preceding period for each category and subcategory and
how this differs from past experience. A discussion of the factors that impacted the loss experience in the preceding period—for example, has the
FDIC-supervised institution experienced higher than average default rates,
loss rates or EADs.
The FDIC-supervised institution’s estimates compared against actual outcomes over a longer period.4 At a minimum, this should include information
on estimates of losses against actual losses in the wholesale category and
each retail subcategory over a period sufficient to allow for a meaningful
assessment of the performance of the internal rating processes for each
category/subcategory.5 Where appropriate, the FDIC-supervised institution
should further decompose this to provide analysis of PD, LGD, and EAD
outcomes against estimates provided in the quantitative risk assessment
disclosures above.6
1 This disclosure item does not require a detailed description of the model in full—it should provide the reader with a broad overview of the
model approach, describing definitions of the variables and methods for estimating and validating those variables set out in the quantitative risk
disclosures below. This should be done for each of the four category/subcategories. The FDIC-supervised institution must disclose any significant
differences in approach to estimating these variables within each category/subcategories.
2 The PD, LGD and EAD disclosures in Table 6 (c) to § 324.173 should reflect the effects of collateral, qualifying master netting agreements,
eligible guarantees and eligible credit derivatives as defined under this part. Disclosure of each PD grade should include the exposure-weighted
average PD for each grade. Where an FDIC-supervised institution aggregates PD grades for the purposes of disclosure, this should be a representative breakdown of the distribution of PD grades used for regulatory capital purposes.
3 Outstanding loans and EAD on undrawn commitments can be presented on a combined basis for these disclosures.
4 These disclosures are a way of further informing the reader about the reliability of the information provided in the ‘‘quantitative disclosures:
risk assessment’’ over the long run. The disclosures are requirements from year-end 2010; in the meantime, early adoption is encouraged. The
phased implementation is to allow an FDIC-supervised institution sufficient time to build up a longer run of data that will make these disclosures
meaningful.
5 This disclosure item is not intended to be prescriptive about the period used for this assessment. Upon implementation, it is expected that an
FDIC-supervised institution would provide these disclosures for as long a set of data as possible—for example, if an FDIC-supervised institution
has 10 years of data, it might choose to disclose the average default rates for each PD grade over that 10-year period. Annual amounts need
not be disclosed.
6 An FDIC-supervised institution must provide this further decomposition where it will allow users greater insight into the reliability of the estimates provided in the ‘‘quantitative disclosures: risk assessment.’’ In particular, it must provide this information where there are material differences between its estimates of PD, LGD or EAD compared to actual outcomes over the long run. The FDIC-supervised institution must also
provide explanations for such differences.
TABLE 7 TO § 324.173—GENERAL DISCLOSURE FOR COUNTERPARTY CREDIT RISK OF OTC DERIVATIVE CONTRACTS,
REPO-STYLE TRANSACTIONS, AND ELIGIBLE MARGIN LOANS
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Qualitative Disclosures ..........................
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The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and repo-style transactions, including:
(1) Discussion of methodology used to assign economic capital and credit
limits for counterparty credit exposures;
(2) Discussion of policies for securing collateral, valuing and managing collateral, and establishing credit reserves;
(3) Discussion of the primary types of collateral taken;
(4) Discussion of policies with respect to wrong-way risk exposures; and
(5) Discussion of the impact of the amount of collateral the FDIC-supervised
institution would have to provide if the FDIC-supervised institution were to
receive a credit rating downgrade.
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TABLE 7 TO § 324.173—GENERAL DISCLOSURE FOR COUNTERPARTY CREDIT RISK OF OTC DERIVATIVE CONTRACTS,
REPO-STYLE TRANSACTIONS, AND ELIGIBLE MARGIN LOANS—Continued
Quantitative Disclosures .......................
(b) ................................
(c) ................................
(d) ................................
Gross positive fair value of contracts, netting benefits, netted current credit
exposure, collateral held (including type, for example, cash, government
securities), and net unsecured credit exposure.1 Also report measures for
EAD used for regulatory capital for these transactions, the notional value of
credit derivative hedges purchased for counterparty credit risk protection,
and, for FDIC-supervised institutions not using the internal models methodology in § 324.132(d), the distribution of current credit exposure by types of
credit exposure.2
Notional amount of purchased and sold credit derivatives, segregated between use for the FDIC-supervised institution’s own credit portfolio and for
its intermediation activities, including the distribution of the credit derivative
products used, categorized further by protection bought and sold within
each product group.
The estimate of alpha if the FDIC-supervised institution has received supervisory approval to estimate alpha.
1 Net unsecured credit exposure is the credit exposure after considering the benefits from legally enforceable netting agreements and collateral
arrangements, without taking into account haircuts for price volatility, liquidity, etc.
2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.
TABLE 8 TO § 324.173—CREDIT RISK MITIGATION 1 2
Qualitative disclosures ..........................
(a) ................................
Quantitative disclosures ........................
(b) ................................
The general qualitative disclosure requirement with respect to credit risk mitigation, including:
(1) Policies and processes for, and an indication of the extent to which the
FDIC-supervised institution uses, on- or off-balance sheet netting;
(2) Policies and processes for collateral valuation and management;
(3) A description of the main types of collateral taken by the FDIC-supervised
institution;
(4) The main types of guarantors/credit derivative counterparties and their
creditworthiness; and
(5) Information about (market or credit) risk concentrations within the mitigation taken.
For each separately disclosed portfolio, the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees/credit
derivatives.
1 At a minimum, an FDIC-supervised institution must provide the disclosures in Table 8 to § 324.173 in relation to credit risk mitigation that has
been recognized for the purposes of reducing capital requirements under this subpart. Where relevant, FDIC-supervised institutions are encouraged to give further information about mitigants that have not been recognized for that purpose.
2 Credit derivatives and other credit mitigation that are treated for the purposes of this subpart as synthetic securitization exposures should be
excluded from the credit risk mitigation disclosures (in Table 8 to § 324.173) and included within those relating to securitization (in Table 9 to
§ 324.173).
TABLE 9 TO § 324.173—SECURITIZATION
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Qualitative disclosures ..........................
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The general qualitative disclosure requirement with respect to securitization
(including synthetic securitizations), including a discussion of:
(1) The FDIC-supervised institution’s objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying
exposures away from the FDIC-supervised institution to other entities and
including the type of risks assumed and retained with resecuritization activity; 1
(2) The nature of the risks (e.g. liquidity risk) inherent in the securitized assets;
(3) The roles played by the FDIC-supervised institution in the securitization
process 2 and an indication of the extent of the FDIC-supervised institution’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 FDIC-supervised institution’s policy for mitigating the credit risk retained through securitization and resecuritization exposures; and
(6) The risk-based capital approaches that the FDIC-supervised institution
follows for its securitization exposures including the type of securitization
exposure to which each approach applies.
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TABLE 9 TO § 324.173—SECURITIZATION—Continued
(b) ................................
(c) ................................
(d) ................................
Quantitative disclosures ........................
(e) ................................
(f) .................................
(g) ................................
(h) ................................
(i) .................................
(j) .................................
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(k) ................................
A list of:
(1) The type of securitization SPEs that the FDIC-supervised institution, as
sponsor, uses to securitize third-party exposures. The FDIC-supervised institution must indicate whether it has exposure to these SPEs, either on- or
off- balance sheet; and
(2) Affiliated entities:
(i) That the FDIC-supervised institution manages or advises; and
(ii) That invest either in the securitization exposures that the FDIC-supervised
institution has securitized or in securitization SPEs that the FDIC-supervised institution sponsors.3
Summary of the FDIC-supervised institution’s accounting policies for
securitization activities, including:
(1) Whether the transactions are treated as sales or financings;
(2) Recognition of gain-on-sale;
(3) Methods and key assumptions and inputs applied in valuing retained or
purchased interests;
(4) Changes in methods and key assumptions and inputs from the previous
period for valuing retained interests and impact of the changes;
(5) Treatment of synthetic securitizations;
(6) How exposures intended to be securitized are valued and whether they
are recorded under subpart E of this part; and
(7) Policies for recognizing liabilities on the balance sheet for arrangements
that could require the FDIC-supervised institution to provide financial support for securitized assets.
An explanation of significant changes to any of the quantitative information
set forth below since the last reporting period.
The total outstanding exposures securitized 4 by the FDIC-supervised institution in securitizations that meet the operational criteria in § 324.141 (categorized into traditional/synthetic), by underlying exposure type 5 separately for securitizations of third-party exposures for which the FDIC-supervised institution acts only as sponsor.
For exposures securitized by the FDIC-supervised institution in
securitizations that meet the operational criteria in § 324.141:
(1) Amount of securitized assets that are impaired 6/past due categorized by
exposure type; and
(2) Losses recognized by the FDIC-supervised institution during the current
period categorized by exposure type.7
The total amount of outstanding exposures intended to be securitized categorized by exposure type.
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.
(1) Aggregate amount of securitization exposures retained or purchased and
the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into
a meaningful number of risk weight bands and by risk-based capital approach (e.g. SA, SFA, or SSFA).
(2) Exposures that have been deducted entirely from tier 1 capital, CEIOs
deducted from total capital (as described in § 324.42(a)(1)), and other exposures deducted from total capital should be disclosed separately by exposure type.
Summary of current year’s securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on
sale by asset type.
Aggregate amount of resecuritization exposures retained or purchased categorized according to:
(1) Exposures to which credit risk mitigation is applied and those not applied;
and
(2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name.
1 The FDIC-supervised institution must describe the structure of resecuritizations in which it participates; this description must be provided for
the main categories of resecuritization products in which the FDIC-supervised institution is active.
2 For example, these roles would include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity provider, or swap provider.
3 For example, money market mutual funds should be listed individually, and personal and private trusts, should be noted collectively.
4 ‘‘Exposures securitized’’ include underlying exposures originated by the FDIC-supervised institution, 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 FDIC-supervised institution’s balance sheet and underlying exposures acquired by
the FDIC-supervised institution from third-party entities) in which the originating bank does not retain any securitization exposure should be
shown separately but need only be reported for the year of inception.
5 An FDIC-supervised institution is required to disclose exposures regardless of whether there is a capital charge under this part.
6 An FDIC-supervised institution must include credit-related other than temporary impairment (OTTI).
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7 For example, charge-offs/allowances (if the assets remain on the FDIC-supervised institution’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 FDIC-supervised institution with respect to securitized assets.
TABLE 10 TO § 324.173—OPERATIONAL RISK
Qualitative disclosures ..........................
(a) ................................
(b) ................................
(c) ................................
The general qualitative disclosure requirement for operational risk.
Description of the AMA, including a discussion of relevant internal and external factors considered in the FDIC-supervised institution’s measurement
approach.
A description of the use of insurance for the purpose of mitigating operational
risk.
TABLE 11 TO § 324.173—EQUITIES NOT SUBJECT TO SUBPART F OF THIS PART
Qualitative disclosures ..........................
(a) ................................
Quantitative disclosures ........................
(b) ................................
(c) ................................
(d) ................................
(e) ................................
(f) .................................
The general qualitative disclosure requirement with respect to the equity risk
of equity holdings not subject to subpart F of this part, including:
(1) Differentiation between holdings on which capital gains are expected and
those held for other objectives, including for relationship and strategic reasons; and
(2) Discussion of important policies covering the valuation of and accounting
for equity holdings not subject to subpart F of this part. This includes the
accounting methodology and valuation methodologies used, including key
assumptions and practices affecting valuation as well as significant
changes in these practices.
Carrying value on the balance sheet of equity investments, as well as the fair
value of those investments.
The types and nature of investments, including the amount that is:
(1) Publicly traded; and
(2) Non-publicly traded.
The cumulative realized gains (losses) arising from sales and liquidations in
the reporting period.
(1) Total unrealized gains (losses) 1
(2) Total latent revaluation gains (losses) 2
(3) Any amounts of the above included in tier 1 and/or tier 2 capital.
Capital requirements categorized by appropriate equity groupings, consistent
with the FDIC-supervised institution’s methodology, as well as the aggregate amounts and the type of equity investments subject to any supervisory transition regarding total capital requirements.3
1 Unrealized
gains (losses) recognized in the balance sheet but not through earnings.
gains (losses) not recognized either in the balance sheet or through earnings.
disclosure must include a breakdown of equities that are subject to the 0 percent, 20 percent, 100 percent, 300 percent, 400 percent,
and 600 percent risk weights, as applicable.
2 Unrealized
3 This
TABLE 12 TO § 324.173—INTEREST RATE RISK FOR NON-TRADING ACTIVITIES
Qualitative disclosures ..........................
(a) ................................
Quantitative disclosures ........................
(b) ................................
§§ 324.174 through 234.200
[Reserved]
Subpart F—Risk-Weighted Assets—
Market Risk
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§ 324.201 Purpose, applicability, and
reservation of authority.
(a) Purpose. This subpart F establishes
risk-based capital requirements for
FDIC-supervised institutions with
significant exposure to market risk,
provides methods for these FDICsupervised institutions to calculate their
standardized measure for market risk
and, if applicable, advanced measure for
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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.
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).
market risk, and establishes public
disclosure requirements.
(b) Applicability. (1) This subpart F
applies to any FDIC-supervised
institution with aggregate trading assets
and trading liabilities (as reported in the
FDIC-supervised institution’s most
recent quarterly Call Report), equal to:
(i) 10 percent or more of quarter-end
total assets as reported on the most
recent quarterly Call Report; or
(ii) $1 billion or more.
(2) The FDIC may apply this subpart
to any FDIC-supervised institution if the
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FDIC deems it necessary or appropriate
because of the level of market risk of the
FDIC-supervised institution or to ensure
safe and sound banking practices.
(3) The FDIC may exclude an FDICsupervised institution that meets the
criteria of paragraph (b)(1) of this
section from application of this subpart
if the FDIC determines that the
exclusion is appropriate based on the
level of market risk of the FDICsupervised institution and is consistent
with safe and sound banking practices.
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(c) Reservation of authority (1) The
FDIC may require an FDIC-supervised
institution to hold an amount of capital
greater than otherwise required under
this subpart if the FDIC determines that
the FDIC-supervised institution’s capital
requirement for market risk as
calculated under this subpart is not
commensurate with the market risk of
the FDIC-supervised institution’s
covered positions. In making
determinations under paragraphs (c)(1)
through (c)(3) of this section, the FDIC
will apply notice and response
procedures generally in the same
manner as the notice and response
procedures set forth in § 324.5(c).
(2) If the FDIC determines that the
risk-based capital requirement
calculated under this subpart by the
FDIC-supervised institution for one or
more covered positions or portfolios of
covered positions is not commensurate
with the risks associated with those
positions or portfolios, the FDIC may
require the FDIC-supervised institution
to assign a different risk-based capital
requirement to the positions or
portfolios that more accurately reflects
the risk of the positions or portfolios.
(3) The FDIC may also require an
FDIC-supervised institution to calculate
risk-based capital requirements for
specific positions or portfolios under
this subpart, or under subpart D or
subpart E of this part, as appropriate, to
more accurately reflect the risks of the
positions.
(4) Nothing in this subpart limits the
authority of the FDIC under any other
provision of law or regulation to take
supervisory or enforcement action,
including action to address unsafe or
unsound practices or conditions,
deficient capital levels, or violations of
law.
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§ 324.202
Definitions.
(a) Terms set forth in § 324.2 and used
in this subpart have the definitions
assigned thereto in § 324.2.
(b) For the purposes of this subpart,
the following terms are defined as
follows:
Backtesting means the comparison of
an FDIC-supervised institution’s
internal estimates with actual outcomes
during a sample period not used in
model development. For purposes of
this subpart, backtesting is one form of
out-of-sample testing.
Commodity position means a position
for which price risk arises from changes
in the price of a commodity.
Corporate debt position means a debt
position that is an exposure to a
company that is not a sovereign entity,
the Bank for International Settlements,
the European Central Bank, the
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European Commission, the International
Monetary Fund, a multilateral
development bank, a depository
institution, a foreign bank, a credit
union, a public sector entity, a GSE, or
a securitization.
Correlation trading position means:
(1) A securitization position for which
all or substantially all of the value of the
underlying exposures is based on the
credit quality of a single company for
which a two-way market exists, or on
commonly traded indices based on such
exposures for which a two-way market
exists on the indices; or
(2) A position that is not a
securitization position and that hedges
a position described in paragraph (1) of
this definition; and
(3) A correlation trading position does
not include:
(i) A resecuritization position;
(ii) A derivative of a securitization
position that does not provide a pro rata
share in the proceeds of a securitization
tranche; or
(iii) A securitization position for
which the underlying assets or reference
exposures are retail exposures,
residential mortgage exposures, or
commercial mortgage exposures.
Covered position means the following
positions:
(1) A trading asset or trading liability
(whether on- or off-balance sheet),27 as
reported on Call Report, that meets the
following conditions:
(i) The position is a trading position
or hedges another covered position; 28
and
(ii) The position is free of any
restrictive covenants on its tradability or
the FDIC-supervised institution is able
to hedge the material risk elements of
the position in a two-way market;
(2) A foreign exchange or commodity
position, regardless of whether the
position is a trading asset or trading
liability (excluding any structural
foreign currency positions that the
FDIC-supervised institution chooses to
exclude with prior supervisory
approval); and
(3) Notwithstanding paragraphs (1)
and (2) of this definition, a covered
position does not include:
(i) An intangible asset, including any
servicing asset;
(ii) Any hedge of a trading position
that the FDIC determines to be outside
the scope of the FDIC-supervised
institution’s hedging strategy required
in paragraph (a)(2) of § 324.203;
27 Securities subject to repurchase and lending
agreements are included as if they are still owned
by the lender.
28 A position that hedges a trading position must
be within the scope of the bank’s hedging strategy
as described in paragraph (a)(2) of § 324.203.
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(iii) Any position that, in form or
substance, acts as a liquidity facility that
provides support to asset-backed
commercial paper;
(iv) A credit derivative the FDICsupervised institution recognizes as a
guarantee for risk-weighted asset
amount calculation purposes under
subpart D or subpart E of this part;
(v) Any position that is recognized as
a credit valuation adjustment hedge
under § 324.132(e)(5) or § 324.132(e)(6),
except as provided in
§ 324.132(e)(6)(vii);
(vi) Any equity position that is not
publicly traded, other than a derivative
that references a publicly traded equity
and other than a position in an
investment company as defined in and
registered with the SEC under the
Investment Company Act, provided that
all the underlying equities held by the
investment company are publicly
traded;
(vii) Any equity position that is not
publicly traded, other than a derivative
that references a publicly traded equity
and other than a position in an entity
not domiciled in the United States (or
a political subdivision thereof) that is
supervised and regulated in a manner
similar to entities described in
paragraph (3)(vi) of this definition;
(viii) Any position an FDICsupervised institution holds with the
intent to securitize; or
(ix) Any direct real estate holding.
Debt position means a covered
position that is not a securitization
position or a correlation trading position
and that has a value that reacts
primarily to changes in interest rates or
credit spreads.
Default by a sovereign entity has the
same meaning as the term sovereign
default under § 324.2.
Equity position means a covered
position that is not a securitization
position or a correlation trading position
and that has a value that reacts
primarily to changes in equity prices.
Event risk means the risk of loss on
equity or hybrid equity positions as a
result of a financial event, such as the
announcement or occurrence of a
company merger, acquisition, spin-off,
or dissolution.
Foreign exchange position means a
position for which price risk arises from
changes in foreign exchange rates.
General market risk means the risk of
loss that could result from broad market
movements, such as changes in the
general level of interest rates, credit
spreads, equity prices, foreign exchange
rates, or commodity prices.
Hedge means a position or positions
that offset all, or substantially all, of one
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or more material risk factors of another
position.
Idiosyncratic risk means the risk of
loss in the value of a position that arises
from changes in risk factors unique to
that position.
Incremental risk means the default
risk and credit migration risk of a
position. Default risk means the risk of
loss on a position that could result from
the failure of an obligor to make timely
payments of principal or interest on its
debt obligation, and the risk of loss that
could result from bankruptcy,
insolvency, or similar proceeding.
Credit migration risk means the price
risk that arises from significant changes
in the underlying credit quality of the
position.
Market risk means the risk of loss on
a position that could result from
movements in market prices.
Resecuritization position means a
covered position that is:
(1) An on- or off-balance sheet
exposure to a resecuritization; or
(2) An exposure that directly or
indirectly references a resecuritization
exposure in paragraph (1) of this
definition.
Securitization means a transaction in
which:
(1) All or a portion of the credit risk
of one or more underlying exposures is
transferred to one or more third parties;
(2) The credit risk associated with the
underlying exposures has been
separated into at least two tranches that
reflect different levels of seniority;
(3) Performance of the securitization
exposures depends upon the
performance of the underlying
exposures;
(4) All or substantially all of the
underlying exposures are financial
exposures (such as loans, commitments,
credit derivatives, guarantees,
receivables, asset-backed securities,
mortgage-backed securities, other debt
securities, or equity securities);
(5) For non-synthetic securitizations,
the underlying exposures are not owned
by an operating company;
(6) The underlying exposures are not
owned by a small business investment
company described in section 302 of the
Small Business Investment Act;
(7) The underlying exposures are not
owned by a firm an investment in which
qualifies as a community development
investment under section 24(Eleventh)
of the National Bank Act;
(8) The FDIC may determine that a
transaction in which the underlying
exposures are owned by an investment
firm that exercises substantially
unfettered control over the size and
composition of its assets, liabilities, and
off-balance sheet exposures is not a
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securitization based on the transaction’s
leverage, risk profile, or economic
substance;
(9) The FDIC may deem an exposure
to a transaction that meets the definition
of a securitization, notwithstanding
paragraph (5), (6), or (7) of this
definition, to be a securitization based
on the transaction’s leverage, risk
profile, or economic substance; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund (as
defined in 12 CFR 344.3 (state
nonmember bank) and 12 CFR 390.203
(state savings association));
(iii) An employee benefit plan as
defined in paragraphs (3) and (32) of
section 3 of ERISA, a ‘‘governmental
plan’’ (as defined in 29 USC 1002(32))
that complies with the tax deferral
qualification requirements provided in
the Internal Revenue Code, or any
similar employee benefit plan
established under the laws of a foreign
jurisdiction; or
(iv) Registered with the SEC under the
Investment Company Act or foreign
equivalents thereof.
Securitization position means a
covered position that is:
(1) An on-balance sheet or off-balance
sheet credit exposure (including creditenhancing representations and
warranties) that arises from a
securitization (including a
resecuritization); or
(2) An exposure that directly or
indirectly references a securitization
exposure described in paragraph (1) of
this definition.
Sovereign debt position means a
direct exposure to a sovereign entity.
Specific risk means the risk of loss on
a position that could result from factors
other than broad market movements and
includes event risk, default risk, and
idiosyncratic risk.
Structural position in a foreign
currency means a position that is not a
trading position and that is:
(1) Subordinated debt, equity, or
minority interest in a consolidated
subsidiary that is denominated in a
foreign currency;
(2) Capital assigned to foreign
branches that is denominated in a
foreign currency;
(3) A position related to an
unconsolidated subsidiary or another
item that is denominated in a foreign
currency and that is deducted from the
FDIC-supervised institution’s tier 1 or
tier 2 capital; or
(4) A position designed to hedge an
FDIC-supervised institution’s capital
ratios or earnings against the effect on
paragraphs (1), (2), or (3) of this
definition of adverse exchange rate
movements.
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Term repo-style transaction means a
repo-style transaction that has an
original maturity in excess of one
business day.
Trading position means a position
that is held by the FDIC-supervised
institution for the purpose of short-term
resale or with the intent of benefiting
from actual or expected short-term price
movements, or to lock in arbitrage
profits.
Two-way market means a market
where there are independent bona fide
offers to buy and sell so that a price
reasonably related to the last sales price
or current bona fide competitive bid and
offer quotations can be determined
within one day and settled at that price
within a relatively short time frame
conforming to trade custom.
Value-at-Risk (VaR) means the
estimate of the maximum amount that
the value of one or more positions could
decline due to market price or rate
movements during a fixed holding
period within a stated confidence
interval.
§ 324.203 Requirements for application of
this subpart F.
(a) Trading positions—(1)
Identification of trading positions. An
FDIC-supervised institution must have
clearly defined policies and procedures
for determining which of its trading
assets and trading liabilities are trading
positions and which of its trading
positions are correlation trading
positions. These policies and
procedures must take into account:
(i) The extent to which a position, or
a hedge of its material risks, can be
marked-to-market daily by reference to
a two-way market; and
(ii) Possible impairments to the
liquidity of a position or its hedge.
(2) Trading and hedging strategies. An
FDIC-supervised institution must have
clearly defined trading and hedging
strategies for its trading positions that
are approved by senior management of
the FDIC-supervised institution.
(i) The trading strategy must articulate
the expected holding period of, and the
market risk associated with, each
portfolio of trading positions.
(ii) The hedging strategy must
articulate for each portfolio of trading
positions the level of market risk the
FDIC-supervised institution is willing to
accept and must detail the instruments,
techniques, and strategies the FDICsupervised institution will use to hedge
the risk of the portfolio.
(b) Management of covered
positions—(1) Active management. An
FDIC-supervised institution must have
clearly defined policies and procedures
for actively managing all covered
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positions. At a minimum, these policies
and procedures must require:
(i) Marking positions to market or to
model on a daily basis;
(ii) Daily assessment of the FDICsupervised institution’s ability to hedge
position and portfolio risks, and of the
extent of market liquidity;
(iii) Establishment and daily
monitoring of limits on positions by a
risk control unit independent of the
trading business unit;
(iv) Daily monitoring by senior
management of information described in
paragraphs (b)(1)(i) through (b)(1)(iii) of
this section;
(v) At least annual reassessment of
established limits on positions by senior
management; and
(vi) At least annual assessments by
qualified personnel of the quality of
market inputs to the valuation process,
the soundness of key assumptions, the
reliability of parameter estimation in
pricing models, and the stability and
accuracy of model calibration under
alternative market scenarios.
(2) Valuation of covered positions.
The FDIC-supervised institution must
have a process for prudent valuation of
its covered positions that includes
policies and procedures on the
valuation of positions, marking
positions to market or to model,
independent price verification, and
valuation adjustments or reserves. The
valuation process must consider, as
appropriate, unearned credit spreads,
close-out costs, early termination costs,
investing and funding costs, liquidity,
and model risk.
(c) Requirements for internal models.
(1) An FDIC-supervised institution must
obtain the prior written approval of the
FDIC before using any internal model to
calculate its risk-based capital
requirement under this subpart.
(2) An FDIC-supervised institution
must meet all of the requirements of this
section on an ongoing basis. The FDICsupervised institution must promptly
notify the FDIC when:
(i) The FDIC-supervised institution
plans to extend the use of a model that
the FDIC has approved under this
subpart to an additional business line or
product type;
(ii) The FDIC-supervised institution
makes any change to an internal model
approved by the FDIC under this
subpart that would result in a material
change in the FDIC-supervised
institution’s risk-weighted asset amount
for a portfolio of covered positions; or
(iii) The FDIC-supervised institution
makes any material change to its
modeling assumptions.
(3) The FDIC may rescind its approval
of the use of any internal model (in
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whole or in part) or of the determination
of the approach under § 324.209(a)(2)(ii)
for an FDIC-supervised institution’s
modeled correlation trading positions
and determine an appropriate capital
requirement for the covered positions to
which the model would apply, if the
FDIC determines that the model no
longer complies with this subpart or
fails to reflect accurately the risks of the
FDIC-supervised institution’s covered
positions.
(4) The FDIC-supervised institution
must periodically, but no less frequently
than annually, review its internal
models in light of developments in
financial markets and modeling
technologies, and enhance those models
as appropriate to ensure that they
continue to meet the FDIC’s standards
for model approval and employ risk
measurement methodologies that are
most appropriate for the FDICsupervised institution’s covered
positions.
(5) The FDIC-supervised institution
must incorporate its internal models
into its risk management process and
integrate the internal models used for
calculating its VaR-based measure into
its daily risk management process.
(6) The level of sophistication of an
FDIC-supervised institution’s internal
models must be commensurate with the
complexity and amount of its covered
positions. An FDIC-supervised
institution’s internal models may use
any of the generally accepted
approaches, including but not limited to
variance-covariance models, historical
simulations, or Monte Carlo
simulations, to measure market risk.
(7) The FDIC-supervised institution’s
internal models must properly measure
all the material risks in the covered
positions to which they are applied.
(8) The FDIC-supervised institution’s
internal models must conservatively
assess the risks arising from less liquid
positions and positions with limited
price transparency under realistic
market scenarios.
(9) The FDIC-supervised institution
must have a rigorous and well-defined
process for re-estimating, re-evaluating,
and updating its internal models to
ensure continued applicability and
relevance.
(10) If an FDIC-supervised institution
uses internal models to measure specific
risk, the internal models must also
satisfy the requirements in paragraph
(b)(1) of § 324.207.
(d) Control, oversight, and validation
mechanisms. (1) The FDIC-supervised
institution must have a risk control unit
that reports directly to senior
management and is independent from
the business trading units.
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(2) The FDIC-supervised institution
must validate its internal models
initially and on an ongoing basis. The
FDIC-supervised institution’s validation
process must be independent of the
internal models’ development,
implementation, and operation, or the
validation process must be subjected to
an independent review of its adequacy
and effectiveness. Validation must
include:
(i) An evaluation of the conceptual
soundness of (including developmental
evidence supporting) the internal
models;
(ii) An ongoing monitoring process
that includes verification of processes
and the comparison of the FDICsupervised institution’s model outputs
with relevant internal and external data
sources or estimation techniques; and
(iii) An outcomes analysis process
that includes backtesting. For internal
models used to calculate the VaR-based
measure, this process must include a
comparison of the changes in the FDICsupervised institution’s portfolio value
that would have occurred were end-ofday positions to remain unchanged
(therefore, excluding fees, commissions,
reserves, net interest income, and
intraday trading) with VaR-based
measures during a sample period not
used in model development.
(3) The FDIC-supervised institution
must stress test the market risk of its
covered positions at a frequency
appropriate to each portfolio, and in no
case less frequently than quarterly. The
stress tests must take into account
concentration risk (including but not
limited to concentrations in single
issuers, industries, sectors, or markets),
illiquidity under stressed market
conditions, and risks arising from the
FDIC-supervised institution’s trading
activities that may not be adequately
captured in its internal models.
(4) The FDIC-supervised institution
must have an internal audit function
independent of business-line
management that at least annually
assesses the effectiveness of the controls
supporting the FDIC-supervised
institution’s market risk measurement
systems, including the activities of the
business trading units and independent
risk control unit, compliance with
policies and procedures, and calculation
of the FDIC-supervised institution’s
measures for market risk under this
subpart. At least annually, the internal
audit function must report its findings
to the FDIC-supervised institution’s
board of directors (or a committee
thereof).
(e) Internal assessment of capital
adequacy. The FDIC-supervised
institution must have a rigorous process
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for assessing its overall capital adequacy
in relation to its market risk. The
assessment must take into account risks
that may not be captured fully in the
VaR-based measure, including
concentration and liquidity risk under
stressed market conditions.
(f) Documentation. The FDICsupervised institution must adequately
document all material aspects of its
internal models, management and
valuation of covered positions, control,
oversight, validation and review
processes and results, and internal
assessment of capital adequacy.
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.204
Measure for market risk.
(a) General requirement. (1) An FDICsupervised institution must calculate its
standardized measure for market risk by
following the steps described in
paragraph (a)(2) of this section. An
advanced approaches FDIC-supervised
institution also must calculate an
advanced measure for market risk by
following the steps in paragraph (a)(2) of
this section.
(2) Measure for market risk. An FDICsupervised institution must calculate
the standardized measure for market
risk, which equals the sum of the VaRbased capital requirement, stressed VaRbased capital requirement, specific risk
add-ons, incremental risk capital
requirement, comprehensive risk capital
requirement, and capital requirement
for de minimis exposures all as defined
under this paragraph (a)(2), (except, that
the FDIC-supervised institution may not
use the SFA in § 324.210(b)(2)(vii)(B) for
purposes of this calculation), plus any
additional capital requirement
established by the FDIC. An advanced
approaches FDIC-supervised institution
that has completed the parallel run
process and that has received
notifications from the FDIC pursuant to
§ 324.121(d) also must calculate the
advanced measure for market risk,
which equals the sum of the VaR-based
capital requirement, stressed VaR-based
capital requirement, specific risk addons, incremental risk capital
requirement, comprehensive risk capital
requirement, and capital requirement
for de minimis exposures as defined
under this paragraph (a)(2), plus any
additional capital requirement
established by the FDIC.
(i) VaR-based capital requirement. An
FDIC-supervised institution’s VaR-based
capital requirement equals the greater
of:
(A) The previous day’s VaR-based
measure as calculated under § 324.205;
or
(B) The average of the daily VaRbased measures as calculated under
§ 324.205 for each of the preceding 60
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business days multiplied by three,
except as provided in paragraph (b) of
this section.
(ii) Stressed VaR-based capital
requirement. An FDIC-supervised
institution’s stressed VaR-based capital
requirement equals the greater of:
(A) The most recent stressed VaRbased measure as calculated under
§ 324.206; or
(B) The average of the stressed VaRbased measures as calculated under
§ 324.206 for each of the preceding 12
weeks multiplied by three, except as
provided in paragraph (b) of this
section.
(iii) Specific risk add-ons. An FDICsupervised institution’s specific risk
add-ons equal any specific risk add-ons
that are required under § 324.207 and
are calculated in accordance with
§ 324.210.
(iv) Incremental risk capital
requirement. An FDIC-supervised
institution’s incremental risk capital
requirement equals any incremental risk
capital requirement as calculated under
§ 324.208.
(v) Comprehensive risk capital
requirement. An FDIC-supervised
institution’s comprehensive risk capital
requirement equals any comprehensive
risk capital requirement as calculated
under § 324.209.
(vi) Capital requirement for de
minimis exposures. An FDIC-supervised
institution’s capital requirement for de
minimis exposures equals:
(A) The absolute value of the fair
value of those de minimis exposures
that are not captured in the FDICsupervised institution’s VaR-based
measure or under paragraph (a)(2)(vi)(B)
of this section; and
(B) With the prior written approval of
the FDIC, the capital requirement for
any de minimis exposures using
alternative techniques that
appropriately measure the market risk
associated with those exposures.
(b) Backtesting. An FDIC-supervised
institution must compare each of its
most recent 250 business days’ trading
losses (excluding fees, commissions,
reserves, net interest income, and
intraday trading) with the
corresponding daily VaR-based
measures calibrated to a one-day
holding period and at a one-tail, 99.0
percent confidence level. An FDICsupervised institution must begin
backtesting as required by this
paragraph (b) no later than one year
after the later of January 1, 2014, and the
date on which the FDIC-supervised
institution becomes subject to this
subpart. In the interim, consistent with
safety and soundness principles, an
FDIC-supervised institution subject to
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this subpart as of January 1, 2014 should
continue to follow backtesting
procedures in accordance with the
FDIC’s supervisory expectations.
(1) Once each quarter, the FDICsupervised institution must identify the
number of exceptions (that is, the
number of business days for which the
actual daily net trading loss, if any,
exceeds the corresponding daily VaRbased measure) that have occurred over
the preceding 250 business days.
(2) An FDIC-supervised institution
must use the multiplication factor in
Table 1 to § 324.204 that corresponds to
the number of exceptions identified in
paragraph (b)(1) of this section to
determine its VaR-based capital
requirement for market risk under
paragraph (a)(2)(i) of this section and to
determine its stressed VaR-based capital
requirement for market risk under
paragraph (a)(2)(ii) of this section until
it obtains the next quarter’s backtesting
results, unless the FDIC notifies the
FDIC-supervised institution in writing
that a different adjustment or other
action is appropriate.
TABLE 1 TO § 324.204—MULTIPLICATION FACTORS BASED ON RESULTS
OF BACKTESTING
Number of exceptions
Multiplication
factor
4 or fewer .......................
5 ......................................
6 ......................................
7 ......................................
8 ......................................
9 ......................................
10 or more ......................
§ 324.205
3.00
3.40
3.50
3.65
3.75
3.85
4.00
VaR-based measure.
(a) General requirement. An FDICsupervised institution must use one or
more internal models to calculate daily
a VaR-based measure of the general
market risk of all covered positions. The
daily VaR-based measure also may
reflect the FDIC-supervised institution’s
specific risk for one or more portfolios
of debt and equity positions, if the
internal models meet the requirements
of § 324.207(b)(1). The daily VaR-based
measure must also reflect the FDICsupervised institution’s specific risk for
any portfolio of correlation trading
positions that is modeled under
§ 324.209. An FDIC-supervised
institution may elect to include term
repo-style transactions in its VaR-based
measure, provided that the FDICsupervised institution includes all such
term repo-style transactions consistently
over time.
(1) The FDIC-supervised institution’s
internal models for calculating its VaR-
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based measure must use risk factors
sufficient to measure the market risk
inherent in all covered positions. The
market risk categories must include, as
appropriate, interest rate risk, credit
spread risk, equity price risk, foreign
exchange risk, and commodity price
risk. For material positions in the major
currencies and markets, modeling
techniques must incorporate enough
segments of the yield curve—in no case
less than six—to capture differences in
volatility and less than perfect
correlation of rates along the yield
curve.
(2) The VaR-based measure may
incorporate empirical correlations
within and across risk categories,
provided the FDIC-supervised
institution validates and demonstrates
the reasonableness of its process for
measuring correlations. If the VaR-based
measure does not incorporate empirical
correlations across risk categories, the
FDIC-supervised institution must add
the separate measures from its internal
models used to calculate the VaR-based
measure for the appropriate market risk
categories (interest rate risk, credit
spread risk, equity price risk, foreign
exchange rate risk, and/or commodity
price risk) to determine its aggregate
VaR-based measure.
(3) The VaR-based measure must
include the risks arising from the
nonlinear price characteristics of
options positions or positions with
embedded optionality and the
sensitivity of the fair value of the
positions to changes in the volatility of
the underlying rates, prices, or other
material risk factors. An FDICsupervised institution with a large or
complex options portfolio must measure
the volatility of options positions or
positions with embedded optionality by
different maturities and/or strike prices,
where material.
(4) The FDIC-supervised institution
must be able to justify to the satisfaction
of the FDIC the omission of any risk
factors from the calculation of its VaRbased measure that the FDIC-supervised
institution uses in its pricing models.
(5) The FDIC-supervised institution
must demonstrate to the satisfaction of
the FDIC the appropriateness of any
proxies used to capture the risks of the
FDIC-supervised institution’s actual
positions for which such proxies are
used.
(b) Quantitative requirements for VaRbased measure. (1) The VaR-based
measure must be calculated on a daily
basis using a one-tail, 99.0 percent
confidence level, and a holding period
equivalent to a 10-business-day
movement in underlying risk factors,
such as rates, spreads, and prices. To
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calculate VaR-based measures using a
10-business-day holding period, the
FDIC-supervised institution may
calculate 10-business-day measures
directly or may convert VaR-based
measures using holding periods other
than 10 business days to the equivalent
of a 10-business-day holding period. An
FDIC-supervised institution that
converts its VaR-based measure in such
a manner must be able to justify the
reasonableness of its approach to the
satisfaction of the FDIC.
(2) The VaR-based measure must be
based on a historical observation period
of at least one year. Data used to
determine the VaR-based measure must
be relevant to the FDIC-supervised
institution’s actual exposures and of
sufficient quality to support the
calculation of risk-based capital
requirements. The FDIC-supervised
institution must update data sets at least
monthly or more frequently as changes
in market conditions or portfolio
composition warrant. For an FDICsupervised institution that uses a
weighting scheme or other method for
the historical observation period, the
FDIC-supervised institution must either:
(i) Use an effective observation period
of at least one year in which the average
time lag of the observations is at least
six months; or
(ii) Demonstrate to the FDIC that its
weighting scheme is more effective than
a weighting scheme with an average
time lag of at least six months
representing the volatility of the FDICsupervised institution’s trading portfolio
over a full business cycle. An FDICsupervised institution using this option
must update its data more frequently
than monthly and in a manner
appropriate for the type of weighting
scheme.
(c) An FDIC-supervised institution
must divide its portfolio into a number
of significant subportfolios approved by
the FDIC for subportfolio backtesting
purposes. These subportfolios must be
sufficient to allow the FDIC-supervised
institution and the FDIC to assess the
adequacy of the VaR model at the risk
factor level; the FDIC will evaluate the
appropriateness of these subportfolios
relative to the value and composition of
the FDIC-supervised institution’s
covered positions. The FDIC-supervised
institution must retain and make
available to the FDIC the following
information for each subportfolio for
each business day over the previous two
years (500 business days), with no more
than a 60-day lag:
(1) A daily VaR-based measure for the
subportfolio calibrated to a one-tail, 99.0
percent confidence level;
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(2) The daily profit or loss for the
subportfolio (that is, the net change in
price of the positions held in the
portfolio at the end of the previous
business day); and
(3) The p-value of the profit or loss on
each day (that is, the probability of
observing a profit that is less than, or a
loss that is greater than, the amount
reported for purposes of paragraph (c)(2)
of this section based on the model used
to calculate the VaR-based measure
described in paragraph (c)(1) of this
section).
§ 324.206
Stressed VaR-based measure.
(a) General requirement. At least
weekly, an FDIC-supervised institution
must use the same internal model(s)
used to calculate its VaR-based measure
to calculate a stressed VaR-based
measure.
(b) Quantitative requirements for
stressed VaR-based measure. (1) An
FDIC-supervised institution must
calculate a stressed VaR-based measure
for its covered positions using the same
model(s) used to calculate the VaRbased measure, subject to the same
confidence level and holding period
applicable to the VaR-based measure
under § 324.205, but with model inputs
calibrated to historical data from a
continuous 12-month period that
reflects a period of significant financial
stress appropriate to the FDICsupervised institution’s current
portfolio.
(2) The stressed VaR-based measure
must be calculated at least weekly and
be no less than the FDIC-supervised
institution’s VaR-based measure.
(3) An FDIC-supervised institution
must have policies and procedures that
describe how it determines the period of
significant financial stress used to
calculate the FDIC-supervised
institution’s stressed VaR-based
measure under this section and must be
able to provide empirical support for the
period used. The FDIC-supervised
institution must obtain the prior
approval of the FDIC for, and notify the
FDIC if the FDIC-supervised institution
makes any material changes to, these
policies and procedures. The policies
and procedures must address:
(i) How the FDIC-supervised
institution links the period of significant
financial stress used to calculate the
stressed VaR-based measure to the
composition and directional bias of its
current portfolio; and
(ii) The FDIC-supervised institution’s
process for selecting, reviewing, and
updating the period of significant
financial stress used to calculate the
stressed VaR-based measure and for
monitoring the appropriateness of the
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period to the FDIC-supervised
institution’s current portfolio.
(4) Nothing in this section prevents
the FDIC from requiring an FDICsupervised institution to use a different
period of significant financial stress in
the calculation of the stressed VaRbased measure.
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.207
Specific risk.
(a) General requirement. An FDICsupervised institution must use one of
the methods in this section to measure
the specific risk for each of its debt,
equity, and securitization positions with
specific risk.
(b) Modeled specific risk. An FDICsupervised institution may use models
to measure the specific risk of covered
positions as provided in § 324.205(a)
(therefore, excluding securitization
positions that are not modeled under
§ 324.209). An FDIC-supervised
institution must use models to measure
the specific risk of correlation trading
positions that are modeled under
§ 324.209.
(1) Requirements for specific risk
modeling. (i) If an FDIC-supervised
institution uses internal models to
measure the specific risk of a portfolio,
the internal models must:
(A) Explain the historical price
variation in the portfolio;
(B) Be responsive to changes in
market conditions;
(C) Be robust to an adverse
environment, including signaling rising
risk in an adverse environment; and
(D) Capture all material components
of specific risk for the debt and equity
positions in the portfolio. Specifically,
the internal models must:
(1) Capture event risk and
idiosyncratic risk; and
(2) Capture and demonstrate
sensitivity to material differences
between positions that are similar but
not identical and to changes in portfolio
composition and concentrations.
(ii) If an FDIC-supervised institution
calculates an incremental risk measure
for a portfolio of debt or equity positions
under § 324.208, the FDIC-supervised
institution is not required to capture
default and credit migration risks in its
internal models used to measure the
specific risk of those portfolios.
(2) Specific risk fully modeled for one
or more portfolios. If the FDICsupervised institution’s VaR-based
measure captures all material aspects of
specific risk for one or more of its
portfolios of debt, equity, or correlation
trading positions, the FDIC-supervised
institution has no specific risk add-on
for those portfolios for purposes of
§ 324.204(a)(2)(iii).
(c) Specific risk not modeled. (1) If the
FDIC-supervised institution’s VaR-based
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measure does not capture all material
aspects of specific risk for a portfolio of
debt, equity, or correlation trading
positions, the FDIC-supervised
institution must calculate a specific-risk
add-on for the portfolio under the
standardized measurement method as
described in § 324.210.
(2) An FDIC-supervised institution
must calculate a specific risk add-on
under the standardized measurement
method as described in § 324.210 for all
of its securitization positions that are
not modeled under § 324.209.
§ 324.208
Incremental risk.
(a) General requirement. An FDICsupervised institution that measures the
specific risk of a portfolio of debt
positions under § 324.207(b) using
internal models must calculate at least
weekly an incremental risk measure for
that portfolio according to the
requirements in this section. The
incremental risk measure is the FDICsupervised institution’s measure of
potential losses due to incremental risk
over a one-year time horizon at a onetail, 99.9 percent confidence level,
either under the assumption of a
constant level of risk, or under the
assumption of constant positions. With
the prior approval of the FDIC, an FDICsupervised institution may choose to
include portfolios of equity positions in
its incremental risk model, provided
that it consistently includes such equity
positions in a manner that is consistent
with how the FDIC-supervised
institution internally measures and
manages the incremental risk of such
positions at the portfolio level. If equity
positions are included in the model, for
modeling purposes default is considered
to have occurred upon the default of any
debt of the issuer of the equity position.
An FDIC-supervised institution may not
include correlation trading positions or
securitization positions in its
incremental risk measure.
(b) Requirements for incremental risk
modeling. For purposes of calculating
the incremental risk measure, the
incremental risk model must:
(1) Measure incremental risk over a
one-year time horizon and at a one-tail,
99.9 percent confidence level, either
under the assumption of a constant level
of risk, or under the assumption of
constant positions.
(i) A constant level of risk assumption
means that the FDIC-supervised
institution rebalances, or rolls over, its
trading positions at the beginning of
each liquidity horizon over the one-year
horizon in a manner that maintains the
FDIC-supervised institution’s initial risk
level. The FDIC-supervised institution
must determine the frequency of
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rebalancing in a manner consistent with
the liquidity horizons of the positions in
the portfolio. The liquidity horizon of a
position or set of positions is the time
required for an FDIC-supervised
institution to reduce its exposure to, or
hedge all of its material risks of, the
position(s) in a stressed market. The
liquidity horizon for a position or set of
positions may not be less than the
shorter of three months or the
contractual maturity of the position.
(ii) A constant position assumption
means that the FDIC-supervised
institution maintains the same set of
positions throughout the one-year
horizon. If an FDIC-supervised
institution uses this assumption, it must
do so consistently across all portfolios.
(iii) An FDIC-supervised institution’s
selection of a constant position or a
constant risk assumption must be
consistent between the FDIC-supervised
institution’s incremental risk model and
its comprehensive risk model described
in § 324.209, if applicable.
(iv) An FDIC-supervised institution’s
treatment of liquidity horizons must be
consistent between the FDIC-supervised
institution’s incremental risk model and
its comprehensive risk model described
in § 324.209, if applicable.
(2) Recognize the impact of
correlations between default and
migration events among obligors.
(3) Reflect the effect of issuer and
market concentrations, as well as
concentrations that can arise within and
across product classes during stressed
conditions.
(4) Reflect netting only of long and
short positions that reference the same
financial instrument.
(5) Reflect any material mismatch
between a position and its hedge.
(6) Recognize the effect that liquidity
horizons have on dynamic hedging
strategies. In such cases, an FDICsupervised institution must:
(i) Choose to model the rebalancing of
the hedge consistently over the relevant
set of trading positions;
(ii) Demonstrate that the inclusion of
rebalancing results in a more
appropriate risk measurement;
(iii) Demonstrate that the market for
the hedge is sufficiently liquid to permit
rebalancing during periods of stress; and
(iv) Capture in the incremental risk
model any residual risks arising from
such hedging strategies.
(7) Reflect the nonlinear impact of
options and other positions with
material nonlinear behavior with
respect to default and migration
changes.
(8) Maintain consistency with the
FDIC-supervised institution’s internal
risk management methodologies for
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identifying, measuring, and managing
risk.
(c) Calculation of incremental risk
capital requirement. The incremental
risk capital requirement is the greater of:
(1) The average of the incremental risk
measures over the previous 12 weeks; or
(2) The most recent incremental risk
measure.
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.209
Comprehensive risk.
(a) General requirement. (1) Subject to
the prior approval of the FDIC, an FDICsupervised institution may use the
method in this section to measure
comprehensive risk, that is, all price
risk, for one or more portfolios of
correlation trading positions.
(2) An FDIC-supervised institution
that measures the price risk of a
portfolio of correlation trading positions
using internal models must calculate at
least weekly a comprehensive risk
measure that captures all price risk
according to the requirements of this
section. The comprehensive risk
measure is either:
(i) The sum of:
(A) The FDIC-supervised institution’s
modeled measure of all price risk
determined according to the
requirements in paragraph (b) of this
section; and
(B) A surcharge for the FDICsupervised institution’s modeled
correlation trading positions equal to
the total specific risk add-on for such
positions as calculated under § 324.210
multiplied by 8.0 percent; or
(ii) With approval of the FDIC and
provided the FDIC-supervised
institution has met the requirements of
this section for a period of at least one
year and can demonstrate the
effectiveness of the model through the
results of ongoing model validation
efforts including robust benchmarking,
the greater of:
(A) The FDIC-supervised institution’s
modeled measure of all price risk
determined according to the
requirements in paragraph (b) of this
section; or
(B) The total specific risk add-on that
would apply to the bank’s modeled
correlation trading positions as
calculated under § 324.210 multiplied
by 8.0 percent.
(b) Requirements for modeling all
price risk. If an FDIC-supervised
institution uses an internal model to
measure the price risk of a portfolio of
correlation trading positions:
(1) The internal model must measure
comprehensive risk over a one-year time
horizon at a one-tail, 99.9 percent
confidence level, either under the
assumption of a constant level of risk,
or under the assumption of constant
positions.
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(2) The model must capture all
material price risk, including but not
limited to the following:
(i) The risks associated with the
contractual structure of cash flows of
the position, its issuer, and its
underlying exposures;
(ii) Credit spread risk, including
nonlinear price risks;
(iii) The volatility of implied
correlations, including nonlinear price
risks such as the cross-effect between
spreads and correlations;
(iv) Basis risk;
(v) Recovery rate volatility as it relates
to the propensity for recovery rates to
affect tranche prices; and
(vi) To the extent the comprehensive
risk measure incorporates the benefits of
dynamic hedging, the static nature of
the hedge over the liquidity horizon
must be recognized. In such cases, an
FDIC-supervised institution must:
(A) Choose to model the rebalancing
of the hedge consistently over the
relevant set of trading positions;
(B) Demonstrate that the inclusion of
rebalancing results in a more
appropriate risk measurement;
(C) Demonstrate that the market for
the hedge is sufficiently liquid to permit
rebalancing during periods of stress; and
(D) Capture in the comprehensive risk
model any residual risks arising from
such hedging strategies;
(3) The FDIC-supervised institution
must use market data that are relevant
in representing the risk profile of the
FDIC-supervised institution’s
correlation trading positions in order to
ensure that the FDIC-supervised
institution fully captures the material
risks of the correlation trading positions
in its comprehensive risk measure in
accordance with this section; and
(4) The FDIC-supervised institution
must be able to demonstrate that its
model is an appropriate representation
of comprehensive risk in light of the
historical price variation of its
correlation trading positions.
(c) Requirements for stress testing. (1)
An FDIC-supervised institution must at
least weekly apply specific, supervisory
stress scenarios to its portfolio of
correlation trading positions that
capture changes in:
(i) Default rates;
(ii) Recovery rates;
(iii) Credit spreads;
(iv) Correlations of underlying
exposures; and
(v) Correlations of a correlation
trading position and its hedge.
(2) Other requirements. (i) An FDICsupervised institution must retain and
make available to the FDIC the results
of the supervisory stress testing,
including comparisons with the capital
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55579
requirements generated by the FDICsupervised institution’s comprehensive
risk model.
(ii) An FDIC-supervised institution
must report to the FDIC promptly any
instances where the stress tests indicate
any material deficiencies in the
comprehensive risk model.
(d) Calculation of comprehensive risk
capital requirement. The comprehensive
risk capital requirement is the greater of:
(1) The average of the comprehensive
risk measures over the previous 12
weeks; or
(2) The most recent comprehensive
risk measure.
§ 324.210 Standardized measurement
method for specific risk.
(a) General requirement. An FDICsupervised institution must calculate a
total specific risk add-on for each
portfolio of debt and equity positions for
which the FDIC-supervised institution’s
VaR-based measure does not capture all
material aspects of specific risk and for
all securitization positions that are not
modeled under § 324.209. An FDICsupervised institution must calculate
each specific risk add-on in accordance
with the requirements of this section.
Notwithstanding any other definition or
requirement in this subpart, a position
that would have qualified as a debt
position or an equity position but for the
fact that it qualifies as a correlation
trading position under paragraph (2) of
the definition of correlation trading
position in § 324.2, shall be considered
a debt position or an equity position,
respectively, for purposes of this
§ 324.210.
(1) The specific risk add-on for an
individual debt or securitization
position that represents sold credit
protection is capped at the notional
amount of the credit derivative contract.
The specific risk add-on for an
individual debt or securitization
position that represents purchased
credit protection is capped at the
current fair value of the transaction plus
the absolute value of the present value
of all remaining payments to the
protection seller under the transaction.
This sum is equal to the value of the
protection leg of the transaction.
(2) For debt, equity, or securitization
positions that are derivatives with linear
payoffs, an FDIC-supervised institution
must assign a specific risk-weighting
factor to the fair value of the effective
notional amount of the underlying
instrument or index portfolio, except for
a securitization position for which the
FDIC-supervised institution directly
calculates a specific risk add-on using
the SFA in paragraph (b)(2)(vii)(B) of
this section. A swap must be included
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as an effective notional position in the
underlying instrument or portfolio, with
the receiving side treated as a long
position and the paying side treated as
a short position. For debt, equity, or
securitization positions that are
derivatives with nonlinear payoffs, an
FDIC-supervised institution must risk
weight the fair value of the effective
notional amount of the underlying
instrument or portfolio multiplied by
the derivative’s delta.
(3) For debt, equity, or securitization
positions, an FDIC-supervised
institution may net long and short
positions (including derivatives) in
identical issues or identical indices. An
FDIC-supervised institution may also
net positions in depositary receipts
against an opposite position in an
identical equity in different markets,
provided that the FDIC-supervised
institution includes the costs of
conversion.
(4) A set of transactions consisting of
either a debt position and its credit
derivative hedge or a securitization
position and its credit derivative hedge
has a specific risk add-on of zero if:
(i) The debt or securitization position
is fully hedged by a total return swap (or
similar instrument where there is a
matching of swap payments and
changes in fair value of the debt or
securitization position);
(ii) There is an exact match between
the reference obligation of the swap and
the debt or securitization position;
(iii) There is an exact match between
the currency of the swap and the debt
or securitization position; and
(iv) There is either an exact match
between the maturity date of the swap
and the maturity date of the debt or
securitization position; or, in cases
where a total return swap references a
portfolio of positions with different
maturity dates, the total return swap
maturity date must match the maturity
date of the underlying asset in that
portfolio that has the latest maturity
date.
(5) The specific risk add-on for a set
of transactions consisting of either a
debt position and its credit derivative
hedge or a securitization position and
its credit derivative hedge that does not
meet the criteria of paragraph (a)(4) of
this section is equal to 20.0 percent of
the capital requirement for the side of
the transaction with the higher specific
risk add-on when:
(i) The credit risk of the position is
fully hedged by a credit default swap or
similar instrument;
(ii) There is an exact match between
the reference obligation of the credit
derivative hedge and the debt or
securitization position;
(iii) There is an exact match between
the currency of the credit derivative
hedge and the debt or securitization
position; and
(iv) There is either an exact match
between the maturity date of the credit
derivative hedge and the maturity date
of the debt or securitization position; or,
in the case where the credit derivative
hedge has a standard maturity date:
(A) The maturity date of the credit
derivative hedge is within 30 business
days of the maturity date of the debt or
securitization position; or
(B) For purchased credit protection,
the maturity date of the credit derivative
hedge is later than the maturity date of
the debt or securitization position, but
is no later than the standard maturity
date for that instrument that
immediately follows the maturity date
of the debt or securitization position.
The maturity date of the credit
derivative hedge may not exceed the
maturity date of the debt or
securitization position by more than 90
calendar days.
(6) The specific risk add-on for a set
of transactions consisting of either a
debt position and its credit derivative
hedge or a securitization position and
its credit derivative hedge that does not
meet the criteria of either paragraph
(a)(4) or (a)(5) of this section, but in
which all or substantially all of the price
risk has been hedged, is equal to the
specific risk add-on for the side of the
transaction with the higher specific risk
add-on.
(b) Debt and securitization positions.
(1) The total specific risk add-on for a
portfolio of debt or securitization
positions is the sum of the specific risk
add-ons for individual debt or
securitization positions, as computed
under this section. To determine the
specific risk add-on for individual debt
or securitization positions, an FDICsupervised institution must multiply the
absolute value of the current fair value
of each net long or net short debt or
securitization position in the portfolio
by the appropriate specific riskweighting factor as set forth in
paragraphs (b)(2)(i) through (b)(2)(vii) of
this section.
(2) For the purpose of this section, the
appropriate specific risk-weighting
factors include:
(i) Sovereign debt positions. (A) In
accordance with Table 1 to § 324.210, an
FDIC-supervised institution must assign
a specific risk-weighting factor to a
sovereign debt position based on the
CRC applicable to the sovereign, and, as
applicable, the remaining contractual
maturity of the position, or if there is no
CRC applicable to the sovereign, based
on whether the sovereign entity is a
member of the OECD. Notwithstanding
any other provision in this subpart,
sovereign debt positions that are backed
by the full faith and credit of the United
States are treated as having a CRC of 0.
TABLE 1 TO § 324.210—SPECIFIC RISK-WEIGHTING FACTORS FOR SOVEREIGN DEBT POSITIONS
Specific risk-weighting factor (in percent)
CRC .................................................
0–1
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2–3
0.0
Remaining contractual maturity of 6 months or less ................................
0.25
Remaining contractual maturity of greater than 6 and up to and including 24 months.
1.0
Remaining contractual maturity exceeds 24 months ................................
1.6
4–6
8.0
7
12.0
OECD Member with No CRC
0.0
Non-OECD Member with No CRC
8.0
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55581
TABLE 1 TO § 324.210—SPECIFIC RISK-WEIGHTING FACTORS FOR SOVEREIGN DEBT POSITIONS—Continued
Sovereign Default
12.0
(B) Notwithstanding paragraph
(b)(2)(i)(A) of this section, an FDICsupervised institution may assign to a
sovereign debt position a specific riskweighting factor that is lower than the
applicable specific risk-weighting factor
in Table 1 to § 324.210 if:
(1) The position is denominated in the
sovereign entity’s currency;
(2) The FDIC-supervised institution
has at least an equivalent amount of
liabilities in that currency; and
(3) The sovereign entity allows banks
under its jurisdiction to assign the lower
specific risk-weighting factor to the
same exposures to the sovereign entity.
(C) An FDIC-supervised institution
must assign a 12.0 percent specific riskweighting factor to a sovereign debt
position immediately upon
determination a default has occurred; or
if a default has occurred within the
previous five years.
(D) An FDIC-supervised institution
must assign a 0.0 percent specific risk-
weighting factor to a sovereign debt
position if the sovereign entity is a
member of the OECD and does not have
a CRC assigned to it, except as provided
in paragraph (b)(2)(i)(C) of this section.
(E) An FDIC-supervised institution
must assign an 8.0 percent specific riskweighting factor to a sovereign debt
position if the sovereign is not a
member of the OECD and does not have
a CRC assigned to it, except as provided
in paragraph (b)(2)(i)(C) of this section.
(ii) Certain supranational entity and
multilateral development bank debt
positions. An FDIC-supervised
institution may assign a 0.0 percent
specific risk-weighting factor to a debt
position that is an exposure to the Bank
for International Settlements, the
European Central Bank, the European
Commission, the International Monetary
Fund, or an MDB.
(iii) GSE debt positions. An FDICsupervised institution must assign a 1.6
percent specific risk-weighting factor to
a debt position that is an exposure to a
GSE. Notwithstanding the foregoing, an
FDIC-supervised institution must assign
an 8.0 percent specific risk-weighting
factor to preferred stock issued by a
GSE.
(iv) Depository institution, foreign
bank, and credit union debt positions.
(A) Except as provided in paragraph
(b)(2)(iv)(B) of this section, an FDICsupervised institution must assign a
specific risk-weighting factor to a debt
position that is an exposure to a
depository institution, a foreign bank, or
a credit union, in accordance with Table
2 to § 324.210 of this section, based on
the CRC that corresponds to that entity’s
home country or the OECD membership
status of that entity’s home country if
there is no CRC applicable to the
entity’s home country, and, as
applicable, the remaining contractual
maturity of the position.
TABLE 2 TO § 324.210—SPECIFIC RISK-WEIGHTING FACTORS FOR DEPOSITORY INSTITUTION, FOREIGN BANK, AND CREDIT
UNION DEBT POSITIONS
Specific risk-weighting factor
CRC 0–2 or OECD Member with No CRC ................................
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CRC 3 .........................................................................................
CRC 4–7 .....................................................................................
Non-OECD Member with No CRC .............................................
Sovereign Default .......................................................................
(B) An FDIC-supervised institution
must assign a specific risk-weighting
factor of 8.0 percent to a debt position
that is an exposure to a depository
institution or a foreign bank that is
includable in the depository
institution’s or foreign bank’s regulatory
capital and that is not subject to
deduction as a reciprocal holding under
§ 324.22.
(C) An FDIC-supervised institution
must assign a 12.0 percent specific riskweighting factor to a debt position that
is an exposure to a foreign bank
immediately upon determination that a
default by the foreign bank’s home
country has occurred or if a default by
the foreign bank’s home country has
occurred within the previous five years.
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Remaining contractual maturity of 6 months or less .................
Remaining contractual maturity of greater than 6 and up to
and including 24 months.
Remaining contractual maturity exceeds 24 months .................
................................................................................................
................................................................................................
................................................................................................
................................................................................................
(v) PSE debt positions. (A) Except as
provided in paragraph (b)(2)(v)(B) of
this section, an FDIC-supervised
institution must assign a specific riskweighting factor to a debt position that
is an exposure to a PSE in accordance
with Tables 3 and 4 to § 324.210
depending on the position’s
categorization as a general obligation or
revenue obligation based on the CRC
that corresponds to the PSE’s home
country or the OECD membership status
of the PSE’s home country if there is no
CRC applicable to the PSE’s home
country, and, as applicable, the
remaining contractual maturity of the
position, as set forth in Tables 3 and 4
to § 324.210.
(B) An FDIC-supervised institution
may assign a lower specific risk-
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Percent
0.25
1.0
1.6
8.0
12.0
8.0
12.0
weighting factor than would otherwise
apply under Tables 3 and 4 to § 324.210
to a debt position that is an exposure to
a foreign PSE if:
(1) The PSE’s home country allows
banks under its jurisdiction to assign a
lower specific risk-weighting factor to
such position; and
(2) The specific risk-weighting factor
is not lower than the risk weight that
corresponds to the PSE’s home country
in Table 1 to § 324.210.
(C) An FDIC-supervised institution
must assign a 12.0 percent specific riskweighting factor to a PSE debt position
immediately upon determination that a
default by the PSE’s home country has
occurred or if a default by the PSE’s
home country has occurred within the
previous five years.
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TABLE 3 TO § 324.210—SPECIFIC RISK-WEIGHTING FACTORS FOR PSE GENERAL OBLIGATION DEBT POSITIONS
General obligation specific risk-weighting factor
CRC 0–2 or OECD Member with No CRC ................................
CRC 3 .........................................................................................
CRC 4–7 .....................................................................................
Non-OECD Member with No CRC .............................................
Sovereign Default .......................................................................
Percent
Remaining contractual maturity of 6 months or less .................
Remaining contractual maturity of greater than 6 and up to
and including 24 months.
Remaining contractual maturity exceeds 24 months .................
................................................................................................
................................................................................................
................................................................................................
................................................................................................
0.25
1.0
1.6
8.0
12.0
8.0
12.0
TABLE 4 TO § 324.210—SPECIFIC RISK-WEIGHTING FACTORS FOR PSE REVENUE OBLIGATION DEBT POSITIONS
Revenue obligation specific risk-weighting factor
CRC 0–1 or OECD Member with No CRC ................................
CRC 2–3 .....................................................................................
CRC 4–7 .....................................................................................
Non-OECD Member with No CRC .............................................
Sovereign Default .......................................................................
(vi) Corporate debt positions. Except
as otherwise provided in paragraph
(b)(2)(vi)(B) of this section, an FDICsupervised institution must assign a
specific risk-weighting factor to a
corporate debt position in accordance
with the investment grade methodology
in paragraph (b)(2)(vi)(A) of this section.
Percent
Remaining contractual maturity of 6 months or less .................
Remaining contractual maturity of greater than 6 and up to
and including 24 months.
Remaining contractual maturity exceeds 24 months .................
.....................................................................................................
.....................................................................................................
.....................................................................................................
.....................................................................................................
(A) Investment grade methodology. (1)
For corporate debt positions that are
exposures to entities that have issued
and outstanding publicly traded
instruments, an FDIC-supervised
institution must assign a specific riskweighting factor based on the category
and remaining contractual maturity of
0.25
1.0
1.6
8.0
12.0
8.0
12.0
the position, in accordance with Table
5 to § 324.210. For purposes of this
paragraph (b)(2)(vi)(A)(1), the FDICsupervised institution must determine
whether the position is in the
investment grade or not investment
grade category.
TABLE 5 TO § 324.210—SPECIFIC RISK-WEIGHTING FACTORS FOR CORPORATE DEBT POSITIONS UNDER THE INVESTMENT
GRADE METHODOLOGY
Remaining contractual maturity
Investment Grade ................................................................
6 months or less ................................................................
Greater than 6 and up to and including 24 months ..........
Greater than 24 months .....................................................
........................................................................................
Non-investment Grade ........................................................
emcdonald on DSK67QTVN1PROD with RULES2
Specific risk-weighting
factor
(in percent)
Category
(2) An FDIC-supervised institution
must assign an 8.0 percent specific riskweighting factor for corporate debt
positions that are exposures to entities
that do not have publicly traded
instruments outstanding.
(B) Limitations. (1) An FDICsupervised institution must assign a
specific risk-weighting factor of at least
8.0 percent to an interest-only mortgagebacked security that is not a
securitization position.
(2) An FDIC-supervised institution
shall not assign a corporate debt
position a specific risk-weighting factor
that is lower than the specific riskweighting factor that corresponds to the
CRC of the issuer’s home country, if
applicable, in Table 1 to § 324.210.
(vii) Securitization positions. (A)
General requirements. (1) An FDIC-
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supervised institution that is not an
advanced approaches FDIC-supervised
institution must assign a specific riskweighting factor to a securitization
position using either the simplified
supervisory formula approach (SSFA) in
paragraph (b)(2)(vii)(C) of this section
(and § 324.211) or assign a specific riskweighting factor of 100 percent to the
position.
(2) An FDIC-supervised institution
that is an advanced approaches FDICsupervised institution must calculate a
specific risk add-on for a securitization
position in accordance with paragraph
(b)(2)(vii)(B) of this section if the FDICsupervised institution and the
securitization position each qualifies to
use the SFA in § 324.143. An FDICsupervised institution that is an
advanced approaches FDIC-supervised
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0.50
2.00
4.00
12.00
institution with a securitization position
that does not qualify for the SFA under
paragraph (b)(2)(vii)(B) of this section
may assign a specific risk-weighting
factor to the securitization position
using the SSFA in accordance with
paragraph (b)(2)(vii)(C) of this section or
assign a specific risk-weighting factor of
100 percent to the position.
(3) An FDIC-supervised institution
must treat a short securitization position
as if it is a long securitization position
solely for calculation purposes when
using the SFA in paragraph (b)(2)(vii)(B)
of this section or the SSFA in paragraph
(b)(2)(vii)(C) of this section.
(B) SFA. To calculate the specific risk
add-on for a securitization position
using the SFA, an FDIC-supervised
institution that is an advanced
approaches FDIC-supervised institution
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must set the specific risk add-on for the
position equal to the risk-based capital
requirement as calculated under
§ 324.143.
(C) SSFA. To use the SSFA to
determine the specific risk-weighting
factor for a securitization position, an
FDIC-supervised institution must
calculate the specific risk-weighting
factor in accordance with § 324.211.
(D) Nth-to-default credit derivatives.
An FDIC-supervised institution must
determine a specific risk add-on using
the SFA in paragraph (b)(2)(vii)(B) of
this section, or assign a specific riskweighting factor using the SSFA in
paragraph (b)(2)(vii)(C) of this section to
an nth-to-default credit derivative in
accordance with this paragraph
(b)(2)(vii)(D), regardless of whether the
FDIC-supervised institution is a net
protection buyer or net protection seller.
An FDIC-supervised institution must
determine its position in the nth-todefault credit derivative as the largest
notional amount of all the underlying
exposures.
(1) For purposes of determining the
specific risk add-on using the SFA in
paragraph (b)(2)(vii)(B) of this section or
the specific risk-weighting factor for an
nth-to-default credit derivative using the
SSFA in paragraph (b)(2)(vii)(C) of this
section the FDIC-supervised institution
must calculate the attachment point and
detachment point of its position as
follows:
(i) The attachment point (parameter
A) is the ratio of the sum of the notional
amounts of all underlying exposures
that are subordinated to the FDICsupervised institution’s position to the
total notional amount of all underlying
exposures. For purposes of the SSFA,
parameter A is expressed as a decimal
value between zero and one. For
purposes of using the SFA in paragraph
(b)(2)(vii)(B) of this section to calculate
the specific add-on for its position in an
nth-to-default credit derivative,
parameter A must be set equal to the
credit enhancement level (L) input to
the SFA formula in § 324.143. In the
case of a first-to-default credit
derivative, there are no underlying
exposures that are subordinated to the
FDIC-supervised institution’s position.
In the case of a second-or-subsequent-todefault credit derivative, the smallest (n1) notional amounts of the underlying
exposure(s) are subordinated to the
FDIC-supervised institution’s position.
(ii) The detachment point (parameter
D) equals the sum of parameter A plus
the ratio of the notional amount of the
FDIC-supervised institution’s position
in the nth-to-default credit derivative to
the total notional amount of all
underlying exposures. For purposes of
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the SSFA, parameter A is expressed as
a decimal value between zero and one.
For purposes of using the SFA in
paragraph (b)(2)(vii)(B) of this section to
calculate the specific risk add-on for its
position in an nth-to-default credit
derivative, parameter D must be set to
equal the L input plus the thickness of
tranche (T) input to the SFA formula in
§ 324.143.
(2) An FDIC-supervised institution
that does not use the SFA in paragraph
(b)(2)(vii)(B) of this section to determine
a specific risk-add on, or the SSFA in
paragraph (b)(2)(vii)(C) of this section to
determine a specific risk-weighting
factor for its position in an nth-to-default
credit derivative must assign a specific
risk-weighting factor of 100 percent to
the position.
(c) Modeled correlation trading
positions. For purposes of calculating
the comprehensive risk measure for
modeled correlation trading positions
under either paragraph (a)(2)(i) or
(a)(2)(ii) of § 324.209, the total specific
risk add-on is the greater of:
(1) The sum of the FDIC-supervised
institution’s specific risk add-ons for
each net long correlation trading
position calculated under this section;
or
(2) The sum of the FDIC-supervised
institution’s specific risk add-ons for
each net short correlation trading
position calculated under this section.
(d) Non-modeled securitization
positions. For securitization positions
that are not correlation trading positions
and for securitizations that are
correlation trading positions not
modeled under § 324.209, the total
specific risk add-on is the greater of:
(1) The sum of the FDIC-supervised
institution’s specific risk add-ons for
each net long securitization position
calculated under this section; or
(2) The sum of the FDIC-supervised
institution’s specific risk add-ons for
each net short securitization position
calculated under this section.
(e) Equity positions. The total specific
risk add-on for a portfolio of equity
positions is the sum of the specific risk
add-ons of the individual equity
positions, as computed under this
section. To determine the specific risk
add-on of individual equity positions,
an FDIC-supervised institution must
multiply the absolute value of the
current fair value of each net long or net
short equity position by the appropriate
specific risk-weighting factor as
determined under this paragraph:
(1) The FDIC-supervised institution
must multiply the absolute value of the
current fair value of each net long or net
short equity position by a specific riskweighting factor of 8.0 percent. For
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55583
equity positions that are index contracts
comprising a well-diversified portfolio
of equity instruments, the absolute
value of the current fair value of each
net long or net short position is
multiplied by a specific risk-weighting
factor of 2.0 percent.29
(2) For equity positions arising from
the following futures-related arbitrage
strategies, an FDIC-supervised
institution may apply a 2.0 percent
specific risk-weighting factor to one side
(long or short) of each position with the
opposite side exempt from an additional
capital requirement:
(i) Long and short positions in exactly
the same index at different dates or in
different market centers; or
(ii) Long and short positions in index
contracts at the same date in different,
but similar indices.
(3) For futures contracts on main
indices that are matched by offsetting
positions in a basket of stocks
comprising the index, an FDICsupervised institution may apply a 2.0
percent specific risk-weighting factor to
the futures and stock basket positions
(long and short), provided that such
trades are deliberately entered into and
separately controlled, and that the
basket of stocks is comprised of stocks
representing at least 90.0 percent of the
capitalization of the index.
(f) Due diligence requirements for
securitization positions. (1) An FDICsupervised institution must demonstrate
to the satisfaction of the FDIC a
comprehensive understanding of the
features of a securitization position that
would materially affect the performance
of the position by conducting and
documenting the analysis set forth in
paragraph (f)(2) of this section. The
FDIC-supervised institution’s analysis
must be commensurate with the
complexity of the securitization position
and the materiality of the position in
relation to capital.
(2) An FDIC-supervised institution
must demonstrate its comprehensive
understanding for each securitization
position by:
(i) Conducting an analysis of the risk
characteristics of a securitization
position prior to acquiring the position
and document such analysis within
three business days after acquiring
position, considering:
(A) Structural features of the
securitization that would materially
impact the performance of the position,
for example, the contractual cash flow
waterfall, waterfall-related triggers,
29 A portfolio is well-diversified if it contains a
large number of individual equity positions, with
no single position representing a substantial portion
of the portfolio’s total fair value.
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credit enhancements, liquidity
enhancements, fair value triggers, the
performance of organizations that
service the position, and deal-specific
definitions of default;
(B) Relevant information regarding the
performance of the underlying credit
exposure(s), for example, the percentage
of loans 30, 60, and 90 days past due;
default rates; prepayment rates; loans in
foreclosure; property types; occupancy;
average credit score or other measures of
creditworthiness; average loan-to-value
ratio; and industry and geographic
diversification data on the underlying
exposure(s);
(C) Relevant market data of the
securitization, for example, bid-ask
spreads, most recent sales price and
historical price volatility, trading
volume, implied market rating, and size,
depth and concentration level of the
market for the securitization; and
(D) For resecuritization positions,
performance information on the
underlying securitization exposures, for
example, the issuer name and credit
quality, and the characteristics and
performance of the exposures
underlying the securitization exposures.
(ii) On an on-going basis (no less
frequently than quarterly), evaluating,
reviewing, and updating as appropriate
the analysis required under paragraph
(f)(1) of this section for each
securitization position.
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§ 324.211 Simplified supervisory formula
approach (SSFA).
(a) General requirements. To use the
SSFA to determine the specific riskweighting factor for a securitization
position, an FDIC-supervised institution
must have data that enables it to assign
accurately the parameters described in
paragraph (b) of this section. Data used
to assign the parameters described in
paragraph (b) of this section must be the
most currently available data; if the
contracts governing the underlying
exposures of the securitization require
payments on a monthly or quarterly
basis, the data used to assign the
parameters described in paragraph (b) of
this section must be no more than 91
calendar days old. An FDIC-supervised
institution that does not have the
appropriate data to assign the
parameters described in paragraph (b) of
this section must assign a specific riskweighting factor of 100 percent to the
position.
(b) SSFA parameters. To calculate the
specific risk-weighting factor for a
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securitization position using the SSFA,
an FDIC-supervised institution must
have accurate information on the five
inputs to the SSFA calculation
described in paragraphs (b)(1) through
(b)(5) of this section.
(1) KG is the weighted-average (with
unpaid principal used as the weight for
each exposure) total capital requirement
of the underlying exposures calculated
using subpart D. KG is expressed as a
decimal value between zero and one
(that is, an average risk weight of 100
percent represents a value of KG equal
to 0.08).
(2) Parameter W is expressed as a
decimal value between zero and one.
Parameter W is the ratio of the sum of
the dollar amounts of any underlying
exposures of the securitization that meet
any of the criteria as set forth in
paragraphs (b)(2)(i) through (vi) of this
section to the balance, measured in
dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or
insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred
payments for 90 days or more, other
than principal or interest payments
deferred on:
(A) Federally-guaranteed student
loans, in accordance with the terms of
those guarantee programs; or
(B) Consumer loans, including nonfederally-guaranteed student loans,
provided that such payments are
deferred pursuant to provisions
included in the contract at the time
funds are disbursed that provide for
period(s) of deferral that are not
initiated based on changes in the
creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment
point for the position, which represents
the threshold at which credit losses will
first be allocated to the position. Except
as provided in § 324.210(b)(2)(vii)(D) for
nth-to-default credit derivatives,
parameter A equals the ratio of the
current dollar amount of underlying
exposures that are subordinated to the
position of the FDIC-supervised
institution to the current dollar amount
of underlying exposures. Any reserve
account funded by the accumulated
cash flows from the underlying
exposures that is subordinated to the
position that contains the FDICsupervised institution’s securitization
exposure may be included in the
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calculation of parameter A to the extent
that cash is present in the account.
Parameter A is expressed as a decimal
value between zero and one.
(4) Parameter D is the detachment
point for the position, which represents
the threshold at which credit losses of
principal allocated to the position
would result in a total loss of principal.
Except as provided in
§ 324.210(b)(2)(vii)(D) for nth-to-default
credit derivatives, parameter D equals
parameter A plus the ratio of the current
dollar amount of the securitization
positions that are pari passu with the
position (that is, have equal seniority
with respect to credit risk) to the current
dollar amount of the underlying
exposures. Parameter D is expressed as
a decimal value between zero and one.
(5) A supervisory calibration
parameter, p, is equal to 0.5 for
securitization positions that are not
resecuritization positions and equal to
1.5 for resecuritization positions.
(c) Mechanics of the SSFA. KG and W
are used to calculate KA, the augmented
value of KG, which reflects the observed
credit quality of the underlying
exposures. KA is defined in paragraph
(d) of this section. The values of
parameters A and D, relative to KA
determine the specific risk-weighting
factor assigned to a position as
described in this paragraph and
paragraph (d) of this section. The
specific risk-weighting factor assigned
to a securitization position, or portion of
a position, as appropriate, is the larger
of the specific risk-weighting factor
determined in accordance with this
paragraph, paragraph (d) of this section,
and a specific risk-weighting factor of
1.6 percent.
(1) When the detachment point,
parameter D, for a securitization
position is less than or equal to KA, the
position must be assigned a specific
risk-weighting factor of 100 percent.
(2) When the attachment point,
parameter A, for a securitization
position is greater than or equal to KA,
the FDIC-supervised institution must
calculate the specific risk-weighting
factor in accordance with paragraph (d)
of this section.
(3) When A is less than KA and D is
greater than KA, the specific riskweighting factor is a weighted-average
of 1.00 and KSSFA calculated under
paragraphs (c)(3)(i) and (c)(3)(ii) of this
section. For the purpose of this
calculation:
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§ 324.212
Market risk disclosures.
(a) Scope. An FDIC-supervised
institution must comply with this
section unless it is a consolidated
subsidiary of a bank holding company
or a depository institution that is subject
to these requirements or of a non-U.S.
banking organization that is subject to
comparable public disclosure
requirements in its home jurisdiction.
An FDIC-supervised institution must
make timely public disclosures each
calendar quarter. If a significant change
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occurs, such that the most recent
reporting amounts are no longer
reflective of the FDIC-supervised
institution’s capital adequacy and risk
profile, then a brief discussion of this
change and its likely impact must be
provided as soon as practicable
thereafter. Qualitative disclosures that
typically do not change each quarter
may be disclosed annually, provided
any significant changes are disclosed in
the interim. If an FDIC-supervised
institution believes that disclosure of
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specific commercial or financial
information would prejudice seriously
its position by making public certain
information that is either proprietary or
confidential in nature, the FDICsupervised institution is not required to
disclose these specific items, but must
disclose more general information about
the subject matter of the requirement,
together with the fact that, and the
reason why, the specific items of
information have not been disclosed.
The FDIC-supervised institution’s
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management may provide all of the
disclosures required by this section in
one place on the FDIC-supervised
institution’s public Web site or may
provide the disclosures in more than
one public financial report or other
regulatory reports, provided that the
FDIC-supervised institution publicly
provides a summary table specifically
indicating the location(s) of all such
disclosures.
(b) Disclosure policy. The FDICsupervised institution must have a
formal disclosure policy approved by
the board of directors that addresses the
FDIC-supervised institution’s approach
for determining its market risk
disclosures. The policy must address
the associated internal controls and
disclosure controls and procedures. The
board of directors and senior
management must ensure that
appropriate verification of the
disclosures takes place and that
effective internal controls and
disclosure controls and procedures are
maintained. One or more senior officers
of the FDIC-supervised institution must
attest that the disclosures meet the
requirements of this subpart, and the
board of directors and senior
management are responsible for
establishing and maintaining an
effective internal control structure over
financial reporting, including the
disclosures required by this section.
(c) Quantitative disclosures. (1) For
each material portfolio of covered
positions, the FDIC-supervised
institution must provide timely public
disclosures of the following information
at least quarterly:
(i) The high, low, and mean VaRbased measures over the reporting
period and the VaR-based measure at
period-end;
(ii) The high, low, and mean stressed
VaR-based measures over the reporting
period and the stressed VaR-based
measure at period-end;
(iii) The high, low, and mean
incremental risk capital requirements
over the reporting period and the
incremental risk capital requirement at
period-end;
(iv) The high, low, and mean
comprehensive risk capital
requirements over the reporting period
and the comprehensive risk capital
requirement at period-end, with the
period-end requirement broken down
into appropriate risk classifications (for
example, default risk, migration risk,
correlation risk);
(v) Separate measures for interest rate
risk, credit spread risk, equity price risk,
foreign exchange risk, and commodity
price risk used to calculate the VaRbased measure; and
(vi) A comparison of VaR-based
estimates with actual gains or losses
experienced by the FDIC-supervised
institution, with an analysis of
important outliers.
(2) In addition, the FDIC-supervised
institution must disclose publicly the
following information at least quarterly:
(i) The aggregate amount of onbalance sheet and off-balance sheet
securitization positions by exposure
type; and
(ii) The aggregate amount of
correlation trading positions.
(d) Qualitative disclosures. For each
material portfolio of covered positions,
the FDIC-supervised institution must
provide timely public disclosures of the
following information at least annually
after the end of the fourth calendar
quarter, or more frequently in the event
of material changes for each portfolio:
(1) The composition of material
portfolios of covered positions;
(2) The FDIC-supervised institution’s
valuation policies, procedures, and
methodologies for covered positions
including, for securitization positions,
the methods and key assumptions used
for valuing such positions, any
significant changes since the last
reporting period, and the impact of such
change;
(3) The characteristics of the internal
models used for purposes of this
subpart. For the incremental risk capital
requirement and the comprehensive risk
capital requirement, this must include:
(i) The approach used by the FDICsupervised institution to determine
liquidity horizons;
(ii) The methodologies used to
achieve a capital assessment that is
consistent with the required soundness
standard; and
(iii) The specific approaches used in
the validation of these models;
(4) A description of the approaches
used for validating and evaluating the
accuracy of internal models and
modeling processes for purposes of this
subpart;
(5) For each market risk category (that
is, interest rate risk, credit spread risk,
equity price risk, foreign exchange risk,
and commodity price risk), a
description of the stress tests applied to
the positions subject to the factor;
(6) The results of the comparison of
the FDIC-supervised institution’s
internal estimates for purposes of this
subpart with actual outcomes during a
sample period not used in model
development;
(7) The soundness standard on which
the FDIC-supervised institution’s
internal capital adequacy assessment
under this subpart is based, including a
description of the methodologies used
to achieve a capital adequacy
assessment that is consistent with the
soundness standard;
(8) A description of the FDICsupervised institution’s processes for
monitoring changes in the credit and
market risk of securitization positions,
including how those processes differ for
resecuritization positions; and
(9) A description of the FDICsupervised institution’s policy
governing the use of credit risk
mitigation to mitigate the risks of
securitization and resecuritization
positions.
§§ 324.213 through 324.299
[Reserved]
Subpart G—Transition Provisions
§ 324.300
Transitions.
(a) Capital conservation and
countercyclical capital buffer. (1) From
January 1, 2014, through December 31,
2015, an FDIC-supervised institution is
not subject to limits on distributions
and discretionary bonus payments
under § 324.11 notwithstanding the
amount of its capital conservation buffer
or any applicable countercyclical capital
buffer amount.
(2) Beginning January 1, 2016,
through December 31, 2018, an FDICsupervised institution’s maximum
payout ratio shall be determined as set
forth in Table 1 to § 324.300.
emcdonald on DSK67QTVN1PROD with RULES2
TABLE 1 TO § 324.300
Transition period
Capital conservation buffer
Maximum payout ratio (as a percentage of eligible retained income)
Calendar year 2016 .........
Greater than 0.625 percent (plus 25 percent of any applicable countercyclical capital buffer amount).
No payout ratio limitation applies
under this section.
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TABLE 1 TO § 324.300—Continued
Transition period
Calendar year 2017 .........
emcdonald on DSK67QTVN1PROD with RULES2
Calendar year 2018 .........
Less than or equal to 0.625 percent (plus 25 percent of any applicable
countercyclical capital buffer amount), and greater than 0.469 percent
(plus 17.25 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 0.469 percent (plus 17.25 percent of any applicable
countercyclical capital buffer amount), and greater than 0.313 percent
(plus 12.5 percent of any applicable countercyclical capital buffer amount).
Less than or equal to 0.313 percent (plus 12.5 percent of any applicable
countercyclical capital buffer amount), and greater than 0.156 percent
(plus 6.25 percent of any applicable countercyclical capital buffer amount).
Less than or equal to 0.156 percent (plus 6.25 percent of any applicable
countercyclical capital buffer amount).
Greater than 1.25 percent (plus 50 percent of any applicable countercyclical
capital buffer amount).
Less than or equal to 1.25 percent (plus 50 percent of any applicable countercyclical capital buffer amount), and greater than 0.938 percent (plus
37.5 percent of any applicable countercyclical capital buffer amount).
Less than or equal to 0.938 percent (plus 37.5 percent of any applicable
countercyclical capital buffer amount), and greater than 0.625 percent
(plus 25 percent of any applicable countercyclical capital buffer amount).
Less than or equal to 0.625 percent (plus 25 percent of any applicable
countercyclical capital buffer amount), and greater than 0.313 percent
(plus 12.5 percent of any applicable countercyclical capital buffer amount).
Less than or equal to 0.313 percent (plus 12.5 percent of any applicable
countercyclical capital buffer amount).
Greater than 1.875 percent (plus 75 percent of any applicable countercyclical capital buffer amount).
Less than or equal to 1.875 percent (plus 75 percent of any applicable
countercyclical capital buffer amount), and greater than 1.406 percent
(plus 56.25 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 1.406 percent (plus 56.25 percent of any applicable
countercyclical capital buffer amount), and greater than 0.938 percent
(plus 37.5 percent of any applicable countercyclical capital buffer amount).
Less than or equal to 0.938 percent (plus 37.5 percent of any applicable
countercyclical capital buffer amount), and greater than 0.469 percent
(plus 18.75 percent of any applicable countercyclical capital buffer
amount).
Less than or equal to 0.469 percent (plus 18.75 percent of any applicable
countercyclical capital buffer amount).
(b) Regulatory capital adjustments
and deductions. Beginning January 1,
2014, for an advanced approaches FDICsupervised institution, and beginning
January 1, 2015, for an FDIC-supervised
institution that is not an advanced
approaches FDIC-supervised institution,
and in each case through December 31,
2017, an FDIC-supervised institution
must make the capital adjustments and
deductions in § 324.22 in accordance
with the transition requirements in this
paragraph (b). Beginning January 1,
2018, an FDIC-supervised institution
must make all regulatory capital
adjustments and deductions in
accordance with § 324.22.
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Capital conservation buffer
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(1) Transition deductions from
common equity tier 1 capital. Beginning
January 1, 2014, for an advanced
approaches FDIC-supervised institution,
and beginning January 1, 2015, for an
FDIC-supervised institution that is not
an advanced approaches FDICsupervised institution, and in each case
through December 31, 2017, an FDICsupervised institution, must make the
deductions required under
§ 324.22(a)(1)—(7) from common equity
tier 1 or tier 1 capital elements in
accordance with the percentages set
forth in Tables 2 and 3 to § 324.300.
(i) An FDIC-supervised institution
must deduct the following items from
common equity tier 1 and additional tier
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60 percent.
40 percent.
20 percent.
0 percent.
No payout ratio limitation applies
under this section.
60 percent.
40 percent.
20 percent.
0 percent.
No payout ratio limitation applies
under this section.
60 percent.
40 percent.
20 percent.
0 percent.
1 capital in accordance with the
percentages set forth in Table 2 to
§ 324.300: Goodwill (§ 324.22(a)(1)),
DTAs that arise from net operating loss
and tax credit carryforwards
(§ 324.22(a)(3)), a gain-on-sale in
connection with a securitization
exposure (§ 324.22(a)(4)), defined
benefit pension fund assets
(§ 324.22(a)(5)), expected credit loss that
exceeds eligible credit reserves (for
advanced approaches FDIC-supervised
institutions that have completed the
parallel run process and that have
received notifications from the FDIC
pursuant to § 324.121(d) of subpart E)
(§ 324.22(a)(6)), and financial
subsidiaries (§ 324.22(a)(7)).
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TABLE 2 TO § 324.300
Transition deductions
under § 324.22(a)(1),
(a)(7), (a)(8), and
(a)(9)
Transition period
Percentage of the deductions from common equity tier 1 capital
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
2014 .................................................................................
2015 .................................................................................
2016 .................................................................................
2017 .................................................................................
2018, and thereafter ........................................................
(ii) An FDIC-supervised institution
must deduct from common equity tier 1
capital any intangible assets other than
goodwill and MSAs in accordance with
Transition deductions under § 324.22(a)(3)–
(6)
Percentage of the deductions from common equity tier 1 capital
Percentage of the deductions from tier 1
capital
20
40
60
80
100
80
60
40
20
0
100
100
100
100
100
the percentages set forth in Table 3 to
§ 324.300.
(iii) An FDIC-supervised institution
must apply a 100 percent risk-weight to
the aggregate amount of intangible
assets other than goodwill and MSAs
that are not required to be deducted
from common equity tier 1 capital under
this section.
TABLE 3 TO § 324.300
Transition deductions under § 324.22(a)(2)—
Percentage of the deductions from common
equity tier 1 capital
Transition period
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
2014 .............................................................................................................................
2015 .............................................................................................................................
2016 .............................................................................................................................
2017 .............................................................................................................................
2018, and thereafter ....................................................................................................
(2) Transition adjustments to common
equity tier 1 capital. Beginning January
1, 2014, for an advanced approaches
FDIC-supervised institution, and
beginning January 1, 2015, for an FDICsupervised institution that is not an
advanced approaches FDIC-supervised
institution, and in each case through
December 31, 2017, an FDIC-supervised
institution, must allocate the regulatory
adjustments related to changes in the
fair value of liabilities due to changes in
the FDIC-supervised institution’s own
credit risk (§ 324.22(b)(1)(iii)) between
common equity tier 1 capital and tier 1
capital in accordance with the
percentages set forth in Table 4 to
§ 324.300.
(i) If the aggregate amount of the
adjustment is positive, the FDIC-
20
40
60
80
100
supervised institution must allocate the
deduction between common equity tier
1 and tier 1 capital in accordance with
Table 4 to § 324.300.
(ii) If the aggregate amount of the
adjustment is negative, the FDICsupervised institution must add back
the adjustment to common equity tier 1
capital or to tier 1 capital, in accordance
with Table 4 to § 324.300.
TABLE 4 TO § 324.300
Transition adjustments under § 324.22(b)(2)
Transition period
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Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
Percentage of the adjustment applied to
tier 1 capital
20
40
60
80
100
80
60
40
20
0
2014 .....................................................
2015 .....................................................
2016 .....................................................
2017 .....................................................
2018, and thereafter ............................
(3) Transition adjustments to AOCI
for an advanced approaches FDICsupervised institution and an FDICsupervised institution that has not made
an AOCI opt-out election under
§ 324.22(b)(2). Beginning January 1,
2014, for an advanced approaches FDICsupervised institution, and beginning
January 1, 2015, for an FDIC-supervised
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Percentage of the adjustment applied to
common equity tier 1 capital
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institution that is not an advanced
approaches FDIC-supervised institution
and that has not made an AOCI opt-out
election under § 324.22(b)(2), and in
each case through December 31, 2017,
an FDIC-supervised institution must
adjust common equity tier 1 capital with
respect to the transition AOCI
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adjustment amount (transition AOCI
adjustment amount):
(i) The transition AOCI adjustment
amount is the aggregate amount of an
FDIC-supervised institution’s:
(A) Unrealized gains on available-forsale securities that are preferred stock
classified as an equity security under
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GAAP or available-for-sale equity
exposures, plus
(B) Net unrealized gains or losses on
available-for-sale securities that are not
preferred stock classified as an equity
security under GAAP or available-forsale equity exposures, plus
(C) Any amounts recorded in AOCI
attributed to defined benefit
postretirement plans resulting from the
initial and subsequent application of the
relevant GAAP standards that pertain to
such plans (excluding, at the FDIC-
supervised institution’s option, the
portion relating to pension assets
deducted under § 324.22(a)(5)), plus
(D) Accumulated net gains or losses
on cash flow hedges related to items
that are reported on the balance sheet at
fair value included in AOCI, plus
(E) Net unrealized gains or losses on
held-to-maturity securities that are
included in AOCI.
(ii) An FDIC-supervised institution
must make the following adjustment to
its common equity tier 1 capital:
55589
(A) If the transition AOCI adjustment
amount is positive, the appropriate
amount must be deducted from common
equity tier 1 capital in accordance with
Table 5 to § 324.300.
(B) If the transition AOCI adjustment
amount is negative, the appropriate
amount must be added back to common
equity tier 1 capital in accordance with
Table 5 to § 324.300.
TABLE 5 TO § 324.300
Percentage of the transition AOCI adjustment amount to be applied to common equity tier 1 capital
Transition period
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
2014
2015
2016
2017
2018
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
and thereafter .....................................................................................................
(iii) An FDIC-supervised institution
may include in tier 2 capital the
percentage of unrealized gains on
available-for-sale preferred stock
classified as an equity security under
GAAP and available-for-sale equity
80
60
40
20
0
exposures as set forth in Table 6 to
§ 324.300.
TABLE 6 TO § 324.300
Percentage of unrealized gains on availablefor-sale preferred stock classified as an equity security under GAAP and available-forsale equity exposures that may be included
in tier 2 capital
Transition period
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
2014
2015
2016
2017
2018
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
and thereafter .....................................................................................................
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(4) Additional transition deductions
from regulatory capital. (i) Beginning
January 1, 2014, for an advanced
approaches FDIC-supervised institution,
and beginning January 1, 2015, for an
FDIC-supervised institution that is not
an advanced approaches FDICsupervised institution, and in each case
through December 31, 2017, an FDICsupervised institution must use Table 7
to § 324.300 to determine the amount of
investments in capital instruments and
the items subject to the 10 and 15
percent common equity tier 1 capital
deduction thresholds (§ 324.22(d)) (that
is, MSAs, DTAs arising from temporary
differences that the FDIC-supervised
institution could not realize through net
operating loss carrybacks, and
significant investments in the capital of
unconsolidated financial institutions in
the form of common stock) that must be
deducted from common equity tier 1
capital.
(ii) Beginning January 1, 2014, for an
advanced approaches FDIC-supervised
institution, and beginning January 1,
2015, for an FDIC-supervised institution
that is not an advanced approaches
FDIC-supervised institution, and in each
case through December 31, 2017, an
FDIC-supervised institution must apply
36
27
18
9
0
a 100 percent risk-weight to the
aggregate amount of the items subject to
the 10 and 15 percent common equity
tier 1 capital deduction thresholds that
are not deducted under this section. As
set forth in § 324.22(d)(2), beginning
January 1, 2018, an FDIC-supervised
institution must apply a 250 percent
risk-weight to the aggregate amount of
the items subject to the 10 and 15
percent common equity tier 1 capital
deduction thresholds that are not
deducted from common equity tier 1
capital.
TABLE 7 TO § 324.300
Transition period
Transitions for deductions under § 324.22(c)
and (d)—Percentage of additional deductions from regulatory capital
Calendar year 2014 .............................................................................................................................
Calendar year 2015 .............................................................................................................................
Calendar year 2016 .............................................................................................................................
20
40
60
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TABLE 7 TO § 324.300—Continued
Transition period
Transitions for deductions under § 324.22(c)
and (d)—Percentage of additional deductions from regulatory capital
Calendar year 2017 .............................................................................................................................
Calendar year 2018 and thereafter .....................................................................................................
80
100
(iii) For purposes of calculating the
transition deductions in this paragraph
(b)(4), beginning January 1, 2014, for an
advanced approaches FDIC-supervised
institution, and beginning January 1,
2015, for an FDIC-supervised institution
that is not an advanced approaches
FDIC-supervised institution, and in each
case through December 31, 2017, an
FDIC-supervised institution’s 15 percent
common equity tier 1 capital deduction
threshold for MSAs, DTAs arising from
temporary differences that the FDICsupervised institution could not realize
through net operating loss carrybacks,
and significant investments in the
capital of unconsolidated financial
institutions in the form of common
stock is equal to 15 percent of the sum
of the FDIC-supervised institution’s
common equity tier 1 elements, after
regulatory adjustments and deductions
required under § 324.22(a) through (c)
(transition 15 percent common equity
tier 1 capital deduction threshold).
(iv) Beginning January 1, 2018, an
FDIC-supervised institution must
calculate the 15 percent common equity
tier 1 capital deduction threshold in
accordance with § 324.22(d).
(c) Non-qualifying capital
instruments. Depository institutions. (1)
Beginning on January 1, 2014, a
depository institution that is an
advanced approaches FDIC-supervised
institution, and beginning on January 1,
2015, all other depository institutions
may include in regulatory capital debt
or equity instruments issued prior to
September 12, 2010, that do not meet
the criteria for additional tier 1 or tier
2 capital instruments in § 324.20 but
that were included in tier 1 or tier 2
capital respectively as of September 12,
2010 (non-qualifying capital
instruments issued prior to September
12, 2010) up to the percentage of the
outstanding principal amount of such
non-qualifying capital instruments as of
January 1, 2014 in accordance with
Table 8 to § 324.300.
(2) Table 8 to § 324.300 applies
separately to tier 1 and tier 2 nonqualifying capital instruments.
(3) The amount of non-qualifying
capital instruments that cannot be
included in additional tier 1 capital
under this section may be included in
tier 2 capital without limitation,
provided that the instruments meet the
criteria for tier 2 capital instruments
under § 324.20(d).
TABLE 8 TO § 324.300
Percentage of non-qualifying capital instruments includable in additional tier 1 or tier 2
capital
Transition period
(calendar year)
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
Calendar
year
year
year
year
year
year
year
year
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
and thereafter .....................................................................................................
emcdonald on DSK67QTVN1PROD with RULES2
(d) Minority interest—(1) Surplus
minority interest. Beginning January 1,
2014, for an advanced approaches FDICsupervised institution, and beginning
January 1, 2015, for an FDIC-supervised
institution that is not an advanced
approaches FDIC-supervised institution,
and in each case through December 31,
2017, an FDIC-supervised institution
may include in common equity tier 1
capital, tier 1 capital, or total capital the
percentage of the common equity tier 1
minority interest, tier 1 minority interest
and total capital minority interest
outstanding as of January 1, 2014 that
exceeds any common equity tier 1
minority interest, tier 1 minority interest
or total capital minority interest
includable under § 324.21 (surplus
minority interest), respectively, as set
forth in Table 9 to § 324.300.
(2) Non-qualifying minority interest.
Beginning January 1, 2014, for an
advanced approaches FDIC-supervised
institution, and beginning January 1,
2015, for an FDIC-supervised institution
80
70
60
50
40
30
20
10
0
that is not an advanced approaches
FDIC-supervised institution, and in each
case through December 31, 2017, an
FDIC-supervised institution may
include in tier 1 capital or total capital
the percentage of the tier 1 minority
interest and total capital minority
interest outstanding as of January 1,
2014 that does not meet the criteria for
additional tier 1 or tier 2 capital
instruments in § 324.20 (non-qualifying
minority interest), as set forth in Table
9 to § 324.300.
TABLE 9 TO § 324.300
Transition period
Percentage of the amount of surplus or nonqualifying minority interest that can be included in regulatory capital during the transition period
Calendar year 2014 .............................................................................................................................
80
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TABLE 9 TO § 324.300—Continued
Percentage of the amount of surplus or nonqualifying minority interest that can be included in regulatory capital during the transition period
Transition period
Calendar
Calendar
Calendar
Calendar
year
year
year
year
2015
2016
2017
2018
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
and thereafter .....................................................................................................
(e) Prompt corrective action. For
purposes of subpart H of this part, an
FDIC-supervised institution must
calculate its capital measures and
tangible equity ratio in accordance with
the transition provisions in this section.
§§ 324.301 through 324.399
[Reserved]
Subpart H—Prompt Corrective Action
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.401 Authority, purpose, scope, other
supervisory authority, disclosure of capital
categories, and transition procedures.
(a) Authority. This subpart H is issued
by the FDIC pursuant to section 38 of
the Federal Deposit Insurance Act (FDI
Act), as added by section 131 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 (Pub.L. 102–
242, 105 Stat. 2236 (1991)) (12 U.S.C.
1831o).
(b) Purpose. Section 38 of the FDI Act
establishes a framework of supervisory
actions for insured depository
institutions that are not adequately
capitalized. The principal purpose of
this subpart is to define, for FDICsupervised institutions, the capital
measures and capital levels, and for
insured branches of foreign banks,
comparable asset-based measures and
levels, that are used for determining the
supervisory actions authorized under
section 38 of the FDI Act. This subpart
also establishes procedures for
submission and review of capital
restoration plans and for issuance and
review of directives and orders pursuant
to section 38 of the FDI Act.
(c) Scope. Until January 1, 2015,
subpart B of part 325 of this chapter will
continue to apply to banks and insured
branches of foreign banks for which the
FDIC is the appropriate Federal banking
agency. Until January 1, 2015, subpart Y
of part 390 of this chapter will continue
to apply to state savings associations.
Beginning on, and thereafter, January 1,
2015, this subpart H implements the
provisions of section 38 of the FDI Act
as they apply to FDIC-supervised
institutions and insured branches of
foreign banks for which the FDIC is the
appropriate Federal banking agency.
Certain of these provisions also apply to
officers, directors and employees of
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those insured institutions. In addition,
certain provisions of this subpart apply
to all insured depository institutions
that are deemed critically
undercapitalized.
(d) Other supervisory authority.
Neither section 38 of the FDI Act nor
this subpart H in any way limits the
authority of the FDIC under any other
provision of law to take supervisory
actions to address unsafe or unsound
practices, deficient capital levels,
violations of law, unsafe or unsound
conditions, or other practices. Action
under section 38 of the FDI Act and this
subpart H may be taken independently
of, in conjunction with, or in addition
to any other enforcement action
available to the FDIC, including
issuance of cease and desist orders,
capital directives, approval or denial of
applications or notices, assessment of
civil money penalties, or any other
actions authorized by law.
(e) Disclosure of capital categories.
The assignment of an FDIC-supervised
institution or an insured branch of a
foreign bank for which the FDIC is the
appropriate Federal banking agency
under this subpart H within a particular
capital category is for purposes of
implementing and applying the
provisions of section 38 of the FDI Act.
Unless permitted by the FDIC or
otherwise required by law, no FDICsupervised institution or insured branch
of a foreign bank for which the FDIC is
the appropriate Federal banking agency
may state in any advertisement or
promotional material its capital category
under this subpart H or that the FDIC or
any other Federal banking agency has
assigned it to a particular capital
category.
(f) Transition procedures—(1)
Definitions applicable before January 1,
2015, for certain FDIC-supervised
institutions. Before January 1, 2015,
notwithstanding any other requirement
in this subpart H and with respect to
any FDIC-supervised institution that is
not an advanced approaches FDICsupervised institution:
(i) The definitions of leverage ratio,
tangible equity, tier 1 capital, tier 1 riskbased capital, and total risk-based
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60
40
20
0
capital as calculated or defined under
Appendix A to part 325 or Appendix B
to part 325, as applicable, remain in
effect for purposes of this subpart H;
and
(ii) The term total assets shall have
the meaning provided in 12 CFR
325.2(x).
(2) Timing. The calculation of the
definitions of common equity tier 1
capital, the common equity tier 1 riskbased capital ratio, the leverage ratio,
the supplementary leverage ratio,
tangible equity, tier 1 capital, the tier 1
risk-based capital ratio, total assets, total
leverage exposure, the total risk-based
capital ratio, and total risk-weighted
assets under this subpart H is subject to
the timing provisions at 12 CFR 324.1(f)
and the transitions at 12 CFR part 324,
subpart G.
(g) For purposes of subpart H, as of
January 1, 2015, total assets means
quarterly average total assets as reported
in an FDIC-supervised institution’s Call
Report, minus amounts deducted from
tier 1 capital under § 324.22(a), (c), and
(d). At its discretion, the FDIC may
calculate total assets using an FDICsupervised institution’s period-end
assets rather than quarterly average
assets.
§ 324.402
Notice of capital category.
(a) Effective date of determination of
capital category. An FDIC-supervised
institution shall be deemed to be within
a given capital category for purposes of
section 38 of the FDI Act and this
subpart H as of the date the FDICsupervised institution is notified of, or
is deemed to have notice of, its capital
category, pursuant to paragraph (b) of
this section.
(b) Notice of capital category. An
FDIC-supervised institution shall be
deemed to have been notified of its
capital levels and its capital category as
of the most recent date:
(1) A Call Report is required to be
filed with the FDIC;
(2) A final report of examination is
delivered to the FDIC-supervised
institution; or
(3) Written notice is provided by the
FDIC to the FDIC-supervised institution
of its capital category for purposes of
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section 38 of the FDI Act and this
subpart or that the FDIC-supervised
institution’s capital category has
changed as provided in § 324.403(d).
(c) Adjustments to reported capital
levels and capital category — (1) Notice
of adjustment by bank or state savings
association. An FDIC-supervised
institution shall provide the appropriate
FDIC regional director with written
notice that an adjustment to the FDICsupervised institution’s capital category
may have occurred no later than 15
calendar days following the date that
any material event has occurred that
would cause the FDIC-supervised
institution to be placed in a lower
capital category from the category
assigned to the FDIC-supervised
institution for purposes of section 38 of
the FDI Act and this subpart H on the
basis of the FDIC-supervised
institution’s most recent Call Report or
report of examination.
(2) Determination by the FDIC to
change capital category. After receiving
notice pursuant to paragraph (c)(1) of
this section, the FDIC shall determine
whether to change the capital category
of the FDIC-supervised institution and
shall notify the bank or state savings
association of the FDIC’s determination.
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.403 Capital measures and capital
category definitions.
(a) Capital measures. For purposes of
section 38 of the FDI Act and this
subpart H, the relevant capital measures
shall be:
(1) The total risk-based capital ratio;
(2) The Tier 1 risk-based capital ratio;
and
(3) The common equity tier 1 ratio;
(4) The leverage ratio;
(5) The tangible equity to total assets
ratio; and
(6) Beginning January 1, 2018, the
supplementary leverage ratio calculated
in accordance with § 324.11 for
advanced approaches FDIC-supervised
institutions that are subject to subpart E
of this part.
(b) Capital categories. For purposes of
section 38 of the FDI Act and this
subpart, an FDIC-supervised institution
shall be deemed to be:
(1) ‘‘Well capitalized’’ if it:
(i) Has a total risk-based capital ratio
of 10.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital
ratio of 8.0 percent or greater; and
(iii) Has a common equity tier 1
capital ratio of 6.5 percent or greater;
and
(iv) Has a leverage ratio of 5.0 percent
or greater; and
(v) Is not subject to any written
agreement, order, capital directive, or
prompt corrective action directive
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issued by the FDIC pursuant to section
8 of the FDI Act (12 U.S.C. 1818), the
International Lending Supervision Act
of 1983 (12 U.S.C. 3907), or the Home
Owners’ Loan Act (12 U.S.C.
1464(t)(6)(A)(ii)), or section 38 of the
FDI Act (12 U.S.C. 1831o), or any
regulation thereunder, to meet and
maintain a specific capital level for any
capital measure.
(2) ‘‘Adequately capitalized’’ if it:
(i) Has a total risk-based capital ratio
of 8.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital
ratio of 6.0 percent or greater; and
(iii) Has a common equity tier 1
capital ratio of 4.5 percent or greater;
and
(iv) Has a leverage ratio of 4.0 percent
or greater; and
(v) Does not meet the definition of a
well capitalized bank.
(vi) Beginning January 1, 2018, an
advanced approaches FDIC-supervised
institution will be deemed to be
‘‘adequately capitalized’’ if it satisfies
paragraphs (b)(2)(i) through (v) of this
section and has a supplementary
leverage ratio of 3.0 percent or greater,
as calculated in accordance with
§ 324.11 of subpart B of this part.
(3) ‘‘Undercapitalized’’ if it:
(i) Has a total risk-based capital ratio
that is less than 8.0 percent; or
(ii) Has a Tier 1 risk-based capital
ratio that is less than 6.0 percent; or
(iii) Has a common equity tier 1
capital ratio that is less than 4.5 percent;
or
(iv) Has a leverage ratio that is less
than 4.0 percent.
(v) Beginning January 1, 2018, an
advanced approaches FDIC-supervised
institution will be deemed to be
‘‘undercapitalized’’ if it has a
supplementary leverage ratio of less
than 3.0 percent, as calculated in
accordance with § 324.11.
(4) ‘‘Significantly undercapitalized’’ if
it has:
(i) A total risk-based capital ratio that
is less than 6.0 percent; or
(ii) A Tier 1 risk-based capital ratio
that is less than 4.0 percent; or
(iii) A common equity tier 1 capital
ratio that is less than 3.0 percent; or
(iv) A leverage ratio that is less than
3.0 percent.
(5) ‘‘Critically undercapitalized’’ if the
insured depository institution has a
ratio of tangible equity to total assets
that is equal to or less than 2.0 percent.
(c) Capital categories for insured
branches of foreign banks. For purposes
of the provisions of section 38 of the FDI
Act and this subpart H, an insured
branch of a foreign bank shall be
deemed to be:
(1) ‘‘Well capitalized’’ if the insured
branch:
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(i) Maintains the pledge of assets
required under § 347.209 of this chapter;
and
(ii) Maintains the eligible assets
prescribed under § 347.210 of this
chapter at 108 percent or more of the
preceding quarter’s average book value
of the insured branch’s third-party
liabilities; and
(iii) Has not received written
notification from:
(A) The OCC to increase its capital
equivalency deposit pursuant to 12 CFR
28.15, or to comply with asset
maintenance requirements pursuant to
12 CFR 28.20; or
(B) The FDIC to pledge additional
assets pursuant to § 347.209 of this
chapter or to maintain a higher ratio of
eligible assets pursuant to § 347.210 of
this chapter.
(2) ‘‘Adequately capitalized’’ if the
insured branch:
(i) Maintains the pledge of assets
required under § 347.209 of this chapter;
and
(ii) Maintains the eligible assets
prescribed under § 347.210 of this
chapter at 106 percent or more of the
preceding quarter’s average book value
of the insured branch’s third-party
liabilities; and
(iii) Does not meet the definition of a
well capitalized insured branch.
(3) ‘‘Undercapitalized’’ if the insured
branch:
(i) Fails to maintain the pledge of
assets required under § 347.209 of this
chapter; or
(ii) Fails to maintain the eligible
assets prescribed under § 347.210 of this
chapter at 106 percent or more of the
preceding quarter’s average book value
of the insured branch’s third-party
liabilities.
(4) ‘‘Significantly undercapitalized’’ if
it fails to maintain the eligible assets
prescribed under § 347.210 of this
chapter at 104 percent or more of the
preceding quarter’s average book value
of the insured branch’s third-party
liabilities.
(5) ‘‘Critically undercapitalized’’ if it
fails to maintain the eligible assets
prescribed under § 347.210 of this
chapter at 102 percent or more of the
preceding quarter’s average book value
of the insured branch’s third-party
liabilities.
(d) Reclassifications based on
supervisory criteria other than capital.
The FDIC may reclassify a well
capitalized FDIC-supervised institution
as adequately capitalized and may
require an adequately capitalized FDICsupervised institution or an
undercapitalized FDIC-supervised
institution to comply with certain
mandatory or discretionary supervisory
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actions as if the FDIC-supervised
institution were in the next lower
capital category (except that the FDIC
may not reclassify a significantly
undercapitalized FDIC-supervised
institution as critically
undercapitalized) (each of these actions
are hereinafter referred to generally as
‘‘reclassifications’’) in the following
circumstances:
(1) Unsafe or unsound condition. The
FDIC has determined, after notice and
opportunity for hearing pursuant to
§ 308.202(a) of this chapter, that the
FDIC-supervised institution is in unsafe
or unsound condition; or
(2) Unsafe or unsound practice. The
FDIC has determined, after notice and
opportunity for hearing pursuant to
§ 308.202(a) of this chapter, that, in the
most recent examination of the FDICsupervised institution, the FDICsupervised institution received and has
not corrected a less-than-satisfactory
rating for any of the categories of asset
quality, management, earnings, or
liquidity.
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.404
Capital restoration plans.
(a) Schedule for filing plan—(1) In
general. An FDIC-supervised institution
shall file a written capital restoration
plan with the appropriate FDIC regional
director within 45 days of the date that
the FDIC-supervised institution receives
notice or is deemed to have notice that
the FDIC-supervised institution is
undercapitalized, significantly
undercapitalized, or critically
undercapitalized, unless the FDIC
notifies the FDIC-supervised institution
in writing that the plan is to be filed
within a different period. An adequately
capitalized FDIC-supervised institution
that has been required pursuant to
§ 324.403(d) to comply with supervisory
actions as if the FDIC-supervised
institution were undercapitalized is not
required to submit a capital restoration
plan solely by virtue of the
reclassification.
(2) Additional capital restoration
plans. Notwithstanding paragraph (a)(1)
of this section, an FDIC-supervised
institution that has already submitted
and is operating under a capital
restoration plan approved under section
38 and this subpart H is not required to
submit an additional capital restoration
plan based on a revised calculation of
its capital measures or a reclassification
of the institution under § 324.403 unless
the FDIC notifies the FDIC-supervised
institution that it must submit a new or
revised capital plan. An FDICsupervised institution that is notified
that it must submit a new or revised
capital restoration plan shall file the
plan in writing with the appropriate
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FDIC regional director within 45 days of
receiving such notice, unless the FDIC
notifies it in writing that the plan must
be filed within a different period.
(b) Contents of plan. All financial data
submitted in connection with a capital
restoration plan shall be prepared in
accordance with the instructions
provided on the Call Report, unless the
FDIC instructs otherwise. The capital
restoration plan shall include all of the
information required to be filed under
section 38(e)(2) of the FDI Act. An FDICsupervised institution that is required to
submit a capital restoration plan as a
result of its reclassification pursuant to
§ 324.403(d) shall include a description
of the steps the FDIC-supervised
institution will take to correct the
unsafe or unsound condition or
practice. No plan shall be accepted
unless it includes any performance
guarantee described in section
38(e)(2)(C) of the FDI Act by each
company that controls the FDICsupervised institution.
(c) Review of capital restoration plans.
Within 60 days after receiving a capital
restoration plan under this subpart, the
FDIC shall provide written notice to the
FDIC-supervised institution of whether
the plan has been approved. The FDIC
may extend the time within which
notice regarding approval of a plan shall
be provided.
(d) Disapproval of capital plan. If a
capital restoration plan is not approved
by the FDIC, the FDIC-supervised
institution shall submit a revised capital
restoration plan within the time
specified by the FDIC. Upon receiving
notice that its capital restoration plan
has not been approved, any
undercapitalized FDIC-supervised
institution (as defined in § 324.403(b))
shall be subject to all of the provisions
of section 38 of the FDI Act and this
subpart H applicable to significantly
undercapitalized institutions. These
provisions shall be applicable until such
time as a new or revised capital
restoration plan submitted by the FDICsupervised institution has been
approved by the FDIC.
(e) Failure to submit capital
restoration plan. An FDIC-supervised
institution that is undercapitalized (as
defined in § 324.403(b)) and that fails to
submit a written capital restoration plan
within the period provided in this
section shall, upon the expiration of that
period, be subject to all of the
provisions of section 38 and this subpart
applicable to significantly
undercapitalized institutions.
(f) Failure to implement capital
restoration plan. Any undercapitalized
FDIC-supervised institution that fails in
any material respect to implement a
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55593
capital restoration plan shall be subject
to all of the provisions of section 38 of
the FDI Act and this subpart H
applicable to significantly
undercapitalized institutions.
(g) Amendment of capital restoration
plan. An FDIC-supervised institution
that has filed an approved capital
restoration plan may, after prior written
notice to and approval by the FDIC,
amend the plan to reflect a change in
circumstance. Until such time as a
proposed amendment has been
approved, the FDIC-supervised
institution shall implement the capital
restoration plan as approved prior to the
proposed amendment.
(h) Performance guarantee by
companies that control an FDICsupervised institution—(1) Limitation
on liability—(i) Amount limitation. The
aggregate liability under the guarantee
provided under section 38 and this
subpart H for all companies that control
a specific FDIC-supervised institution
that is required to submit a capital
restoration plan under this subpart H
shall be limited to the lesser of:
(A) An amount equal to 5.0 percent of
the FDIC-supervised institution’s total
assets at the time the FDIC-supervised
institution was notified or deemed to
have notice that the FDIC-supervised
institution was undercapitalized; or
(B) The amount necessary to restore
the relevant capital measures of the
FDIC-supervised institution to the levels
required for the FDIC-supervised
institution to be classified as adequately
capitalized, as those capital measures
and levels are defined at the time that
the FDIC-supervised institution initially
fails to comply with a capital restoration
plan under this subpart H.
(ii) Limit on duration. The guarantee
and limit of liability under section 38 of
the FDI Act and this subpart H shall
expire after the FDIC notifies the FDICsupervised institution that it has
remained adequately capitalized for
each of four consecutive calendar
quarters. The expiration or fulfillment
by a company of a guarantee of a capital
restoration plan shall not limit the
liability of the company under any
guarantee required or provided in
connection with any capital restoration
plan filed by the same FDIC-supervised
institution after expiration of the first
guarantee.
(iii) Collection on guarantee. Each
company that controls a given FDICsupervised institution shall be jointly
and severally liable for the guarantee for
such FDIC-supervised institution as
required under section 38 and this
subpart H, and the FDIC may require
and collect payment of the full amount
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of that guarantee from any or all of the
companies issuing the guarantee.
(2) Failure to provide guarantee. In
the event that an FDIC-supervised
institution that is controlled by any
company submits a capital restoration
plan that does not contain the guarantee
required under section 38(e)(2) of the
FDI Act, the FDIC-supervised institution
shall, upon submission of the plan, be
subject to the provisions of section 38
and this subpart H that are applicable to
FDIC-supervised institutions that have
not submitted an acceptable capital
restoration plan.
(3) Failure to perform guarantee.
Failure by any company that controls an
FDIC-supervised institution to perform
fully its guarantee of any capital plan
shall constitute a material failure to
implement the plan for purposes of
section 38(f) of the FDI Act. Upon such
failure, the FDIC-supervised institution
shall be subject to the provisions of
section 38 and this subpart H that are
applicable to FDIC-supervised
institutions that have failed in a
material respect to implement a capital
restoration plan.
emcdonald on DSK67QTVN1PROD with RULES2
§ 324.405 Mandatory and discretionary
supervisory actions.
(a) Mandatory supervisory actions—
(1) Provisions applicable to all FDICsupervised institutions. All FDICsupervised institutions are subject to the
restrictions contained in section 38(d) of
the FDI Act on payment of capital
distributions and management fees.
(2) Provisions applicable to
undercapitalized, significantly
undercapitalized, and critically
undercapitalized FDIC-supervised
institution. Immediately upon receiving
notice or being deemed to have notice,
as provided in § 324.402, that the FDICsupervised institution is
undercapitalized, significantly
undercapitalized, or critically
undercapitalized, it shall become
subject to the provisions of section 38 of
the FDI Act:
(i) Restricting payment of capital
distributions and management fees
(section 38(d) of the FDI Act);
(ii) Requiring that the FDIC monitor
the condition of the FDIC-supervised
institution (section 38(e)(1) of the FDI
Act);
(iii) Requiring submission of a capital
restoration plan within the schedule
established in this subpart (section
38(e)(2) of the FDI Act);
(iv) Restricting the growth of the
FDIC-supervised institution’s assets
(section 38(e)(3) of the FDI Act); and
(v) Requiring prior approval of certain
expansion proposals (section 38(e)(4) of
the FDI Act).
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(3) Additional provisions applicable
to significantly undercapitalized, and
critically undercapitalized FDICsupervised institutions. In addition to
the provisions of section 38 of the FDI
Act described in paragraph (a)(2) of this
section, immediately upon receiving
notice or being deemed to have notice,
as provided in § 324.402, that the FDICsupervised institution is significantly
undercapitalized, or critically
undercapitalized, or that the FDICsupervised institution is subject to the
provisions applicable to institutions that
are significantly undercapitalized
because the FDIC-supervised institution
failed to submit or implement in any
material respect an acceptable capital
restoration plan, the FDIC-supervised
institution shall become subject to the
provisions of section 38 of the FDI Act
that restrict compensation paid to senior
executive officers of the institution
(section 38(f)(4) of the FDI Act).
(4) Additional provisions applicable
to critically undercapitalized
institutions. (i) In addition to the
provisions of section 38 of the FDI Act
described in paragraphs (a)(2) and (a)(3)
of this section, immediately upon
receiving notice or being deemed to
have notice, as provided in § 324.402,
that the insured depository institution is
critically undercapitalized, the
institution is prohibited from doing any
of the following without the FDIC’s
prior written approval:
(A) Entering into any material
transaction other than in the usual
course of business, including any
investment, expansion, acquisition, sale
of assets, or other similar action with
respect to which the depository
institution is required to provide notice
to the appropriate Federal banking
agency;
(B) Extending credit for any highly
leveraged transaction;
(C) Amending the institution’s charter
or bylaws, except to the extent
necessary to carry out any other
requirement of any law, regulation, or
order;
(D) Making any material change in
accounting methods;
(E) Engaging in any covered
transaction (as defined in section 23A(b)
of the Federal Reserve Act (12 U.S.C.
371c(b)));
(F) Paying excessive compensation or
bonuses;
(G) Paying interest on new or renewed
liabilities at a rate that would increase
the institution’s weighted average cost
of funds to a level significantly
exceeding the prevailing rates of interest
on insured deposits in the institution’s
normal market areas; and
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(H) Making any principal or interest
payment on subordinated debt
beginning 60 days after becoming
critically undercapitalized except that
this restriction shall not apply, until
July 15, 1996, with respect to any
subordinated debt outstanding on July
15, 1991, and not extended or otherwise
renegotiated after July 15, 1991.
(ii) In addition, the FDIC may further
restrict the activities of any critically
undercapitalized institution to carry out
the purposes of section 38 of the FDI
Act.
(iii) The FDIC-supervised institution
must remain in compliance with the
plan or is operating under a written
agreement with the appropriate Federal
banking agency.
(b) Discretionary supervisory actions.
In taking any action under section 38 of
the FDI Act that is within the FDIC’s
discretion to take in connection with:
(1) An insured depository institution
that is deemed to be undercapitalized,
significantly undercapitalized, or
critically undercapitalized, or has been
reclassified as undercapitalized, or
significantly undercapitalized; or
(2) An officer or director of such
institution, the FDIC shall follow the
procedures for issuing directives under
§§ 308.201 and 308.203 of this chapter,
unless otherwise provided in section 38
of the FDI Act or this subpart H.
PART 327—ASSESSMENTS
14. The authority citation for part 327
continues to read as follows:
■
Authority: 12 U.S.C. 1441, 1813, 1815,
1817–19, 1821.
15. Appendix A to subpart A of part
327 is amended by revising footnote 5
in section VI. to read as follows:
■
Appendix A to Subpart A of Part 327—
Method to Derive Pricing Multipliers
and Uniform Amount
*
*
*
*
*
VI. Description of Scorecard Measures
*
*
*
*
*
5 Market
risk capital is defined in
Appendix C of part 325 of the FDIC Rules
and Regulations or subpart F of Part 324 of
the FDIC Rules and Regulations, as
applicable.
*
*
*
*
*
16. Appendix C to subpart A of part
327 is amended by revising the first
paragraph in section I.A.5 to read as
follows:
■
Appendix C to Subpart A to Part 327
*
*
*
I. * * *
A. * * *
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5. Higher-Risk Securitizations
Higher-risk securitizations are defined
as securitizations or securitization
exposures (except securitizations
classified as trading book), where, in
aggregate, more than 50 percent of the
assets backing the securitization meet
either the criteria for higher-risk C & I
loans or securities, higher-risk consumer
loans, or nontraditional mortgage loans,
except those classified as trading book.
A securitization is as defined in 12 CFR
part 325, Appendix A, Section II(B)(16),
or in 12 CFR 324.2, as applicable, as
they may be amended from time to time.
A higher-risk securitization excludes the
maximum amount that is recoverable
from the U.S. government under
guarantee or insurance provisions.
*
*
*
*
*
PART 333—EXTENSION OF
CORPORATE POWERS
17. The authority citation for part 333
continues to read as follows:
■
Authority: 12 U.S.C. 1816, 1818, 1819
(‘‘Seventh’’, ‘‘Eighth’’ and ‘‘Tenth’’), 1828,
1828(m), 1831p–1(c).
Conversions from mutual to stock
PART 337—UNSAFE AND UNSOUND
BANKING PRACTICES
19. The authority citation for part 337
continues to read as follows:
■
Authority: 12 U.S.C. 375a(4), 375b, 1816,
1818(a), 1818(b), 1819, 1820(d)(10), 1821(f),
1828(j)(2), 1831, 1831f.
20. Section 337.6 is amended by
revising footnotes 12 and 13 in
paragraph (a) to read as follows:
emcdonald on DSK67QTVN1PROD with RULES2
■
*
*
*
*
12 For
the most part, the capital measure
terms are defined in the following
regulations: FDIC—12 CFR part 325, subpart
B or 12 CFR part 324, subpart H, as
applicable; Board of Governors of the Federal
Reserve System—12 CFR part 208; and Office
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*
*
*
*
*
21. Section 337.12 is amended by
revising paragraph (b)(2) to read as
follows:
■
Frequency of examination.
*
*
*
*
(b) * * *
(2) The bank is well capitalized as
defined in § 325.103(b)(1) of this chapter
or § 324.403(b)(1) of this chapter, as
applicable.
*
*
*
*
*
PART 347—INTERNATIONAL
BANKING
22. The authority citation for part 347
continues to read as follows:
■
Authority: 12 U.S.C. 1813, 1815, 1817,
1819, 1820, 1828, 3103, 3104, 3105, 3108,
3109; Title IX, Pub.L. 98–181, 97 Stat. 1153.
23. Section 347.102 is amended by
revising paragraphs (u) and (v) to read
as follows:
■
§ 347.102
Definition.
*
*
*
*
*
(u) Tier 1 capital means Tier 1 capital
as defined in § 325.2 of this chapter or
§ 324.2 of this chapter, as applicable.
(v) Well capitalized means well
capitalized as defined in § 325.103 of
this chapter or § 324.403 of this chapter,
as applicable.
PART 349—RETAIL FOREIGN
EXCHANGE TRANSACTIONS
Brokered deposits.
*
*
*
(a) Scope. * * * As determined by
the Board of Directors of the FDIC on a
case-by-case basis, the requirements of
paragraphs (d), (e), and (f) of this section
do not apply to mutual-to-stock
conversions of insured mutual state
savings banks whose capital category
under § 325.103 of this chapter or
§ 324.403, as applicable, is
‘‘undercapitalized’’, ‘‘significantly
undercapitalized’’ or ‘‘critically
undercapitalized’’. * * *
*
*
*
*
*
§ 337.6
§ 349.8
§ 337.12
18. Section 333.4 is amended by
revising the fourth sentence in
paragraph (a) to read as follows:
■
§ 333.4
form.
of the Comptroller of the Currency—12 CFR
part 6.
13 The regulations implementing section 38
of the Federal Deposit Insurance Act and
issued by the federal banking agencies
generally provide that an insured depository
institution is deemed to have been notified
of its capital levels and its capital category
as of the most recent date: (1) A Consolidated
Report of Condition and Income is required
to be filed with the appropriate federal
banking agency; (2) A final report of
examination is delivered to the institution; or
(3) Written notice is provided by the
appropriate federal banking agency to the
institution of its capital category for purposes
of section 38 of the Federal Deposit Insurance
Act and implementing regulations or that the
institution’s capital category has changed.
Provisions specifying the effective date of
determination of capital category are
generally published in the following
regulations: FDIC—12 CFR 325.102 or 12
CFR 324.402, as applicable. Board of
Governors of the Federal Reserve System—12
CFR 208.32. Office of the Comptroller of the
Currency—12 CFR 6.3.
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24. The authority citation for part 349
continues to read as follows:
■
Authority: 12 U.S.C.1813(q), 1818, 1819,
and 3108; 7 U.S.C. 2(c)(2)(E), 27 et seq.
■
25. Section 349.8 is revised as follows:
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55595
Capital requirements.
An FDIC-supervised insured
depository institution offering or
entering into retail forex transactions
must be well capitalized as defined by
12 CFR part 325 or 12 CFR part 324, as
applicable, unless specifically exempted
by the FDIC in writing.
PART 360—RESOLUTION AND
RECEIVERSHIP RULES
26. The authority citation for part 360
continues to read as follows:
■
Authority: 12 U.S.C. 1817(b), 1818(a)(2),
1818(t), 1819(a) Seventh, Ninth and Tenth,
1820(b)(3), (4), 1821(d)(1), 1821(d)(10)(c),
1821(d)(11), 1821(e)(1), 1821(e)(8)(D)(i),
1823(c)(4), 1823(e)(2); Sec. 401(h), Pub.L.
101–73, 103 Stat. 357.
27. Section 360.5 is amended to revise
paragraph (b) to read as follows:
■
§ 360.5 Definition of qualified financial
contracts.
*
*
*
*
(b) Repurchase agreements. The
following agreements shall be deemed
‘‘repurchase agreements’’ under section
11(e)(8)(D)(v) of the Federal Deposit
Insurance Act, as amended (12 U.S.C.
1821(e)(8)(D)(v)): A repurchase
agreement on qualified foreign
government securities is an agreement
or combination of agreements (including
master agreements) which provides for
the transfer of securities that are direct
obligations of, or that are fully
guaranteed by, the central governments
(as set forth at 12 CFR part 325,
appendix A, section II.C, n. 17, as may
be amended from time to time or 12 CFR
324.2 (definition of sovereign exposure),
as applicable) of the OECD-based group
of countries (as set forth at 12 CFR part
325, appendix A, section II.B.2., note 12
as generally discussed in 12 CFR
324.32) against the transfer of funds by
the transferee of such securities with a
simultaneous agreement by such
transferee to transfer to the transferor
thereof securities as described above, at
a date certain not later than one year
after such transfers or on demand,
against the transfer of funds.
*
*
*
*
*
■ 28. Section 360.9 is amended by
revising the first sentence of paragraph
(e)(6) to read as follows:
§ 360.9 Large-bank deposit insurance
determination modernization.
*
*
*
*
*
(e) * * *
(6) Notwithstanding the general
requirements of this paragraph (e), on a
case-by-case basis, the FDIC may
accelerate, upon notice, the
implementation timeframe of all or part
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of the requirements of this section for a
covered institution that: Has a
composite rating of 3, 4, or 5 under the
Uniform Financial Institution’s Rating
System, or in the case of an insured
branch of a foreign bank, an equivalent
rating; is undercapitalized, as defined
under the prompt corrective action
provisions of 12 CFR part 325 or 12 CFR
part 324, as applicable; or is determined
by the appropriate Federal banking
agency or the FDIC in consultation with
the appropriate Federal banking agency
to be experiencing a significant
deterioration of capital or significant
funding difficulties or liquidity stress,
notwithstanding the composite rating of
the institution by its appropriate Federal
banking agency in its most recent report
of examination. * * *
*
*
*
*
*
PART 362—ACTIVITIES OF INSURED
STATE BANKS AND INSURED
SAVINGS ASSOCIATIONS
29. The authority citation for part 362
continues to read as follows:
■
Authority: 12 U.S.C. 1816, 1818,
1819(a)(Tenth), 1828(j), 1828(m), 1828a,
1831a, 1831e, 1831w, 1843(l).
30. Section 362.2 is amended by
revising paragraphs (s) and (t) to read as
follows:
■
§ 362.2
Definitions.
*
*
*
*
*
(s) Tier one capital has the same
meaning as set forth in part 324 or 325
of this chapter, as applicable, for an
insured State nonmember bank. For
other state-chartered depository
institutions, the term ‘‘tier one capital’’
has the same meaning as set forth in the
capital regulations adopted by the
appropriate Federal banking agency.
(t) Well-capitalized has the same
meaning set forth in part 324 or 325 of
this chapter, as applicable, of this
chapter for an insured State nonmember
bank. For other state-chartered
depository institutions, the term ‘‘wellcapitalized’’ has the same meaning as
set forth in the capital regulations
adopted by the appropriate Federal
banking agency.
■ 31. Section 362.4 is amended by
revising paragraph (e)(3) to read as
follows:
§ 362.4
banks.
(d) Tangible equity and Tier 2 capital
have the same meaning as set forth in
part 325 of this chapter or part 324 of
this chapter, as applicable.
*
*
*
*
*
33. Revise § 362.18(a)(3) to read as
follows:
■
§ 362.18 Financial subsidiaries of insured
state nonmember banks.
Subsidiaries of insured State
*
*
*
*
*
(e) * * *
(3) Use such regulatory capital
amount for the purposes of the bank’s
assessment risk classification under part
327 of this chapter and its categorization
as a ‘‘well-capitalized’’, an ‘‘adequately
capitalized’’, an ‘‘undercapitalized’’, or
a ‘‘significantly undercapitalized’’
institution as defined in § 325.103(b) of
this chapter or § 324.403(b) of this
chapter, as applicable, provided that the
capital deduction shall not be used for
purposes of determining whether the
bank is ‘‘critically undercapitalized’’
under part 325 of this chapter or part
324 of this chapter, as applicable.
■ 32. Section 362.17 is amended by
revising paragraph (d) to read as
follows:
§ 362.17
*
*
Definitions.
*
*
(a) * * *
(3) The insured state nonmember
bank will deduct the aggregate amount
of its outstanding equity investment,
including retained earnings, in all
financial subsidiaries that engage in
activities as principal pursuant to
section 46(a) of the Federal Deposit Act
(12 U.S.C. 1831w(a)), from the bank’s
total assets and tangible equity and
deduct such investment from its total
risk-based capital (this deduction shall
be made equally from tier 1 and tier 2
capital) or from common equity tier 1
capital in accordance with 12 CFR part
324, subpart C, as applicable.
*
*
*
*
*
PART 363—ANNUAL INDEPENDENT
AUDITS AND REPORTING
REQUIREMENTS
34. The authority citation for part 363
continues to read as follows:
■
Authority: 12 U.S.C. 1831m.
35. Appendix A to part 363 is
amended by revising Table 1 to
Appendix A to read as follows:
■
Appendix A to Part 363—Guidelines
and Interpretations
*
TABLE 1 TO APPENDIX A—DESIGNATED FEDERAL LAWS AND REGULATIONS APPLICABLE TO:
National banks
State member
banks
State nonmember banks
Savings associations
Insider Loans—Parts and/or Sections of Title 12 of the United States Code
375a ..............................
375b ..............................
1468(b) ..........................
1828(j)(2) .......................
1828(j)(3)(B) ..................
Loans to Executive Officers of Banks .................
Extensions of Credit to Executive Officers, Directors, and Principal Shareholders of Banks.
Extensions of Credit to Executive Officers, Directors, and Principal Shareholders.
Extensions of Credit to Officers, Directors, and
Principal Shareholders.
Extensions of Credit to Officers, Directors, and
Principal Shareholders.
√
√
√
√
(A)
(A)
(A)
(A)
........................
........................
........................
√
........................
........................
√
........................
(B)
........................
(C)
........................
emcdonald on DSK67QTVN1PROD with RULES2
Parts and/or Sections of Title 12 of the Code of Federal Regulations
31 ..................................
32 ..................................
215 ................................
337.3 .............................
VerDate Mar<15>2010
Extensions of Credit to Insiders ...........................
Lending Limits ......................................................
Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks.
Limits on Extensions of Credit to Executive Officers, Directors, and Principal Shareholders of
Insured Nonmember Banks.
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√
√
√
........................
........................
√
........................
........................
(D)
........................
........................
(E)
........................
........................
√
........................
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55597
TABLE 1 TO APPENDIX A—DESIGNATED FEDERAL LAWS AND REGULATIONS APPLICABLE TO:—Continued
563.43 ...........................
Loans by Savings Associations to Their Executive Officers, Directors, and Principal Shareholders.
National banks
State member
banks
State nonmember banks
Savings associations
........................
........................
........................
√
Dividend Restrictions—Parts and/or Sections of Title 12 of the United States Code
56 ..................................
Prohibition on Withdrawal of Capital and Unearned Dividends.
Dividends and Surplus Fund ...............................
Declaration of Dividend ........................................
Prompt Corrective Action—Capital Distributions
Restricted.
60 ..................................
1467a(f) .........................
1831o(d)(1) ....................
√
√
........................
........................
√
........................
√
√
........................
√
........................
........................
√
........................
√
√
Parts and/or Sections of Title 12 of the Code of Federal Regulations
5 Subpart E ...................
6.6 .................................
Payment of Dividends ..........................................
Prompt Corrective Action— Restrictions on
Undercapitalized Institutions.
Dividends and Other Distributions .......................
Prompt Corrective Action— Restrictions on
Undercapitalized Institutions.
Prompt Corrective Action— Restrictions on
Undercapitalized Institutions.
Capital Distributions .............................................
Prompt Corrective Action—Restrictions on
Undercapitalized Institutions.
208.5 .............................
208.45 ...........................
325.105 or 324.403, as
applicable.
563 Subpart E ...............
565.6 .............................
√
√
........................
........................
........................
........................
........................
........................
........................
........................
√
√
........................
........................
........................
........................
........................
........................
√
........................
........................
........................
........................
........................
........................
........................
√
√
A. Subsections (g) and (h) of section 22 of the Federal Reserve Act [12 U.S.C. 375a, 375b].
B. Applies only to insured Federal branches of foreign banks.
C. Applies only to insured State branches of foreign banks.
D. See 12 CFR 337.3.
E. See 12 CFR 563.43.
PART 364—STANDARDS FOR SAFETY
AND SOUNDNESS
Authority: 12 U.S.C. 1828(o) and 5101 et
seq.
39. Appendix A to subpart A of part
365 is amended by revising footnote 2
to the ‘‘Loans in Excess of the
Supervisory Loan-to-Value Limits’’
section to read as follows:
■
36. The authority citation in part 364
continues to read as follows:
■
Authority: 12 U.S.C. 1818 and 1819
(Tenth), 1831p–1; 15 U.S.C. 1681b, 1681s,
1681w, 6801(b), 6805(b)(1).
37. Appendix A to part 364 is
amended by revising the last sentence in
section I.A. as follows:
■
Appendix A to Part 364—Interagency
Guidelines Establishing Standards for
Safety and Soundness
*
*
*
*
*
*
*
I. Introduction
*
*
*
emcdonald on DSK67QTVN1PROD with RULES2
* * * Nothing in these Guidelines
limits the authority of the FDIC
pursuant to section 38(i)(2)(F) of the FDI
Act (12 U.S.C. 1831(o)) and part 325 or
part 324, as applicable, of Title 12 of the
Code of Federal Regulations.
*
*
*
*
*
PART 365—REAL ESTATE LENDING
STANDARDS
38. The authority citation for part 365
continues to read as follows:
VerDate Mar<15>2010
17:14 Sep 09, 2013
Jkt 229001
*
*
*
*
*
2 For
insured state non-member banks,
‘‘total capital’’ refers to that term described
in table I of appendix A to 12 CFR part 325
or 12 CFR 324.2, as applicable. For state
savings associations, the term ‘‘total capital’’
is defined at 12 CFR part 390, subpart Z or
12 CFR 324.2, as applicable.
*
A. Preservation of Existing Authority
■
Appendix A to Subpart A of Part 365—
Interagency Guidelines for Real Estate
Lending Policies
*
*
*
*
PART 390—REGULATIONS
TRANSFERRED FROM THE OFFICE OF
THRIFT SUPERVISION
40. The authority citation for part 390
continues to read as follows:
■
Authority: 12 U.S.C. 1819.; Subpart A also
issued under 12 U.S.C. 1820; Subpart B also
issued under 12 U.S.C. 1818.; Subpart C also
issued under 5 U.S.C. 504; 554–557; 12
U.S.C. 1464; 1467; 1468; 1817; 1818; 1820;
1829; 3349, 4717; 15 U.S.C. 78l; 78o–5; 78u–
2; 28 U.S.C. 2461 note; 31 U.S.C. 5321; 42
U.S.C. 4012a.; Subpart D also issued under
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12 U.S.C. 1817; 1818; 1820; 15 U.S.C. 78l;
Subpart E also issued under 12 U.S.C. 1813;
1831m; 15 U.S.C. 78.; Subpart F also issued
under 5 U.S.C. 552; 559; 12 U.S.C. 2901 et
seq.; Subpart G also issued under 12 U.S.C.
2810 et seq., 2901 et seq.; 15 U.S.C. 1691; 42
U.S.C. 1981, 1982, 3601–3619.; Subpart H
also issued under 12 U.S.C. 1464; 1831y;
Subpart I also issued under 12 U.S.C. 1831x;
Subpart J also issued under 12 U.S.C. 1831p–
1; Subpart K also issued under 12 U.S.C.
1817; 1818; 15 U.S.C. 78c; 78l; Subpart L also
issued under 12 U.S.C. 1831p–1; Subpart M
also issued under 12 U.S.C. 1818; Subpart N
also issued under 12 U.S.C. 1821; Subpart O
also issued under 12 U.S.C. 1828; Subpart P
also issued under 12 U.S.C. 1470; 1831e;
1831n; 1831p–1; 3339; Subpart Q also issued
under 12 U.S.C. 1462.
41. Appendix A to § 390.265 is
amended by revising footnote 4 as
follows:
■
§ 390.265
*
*
Real estate landing standards.
*
*
*
Appendix A to § 390.265—Interagency
Guidelines for Real Estate Lending
Policies
*
*
*
*
*
For the state member banks, the term
‘‘total capital’’ means ‘‘total risk-based
capital’’ as defined in appendix A to 12 CFR
part 208. For insured state non-member
banks, ‘‘total capital’’ refers to that term
described in table I of appendix A to 12 CFR
4
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part 325 or 12 CFR 324.2, as applicable. For
national banks, the term ‘‘total capital’’ is
defined at 12 CFR 3.2(e). For savings
associations, the term ‘‘total capital’’ is
defined at 12 CFR 390, subpart Z or 12 CFR
324.2, as applicable.
*
*
*
*
*
PART 391—FORMER OFFICE OF
THRIFT SUPERVISION REGULATIONS
42. The authority citation for part 391
continues to read as follows:
■
emcdonald on DSK67QTVN1PROD with RULES2
Authority: 12 U.S.C. 1819 (Tenth); Subpart
A also issued under 12 U.S.C. 1462a; 1463;
1464; 1828; 1831p–1; 1881–1884; 15 U.S.C.
1681w; 15 U.S.C. 6801; 6805; Subpart B also
issued under 12 U.S.C. 1462a; 1463; 1464;
1828; 1831p–1; 1881–1884; 15 U.S.C.1681w;
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17:14 Sep 09, 2013
Jkt 229001
15 U.S.C. 6801; 6805; Subpart C also issued
under 12 U.S.C. 1462a; 1463; 1464; 1828;
1831p–1; and 1881–1884; 15 U.S.C. 1681m;
1681w; Subpart D also issued under 12
U.S.C. 1462; 1462a; 1463; 1464; 42 U.S.C.
4012a; 4104a; 4104b; 4106; 4128; Subpart E
also issued under 12 U.S.C. 1467a; 1468;
1817; 1831i.
43. Appendix A to subpart B of part
391 is amended by revising the last
sentence in section I.A. as follows:
■
Appendix A to Subpart B of Part 391—
Interagency Guidelines Establishing
Standards for Safety and Soundness
*
*
*
*
*
PO 00000
*
*
Frm 00260
* * * Nothing in these Guidelines
limits the authority of the FDIC
pursuant to section 38(i)(2)(F) of the FDI
Act (12 U.S.C. 1831(o)) and part 325 or
part 324, as applicable of Title 12 of the
Code of Federal Regulations.
Dated at Washington, DC, this 9th day of
July, 2013.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2013–20536 Filed 9–9–13; 8:45 am]
I. Introduction
*
A. Preservation of Existing Authority
BILLING CODE 6714–01–P
*
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*
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10SER2
| File Type | application/pdf |
| File Modified | 2013-09-10 |
| File Created | 2013-09-10 |