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Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations

1 ABCP programs generally also include

structured investment vehicles, which are entities

that earn a spread by issuing commercial paper and

medium-term notes and using the proceeds to

purchase highly-rated debt securities.

than under 8 CFR part 335, or any

application made ancillary to the

proceeding, see 8 CFR 287.4(a)(2)(i).

(ii) Subsequent to commencement of

any proceeding. (A) In any proceeding

under this chapter and in any

proceeding ancillary thereto, an

immigration judge having jurisdiction

over the matter may, upon his/her own

volition or upon application of

government counsel, the alien, or other

party affected, issue subpoenas

requiring the attendance of witnesses or

for the production of books, papers and

sponsored ABCP programs that are

consolidated under FIN 46–R. Exclusion

of minority interests associated with

consolidated ABCP programs is

appropriate when such programs’ assets

are not included in a sponsoring

organization’s risk-weighted asset base

and, thus, are not assessed a risk-based

capital charge. This interim risk-based

capital treatment was initially

scheduled to expire on April 1, 2004.

However, the agencies subsequently

issued another interim final rule to

extend to July 1, 2004 the time during

which the interim risk-based capital

treatment would be in effect. See 69 FR

22382 (April 26, 2004)

n’s risk-weighted asset base

and, thus, are not assessed a risk-based

capital charge. This interim risk-based

capital treatment was initially

scheduled to expire on April 1, 2004.

However, the agencies subsequently

issued another interim final rule to

extend to July 1, 2004 the time during

which the interim risk-based capital

treatment would be in effect. See 69 FR

22382 (April 26, 2004).

Concurrent with the publication of

the October 2003 interim final rule, the

agencies also published a notice of

proposed rulemaking (NPR) that would

make permanent the interim risk-based

capital treatment for consolidated ABCP

program assets. See 68 FR 56568

(October 1, 2003). The NPR also

proposed to establish risk-based capital

requirements for (1) short-term liquidity

facilities extended to ABCP programs

and (2) securitizations of revolving

credit exposures (for example, credit

card receivables) that incorporate early

amortization provisions. The period

during which the interim final rules

have been in effect has provided the

agencies with additional time to

develop appropriate risk-based capital

requirements for banking organizations’

sponsorship of ABCP programs and

their provision of liquidity support to

ABCP, and to receive and analyze

comments from the industry on the

NPR.

Collectively, the agencies received 13

comment letters on the October 2003

interim final rule and the NPR.

Commenters uniformly supported the

exclusion of ABCP program assets from

the risk-based capital calculations.

Commenters expressed concern,

however, with certain other aspects of

the NPR, notably the credit conversion

factor for eligible, short-term liquidity

facilities and the NPR’s relationship to

the Basel Accord revision process.4

II. Final Rule

A. Exclusion of ABCP Program Assets

and Related Minority Interests

In this final rule, the agencies are

amending their risk-based capital

standards by removing the interim final

rule’s July 1, 2004 sunset provision

the NPR, notably the credit conversion

factor for eligible, short-term liquidity

facilities and the NPR’s relationship to

the Basel Accord revision process.4

II. Final Rule

A. Exclusion of ABCP Program Assets

and Related Minority Interests

In this final rule, the agencies are

amending their risk-based capital

standards by removing the interim final

rule’s July 1, 2004 sunset provision.

Thus, the final rule will make

permanent the exclusion of ABCP

program assets consolidated under FIN

46–R and any associated minority

interests from risk-weighted assets and

tier 1 capital, respectively, when

sponsoring banking organizations

calculate their tier 1 and total risk-based

capital ratios.

The risk-based capital treatment does

not alter generally accepted accounting

principles (GAAP) or the manner in

which banking organizations must

report consolidated on-balance sheet

assets pursuant to FIN 46–R. In

addition, the risk-based capital

treatment does not affect the

denominator of the tier 1 leverage

capital ratio, which is based primarily

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Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations

5 Structured investment vehicles are ABCP

programs that issue commercial paper and medium-

term notes and use the proceeds to purchase highly-

rated debt securities.

on on-balance sheet assets as reported

under GAAP. Thus, as a result of FIN

46–R, banking organizations must

include all assets of consolidated ABCP

programs as part of on-balance sheet

assets for purposes of calculating the

tier 1 leverage capital ratio. One

commenter objected to this treatment,

arguing that ABCP program assets

should also be excluded from on-

balance sheet assets when calculating

the tier 1 leverage ratio

under GAAP. Thus, as a result of FIN

46–R, banking organizations must

include all assets of consolidated ABCP

programs as part of on-balance sheet

assets for purposes of calculating the

tier 1 leverage capital ratio. One

commenter objected to this treatment,

arguing that ABCP program assets

should also be excluded from on-

balance sheet assets when calculating

the tier 1 leverage ratio. However, the

agencies typically do not remove on-

balance sheet assets from the total asset

base for purposes of calculating the

leverage ratio because the leverage ratio

is intended to work in conjunction with

the risk-based capital standards by

providing a simple, GAAP-based

measure of capital adequacy. There was

not, in the agencies’ judgment, sufficient

reason to revise the leverage ratio in the

manner suggested.

As a general matter, minority interests

in consolidated subsidiaries are

included as a component of tier 1

capital and, hence, are incorporated into

the tier 1 leverage capital ratio

calculation. However, under this final

rule, minority interests related to

sponsoring banking organizations’

ABCP program assets consolidated as a

result of FIN 46–R are not to be

included in tier 1 capital. Because the

program’s assets would not be

consolidated for risk-based capital

purposes, the agencies believe that the

minority interest that supports those

assets should not be included in the

banking organization’s consolidated

regulatory capital. Thus, the reported

tier 1 leverage capital ratio for a

sponsoring banking organization would

likely be lower than it would be if the

ABCP program assets were consolidated

and related minority interest were

permitted to remain in the capital

calculation

t the

minority interest that supports those

assets should not be included in the

banking organization’s consolidated

regulatory capital. Thus, the reported

tier 1 leverage capital ratio for a

sponsoring banking organization would

likely be lower than it would be if the

ABCP program assets were consolidated

and related minority interest were

permitted to remain in the capital

calculation. The agencies do not

anticipate that the exclusion of minority

interests related to consolidated ABCP

program assets would significantly

affect the tier 1 leverage capital ratio of

sponsoring banking organizations

because the amount of equity in ABCP

programs generally is small relative to

the capital levels of the sponsoring

organizations.

In addition, commenters noted that

the definitions of an ‘‘ABCP program’’

proposed in the NPR were not

consistent among the agencies, and

requested that the definitions be

harmonized. Two commenters asked

that the definition be broadened to

explicitly include structured investment

vehicles.5 The agencies believe that it is

important that the definition of an

ABCP program be both clear and

consistent among the agencies.

Therefore, the final rule for each agency

defines an ‘‘ABCP program’’ to be a

program that primarily issues (that is,

more than 50 percent) externally rated

commercial paper backed by assets or

other exposures held in a bankruptcy-

remote, special purpose entity. As a

result, the definition of ‘‘ABCP

program’’ generally includes structured

investment vehicles and securities

arbitrage programs. The agencies believe

that the ‘‘primarily issues’’ requirement

ensures that programs covered by this

final rule retain their ABCP character by

requiring that such programs generally

issue no less than 50 percent ABCP

nkruptcy-

remote, special purpose entity. As a

result, the definition of ‘‘ABCP

program’’ generally includes structured

investment vehicles and securities

arbitrage programs. The agencies believe

that the ‘‘primarily issues’’ requirement

ensures that programs covered by this

final rule retain their ABCP character by

requiring that such programs generally

issue no less than 50 percent ABCP.

Under the final rule, a banking

organization will be able to exclude FIN

46–R related assets from its risk-

weighted asset base only with respect to

programs that meet the rule’s definition

of an ‘‘ABCP program.’’ Thus, a banking

organization sponsoring a program

issuing ABCP that does not meet the

rule’s definition of an ‘‘ABCP program’’

must continue to include the program’s

assets in the institution’s risk-weighted

asset base.

B. Liquidity Facilities Supporting ABCP

In addition to the exclusion of

consolidated ABCP program assets from

risk-weighted assets and related

minority interests from tier 1 capital, the

agencies are amending their risk-based

capital requirements with respect to

liquidity facilities that support ABCP.

Liquidity facilities supporting ABCP

often take the form of commitments to

lend to, or purchase assets from, the

ABCP programs in the event that funds

are needed to repay maturing

commercial paper. Typically, this need

for liquidity is due to a timing mismatch

between cash collections on the

underlying assets in the program and

scheduled repayments of the

commercial paper issued by the

program. Under the current risk-based

capital standards, liquidity facilities

with an original maturity of over one

year (that is, long-term liquidity

facilities) are converted to an on-balance

sheet credit equivalent amount using

the 50 percent credit conversion factor

cash collections on the

underlying assets in the program and

scheduled repayments of the

commercial paper issued by the

program. Under the current risk-based

capital standards, liquidity facilities

with an original maturity of over one

year (that is, long-term liquidity

facilities) are converted to an on-balance

sheet credit equivalent amount using

the 50 percent credit conversion factor.

Prior to this final rule, liquidity

facilities with an original maturity of

one year or less (that is, short-term

liquidity facilities) were converted to an

on-balance sheet credit equivalent

amount utilizing the zero percent credit

conversion factor. As a result, such

short-term liquidity facilities were not

subject to any risk-based capital charge

prior to this rule.

In the agencies’ view, a banking

organization that provides liquidity

facilities to ABCP is exposed to credit

risk regardless of the term of the

liquidity facilities. For example, an

ABCP program may require a liquidity

facility to purchase assets from the

program at the first sign of deterioration

in the credit quality of an asset pool,

thereby removing such assets from the

program. In such an event, a draw on

the liquidity facility exposes the

banking organization to credit risk. The

agencies believe that the existing risk-

based capital rules do not adequately

reflect the risks associated with

liquidity facilities supporting ABCP.

Although the agencies believe that

liquidity facilities expose banking

organizations to credit risk, the agencies

also believe that the short term of

commitments with an original maturity

of one year or less exposes banking

organizations to a lower degree of credit

risk than longer term commitments,

provided the liquidity facility meets

certain asset quality requirements

discussed below. This difference in

degree of credit risk should be reflected

in the risk-based capital requirement for

the exposure

so believe that the short term of

commitments with an original maturity

of one year or less exposes banking

organizations to a lower degree of credit

risk than longer term commitments,

provided the liquidity facility meets

certain asset quality requirements

discussed below. This difference in

degree of credit risk should be reflected

in the risk-based capital requirement for

the exposure. For this reason, in the

NPR the agencies proposed a 20 percent

credit conversion factor on eligible

short-term liquidity facilities providing

liquidity support to ABCP.

Two commenters explicitly agreed

with the agencies’ position that

regulatory capital should be held against

liquidity facilities that provide liquidity

support to ABCP and that have an

original maturity of one year or less.

Seven commenters stated that the

proposed 20 percent credit conversion

factor for short-term liquidity facilities

was too high given the low historical

losses and the overall strength of the

credit risk profiles of such liquidity

facilities. Six of these seven commenters

instead suggested that a conversion

factor in the range of 5–10 percent

would be more appropriate given

banking organizations’ credit loss

experience with short-term liquidity

facilities. One commenter noted that the

proposed capital charge would put U.S.

banks at a competitive disadvantage

relative to foreign banks and non-bank

funding sources. The agencies generally

agree with these commenters. In

addition, recent examination experience

suggests that application of a 10 percent

credit conversion factor would result in

an effective capital charge that is more

reflective of the amount of economic

capital that banking organizations

maintain internally for short-term

liquidity facilities supporting ABCP.

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perience

suggests that application of a 10 percent

credit conversion factor would result in

an effective capital charge that is more

reflective of the amount of economic

capital that banking organizations

maintain internally for short-term

liquidity facilities supporting ABCP.

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6 See 12 CFR part 3, appendix A, Section 4(d)

(OCC); 12 CFR parts 208 and 225, appendix A,

III.B.3.c. (FRB); 12 CFR part 325, appendix A,

II.B.5.d. (FDIC); 12 CFR 567.6(b) (OTS).

7 This example assumes that a banking

organization is able to use the internal ratings that

it has assigned to liquidity facilities providing

support to ABCP and also assumes that such

facilities would be assigned to the 100 percent risk

category.

After consideration of the comments,

the agencies have decided to impose a

10 percent credit conversion factor on

eligible short-term liquidity facilities

supporting ABCP, as opposed to the 20

percent credit conversion factor set forth

in the NPR. A 50 percent credit

conversion factor will continue to apply

to eligible long-term ABCP liquidity

facilities. These credit conversion

factors will apply regardless of whether

the structure issuing the ABCP meets

the definition of an ‘‘ABCP program’’

under the final rule

-term liquidity facilities

supporting ABCP, as opposed to the 20

percent credit conversion factor set forth

in the NPR. A 50 percent credit

conversion factor will continue to apply

to eligible long-term ABCP liquidity

facilities. These credit conversion

factors will apply regardless of whether

the structure issuing the ABCP meets

the definition of an ‘‘ABCP program’’

under the final rule. For example, a

capital charge would apply to an

eligible short-term liquidity facility that

provides liquidity support to ABCP

where the ABCP constitutes less than 50

percent of the securities issued causing

the issuing structure not to meet this

final rule’s definition of an ‘‘ABCP

program.’’ However, if a banking

organization (1) does not meet this final

rule’s definition of an ‘‘ABCP program’’

and must include the program’s assets

in its risk-weighted asset base, or (2)

otherwise chooses to include the

program’s assets in risk-weighted assets,

then there will be no risk-based capital

requirement assessed against any

liquidity facilities that support that

program’s ABCP. In addition, ineligible

liquidity facilities will be treated as

recourse obligations or direct credit

substitutes.

The resulting credit equivalent

amount would then be risk-weighted

according to the underlying assets or the

obligor, after considering any collateral

or guarantees, or external credit ratings,

if applicable. For example, if an eligible

short-term liquidity facility providing

liquidity support to ABCP covered an

asset-backed security (ABS) externally

rated AAA, then the notional amount of

the liquidity facility would be converted

at 10 percent to an on-balance sheet

credit equivalent amount and assigned

to the 20 percent risk weight category

appropriate for AAA-rated ABS.6

C. Overlapping Exposures to an ABCP

Program

In many cases, a banking organization

may have multiple exposures to a single

ABCP program (for example, both a

credit enhancement and a liquidity

facility)

the liquidity facility would be converted

at 10 percent to an on-balance sheet

credit equivalent amount and assigned

to the 20 percent risk weight category

appropriate for AAA-rated ABS.6

C. Overlapping Exposures to an ABCP

Program

In many cases, a banking organization

may have multiple exposures to a single

ABCP program (for example, both a

credit enhancement and a liquidity

facility). The agencies do not intend to

subject a banking organization to

duplicative risk-based capital

requirements against these multiple

exposures where they overlap and cover

the same underlying asset pool.

Accordingly, the final rule requires that

a banking organization must hold risk-

based capital only once against the

assets covered by the overlapping

exposures. Where the overlapping

exposures are subject to different risk-

based capital requirements, the banking

organization must apply the risk-based

capital treatment that results in the

highest capital charge to the overlapping

portion of the exposures.

For example, assume a banking

organization provides a program-wide

credit enhancement that would absorb

10 percent of the losses in all of the

underlying asset pools in an ABCP

program and pool-specific liquidity

facilities that cover 100 percent of each

of the underlying asset pools.7 The

banking organization would be required

to hold capital against 10 percent of the

underlying asset pools because it is

providing the program-wide credit

enhancement. The banking organization

also would be required to hold capital

against 90 percent of the liquidity

facilities it is providing to each of the

underlying asset pools. However, if a

banking organization chooses to

consolidate ABCP program assets onto

its balance sheet for risk-based capital

purposes the organization would not be

required also to hold risk-based capital

against any credit enhancements or

liquidity facilities that cover those same

program assets

90 percent of the liquidity

facilities it is providing to each of the

underlying asset pools. However, if a

banking organization chooses to

consolidate ABCP program assets onto

its balance sheet for risk-based capital

purposes the organization would not be

required also to hold risk-based capital

against any credit enhancements or

liquidity facilities that cover those same

program assets.

If different banking organizations

have overlapping exposures to an ABCP

program, however, each organization

must hold capital against the entire

maximum amount of its exposure. As a

result, while duplication of capital

charges will not occur for individual

banking organizations, some systemic

duplication may occur where multiple

banking organizations have overlapping

exposures to the same ABCP program.

D. Asset Quality Test

In order for a liquidity facility, either

short-or long-term, that supports ABCP

not to be considered a recourse

obligation or a direct credit substitute, it

must meet the rule’s definition of an

‘‘eligible ABCP liquidity facility.’’ The

NPR proposed that the liquidity facility,

in order to be an eligible liquidity

facility, meet a reasonable asset quality

test that, among other things, precluded

funding assets that are 60 days or more

past due or in default. The funding of

assets past due 60 days or more using

a liquidity facility exposes the

institution to a greater degree of credit

risk than the funding of assets of a more

current nature.

Five commenters objected to the

uniform 60 days past due asset quality

test, noting that although it may be

appropriate for trade receivables, it is

not appropriate for many other asset

classes. These commenters believed that

a reasonable asset quality test could be

defined to include assets that are 90 to

180 days or more past due, depending

upon the type of asset (for example,

residential mortgages or credit cards)

uniform 60 days past due asset quality

test, noting that although it may be

appropriate for trade receivables, it is

not appropriate for many other asset

classes. These commenters believed that

a reasonable asset quality test could be

defined to include assets that are 90 to

180 days or more past due, depending

upon the type of asset (for example,

residential mortgages or credit cards).

Furthermore, one commenter stated that

the 60-day delinquency standard would

significantly overstate the risk of default

in the case of credit cards since the

amount of credit card receivables that is

ultimately charged-off between 120 days

and 180 days usually is far less than the

amount that is 60-days delinquent. Five

commenters suggested that the

definition of an eligible liquidity facility

should be more flexible and incorporate

asset quality tests that vary based on the

specific transaction structures or

underlying asset types.

Specifically, these commenters

proposed that each banking organization

should be allowed to develop its own

asset quality tests, subject to supervisory

oversight. Although the agencies

considered the possibility of developing

separate past due requirements for

different asset categories, and the

possibility of permitting each banking

organization to develop its own asset

quality test, the agencies believe that

these approaches would be complex to

develop and burdensome to administer,

and would lack uniform application

among banking organizations.

The agencies believe that it is

important to ensure that the primary

function of an eligible liquidity facility

is to provide liquidity and, accordingly,

such a facility should not be used to

fund assets with the higher degree of

credit risk typically associated with

seriously delinquent assets. However,

the agencies agree that a limitation of 60

days or more past due might be too

constraining for some asset types held

in an ABCP program

that the primary

function of an eligible liquidity facility

is to provide liquidity and, accordingly,

such a facility should not be used to

fund assets with the higher degree of

credit risk typically associated with

seriously delinquent assets. However,

the agencies agree that a limitation of 60

days or more past due might be too

constraining for some asset types held

in an ABCP program.

This final rule increases the number

of days in the past due requirement to

90 days or more past due. The agencies

believe that when assets are 90 days or

more past due, they typically have

deteriorated to the point where there is

an extremely high probability of default.

Assets that are 90 days past due, for

example, often must be placed on non-

accrual status in accordance with the

agencies’ Uniform Retail Credit

Classification and Account Management

Policy. See 65 FR 36904 (June 12, 2000).

Further, they generally must also be

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Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations

8 In the NPR, the agencies proposed an additional

requirement that ABCP liquidity facilities only fund

against assets that met the funding criteria under

the asset quality test. The agencies believe that this

criterion is unnecessary and, as a result, have

deleted it from the final rule.

classified ‘‘substandard’’ under that

Policy.

Commenters also suggested that the

asset quality test should be modified to

reflect guarantees providing credit

protection to the bank providing the

liquidity facility. The agencies agree

that in the case of a government

guarantee, the past due limitation is not

a relevant asset quality test

, as a result, have

deleted it from the final rule.

classified ‘‘substandard’’ under that

Policy.

Commenters also suggested that the

asset quality test should be modified to

reflect guarantees providing credit

protection to the bank providing the

liquidity facility. The agencies agree

that in the case of a government

guarantee, the past due limitation is not

a relevant asset quality test. As a result,

this final rule does not apply the ‘‘days

past due’’ limitation in the asset quality

test with respect to assets that are either

conditionally or unconditionally

guaranteed by the United States

government or its agencies, or another

OECD central government subsequent to

a draw on a liquidity facility.

In addition, to qualify as an eligible

liquidity facility, the agencies proposed

in the NPR that, if the assets covered by

the liquidity facility are initially

externally rated (at the time the facility

is provided), the facility may be used to

fund only those assets that are

externally rated investment grade at the

time of funding. If the asset quality tests

are not met (that is, if a banking

organization actually funds through the

liquidity facility assets that do not

satisfy the facility’s asset quality tests),

the liquidity facility will be considered

a recourse obligation or a direct credit

substitute and generally will be

converted at 100 percent as opposed to

10 or 50 percent.8

Three commenters asserted that the

asset quality test proposed for

transactions with externally rated assets

was inappropriate, noting that the test is

irrelevant for transactions without a

ratings-based trigger where asset quality

is determined using cash flow or other

benchmarks. These commenters also

noted that, in some cases, the price of

assets purchased under the liquidity

facility is adjusted for the assets’ credit

quality, mitigating the need for a

ratings-based asset quality test

ssets

was inappropriate, noting that the test is

irrelevant for transactions without a

ratings-based trigger where asset quality

is determined using cash flow or other

benchmarks. These commenters also

noted that, in some cases, the price of

assets purchased under the liquidity

facility is adjusted for the assets’ credit

quality, mitigating the need for a

ratings-based asset quality test.

Moreover, one commenter asserted that

the increase in regulatory capital that

occurs when the rating on an asset-

backed security underlying a liquidity

facility declines makes the additional

limitation on non-investment grade

assets unnecessary.

While the agencies acknowledge that

some liquidity facility agreements adjust

the purchase price of assets for credit

quality, the agencies believe that most

purchases of rated assets through

liquidity facilities are conducted at a

price that exceeds the assets’ market

value, which in the agencies’ view is

equivalent to credit enhancement. Even

in cases where the purchase price is

adjusted, it is not necessarily adjusted to

market value.

For these reasons, the final rule

considers the practice of purchasing

assets that are externally rated below

investment grade out of an ABCP

program as the equivalent of providing

credit protection to the commercial

paper investors. Thus, liquidity

facilities permitting purchases of below

investment grade securities will be

considered either recourse or direct

credit substitutes. However, for the

same reason mentioned previously, this

final rule does not apply the

‘‘investment grade’’ limitation in the

asset quality test with respect to assets

that are conditionally or

unconditionally guaranteed by the

United States government or its

agencies, or another OECD central

government subsequent to a draw on a

liquidity facility.

course or direct

credit substitutes. However, for the

same reason mentioned previously, this

final rule does not apply the

‘‘investment grade’’ limitation in the

asset quality test with respect to assets

that are conditionally or

unconditionally guaranteed by the

United States government or its

agencies, or another OECD central

government subsequent to a draw on a

liquidity facility.

E. Applicability of the Market Risk

Capital Requirements

The amendments to the risk-based

capital standards with respect to

liquidity facilities reflect the efforts of

the agencies to ensure that banking

organizations maintain adequate capital

with respect to exposures represented

by liquidity facilities supporting ABCP.

Under the current risk-based capital

standards, liquidity facilities held in the

trading book may be subject to the

market risk capital requirements instead

of the banking book capital

requirements. Consequently, in the

NPR, the agencies proposed that

banking organizations subject to the

market risk capital rules would not be

permitted to apply those rules to any

liquidity facility supporting ABCP held

in the trading book. This final rule

adopts the proposed market risk

exception to preclude banking

organizations that are subject to the

market risk capital rules from applying

those rules to positions held in a bank’s

trading book that act, in form or in

substance, as liquidity facilities

supporting ABCP.

Under this final rule, any facility held

in the trading book whose primary

function, in form or in substance, is to

provide liquidity to ABCP—even if the

facility does not qualify as an eligible

ABCP liquidity facility under the rule—

will be subject to the banking book risk-

based capital requirements. Specifically,

organizations will be required to convert

the notional amount of all trading book

positions that provide liquidity to ABCP

to credit equivalent amounts by

applying the appropriate banking book

credit conversion factors

n if the

facility does not qualify as an eligible

ABCP liquidity facility under the rule—

will be subject to the banking book risk-

based capital requirements. Specifically,

organizations will be required to convert

the notional amount of all trading book

positions that provide liquidity to ABCP

to credit equivalent amounts by

applying the appropriate banking book

credit conversion factors. For example,

the full amount of all eligible ABCP

liquidity facilities with an original

maturity of one year or less will be

subject to a 10 percent conversion

factor, as described previously,

regardless of whether the facility is

carried in the trading account or the

banking book.

Two commenters objected to this

provision, noting that it ignores GAAP

accounting decisions with respect to the

trading book classification of individual

transactions, and that a well-defined

mechanism for assessing capital in the

trading book already exists. In addition,

these commenters stated that the mark-

to-market accounting discipline applied

to trading book positions, combined

with individual banking organizations’

market value adjustments for illiquidity

or pricing uncertainty, assures that

adequate capital is held on a ‘‘real-time’’

basis. These commenters also suggested

that banking organizations be permitted

to apply the trading book capital rules

to liquidity facilities or arrangements

that satisfy certain criteria. While the

agencies understand the benefit of

consistent classification under GAAP

and appreciate the value of the market

risk capital framework, the agencies

believe that a market risk exception for

ABCP-related liquidity facilities is

necessary to ensure an adequate risk-

based capital charge for such exposures

and to mitigate regulatory capital

arbitrage opportunities.

III

in criteria. While the

agencies understand the benefit of

consistent classification under GAAP

and appreciate the value of the market

risk capital framework, the agencies

believe that a market risk exception for

ABCP-related liquidity facilities is

necessary to ensure an adequate risk-

based capital charge for such exposures

and to mitigate regulatory capital

arbitrage opportunities.

III. Early Amortization Capital Charge

In the NPR, the agencies also

proposed the assessment of a risk-based

capital charge against the risks

associated with early amortization, a

common feature in securitizations of

revolving retail credit exposures (for

example, credit card receivables). When

assets are securitized, the extent to

which the selling or sponsoring entity

transfers the risks associated with the

assets depends on the structure of the

securitization and the nature of the

underlying assets. The early

amortization provision often present in

securitizations of revolving retail credit

facilities increases the likelihood that

investors will be repaid before being

subject to risk of significant credit

losses.

The NPR was not the first time that

the agencies have raised the issue of

whether to impose a capital charge on

securitizations of revolving credit

exposures that incorporate early

amortization provisions. On March 8,

2000, the agencies published a notice of

proposed rulemaking on recourse

obligations and direct credit substitutes

(March 2000 NPR). See 65 FR 12320. In

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capital charge on

securitizations of revolving credit

exposures that incorporate early

amortization provisions. On March 8,

2000, the agencies published a notice of

proposed rulemaking on recourse

obligations and direct credit substitutes

(March 2000 NPR). See 65 FR 12320. In

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44913

Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations

9 The credit conversion factors used in the

October 2003 NPR mirror those in the agencies’

August 2003 Advance Notice of Proposed

Rulemaking for non-controlled early amortization of

uncommitted retail credit lines. See 68 FR 45899

(August 4, 2003).

the March 2000 NPR, the agencies

proposed a fixed conversion factor of 20

percent to be applied to the amount of

assets under management in all

revolving securitizations that contained

early amortization features, in

recognition of the risks associated with

these structures. The agencies

acknowledge that the March 2000 NPR

was not particularly risk sensitive and

would have required the same amount

of capital for all securitizations of

revolving credit exposures that

contained early amortization features,

regardless of the risk present in a

particular securitization transaction. In

the subsequent November 2001 final

rule (66 FR 59614) (November 2001

final rule), which implemented many of

the provisions in the March 2000 NPR,

the agencies reiterated their concerns

with early amortization, indicating that

the risks associated with securitization,

including those posed by an early

amortization feature, were not fully

captured in the then current capital

rules. In the November 2001 final rule,

however, the agencies did not impose a

special capital charge on securitizations

with early amortization features

0 NPR,

the agencies reiterated their concerns

with early amortization, indicating that

the risks associated with securitization,

including those posed by an early

amortization feature, were not fully

captured in the then current capital

rules. In the November 2001 final rule,

however, the agencies did not impose a

special capital charge on securitizations

with early amortization features.

In the interim, the Basel Committee

on Banking Supervision (Basel

Committee) set forth a more risk-

sensitive proposal that would assess

capital against securitizations of

revolving exposures with early

amortization features based on key

indicators of risk, such as excess spread

levels. The risk-based capital charge for

early amortization proposed in the NPR

was based on the proposal set forth by

the Basel Committee in its third

consultative paper issued in April

2003.9

Three commenters stated that the

proposal as set forth in the NPR was, in

their view, a significant improvement

over previous proposed capital charges

for early amortization. Five commenters,

however, recommended that any

changes to the regulatory capital

guidelines in this area be made through

the Basel process. Coordinating both the

timing and the substance of an early

amortization capital charge

internationally would help maintain a

level playing field across countries and

would avoid requiring U.S. banking

organizations to implement new capital

rules, only to require them to implement

slightly different rules in the future

when the agencies implement the Basel

changes. Moreover, three commenters

requested that the agencies establish an

alternative approach for controlled early

amortization transactions similar to that

proposed by the Basel Committee in the

third Consultative Paper (dated April

2003).

At this time, the capital treatment of

retail credit, including securitizations of

revolving credits, may change as the

revised Basel framework proceeds

through the U.S. rulemaking process

ed that the agencies establish an

alternative approach for controlled early

amortization transactions similar to that

proposed by the Basel Committee in the

third Consultative Paper (dated April

2003).

At this time, the capital treatment of

retail credit, including securitizations of

revolving credits, may change as the

revised Basel framework proceeds

through the U.S. rulemaking process.

Therefore, the ultimate treatment of

securitizations of revolving credit

exposures incorporating early

amortization provisions is still

uncertain. As a result, the agencies have

decided that, at this time, it would not

be appropriate to implement a risk-

based capital charge for securitizations

of revolving credits when the treatment

may be revised with the implementation

of the new Basel Accord. However, the

agencies intend to revisit this issue in

the near future for possible domestic

implementation for all U.S. banking

organizations.

IV. Elimination of Summary Sections of

Rules Text

The final rule also removes tables and

attachments in the risk-based capital

standards that summarize the risk

categories, credit conversion factors,

and transitional arrangements. These

tables and attachments are outdated and

unnecessary because the substance of

these summaries is included in the main

text of the risk-based capital standards.

Furthermore, these summary tables and

attachments were originally provided to

assist banking organizations unfamiliar

with the new framework during the

transition period when the agencies’

risk-based capital requirements were

initially implemented in 1989. No

comments were received on this issue.

The agencies consider this change to be

technical in nature and do not intend

any substantive impact on the risk-

based capital standards.

V. Effective Dates

This final rule is effective September

30, 2004

liar

with the new framework during the

transition period when the agencies’

risk-based capital requirements were

initially implemented in 1989. No

comments were received on this issue.

The agencies consider this change to be

technical in nature and do not intend

any substantive impact on the risk-

based capital standards.

V. Effective Dates

This final rule is effective September

30, 2004. However, any banking

organization may elect to adopt, as of

July 28, 2004, the capital treatment

described in this final rule for assets in

ABCP programs that are consolidated

onto the balance sheets of sponsoring

banking organizations as a result of FIN

46–R. All liquidity facilities providing

liquidity support to ABCP will be

treated as ‘‘eligible ABCP liquidity

facilities’’ until September 30, 2005. On

that date, all ABCP-related liquidity

facilities that do not meet this final

rule’s definition of an eligible ABCP

liquidity facility will be treated as direct

credit substitutes or recourse

obligations. This transition period for

ABCP-related liquidity facilities existing

prior to this final rule’s effective date

should provide banking organizations

with sufficient time to revise their

liquidity facilities over the next year to

ensure that the facilities meet the

eligibility criteria set forth in this final

rule.

VI. Regulatory Analysis

Riegle Community Development and

Regulatory Improvement Act

Section 302 of Riegle Community

Development and Regulatory

Improvement Act (12 U.S.C. 4802)

generally requires that regulations take

effect on the first day of a calendar

quarter unless an agency finds good

cause that the regulations should

become effective sooner and publishes

its finding with the rule. The agencies

believe that it is important to make this

final rule effective before banking

organizations must calculate their

regulatory risk-based capital ratios at the

end of the third quarter 2004

regulations take

effect on the first day of a calendar

quarter unless an agency finds good

cause that the regulations should

become effective sooner and publishes

its finding with the rule. The agencies

believe that it is important to make this

final rule effective before banking

organizations must calculate their

regulatory risk-based capital ratios at the

end of the third quarter 2004. If ABCP

program assets are consolidated onto the

balance sheets of sponsoring banking

organizations under FIN 46–R, then the

agencies believe that the resulting

capital requirements could be excessive

in light of the risks incurred by those

organizations as related to those assets.

In addition, with respect to liquidity

facilities that support ABCP, the current

risk-based capital charges may not

sufficiently reflect the risks associated

with such liquidity facilities. The

issuance of this final rule with a

September 30, 2004, effective date will

ensure that banking organizations

maintain appropriate risk-based capital

levels with respect to ABCP program

assets and ABCP liquidity facilities in

calculating their regulatory capital ratios

for the third quarter 2004.

Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the Agencies

have determined that this final rule will

not have a significant impact on a

substantial number of small entities in

accordance with the spirit and purposes

of the Regulatory Flexibility Act (5

U.S.C. 601 et seq.). For purposes of the

Regulatory Flexibility Act, ‘‘small

entities’’ are banking organizations

having assets of $150 million or less.

There are approximately 18 banking

organizations that will be affected by

this final rule. All are well over that size

threshold. Accordingly, a regulatory

flexibility analysis is not required.

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‘small

entities’’ are banking organizations

having assets of $150 million or less.

There are approximately 18 banking

organizations that will be affected by

this final rule. All are well over that size

threshold. Accordingly, a regulatory

flexibility analysis is not required.

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44914

Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations

Paperwork Reduction Act

The Agencies have determined that

this final rule does not involve a

collection of information pursuant to

the provisions of the Paperwork

Reduction Act of 1995 (44 U.S.C. 3501

et seq.).

Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded

Mandates Reform Act of 1995, Public

Law 104–4 (Unfunded Mandates Act)

requires that an agency prepare a

budgetary impact statement before

promulgating a rule that includes a

Federal mandate that may result in

expenditure by State, local, and tribal

governments, in the aggregate, or by the

private sector, of $100 million or more

in any one year. If a budgetary impact

statement is required, section 205 of the

Unfunded Mandates Act also requires

an agency to identify and consider a

reasonable number of regulatory

alternatives before promulgating a rule.

The OCC and OTS believe that

exclusion of consolidated ABCP

program assets from risk-weighted

assets for risk-based capital purposes

will not result in any expenditures by

national banks or savings associations.

The exclusion of consolidated ABCP

program assets is designed to offset the

effect of FIN 46–R on risk-based capital.

With respect to the risk-based capital

treatment of liquidity facilities, because

all national banks and savings

associations that provide liquidity

facilities to ABCP programs currently

exceed regulatory minimum capital

requirements, the OCC and OTS do not

believe these banks will be required to

raise additional capital

is designed to offset the

effect of FIN 46–R on risk-based capital.

With respect to the risk-based capital

treatment of liquidity facilities, because

all national banks and savings

associations that provide liquidity

facilities to ABCP programs currently

exceed regulatory minimum capital

requirements, the OCC and OTS do not

believe these banks will be required to

raise additional capital.

Executive Order 12866

The OCC and OTS have determined

that this final rule is not a significant

regulatory action under Executive Order

12866.

List of Subjects

12 CFR Part 3

Administrative practice and

procedure, Capital, National banks,

Reporting and recordkeeping

requirements, Risk.

12 CFR Part 208

Accounting, Agriculture, Banks,

banking, Confidential business

information, Crime, Currency,

Mortgages, Reporting and recordkeeping

requirements, Securities.

12 CFR Part 225

Administrative practice and

procedure, Banks, banking, Holding

companies, Reporting and

recordkeeping requirements, Securities.

12 CFR Part 325

Administrative practice and

procedure, Bank deposit insurance,

Banks, banking, Capital adequacy,

Reporting and recordkeeping

requirements, Savings associations,

State non-member banks.

12 CFR Part 567

Capital, Reporting and recordkeeping

requirements, Savings associations.

DEPARTMENT OF TREASURY

Office of the Comptroller of the

Currency

12 CFR Chapter 1

Authority and Issuance

I For the reasons set out in the joint

preamble, part 3 of chapter I of title 12

of the Code of Federal Regulations is

amended as follows:

PART 3—MINIMUM CAPITAL RATIOS;

ISSUANCE OF DIRECTIVES

I 1. The authority citation for part 3

continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818,

1828(n), 1828 note, 1831n note, 1835, 3907,

and 3909.

I 2. In appendix A to part 3, section 1 is

amended as follows:

I a. Paragraphs (c)(31) to (c)(37) are

redesignated as paragraphs (c)(32) to

ral Regulations is

amended as follows:

PART 3—MINIMUM CAPITAL RATIOS;

ISSUANCE OF DIRECTIVES

I 1. The authority citation for part 3

continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818,

1828(n), 1828 note, 1831n note, 1835, 3907,

and 3909.

I 2. In appendix A to part 3, section 1 is

amended as follows:

I a. Paragraphs (c)(31) to (c)(37) are

redesignated as paragraphs (c)(32) to

(c)(38);

I b. Paragraph (c)(30) is removed;

I c. Paragraphs (c)(19) to (c)(29) are

redesignated as paragraphs (c)(21) to

(c)(31);

I d. New paragraph (c)(20) is added;

I e. Paragraphs (c)(9) to (c)(18) are

redesignated as paragraphs (c)(10) to

(c)(19);

I f. Paragraph (c)(8) is redesignated as

paragraph (c)(9) and revised;

I g. Paragraphs (c)(4) to (c)(7) are

redesignated as paragraphs (c)(5) to

(c)(8);

I h. New paragraph (c)(4) is added; and

I i. Paragraph (c)(3) is revised.

I 3. In appendix A to part 3, section 2,

paragraph (a)(3) is revised.

I 4. In appendix A to part 3, section 3 is

amended as follows:

I a. Paragraph (a)(4)(iii) is revised;

I b. New paragraphs (a)(5) and (a)(6) are

added;

I c. Paragraph (b) introductory text is

revised by amending the fourth sentence;

I d. Paragraphs (b)(2)(ii) is revised;

I e. Paragraphs (b)(4) and (b)(5) are

redesignated as paragraphs (b)(5) and

(b)(7), respectively;

I f. New paragraph (b)(4) is added;

I g. Newly redesignated paragraph

(b)(5)(i) is revised; and

I h. New paragraph (b)(6) is added.

I 5. In appendix A to part 3, section 4 is

amended as follows:

I a. Paragraphs (a)(4)(vi) and (a)(4)(vii)

are revised;

I b. New paragraph (a)(4)(viii) is added;

I c. Paragraphs (a)(11)(vi) and (a)(11)(vii)

are revised;

I d. New paragraph (a)(11)(viii) is added;

and

I e. Paragraphs (j) and (k) are removed.

I 6. In appendix A to part 3, section 5,

Tables 1 through 4 are removed.

Appendix A to Part 3—Risk-Based

Capital Guidelines

Section 1. Purpose, Applicability of

Guidelines and Definitions

sed;

I b. New paragraph (a)(4)(viii) is added;

I c. Paragraphs (a)(11)(vi) and (a)(11)(vii)

are revised;

I d. New paragraph (a)(11)(viii) is added;

and

I e. Paragraphs (j) and (k) are removed.

I 6. In appendix A to part 3, section 5,

Tables 1 through 4 are removed.

Appendix A to Part 3—Risk-Based

Capital Guidelines

Section 1. Purpose, Applicability of

Guidelines and Definitions

(3) Asset-backed commercial paper

program means a program that primarily

issues externally rated commercial

paper backed by assets or other

exposures held in a bankruptcy-remote,

special-purpose entity.

(4) Asset-backed commercial paper

sponsor means a bank that:

(i) Establishes an asset-backed

commercial paper program;

(ii) Approves the sellers permitted to

participate in an asset-backed

commercial paper program;

(iii) Approves the asset pools to be

purchased by an asset-backed

commercial paper program; or

(iv) Administers the asset-backed

commercial paper program by

monitoring the assets, arranging for debt

placement, compiling monthly reports,

or ensuring compliance with the

program documents and with the

program’s credit and investment policy.

(9) Commitment means any

arrangement that obligates a national

bank to: (i) Purchase loans or securities;

or (ii) extend credit in the form of loans

or leases, participations in loans or

leases, overdraft facilities, revolving

credit facilities, home equity lines of

credit, liquidity facilities, or similar

transactions.

program’s credit and investment policy.

(9) Commitment means any

arrangement that obligates a national

bank to: (i) Purchase loans or securities;

or (ii) extend credit in the form of loans

or leases, participations in loans or

leases, overdraft facilities, revolving

credit facilities, home equity lines of

credit, liquidity facilities, or similar

transactions.

(20) Liquidity facility means a legally

binding commitment to provide

liquidity to various types of

transactions, structures or programs. A

liquidity facility that supports asset-

backed commercial paper, in any

amount, by lending to, or purchasing

assets from any structure, program, or

conduit constitutes an asset-backed

commercial paper liquidity facility.

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Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations

17 Participations in commitments are treated in

accordance with section 4 of this Appendix A.

Section 2. Components of Capital

(a) * * *

(3) Minority interests in the equity

accounts of consolidated subsidiaries,

except that the following are not

included in Tier 1 capital or total

capital:

(i) Minority interests in a small

business investment company or

investment fund that holds nonfinancial

equity investments and minority

interests in a subsidiary that is engaged

in a nonfinancial activities and is held

under one of the legal authorities listed

in section 1(c)(23) of this appendix A.

(ii) Minority interests in consolidated

asset-backed commercial paper

programs sponsored by a bank if the

consolidated assets are excluded from

risk-weighted assets pursuant to section

3(a)(5)(i) of this appendix A.

Section 3. Risk Categories/Weights for

On-Balance Sheet Assets and Off-

Balance Sheet Items

thorities listed

in section 1(c)(23) of this appendix A.

(ii) Minority interests in consolidated

asset-backed commercial paper

programs sponsored by a bank if the

consolidated assets are excluded from

risk-weighted assets pursuant to section

3(a)(5)(i) of this appendix A.

Section 3. Risk Categories/Weights for

On-Balance Sheet Assets and Off-

Balance Sheet Items

(a) * * *

(4) * * *

(iii) Asset-or mortgage backed

securities that are externally rated are

risk weighted in accordance with

section 4(d) of this appendix A.

(5) Asset-backed commercial paper

programs subject to consolidation. (i) A

bank that qualifies as a primary

beneficiary and must consolidate an

asset-backed commercial paper program

as a variable interest entity under

generally accepted accounting

principles may exclude the consolidated

asset-backed commercial paper program

assets from risk-weighted assets if the

bank is the sponsor of the consolidated

asset-backed commercial paper

program.

(ii) If a bank excludes such

consolidated asset-backed commercial

paper program assets from risk-weighted

assets, the bank must assess the

appropriate risk-based capital charge

against any risk exposures of the bank

arising in connection with such asset-

backed commercial paper program,

including direct credit substitutes,

recourse obligations, residual interests,

asset-backed commercial paper liquidity

facilities, and loans, in accordance with

section 3 and section 4 of this appendix

assets, the bank must assess the

appropriate risk-based capital charge

against any risk exposures of the bank

arising in connection with such asset-

backed commercial paper program,

including direct credit substitutes,

recourse obligations, residual interests,

asset-backed commercial paper liquidity

facilities, and loans, in accordance with

section 3 and section 4 of this appendix

(iii) If a bank either is not permitted

to exclude consolidated asset-backed

commercial paper program assets or

elects not to exclude consolidated asset-

backed commercial paper program

assets from its risk-weighted assets, the

bank must assess a risk-based capital

charge based on the appropriate risk

weight of the consolidated asset-backed

commercial paper program assets in

accordance with sections 3(a) and 4 of

this appendix A. Any direct credit

substitutes and recourse obligations

(including residual interests and asset-

backed commercial paper liquidity

facilities), and loans that sponsoring

banks provide to such asset-backed

commercial paper programs are not

subject to a capital charge under this

section 4 of this appendix A.

(iv) If a bank has multiple overlapping

exposures (such as a program-wide

credit enhancement and an asset-backed

commercial paper liquidity facility) to

an asset-backed commercial paper

program that is not consolidated for

risk-based capital purposes, the bank

must apply the highest capital charge

applicable to the exposures but is not

required to hold capital multiple times

for the overlapping exposures under

section 4 of this appendix A.

h as a program-wide

credit enhancement and an asset-backed

commercial paper liquidity facility) to

an asset-backed commercial paper

program that is not consolidated for

risk-based capital purposes, the bank

must apply the highest capital charge

applicable to the exposures but is not

required to hold capital multiple times

for the overlapping exposures under

section 4 of this appendix A.

(6) Other variable interest entities

subject to consolidation. If a bank is

required to consolidate the assets of a

variable interest entity other than an

asset-backed commercial paper program

under generally accepted accounting

principles, the bank must assess a risk-

based capital charge based on the

appropriate risk weight of the

consolidated assets in accordance with

sections 3(a) and 4 of this appendix A.

Any direct credit substitutes and

recourse obligations (including residual

interests), and loans that a bank may

provide to such a variable interest entity

are not subject to any capital charge

under section 4 of this appendix A.

(b) * * * Second, the resulting credit

equivalent amount is then assigned to

the proper risk category using the

criteria regarding obligors, guarantors,

and collateral listed in section 3(a) of

this appendix A, or external credit

rating in accordance with section 4(d),

if applicable. * * *

(2) * * *

(i) * * *

(ii) Unused portion of commitments

with an original maturity exceeding

one-year; 17 however, commitments that

are asset-backed commercial paper

liquidity facilities must satisfy the

eligibility requirements under section

3(b)(6)(ii) of this appendix A;

(4) 10 percent credit conversion

factor. Unused portion of asset-backed

commercial paper liquidity facilities

with an original maturity of one year or

less that satisfy the eligibility

requirements under section 3(b)(6)(ii) of

this appendix A.

backed commercial paper

liquidity facilities must satisfy the

eligibility requirements under section

3(b)(6)(ii) of this appendix A;

(4) 10 percent credit conversion

factor. Unused portion of asset-backed

commercial paper liquidity facilities

with an original maturity of one year or

less that satisfy the eligibility

requirements under section 3(b)(6)(ii) of

this appendix A.

(5) * * * (i) Unused portion of

commitments with an original maturity

of one year or less, but excluding any

asset-backed commercial paper liquidity

facilities;

(6) Liquidity facility provided to asset-

backed commercial paper. (i)

Noneligible asset-backed commercial

paper liquidity facilities treated as

recourse or direct credit substitute.

Unused portion of asset-backed

commercial paper liquidity facilities

that do not meet the criteria for an

eligible liquidity facility provided to

asset-backed commercial paper in

accordance with section 3(b)(6)(ii) of

this appendix A must be treated as

recourse or as a direct credit substitute,

and assessed the appropriate risk-based

capital charge in accordance with

section 4 of this appendix A.

(ii) Eligible asset-backed commercial

paper liquidity facility. Except as

provided in section 3(b)(6)(iii) of this

appendix A, in order for the unused

portion of an asset-backed commercial

paper liquidity facility to be eligible for

either the 50 percent or 10 percent

credit conversion factors under section

3(b)(2)(ii) or 3(b)(4) of this appendix A,

the asset-backed commercial paper

liquidity facility must satisfy the

following criteria:

(A) At the time of draw, the asset-

backed commercial paper liquidity

facility must be subject to a asset quality

test that:

(1) Precludes funding of assets that

are 90 days or more past due or in

default; and

rcent

credit conversion factors under section

3(b)(2)(ii) or 3(b)(4) of this appendix A,

the asset-backed commercial paper

liquidity facility must satisfy the

following criteria:

(A) At the time of draw, the asset-

backed commercial paper liquidity

facility must be subject to a asset quality

test that:

(1) Precludes funding of assets that

are 90 days or more past due or in

default; and

(2) If the assets that an asset-backed

commercial paper liquidity facility is

required to fund are externally rated

securities at the time they are

transferred into the program, the asset-

backed commercial paper liquidity

facility must be used to fund only

securities that are externally rated

investment grade at the time of funding.

If the assets are not externally rated at

the time they are transferred into the

program, then they are not subject to

this investment grade requirement.

(B) The asset-backed commercial

paper liquidity facility must provide

that, prior to any draws, the bank’s

funding obligation is reduced to cover

only those assets that satisfy the funding

criteria under the asset quality test as

provided in section 3(b)(6)(ii)(A) of this

appendix A.

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(iii) Exception to eligibility

requirements for assets guaranteed by

the United States Government or its

agencies, or the central government of

an OECD country

(A) of this

appendix A.

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(iii) Exception to eligibility

requirements for assets guaranteed by

the United States Government or its

agencies, or the central government of

an OECD country. Notwithstanding the

eligibility requirements for asset-backed

commercial paper program liquidity

facilities in section 3(b)(6)(ii), the

unused portion of an asset-backed

commercial paper liquidity facility may

still qualify for either the 50 percent or

10 percent credit conversion factors

under section 3(b)(2)(ii) or 3(b)(4) of this

appendix A, if the assets required to be

funded by the asset-back commercial

paper liquidity facility are guaranteed,

either conditionally or unconditionally,

by the United States Government or its

agencies, or the central government of

an OECD country.

(iv) Transition period for asset-backed

commercial paper liquidity facilities.

Notwithstanding the eligibility

requirements for asset-backed

commercial paper program liquidity

facilities in section 3(b)(6)(i) of this

appendix A, the unused portion of an

asset-backed commercial paper liquidity

will be treated as eligible liquidity

facilities pursuant to section 3(b)(6)(ii)

of this appendix A regardless of their

compliance with the definition of

eligible liquidity facilities until

September 30, 2005. On that date and

thereafter, the unused portions of asset-

backed commercial paper liquidity

facilities that do not meet the eligibility

requirements in section 3(b)(6)(i) of this

appendix A will be treated as recourse

obligations or direct credit substitutes.

Section 4. Recourse, Direct Credit

Substitutes and Positions in

Securitizations

facilities until

September 30, 2005. On that date and

thereafter, the unused portions of asset-

backed commercial paper liquidity

facilities that do not meet the eligibility

requirements in section 3(b)(6)(i) of this

appendix A will be treated as recourse

obligations or direct credit substitutes.

Section 4. Recourse, Direct Credit

Substitutes and Positions in

Securitizations

(a) * * *

(4) * * *

(vi) Purchased loan servicing assets if

the servicer is responsible for credit

losses or if the servicer makes or

assumes credit-enhancing

representations and warranties with

respect to the loans serviced. Mortgage

servicer case advances that meet the

conditions of section 4(a)(8)(i) and (ii) of

this appendix A, are not direct credit

substitutes;

(vii) Clean-up calls on third-party

assets. Clean-up calls that are 10% or

less of the original pool balance and that

are exercisable at the option of the bank

are not direct credit substitutes; and

(viii) Unused portion of noneligible

asset-backed commercial paper liquidity

facilities.

(11) * * *

(vi) Credit derivatives issued that

absorb more than the bank’s pro rata

share of losses from the transferred

assets;

(vii) Clean-up calls. Clean-up calls

that are 10% or less of the original pool

balance and that are exercisable at the

option of the bank are not recourse

arrangements; and

(viii) Noneligible asset-backed

commercial paper liquidity facilities.

I 7. Appendix B to part 3 is amended by

adding a new sentence at the end of

section 2, paragraph (a) to read as

follows:

Appendix B to Part 3—Risk-Based

Capital Guidelines; Market Risk

Adjustment

Section 2. Definitions

t the

option of the bank are not recourse

arrangements; and

(viii) Noneligible asset-backed

commercial paper liquidity facilities.

I 7. Appendix B to part 3 is amended by

adding a new sentence at the end of

section 2, paragraph (a) to read as

follows:

Appendix B to Part 3—Risk-Based

Capital Guidelines; Market Risk

Adjustment

Section 2. Definitions

(a) * * * Asset backed commercial paper

liquidity facilities, in form or in substance, in

a bank’s trading account are excluded from

covered positions, and instead, are subject to

the risk-based capital requirements as

provided in appendix A of this part.

Dated: July 13, 2004.

John D. Hawke, Jr.,

Comptroller of the Currency.

FEDERAL RESERVE SYSTEM

12 CFR Chapter II

Authority and Issuance

I For the reasons set forth in the joint

preamble, the Board of Governors of the

Federal Reserve System amends parts

208 and 225 of chapter II of title 12 of

the Code of Federal Regulations as

follows:

PART 208—MEMBERSHIP OF STATE

BANKING INSTITUTIONS IN THE

FEDERAL RESERVE SYSTEM

(REGULATION H)

I 1. The authority citation for part 208

continues to read as follows:

Authority: 12 U.S.C. 24, 36, 92a, 93a,

248(a), 248(c), 321–338a, 371d, 461, 481–486,

601, 611, 1814, 1816, 1818, 1820(d)(9),

1823(j), 1828(o), 1831, 1831o, 1831p–1,

1831r–1, 1831w, 1831x, 1835a, 1882, 2901–

2907, 3105, 3310, 3331–3351, and 3906–

3909; 15 U.S.C. 78b, 78l(b), 78l(g), 78l(i),

78o–4(c)(5), 78q, 78q–1, and 78w; 31 U.S.C.

5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106,

and 4128.

I 2. In Appendix A to part 208, the

following amendments are made:

I a. Section II.A.1.c. is revised.

I b. Section III.B.3.a., Definitions, is

revised.

I c. Section III.B.6. is revised.

I d. In section III.D—

I i. The third sentence of the

introductory paragraph is revised and

the last sentence is removed.

I ii

q, 78q–1, and 78w; 31 U.S.C.

5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106,

and 4128.

I 2. In Appendix A to part 208, the

following amendments are made:

I a. Section II.A.1.c. is revised.

I b. Section III.B.3.a., Definitions, is

revised.

I c. Section III.B.6. is revised.

I d. In section III.D—

I i. The third sentence of the

introductory paragraph is revised and

the last sentence is removed.

I ii. In paragraph 2., Items with a 50

percent conversion factor, the fourth

undesignated paragraph is removed, the

five remaining undesignated paragraphs

are designated as 2.a. through 2.e., and

the newly designated paragraph 2.c. is

revised.

I iii. Paragraph 4., Items with a zero

percent conversion factor, is

redesignated as paragraph 5. and a new

paragraph 4., Items with a 10 percent

conversion factor, is added.

I iv. The first sentence in redesignated

paragraph 5., Items with a zero percent

conversion factor, is revised.

I v. Footnote 54 is removed and

reserved.

I e. Attachments IV, V, and VI are

removed.

Appendix A To Part 208—Capital

Adequacy Guidelines for State Member

Banks: Risk-Based Measure

II. * * *

A. * * *

1. * * *

c. Minority interest in equity accounts of

consolidated subsidiaries. This element is

included in tier 1 capital because, as a

general rule, it represents equity that is freely

available to absorb losses in operating

subsidiaries whose assets are included in a

bank’s risk-weighted asset base. While not

subject to an explicit sublimit within tier 1,

banks are expected to avoid using minority

interest in the equity accounts of

consolidated subsidiaries as an avenue for

introducing into their capital structures

elements that might not otherwise qualify as

tier 1 capital or that would, in effect, result

in an excessive reliance on preferred stock

within tier 1. Minority interests in small

business investment companies, investment

funds that hold nonfinancial equity

investments (as defined in section II.B.5.b

s of

consolidated subsidiaries as an avenue for

introducing into their capital structures

elements that might not otherwise qualify as

tier 1 capital or that would, in effect, result

in an excessive reliance on preferred stock

within tier 1. Minority interests in small

business investment companies, investment

funds that hold nonfinancial equity

investments (as defined in section II.B.5.b. of

this appendix A), and subsidiaries engaged in

nonfinancial activities, are not included in

the bank’s tier 1 or total capital base if the

bank’s interest in the company or fund is

held under one of the legal authorities listed

in section II.B.5.b. In addition, minority

interests in consolidated asset-backed

commercial paper programs (ABCP) (as

defined in section III.B.6. of this appendix A)

that are sponsored by a bank are not to be

included in the bank’s tier 1 or total capital

base if the bank excludes the consolidated

assets of such programs from risk-weighted

assets pursuant to section III.B.6. of this

appendix.

III. * * *

B. * * *

3. * * *

a. Definitions—i. Credit derivative means a

contract that allows one party (the

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‘‘protection purchaser’’) to transfer the credit

risk of an asset or off-balance sheet credit

exposure to another party (the ‘‘protection

provider’’). The value of a credit derivative

is dependent, at least in part, on the credit

performance of the ‘‘reference asset.’’

ii. Credit-enhancing representations and

warranties means representations and

warranties that are made or assumed in

connection with a transfer of assets

(including loan servicing assets) and that

obligate the bank to protect investors from

losses arising from credit risk in the assets

transferred or the loans serviced

t least in part, on the credit

performance of the ‘‘reference asset.’’

ii. Credit-enhancing representations and

warranties means representations and

warranties that are made or assumed in

connection with a transfer of assets

(including loan servicing assets) and that

obligate the bank to protect investors from

losses arising from credit risk in the assets

transferred or the loans serviced. Credit-

enhancing representations and warranties

include promises to protect a party from

losses resulting from the default or

nonperformance of another party or from an

insufficiency in the value of the collateral.

Credit-enhancing representations and

warranties do not include:

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 government-sponsored enterprise,

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

assets in instances of misrepresentation,

fraud or incomplete documentation.

iii. Direct credit substitute means an

arrangement in which a bank assumes, in

form or in substance, credit risk associated

with an on- or off-balance sheet credit

exposure that was not previously owned by

the bank (third-party asset) and the risk

assumed by the bank exceeds the pro rata

share of the bank’s interest in the third-party

asset. If the bank has no claim on the third-

party asset, then the bank’s assumption of

any credit risk with respect to the third party

asset is a direct credit substitute. Direct credit

substitutes include, but are not limited to:

as not previously owned by

the bank (third-party asset) and the risk

assumed by the bank exceeds the pro rata

share of the bank’s interest in the third-party

asset. If the bank has no claim on the third-

party asset, then the bank’s assumption of

any credit risk with respect to the third party

asset is a direct credit substitute. Direct credit

substitutes include, but are not limited to:

1. Financial standby letters of credit that

support financial claims on a third party that

exceed a bank’s pro rata share of losses in the

financial claim;

2. Guarantees, surety arrangements, credit

derivatives, and similar instruments backing

financial claims that exceed a bank’s pro rata

share in the financial claim;

3. Purchased subordinated interests or

securities that absorb more than their pro rata

share of losses from the underlying assets;

4. Credit derivative contracts under which

the bank assumes more than its pro rata share

of credit risk on a third party exposure;

5. Loans or lines of credit that provide

credit enhancement for the financial

obligations of an account party;

6. Purchased loan servicing assets if the

servicer is responsible for credit losses or if

the servicer makes or assumes credit-

enhancing representations and warranties

with respect to the loans serviced. Mortgage

servicer cash advances that meet the

conditions of section III.B.3.a.viii. of this

appendix are not direct credit substitutes;

7. Clean-up calls on third party assets.

Clean-up calls that are 10 percent or less of

the original pool balance that are exercisable

at the option of the bank are not direct credit

substitutes; and

8. Liquidity facilities that provide liquidity

support to ABCP (other than eligible ABCP

liquidity facilities).

iv. 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

ct credit

substitutes; and

8. Liquidity facilities that provide liquidity

support to ABCP (other than eligible ABCP

liquidity facilities).

iv. 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. In addition, if

the assets that an eligible ABCP liquidity

facility is required to fund against are

externally rated assets or exposures at the

inception of the facility, the facility can be

used to fund only those assets or exposures

that are externally rated investment grade at

the time of funding. Notwithstanding the

eligibility requirements set forth in the two

preceding sentences, a liquidity facility will

be considered an eligible ABCP liquidity

facility if the assets that are funded under the

liquidity facility and which do not meet the

eligibility requirements are guaranteed, either

conditionally or unconditionally, by the U.S.

government or its agencies, or by the central

government of an OECD country.

v. Externally rated means that an

instrument or obligation has received a credit

rating from a nationally recognized statistical

rating organization.

vi. Face amount means the notional

principal, or face value, amount of an off-

balance sheet item; the amortized cost of an

asset not held for trading purposes; and the

fair value of a trading asset.

vii. Financial asset means cash or other

monetary instrument, evidence of debt,

evidence of an ownership interest in an

entity, or a contract that conveys a right to

receive or exchange cash or another financial

instrument from another party.

viii. Financial standby letter of credit

means a letter of credit or similar

arrangement that represents an irrevocable

obligation to a third-party beneficiary:

1. To repay money borrowed by, or

advanced to, or for the account of, a second

party (the account party), or

ty, or a contract that conveys a right to

receive or exchange cash or another financial

instrument from another party.

viii. Financial standby letter of credit

means a letter of credit or similar

arrangement that represents an irrevocable

obligation to a third-party beneficiary:

1. To repay money borrowed by, or

advanced to, or for the account of, a second

party (the account party), or

2. To make payment on behalf of the

account party, in the event that the account

party fails to fulfill its obligation to the

beneficiary.

ix. Liquidity Facility means a legally

binding commitment to provide liquidity

support to ABCP by lending to, or purchasing

assets from, any structure, program, or

conduit in the event that funds are required

to repay maturing ABCP.

x. Mortgage servicer cash advance means

funds that a residential mortgage loan

servicer advances to ensure an uninterrupted

flow of payments, including advances made

to cover foreclosure costs or other expenses

to facilitate the timely collection of the loan.

A mortgage servicer cash advance is not a

recourse obligation or a direct credit

substitute if:

1. The servicer is entitled to full

reimbursement and this right is not

subordinated to other claims on the cash

flows from the underlying asset pool; or

2. For any one loan, the servicer’s

obligation to make nonreimbursable

advances is contractually limited to an

insignificant amount of the outstanding

principal balance of that loan.

xi. Nationally recognized statistical rating

organization (NRSRO) means an entity

recognized by the Division of Market

Regulation of the Securities and Exchange

Commission (or any successor Division)

(Commission) as a nationally recognized

statistical rating organization for various

purposes, including the Commission’s

uniform net capital requirements for brokers

and dealers.

xii

loan.

xi. Nationally recognized statistical rating

organization (NRSRO) means an entity

recognized by the Division of Market

Regulation of the Securities and Exchange

Commission (or any successor Division)

(Commission) as a nationally recognized

statistical rating organization for various

purposes, including the Commission’s

uniform net capital requirements for brokers

and dealers.

xii. Recourse means the retention, by a

bank, in form or in substance, of any credit

risk directly or indirectly associated with an

asset it has transferred and sold that exceeds

a pro rata share of the bank’s claim on the

asset. If a bank has no claim on a transferred

asset, then the retention of any risk of credit

loss is recourse. A recourse obligation

typically arises when a bank transfers assets

and retains an explicit obligation to

repurchase the assets or absorb losses due to

a default on the payment of principal or

interest or any other deficiency in the

performance of the underlying obligor or

some other party. Recourse may also exist

implicitly if a bank provides credit

enhancement beyond any contractual

obligation to support assets it has sold. The

following are examples of recourse

arrangements:

1. Credit-enhancing representations and

warranties made on the transferred assets;

2. Loan servicing assets retained pursuant

to an agreement under which the bank will

be responsible for credit losses associated

with the loans being serviced. Mortgage

servicer cash advances that meet the

conditions of section III.B.3.a.x. of this

appendix are not recourse arrangements;

3. Retained subordinated interests that

absorb more than their pro rata share of

losses from the underlying assets;

4. Assets sold under an agreement to

repurchase, if the assets are not already

included on the balance sheet;

5. Loan strips sold without contractual

recourse where the maturity of the

transferred loan is shorter than the maturity

of the commitment under which the loan is

drawn;

ned subordinated interests that

absorb more than their pro rata share of

losses from the underlying assets;

4. Assets sold under an agreement to

repurchase, if the assets are not already

included on the balance sheet;

5. Loan strips sold without contractual

recourse where the maturity of the

transferred loan is shorter than the maturity

of the commitment under which the loan is

drawn;

6. Credit derivatives issued that absorb

more than the bank’s pro rata share of losses

from the transferred assets;

7. Clean-up calls at inception that are

greater than 10 percent of the balance of the

original pool of transferred loans. Clean-up

calls that are 10 percent or less of the original

pool balance that are exercisable at the

option of the bank are not recourse

arrangements; and

8. Liquidity facilities that provide liquidity

support to ABCP (other than eligible ABCP

liquidity facilities).

xiii. Residual interest means any on-

balance sheet asset that represents an interest

(including a beneficial interest) created by a

transfer that qualifies as a sale (in accordance

with generally accepted accounting

principles) of financial assets, whether

through a securitization or otherwise, and

that exposes the bank to credit risk directly

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47 The sufficiency of collateral and guarantees for

off-balance-sheet items is determined by the market

value of the collateral or the amount of the

guarantee in relation to the face amount of the item,

except for derivative contracts, for which this

determination is generally made in relation to the

credit equivalent amount. Collateral and guarantees

are subject to the same provisions noted under

section III.B of this appendix A.

54 [Reserved]

-balance-sheet items is determined by the market

value of the collateral or the amount of the

guarantee in relation to the face amount of the item,

except for derivative contracts, for which this

determination is generally made in relation to the

credit equivalent amount. Collateral and guarantees

are subject to the same provisions noted under

section III.B of this appendix A.

54 [Reserved].

or indirectly associated with the transferred

assets that exceeds a pro rata share of the

bank’s claim on the assets, whether through

subordination provisions or other credit

enhancement techniques. Residual interests

generally include credit-enhancing I/Os,

spread accounts, cash collateral accounts,

retained subordinated interests, other forms

of over-collateralization, and similar assets

that function as a credit enhancement.

Residual interests further include those

exposures that, in substance, cause the bank

to retain the credit risk of an asset or

exposure that had qualified as a residual

interest before it was sold. Residual interests

generally do not include interests purchased

from a third party, except that purchased

credit-enhancing I/Os are residual interests

for purposes of this appendix.

xiv. Risk participation means a

participation in which the originating party

remains liable to the beneficiary for the full

amount of an obligation (e.g., a direct credit

substitute) notwithstanding that another

party has acquired a participation in that

obligation.

xv. Securitization means the pooling and

repackaging by a special purpose entity of

assets or other credit exposures into

securities that can be sold to investors.

Securitization includes transactions that

create stratified credit risk positions whose

performance is dependent upon an

underlying pool of credit exposures,

including loans and commitments.

xvi

ticipation in that

obligation.

xv. Securitization means the pooling and

repackaging by a special purpose entity of

assets or other credit exposures into

securities that can be sold to investors.

Securitization includes transactions that

create stratified credit risk positions whose

performance is dependent upon an

underlying pool of credit exposures,

including loans and commitments.

xvi. Sponsor means a bank that establishes

an ABCP program; approves the sellers

permitted to participate in the program;

approves the asset pools to be purchased by

the program; or administers the program by

monitoring the assets, arranging for debt

placement, compiling monthly reports, or

ensuring compliance with the program

documents and with the program’s credit and

investment policy.

xvii. Structured finance program means a

program where receivable interests and asset-

backed securities issued by multiple

participants are purchased by a special

purpose entity that repackages those

exposures into securities that can be sold to

investors. Structured finance programs

allocate credit risks, generally, between the

participants and credit enhancement

provided to the program.

xviii. Traded position means a position

that is externally rated and is retained,

assumed, or issued in connection with an

asset securitization, where there is a

reasonable expectation that, in the near

future, the rating will be relied upon by

unaffiliated investors to purchase the

position; or an unaffiliated third party to

enter into a transaction involving the

position, such as a purchase, loan, or

repurchase agreement.

6. Asset-backed commercial paper

programs. a. An asset-backed commercial

paper (ABCP) program means a program that

primarily issues externally rated commercial

paper backed by assets or other exposures

held in a bankruptcy-remote, special purpose

entity.

ated third party to

enter into a transaction involving the

position, such as a purchase, loan, or

repurchase agreement.

6. Asset-backed commercial paper

programs. a. An asset-backed commercial

paper (ABCP) program means a program that

primarily issues externally rated commercial

paper backed by assets or other exposures

held in a bankruptcy-remote, special purpose

entity.

b. A bank that qualifies as a primary

beneficiary and must consolidate an ABCP

program that is defined as a variable interest

entity under GAAP may exclude the

consolidated ABCP program assets from risk-

weighted assets provided that the bank is the

sponsor of the ABCP program. If a bank

excludes such consolidated ABCP program

assets, the bank must assess the appropriate

risk-based capital charge against any

exposures of the bank arising in connection

with such ABCP programs, including direct

credit substitutes, recourse obligations,

residual interests, liquidity facilities, and

loans, in accordance with sections III.B.3.,

III.C., and III.D. of this appendix.

c. If a bank has multiple overlapping

exposures (such as a program-wide credit

enhancement and multiple pool-specific

liquidity facilities) to an ABCP program that

is not consolidated for risk-based capital

purposes, the bank is not required to hold

duplicative risk-based capital under this

appendix against the overlapping position.

Instead, the bank should apply to the

overlapping position the applicable risk-

based capital treatment that results in the

highest capital charge.

III. * * *

D. * * * The resultant credit equivalent

amount is assigned to the appropriate risk

category according to the obligor or, if

relevant, the guarantor, the nature of any

collateral, or external credit ratings.47

2. Items with a 50 percent conversion

factor. * * *

c.i

the applicable risk-

based capital treatment that results in the

highest capital charge.

III. * * *

D. * * * The resultant credit equivalent

amount is assigned to the appropriate risk

category according to the obligor or, if

relevant, the guarantor, the nature of any

collateral, or external credit ratings.47

2. Items with a 50 percent conversion

factor. * * *

c.i. Commitments are defined as any

legally binding arrangements that obligate a

bank to extend credit in the form of loans or

leases; to purchase loans, securities, or other

assets; or to participate in loans and leases.

They also include overdraft facilities,

revolving credit, home equity and mortgage

lines of credit, eligible ABCP liquidity

facilities, and similar transactions. Normally,

commitments involve a written contract or

agreement and a commitment fee, or some

other form of consideration. Commitments

are included in weighted-risk assets

regardless of whether they contain ‘‘material

adverse change’’ clauses or other provisions

that are intended to relieve the issuer of its

funding obligation under certain conditions.

In the case of commitments structured as

syndications, where the bank is obligated

solely for its pro rata share, only the bank’s

proportional share of the syndicated

commitment is taken into account in

calculating the risk-based capital ratio.

ii Banks that are subject to the market risk

rules are required to convert the notional

amount of eligible ABCP liquidity facilities,

in form or in substance, with an original

maturity of over one year that are carried in

the trading account at 50 percent to

determine the appropriate credit equivalent

amount even though those facilities are

structured or characterized as derivatives or

other trading book assets

ct to the market risk

rules are required to convert the notional

amount of eligible ABCP liquidity facilities,

in form or in substance, with an original

maturity of over one year that are carried in

the trading account at 50 percent to

determine the appropriate credit equivalent

amount even though those facilities are

structured or characterized as derivatives or

other trading book assets. Liquidity facilities

that support ABCP, in form or in substance,

(including those positions to which the

market risk rules may not be applied as set

forth in section 2(a) of appendix E to part

208) that are not eligible ABCP liquidity

facilities are to be considered recourse

obligations or direct credit substitutes, and

assessed the appropriate risk-based capital

treatment in accordance with section III.B.3.

of this appendix.

4. Items with a 10 percent conversion

factor. a. Unused portions of eligible ABCP

liquidity facilities with an original maturity

of one year or less are converted at 10

percent.

b. Banks that are subject to the market risk

rules are required to convert the notional

amount of eligible ABCP liquidity facilities,

in form or in substance, with an original

maturity of one year or less that are carried

in the trading account at 10 percent to

determine the appropriate credit equivalent

amount even though those facilities are

structured or characterized as derivatives or

other trading book assets. Liquidity facilities

that support ABCP, in form or in substance,

(including those positions to which the

market risk rules may not be applied as set

forth in section 2(a) of appendix E of this

part) that are not eligible ABCP liquidity

facilities are to be considered recourse

obligations or direct credit substitutes and

assessed the appropriate risk-based capital

requirement in accordance with section

III.B.3. of this appendix.

form or in substance,

(including those positions to which the

market risk rules may not be applied as set

forth in section 2(a) of appendix E of this

part) that are not eligible ABCP liquidity

facilities are to be considered recourse

obligations or direct credit substitutes and

assessed the appropriate risk-based capital

requirement in accordance with section

III.B.3. of this appendix.

5. * * * These include unused portions of

commitments (with the exception of eligible

ABCP liquidity facilities) with an original

maturity of one year or less,54 or which are

unconditionally cancelable at any time,

provided a separate credit decision is made

before each drawing under the facility. * * *

I 3. Amend Appendix E to part 208 by

adding two new sentences at the end of

section 2(a) to read as follows:

Appendix E to Part 208—Capital

Adequacy Guidelines for State Member

Banks; Market Risk Measure

Section 2. Definitions * * *

(a) * * * Covered positions exclude all

positions in a bank’s trading account that, in

form or in substance, act as liquidity facilities

that provide liquidity support to asset-backed

commercial paper. Such excluded positions

are subject to the risk-based capital

requirements set forth in appendix A of this

part.

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Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations

PART 225—BANK HOLDING

COMPANIES AND CHANGE IN BANK

CONTROL (REGULATION Y)

I 1. The authority citation for part 225

continues to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818,

1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b),

1972(1), 3106, 3108, 3310, 3331–3351, 3907,

and 3909; 15 U.S.C. 6801 and 6805.

I 2. In Appendix A to part 225, the

following amendments are made:

I a. Section II.A.1.c. is revised.

I b. Section III.B.3.a., Definitions, is

revised.

I c. Section III.B.6. is revised.

I d

part 225

continues to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818,

1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b),

1972(1), 3106, 3108, 3310, 3331–3351, 3907,

and 3909; 15 U.S.C. 6801 and 6805.

I 2. In Appendix A to part 225, the

following amendments are made:

I a. Section II.A.1.c. is revised.

I b. Section III.B.3.a., Definitions, is

revised.

I c. Section III.B.6. is revised.

I d. In section III.D—

I i. The third sentence of the

introductory paragraph is revised and

the last sentence is removed.

I ii. In paragraph 2., Items with a 50

percent conversion factor, the fourth

undesignated paragraph is removed, the

five remaining undesignated paragraphs

are designated as 2.a. through 2.e., and

the newly designated paragraph 2.c. is

revised.

I iii. Paragraph 4, Items with a zero

percent conversion factor, is

redesignated as paragraph 5. and a new

paragraph 4. is added.

I iv. The first sentence is redesignated

paragraph 5., Items with a zero percent

conversion factor, is revised.

d. Attachments IV, V, and VI are removed.

Appendix A to Part 225—Capital Adequacy

Guidelines for Bank Holding Companies:

Risk-Based Measure

II. * * *

A. * * *

1. * * *

c. Minority interest in equity accounts of

consolidated subsidiaries. This element is

included in tier 1 capital because, as a

general rule, it represents equity that is freely

available to absorb losses in operating

subsidiaries whose assets are included in a

banking organization’s risk-weighted asset

base. While not subject to an explicit

sublimit within tier 1, banking organizations

are expected to avoid using minority interest

in the equity accounts of consolidated

subsidiaries as an avenue for introducing into

their capital structures elements that might

not otherwise qualify as tier 1 capital or that

would, in effect, result in an excessive

reliance on preferred stock within tier 1

base. While not subject to an explicit

sublimit within tier 1, banking organizations

are expected to avoid using minority interest

in the equity accounts of consolidated

subsidiaries as an avenue for introducing into

their capital structures elements that might

not otherwise qualify as tier 1 capital or that

would, in effect, result in an excessive

reliance on preferred stock within tier 1.

Minority interests in small business

investment companies, investment funds that

hold nonfinancial equity investments (as

defined in section II.B.5.b. of this appendix

A), and subsidiaries engaged in nonfinancial

activities are not included in the banking

organization’s tier 1 or total capital base if the

organization’s interest in the company or

fund is held under one of the legal

authorities listed in section II.B.5.b. In

addition, minority interests in consolidated

asset-backed commercial paper programs

(ABCP) (as defined in section III.B.6. of this

appendix A) that are sponsored by a banking

organization are not to be included in the

organization’s tier 1 or total capital base if the

bank holding company excludes the

consolidated assets of such programs from

risk-weighted assets pursuant to section

III.B.6. of this appendix.

III. * * *

B. * * *

3. * * *

a. Definitions—i. Credit derivative means a

contract that allows one party (the

‘‘protection purchaser’’) to transfer the credit

risk of an asset or off-balance sheet credit

exposure to another party (the ‘‘protection

provider’’). The value of a credit derivative

is dependent, at least in part, on the credit

performance of the ‘‘reference asset.’’

ii. Credit-enhancing representations and

warranties means representations and

warranties that are made or assumed in

connection with a transfer of assets

(including loan servicing assets) and that

obligate the bank holding company to protect

investors from losses arising from credit risk

in the assets transferred or the loans serviced

on the credit

performance of the ‘‘reference asset.’’

ii. Credit-enhancing representations and

warranties means representations and

warranties that are made or assumed in

connection with a transfer of assets

(including loan servicing assets) and that

obligate the bank holding company to protect

investors from losses arising from credit risk

in the assets transferred or the loans serviced.

Credit-enhancing representations and

warranties include promises to protect a

party from losses resulting from the default

or nonperformance of another party or from

an insufficiency in the value of the collateral.

Credit-enhancing representations and

warranties do not include:

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 government-sponsored enterprise,

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

assets in instances of misrepresentation,

fraud or incomplete documentation.

iii. Direct credit substitute means an

arrangement in which a bank holding

company assumes, in form or in substance,

credit risk associated with an on- or off-

balance sheet credit exposure that was not

previously owned by the bank holding

company (third-party asset) and the risk

assumed by the bank holding company

exceeds the pro rata share of the bank

holding company’s interest in the third-party

asset

it substitute means an

arrangement in which a bank holding

company assumes, in form or in substance,

credit risk associated with an on- or off-

balance sheet credit exposure that was not

previously owned by the bank holding

company (third-party asset) and the risk

assumed by the bank holding company

exceeds the pro rata share of the bank

holding company’s interest in the third-party

asset. If the bank holding company has no

claim on the third-party asset, then the bank

holding company’s assumption of any credit

risk with respect to the third party asset is

a direct credit substitute. Direct credit

substitutes include, but are not limited to:

1. Financial standby letters of credit that

support financial claims on a third party that

exceed a bank holding company’s pro rata

share of losses in the financial claim;

2. Guarantees, surety arrangements, credit

derivatives, and similar instruments backing

financial claims that exceed a bank holding

company’s pro rata share in the financial

claim;

3. Purchased subordinated interests or

securities that absorb more than their pro rata

share of losses from the underlying assets;

4. Credit derivative contracts under which

the bank holding company assumes more

than its pro rata share of credit risk on a third

party exposure;

5. Loans or lines of credit that provide

credit enhancement for the financial

obligations of an account party;

6. Purchased loan servicing assets if the

servicer is responsible for credit losses or if

the servicer makes or assumes credit-

enhancing representations and warranties

with respect to the loans serviced. Mortgage

servicer cash advances that meet the

conditions of section III.B.3.a.viii. of this

appendix are not direct credit substitutes;

7. Clean-up calls on third party assets.

Clean-up calls that are 10 percent or less of

the original pool balance that are exercisable

at the option of the bank holding company

are not direct credit substitutes; and

with respect to the loans serviced. Mortgage

servicer cash advances that meet the

conditions of section III.B.3.a.viii. of this

appendix are not direct credit substitutes;

7. Clean-up calls on third party assets.

Clean-up calls that are 10 percent or less of

the original pool balance that are exercisable

at the option of the bank holding company

are not direct credit substitutes; and

8. Liquidity facilities that provide liquidity

support to ABCP (other than eligible ABCP

liquidity facilities).

iv. 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. In addition, if

the assets that an eligible ABCP liquidity

facility is required to fund against are

externally rated assets or exposures at the

inception of the facility, the facility can be

used to fund only those assets or exposures

that are externally rated investment grade at

the time of funding. Notwithstanding the

eligibility requirements set forth in the two

preceding sentences, a liquidity facility will

be considered an eligible ABCP liquidity

facility if the assets that are funded under the

liquidity facility and which do not meet the

eligibility requirements are guaranteed, either

conditionally or unconditionally, by the U.S.

government or its agencies, or by the central

government of an OECD country.

v. Externally rated means that an

instrument or obligation has received a credit

rating from a nationally recognized statistical

rating organization.

vi. Face amount means the notional

principal, or face value, amount of an off-

balance sheet item; the amortized cost of an

asset not held for trading purposes; and the

fair value of a trading asset.

vii

ntral

government of an OECD country.

v. Externally rated means that an

instrument or obligation has received a credit

rating from a nationally recognized statistical

rating organization.

vi. Face amount means the notional

principal, or face value, amount of an off-

balance sheet item; the amortized cost of an

asset not held for trading purposes; and the

fair value of a trading asset.

vii. Financial asset means cash or other

monetary instrument, evidence of debt,

evidence of an ownership interest in an

entity, or a contract that conveys a right to

receive or exchange cash or another financial

instrument from another party.

viii. Financial standby letter of credit

means a letter of credit or similar

arrangement that represents an irrevocable

obligation to a third-party beneficiary:

1. To repay money borrowed by, or

advanced to, or for the account of, a second

party (the account party), or

2. To make payment on behalf of the

account party, in the event that the account

party fails to fulfill its obligation to the

beneficiary.

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51 The sufficiency of collateral and guarantees for

off-balance-sheet items is determined by the market

value of the collateral or the amount of the

guarantee in relation to the face amount of the item,

except for derivative contracts, for which this

determination is generally made in relation to the

credit equivalent amount. Collateral and guarantees

are subject to the same provisions noted under

section III.B of this appendix A.

ix. Liquidity Facility means a legally

binding commitment to provide liquidity

support to ABCP by lending to, or purchasing

assets from, any structure, program, or

conduit in the event that funds are required

to repay maturing ABCP.

made in relation to the

credit equivalent amount. Collateral and guarantees

are subject to the same provisions noted under

section III.B of this appendix A.

ix. Liquidity Facility means a legally

binding commitment to provide liquidity

support to ABCP by lending to, or purchasing

assets from, any structure, program, or

conduit in the event that funds are required

to repay maturing ABCP.

x. Mortgage servicer cash advance means

funds that a residential mortgage loan

servicer advances to ensure an uninterrupted

flow of payments, including advances made

to cover foreclosure costs or other expenses

to facilitate the timely collection of the loan.

A mortgage servicer cash advance is not a

recourse obligation or a direct credit

substitute if:

1. The servicer is entitled to full

reimbursement and this right is not

subordinated to other claims on the cash

flows from the underlying asset pool; or

2. For any one loan, the servicer’s

obligation to make nonreimbursable

advances is contractually limited to an

insignificant amount of the outstanding

principal balance of that loan.

xi. Nationally recognized statistical rating

organization (NRSRO) means an entity

recognized by the Division of Market

Regulation of the Securities and Exchange

Commission (or any successor Division)

(Commission) as a nationally recognized

statistical rating organization for various

purposes, including the Commission’s

uniform net capital requirements for brokers

and dealers.

xii. Recourse means the retention, by a

bank holding company, in form or in

substance, of any credit risk directly or

indirectly associated with an asset it has

transferred and sold that exceeds a pro rata

share of the banking organization’s claim on

the asset. If a banking organization has no

claim on a transferred asset, then the

retention of any risk of credit loss is recourse

dealers.

xii. Recourse means the retention, by a

bank holding company, in form or in

substance, of any credit risk directly or

indirectly associated with an asset it has

transferred and sold that exceeds a pro rata

share of the banking organization’s claim on

the asset. If a banking organization has no

claim on a transferred asset, then the

retention of any risk of credit loss is recourse.

A recourse obligation typically arises when a

bank holding company transfers assets and

retains an explicit obligation to repurchase

the assets or absorb losses due to a default

on the payment of principal or interest or any

other deficiency in the performance of the

underlying obligor or some other party.

Recourse may also exist implicitly if a bank

holding company provides credit

enhancement beyond any contractual

obligation to support assets it has sold. The

following are examples of recourse

arrangements:

1. Credit-enhancing representations and

warranties made on the transferred assets;

2. Loan servicing assets retained pursuant

to an agreement under which the bank

holding company will be responsible for

credit losses associated with the loans being

serviced. Mortgage servicer cash advances

that meet the conditions of section III.B.3.a.x.

of this appendix are not recourse

arrangements;

3. Retained subordinated interests that

absorb more than their pro rata share of

losses from the underlying assets;

4. Assets sold under an agreement to

repurchase, if the assets are not already

included on the balance sheet;

5. Loan strips sold without contractual

recourse where the maturity of the

transferred loan is shorter than the maturity

of the commitment under which the loan is

drawn;

6. Credit derivatives issued that absorb

more than the bank holding company’s pro

rata share of losses from the transferred

assets;

7. Clean-up calls at inception that are

greater than 10 percent of the balance of the

original pool of transferred loans

actual

recourse where the maturity of the

transferred loan is shorter than the maturity

of the commitment under which the loan is

drawn;

6. Credit derivatives issued that absorb

more than the bank holding company’s pro

rata share of losses from the transferred

assets;

7. Clean-up calls at inception that are

greater than 10 percent of the balance of the

original pool of transferred loans. Clean-up

calls that are 10 percent or less of the original

pool balance that are exercisable at the

option of the bank holding company are not

recourse arrangements; and

8. Liquidity facilities that provide liquidity

support to ABCP (other than eligible ABCP

liquidity facilities).

xiii. Residual interest means any on-

balance sheet asset that represents an interest

(including a beneficial interest) created by a

transfer that qualifies as a sale (in accordance

with generally accepted accounting

principles) of financial assets, whether

through a securitization or otherwise, and

that exposes the bank holding company to

credit risk directly or indirectly associated

with the transferred assets that exceeds a pro

rata share of the bank holding company’s

claim on the assets, whether through

subordination provisions or other credit

enhancement techniques. Residual interests

generally include credit-enhancing I/Os,

spread accounts, cash collateral accounts,

retained subordinated interests, other forms

of over-collateralization, and similar assets

that function as a credit enhancement.

Residual interests further include those

exposures that, in substance, cause the bank

holding company to retain the credit risk of

an asset or exposure that had qualified as a

residual interest before it was sold. Residual

interests generally do not include interests

purchased from a third party, except that

purchased credit-enhancing I/Os are residual

interests for purposes of this appendix.

xiv

interests further include those

exposures that, in substance, cause the bank

holding company to retain the credit risk of

an asset or exposure that had qualified as a

residual interest before it was sold. Residual

interests generally do not include interests

purchased from a third party, except that

purchased credit-enhancing I/Os are residual

interests for purposes of this appendix.

xiv. Risk participation means a

participation in which the originating party

remains liable to the beneficiary for the full

amount of an obligation (e.g., a direct credit

substitute) notwithstanding that another

party has acquired a participation in that

obligation.

xv. Securitization means the pooling and

repackaging by a special purpose entity of

assets or other credit exposures into

securities that can be sold to investors.

Securitization includes transactions that

create stratified credit risk positions whose

performance is dependent upon an

underlying pool of credit exposures,

including loans and commitments.

xvi. Sponsor means a bank holding

company that establishes an ABCP program;

approves the sellers permitted to participate

in the program; approves the asset pools to

be purchased by the program; or administers

the program by monitoring the assets,

arranging for debt placement, compiling

monthly reports, or ensuring compliance

with the program documents and with the

program’s credit and investment policy.

xvii. Structured finance program means a

program where receivable interests and asset-

backed securities issued by multiple

participants are purchased by a special

purpose entity that repackages those

exposures into securities that can be sold to

investors. Structured finance programs

allocate credit risks, generally, between the

participants and credit enhancement

provided to the program.

xviii

tructured finance program means a

program where receivable interests and asset-

backed securities issued by multiple

participants are purchased by a special

purpose entity that repackages those

exposures into securities that can be sold to

investors. Structured finance programs

allocate credit risks, generally, between the

participants and credit enhancement

provided to the program.

xviii. Traded position means a position

that is externally rated and is retained,

assumed, or issued in connection with an

asset securitization, where there is a

reasonable expectation that, in the near

future, the rating will be relied upon by

unaffiliated investors to purchase the

position; or an unaffiliated third party to

enter into a transaction involving the

position, such as a purchase, loan, or

repurchase agreement.

6. Asset-backed commercial paper

programs. a. An asset-backed commercial

paper (ABCP) program means a program that

primarily issues externally rated commercial

paper backed by assets or exposures held in

a bankruptcy-remote, special purpose entity.

b. A bank holding company that qualifies

as a primary beneficiary and must

consolidate an ABCP program that is defined

as a variable interest entity under GAAP may

exclude the consolidated ABCP program

assets from risk-weighted assets provided

that the bank holding company is the sponsor

of the ABCP program. If a bank holding

company excludes such consolidated ABCP

program assets, the bank holding company

must assess the appropriate risk-based capital

charge against any exposures of the

organization arising in connection with such

ABCP programs, including direct credit

substitutes, recourse obligations, residual

interests, liquidity facilities, and loans, in

accordance with sections III.B.3., III.C., and

III.D. of this appendix.

consolidated ABCP

program assets, the bank holding company

must assess the appropriate risk-based capital

charge against any exposures of the

organization arising in connection with such

ABCP programs, including direct credit

substitutes, recourse obligations, residual

interests, liquidity facilities, and loans, in

accordance with sections III.B.3., III.C., and

III.D. of this appendix.

c. If a bank holding company has multiple

overlapping exposures (such as a program-

wide credit enhancement and multiple pool-

specific liquidity facilities) to an ABCP

program that is not consolidated for risk-

based capital purposes, the bank holding

company is not required to hold duplicative

risk-based capital under this appendix

against the overlapping position. Instead, the

bank holding company should apply to the

overlapping position the applicable risk-

based capital treatment that results in the

highest capital charge.

III. * * *

D. * * * The resultant credit equivalent

amount is assigned to the appropriate risk

category according to the obligor or, if

relevant, the guarantor, the nature of any

collateral, or external credit ratings.51

2. Items with a 50 percent conversion

factor. * * *

c.i. Commitments are defined as any

legally binding arrangements that obligate a

banking organization to extend credit in the

form of loans or leases; to purchase loans,

securities, or other assets; or to participate in

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2. Items with a 50 percent conversion

factor. * * *

c.i. Commitments are defined as any

legally binding arrangements that obligate a

banking organization to extend credit in the

form of loans or leases; to purchase loans,

securities, or other assets; or to participate in

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Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations

2 Preferred stock issues where the dividend is

reset periodically based, in whole or in part, upon

the bank’s current credit standing, including but not

limited to, auction rate, money market or

remarketable preferred stock, are assigned to Tier 2

capital, regardless of whether the dividends are

cumultive or noncumulative.

3 An exception is allowed for intanglble assets

that are explicitly approved by the FDIC as part of

the bank’s regulatory capital on a specific case

basis. These intangibles will be included in capital

for risk-based capital purposes under the terms and

conditions that are specifically approved by the

FDIC.

loans and leases. They also include overdraft

facilities, revolving credit, home equity and

mortgage lines of credit, eligible ABCP

liquidity facilities, and similar transactions.

Normally, commitments involve a written

contract or agreement and a commitment fee,

or some other form of consideration.

Commitments are included in weighted-risk

assets regardless of whether they contain

‘‘material adverse change’’ clauses or other

provisions that are intended to relieve the

issuer of its funding obligation under certain

conditions. In the case of commitments

structured as syndications, where the

banking organization is obligated solely for

its pro rata share, only the organization’s

proportional share of the syndicated

commitment is taken into account in

calculating the risk-based capital ratio.

lauses or other

provisions that are intended to relieve the

issuer of its funding obligation under certain

conditions. In the case of commitments

structured as syndications, where the

banking organization is obligated solely for

its pro rata share, only the organization’s

proportional share of the syndicated

commitment is taken into account in

calculating the risk-based capital ratio.

ii. Banking organizations that are subject to

the market risk rules are required to convert

the notional amount of eligible ABCP

liquidity facilities, in form or in substance,

with an original maturity of over one year

that are carried in the trading account at 50

percent to determine the appropriate credit

equivalent amount even though those

facilities are structured or characterized as

derivatives or other trading book assets.

Liquidity facilities that support ABCP, in

form or in substance, (including those

positions to which the market risk rules may

not be applied as set forth in section 2(a) of

appendix E of this part) that are not eligible

ABCP liquidity facilities are to be considered

recourse obligations or direct credit

substitutes, and assessed the appropriate

risk-based capital treatment in accordance

with section III.B.3. of this appendix.

4. Items with a 10 percent conversion

factor. a. Unused portions of eligible ABCP

liquidity facilities with an original maturity

of one year or less also are converted at 10

percent.

b. Banking organizations that are subject to

the market risk rules are required to convert

the notional amount of eligible ABCP

liquidity facilities, in form or in substance,

with an original maturity of one year or less

that are carried in the trading account at 10

percent to determine the appropriate credit

equivalent amount even though those

facilities are structured or characterized as

derivatives or other trading book assets

the market risk rules are required to convert

the notional amount of eligible ABCP

liquidity facilities, in form or in substance,

with an original maturity of one year or less

that are carried in the trading account at 10

percent to determine the appropriate credit

equivalent amount even though those

facilities are structured or characterized as

derivatives or other trading book assets.

Liquidity facilities that support ABCP, in

form or in substance, (including those

positions to which the market risk rules may

not be applied as set forth in section 2(a) of

appendix E of this part) that are not eligible

ABCP liquidity facilities are to be considered

recourse obligations or direct credit

substitutes and assessed the appropriate risk-

based capital requirement in accordance with

section III.B.3. of this appendix.

5. * * * These include unused portions of

commitments (with the exception of eligible

ABCP liquidity facilities) with an original

maturity of one year or less, or which are

unconditionally cancelable at any time,

provided a separate credit decision is made

before each drawing under the facility. * * *

I 3. Amend Appendix E to part 225 by

adding two new sentences at the end of

section 2(a) to read as follows:

Appendix E To Part 225—Capital

Adequacy Guidelines for Bank Holding

Companies; Market Risk Measure

Section 2. Definitions * * *

(a) * * * Covered positions exclude

all positions in a banking organization’s

trading account that, in form or in

substance, act as liquidity facilities that

provide liquidity support to asset-

backed commercial paper. Such

excluded positions are subject to the

risk-based capital requirements set forth

in appendix A of this part.

By order of the Board of Governors of the

Federal Reserve System, July 19, 2004.

Jennifer J. Johnson,

Secretary of the Board

trading account that, in form or in

substance, act as liquidity facilities that

provide liquidity support to asset-

backed commercial paper. Such

excluded positions are subject to the

risk-based capital requirements set forth

in appendix A of this part.

By order of the Board of Governors of the

Federal Reserve System, July 19, 2004.

Jennifer J. Johnson,

Secretary of the Board.

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Chapter III

Authority and Issuance

I For the reasons set forth in the joint

preamble, the Board of Directors of the

Federal Deposit Insurance Corporation

amends part 325 of chapter III of title 12

of the Code of Federal Regulations as

follows:

PART 325—CAPITAL MAINTENANCE

I 1. The authority citation for part 325

continues to read as follows:

Authority: 12 U.S.C. 1815(a), 1815(b),

1816, 1818(a), 1818(b), 1818(c), 1818(t),

1819(Tenth), 1828(c), 1828(d), 1828(i),

1828(n), 1828(o), 1831o, 1835, 3907, 3909,

4808; Pub. L. 102–233, 105 Stat. 1761, 1789,

1790 (12 U.S.C. 1831n note); Pub. L. 102–

242, 105 Stat. 2236, 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).

I 2. In Appendix A to part 325, the

following amendments are made:

I a. Section I.A.1. is revised.

I b. Section II.B.5(a), Definitions, is

revised.

I c. Section II.B.6. is revised.

I d. In section II.D—

I i. The third sentence of the

introductory paragraph is revised and

the last sentence is removed;

I ii. In paragraph 2., Items With a 50

Percent Conversion Factor, the five

undesignated paragraphs are designated

as 2.a. through 2.e., the newly designated

paragraph 2.c. is revised, and the second

sentence of the newly designated

paragraph 2.d. is revised;

I iii. Paragraph 4., Items With a Zero

Percent Conversion Factor, is

redesignated as paragraph 5. and a new

paragraph 4., Items With a 10 Percent

Conversion Factor, is added; and

I iv

ersion Factor, the five

undesignated paragraphs are designated

as 2.a. through 2.e., the newly designated

paragraph 2.c. is revised, and the second

sentence of the newly designated

paragraph 2.d. is revised;

I iii. Paragraph 4., Items With a Zero

Percent Conversion Factor, is

redesignated as paragraph 5. and a new

paragraph 4., Items With a 10 Percent

Conversion Factor, is added; and

I iv. The first sentence in redesignated

paragraph 5., Items With a Zero Percent

Conversion Factor, is revised.

I e. Tables III and IV are removed.

Appendix A To Part 325—Statement of

Policy on Risk-Based Capital

I. * * *

A.* * *

1. Core capital elements (Tier 1) consists

of:

i. Common stockholders’ equity capital

(includes common stock and related surplus,

undivided profits, disclosed capital reserves

that represent a segregation of undivided

profits, and foreign currency translation

adjustments, less net unrealized holding

losses on available-for-sale equity securities

with readily determinable fair values);

ii. Noncumulative perpetual preferred

stock,2 including any related surplus; and

iii. Minority interests in the equity capital

accounts of consolidated subsidiaries.

(a) At least 50 percent of the qualifying

total capital base should consist of Tier 1

capital. Core (Tier 1) capital is defined as the

sum of core capital elements minus all

intangible assets (other than mortgage

servicing assets, nonmortgage servicing assets

and purchased credit card relationships

eligible for inclusion in core capital pursuant

to § 325.5(f)),3 minus credit-enhancing

interest-only strips that are not eligible for

inclusion in core capital pursuant to

§ 325.5(f), minus any disallowed deferred tax

assets, and minus any amount of

nonfinancial equity investments required to

be deducted pursuant to section II.B.(6) of

this Appendix.

d purchased credit card relationships

eligible for inclusion in core capital pursuant

to § 325.5(f)),3 minus credit-enhancing

interest-only strips that are not eligible for

inclusion in core capital pursuant to

§ 325.5(f), minus any disallowed deferred tax

assets, and minus any amount of

nonfinancial equity investments required to

be deducted pursuant to section II.B.(6) of

this Appendix.

(b) Although nonvoting common stock,

noncumulative perpetual preferred stock,

and minority interests in the equity capital

accounts of consolidated subsidiaries are

normally included in Tier 1 capital, voting

common stockholders’ equity generally will

be expected to be the dominant form of Tier

1 capital. Thus, banks should avoid undue

reliance on nonvoting equity, preferred stock

and minority interests.

consolidated subsidiaries are generally

included in regulatory capital, exceptions to

this general rule will be made if the minority

interests fail to provide meaningful capital

support to the consolidated bank. Such a

situation could arise if the minority interests

are entitled to a preferred claim on

essentially low risk assets of the subsidiary.

Similarly, although credit-enhancing interest-

only strips and intangible assets in the form

of mortgage servicing assets, nonmortgage

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ank. Such a

situation could arise if the minority interests

are entitled to a preferred claim on

essentially low risk assets of the subsidiary.

Similarly, although credit-enhancing interest-

only strips and intangible assets in the form

of mortgage servicing assets, nonmortgage

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Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations

servicing assets and purchased credit card

relationships are generally recognized for

risk-based capital purposes, the deduction of

part or all of the credit-enhancing interest-

only strips, mortgage servicing assets,

nonmortgage servicing assets and purchased

credit card relationships may be required if

the carrying amounts of these assets are

excessive in relation to their market value or

the level of the bank’s capital accounts.

Credit-enhancing interest-only strips,

mortgage servicing assets, nonmortgage

servicing assets, purchased credit card

relationships and deferred tax assets that do

not meet the conditions, limitations and

restrictions described in § 325.5(f) and (g) of

this part will not be recognized for risk-based

capital purposes.

(d) Minority interests in small business

investment companies, investment funds that

hold nonfinancial equity investments (as

defined in section II.B.(6)(ii) of this appendix

A), and subsidiaries that are engaged in

nonfinancial activities are not included in

the bank’s Tier 1 or total capital base if the

bank’s interest in the company or fund is

held under one of the legal authorities listed

in section II.B.(6)(ii) of this appendix A. In

addition, minority interests in consolidated

asset-backed commercial paper programs

(ABCP) that are sponsored by a bank are not

to be included in the bank’s Tier 1 or total

capital base if the bank excludes the

consolidated assets of such programs from

risk-weighted assets pursuant to section

II.B.6. of this appendix

legal authorities listed

in section II.B.(6)(ii) of this appendix A. In

addition, minority interests in consolidated

asset-backed commercial paper programs

(ABCP) that are sponsored by a bank are not

to be included in the bank’s Tier 1 or total

capital base if the bank excludes the

consolidated assets of such programs from

risk-weighted assets pursuant to section

II.B.6. of this appendix.

II. * * *

B. * * *

5. * * *

a. Definitions—(1) Credit derivative means

a contract that allows one party (the

‘‘protection purchaser’’) to transfer the credit

risk of an asset or off-balance sheet credit

exposure to another party (the ‘‘protection

provider’’). The value of a credit derivative

is dependent, at least in part, on the credit

performance of the ‘‘reference asset.’’

(2) Credit-enhancing interest only strip is

defined in § 325.2(g).

(3) Credit-enhancing representations and

warranties means representations and

warranties that are made or assumed in

connection with a transfer of assets

(including loan servicing assets) and that

obligate the bank to protect investors from

losses arising from credit risk in the assets

transferred or the loans serviced. Credit-

enhancing representations and warranties

include promises to protect a party from

losses resulting from the default or

nonperformance of another party or from an

insufficiency in the value of the collateral.

Credit-enhancing representations and

warranties do not include:

bank to protect investors from

losses arising from credit risk in the assets

transferred or the loans serviced. Credit-

enhancing representations and warranties

include promises to protect a party from

losses resulting from the default or

nonperformance of another party or from an

insufficiency in the value of the collateral.

Credit-enhancing representations and

warranties do not include:

(i) Early default clauses and similar

warranties that permit the return of, or

premium refund clauses covering, 1–4 family

residential first mortgage loans 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;

(ii) Premium refund clauses that cover

assets guaranteed, in whole or in part, by the

U.S. Government, a U.S. Government agency

or a government-sponsored enterprise,

provided the premium refund clauses are for

a period not to exceed 120 days from the date

of transfer; or

(iii) Warranties that permit the return of

assets in instances of misrepresentation,

fraud or incomplete documentation.

(4) Direct credit substitute means an

arrangement in which a bank assumes, in

form or in substance, credit risk associated

with an on-or off-balance sheet credit

exposure that was not previously owned by

the bank (third-party asset) and the risk

assumed by the bank exceeds the pro rata

share of the bank’s interest in the third-party

asset. If the bank has no claim on the third-

party asset, then the bank’s assumption of

any credit risk with respect to the third party

asset is a direct credit substitute. Direct credit

substitutes include, but are not limited to:

was not previously owned by

the bank (third-party asset) and the risk

assumed by the bank exceeds the pro rata

share of the bank’s interest in the third-party

asset. If the bank has no claim on the third-

party asset, then the bank’s assumption of

any credit risk with respect to the third party

asset is a direct credit substitute. Direct credit

substitutes include, but are not limited to:

(i) Financial standby letters of credit,

which includes any letter of credit or similar

arrangement, however named or described,

that support financial claims on a third party

that exceed a bank’s pro rata share of losses

in the financial claim;

(ii) Guarantees, surety arrangements, credit

derivatives, and similar instruments backing

financial claims;

(iii) Purchased subordinated interests or

securities that absorb more than their pro

rata share of credit losses from the

underlying assets;

(iv) Credit derivative contracts under

which the bank assumes more than its pro

rata share of credit risk on a third party asset

or exposure;

(v) Loans or lines of credit that provide

credit enhancement for the financial

obligations of an account party;

(vi) Purchased loan servicing assets if the

servicer:

(A) Is responsible for credit losses with the

loans being serviced,

(B) Is responsible for making servicer cash

advances (unless the advances are not direct

credit substitutes because they meet the

conditions specified in section II.B.5(a)(9) of

this Appendix A), or

representations and warranties with respect

to the loans serviced;

(vii) Clean-up calls on third party assets.

Clean-up calls that are exercisable at the

option of the bank (as servicer or as an

affiliate of the servicer) when the pool

balance is 10 percent or less of the original

pool balance are not direct credit substitutes;

and

(viii) Liquidity facilities that provide

liquidity support to ABCP (other than eligible

ABCP liquidity facilities).

viced;

(vii) Clean-up calls on third party assets.

Clean-up calls that are exercisable at the

option of the bank (as servicer or as an

affiliate of the servicer) when the pool

balance is 10 percent or less of the original

pool balance are not direct credit substitutes;

and

(viii) Liquidity facilities that provide

liquidity support to ABCP (other than eligible

ABCP liquidity facilities).

(5) 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. In addition, if

the assets that an eligible ABCP liquidity

facility is required to fund against are

externally rated assets or exposures at the

inception of the facility, the facility can be

used to fund only those assets or exposures

that are externally rated investment grade at

the time of funding. Notwithstanding the

eligibility requirements set forth in the two

preceding sentences, a liquidity facility will

be considered an eligible ABCP liquidity

facility if the assets that are funded under the

liquidity facility and which do not meet the

eligibility requirements are guaranteed, either

conditionally or unconditionally, by the U.S.

government or its agencies, or by the central

government of an OECD country.

(6) Externally rated means that an

instrument or obligation has received a credit

rating from a nationally recognized statistical

rating organization.

(7) Face amount means the notional

principal, or face value, amount of an off-

balance sheet item; the amortized cost of an

asset not held for trading purposes; and the

fair value of a trading asset.

(8) Financial asset means cash or other

monetary instrument, evidence of debt,

evidence of an ownership interest in an

entity, or a contract that conveys a right to

receive or exchange cash or another financial

instrument from another party.

ace value, amount of an off-

balance sheet item; the amortized cost of an

asset not held for trading purposes; and the

fair value of a trading asset.

(8) Financial asset means cash or other

monetary instrument, evidence of debt,

evidence of an ownership interest in an

entity, or a contract that conveys a right to

receive or exchange cash or another financial

instrument from another party.

(9) Financial standby letter of credit means

a letter of credit or similar arrangement that

represents an irrevocable obligation to a

third-party beneficiary:

(i) To receive money borrowed by, or

advanced to, or advanced to, or for the

account of, a second party (the account

party), or

(ii) To make payment on behalf of the

account party, in the event that the account

party fails to fulfill its obligation to the

beneficiary.

(10) Liquidity facility means a legally

binding commitment to provide liquidity

support to ABCP by lending to, or purchasing

assets from, any structure, program, or

conduit in the event that funds are required

to repay maturing ABCP.

(11) Mortgage servicer cash advance means

funds that a residential mortgage servicer

advances to ensure an uninterrupted flow of

payments, including advances made to cover

foreclosure costs or other expenses to

facilitate the timely collection of the loan. A

mortgage servicer cash advance is not a

recourse obligation or a direct credit

substitute if:

are required

to repay maturing ABCP.

(11) Mortgage servicer cash advance means

funds that a residential mortgage servicer

advances to ensure an uninterrupted flow of

payments, including advances made to cover

foreclosure costs or other expenses to

facilitate the timely collection of the loan. A

mortgage servicer cash advance is not a

recourse obligation or a direct credit

substitute if:

(i) The mortgage servicer is entitled to full

reimbursement and this right is not

subordinated to other claims on the cash

flows from the underlying asset pool; or

(ii) For any one loan, the servicer’s

obligation to make nonreimbursable

advances is contractually limited to an

insignificant amount of the outstanding

principal of that loan.

(12) Nationally recognized statistical rating

organization (NRSRO) means an entity

recognized by the Division of Market

Regulation of the Securities and Exchange

Commission (or any successor Division)

(Commission) as a nationally recognized

statistical rating organization for various

purposes, including the Commission’s

uniform net capital requirements for brokers

and dealers (17 CFR 240.15c3–1).

(13) Recourse means an arrangement in

which a bank retains, in form or in substance,

of any credit risk directly or indirectly

associated with an asset it has sold (in

accordance with generally accepted

accounting principles) that exceeds a pro rata

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ealers (17 CFR 240.15c3–1).

(13) Recourse means an arrangement in

which a bank retains, in form or in substance,

of any credit risk directly or indirectly

associated with an asset it has sold (in

accordance with generally accepted

accounting principles) that exceeds a pro rata

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Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations

45 The sufficiency of collateral and guarantees for

off-balance-sheet items is determined by the market

value of the collateral or the amount of the

guarantee in relation to the face amount of the item,

except for derivative contracts, for which this

determination is generally made in relation to the

credit equivalent amount. Collateral and guarantees

are subject to the same provisions noted under

section II.B of this appendix A.

share of the bank’s claim on the asset. If a

bank has no claim on an asset it has sold,

then the retention of any credit risk is

recourse. A recourse obligation typically

arises when an institution transfers assets in

a sale and retains an obligation to repurchase

the assets or absorb losses due to a default

of principal or interest or any other

deficiency in the performance of the

underlying obligor or some other party.

Recourse may exist implicitly where a bank

provides credit enhancement beyond any

contractual obligation to support assets it has

sold. The following are examples of recourse

arrangements:

e and retains an obligation to repurchase

the assets or absorb losses due to a default

of principal or interest or any other

deficiency in the performance of the

underlying obligor or some other party.

Recourse may exist implicitly where a bank

provides credit enhancement beyond any

contractual obligation to support assets it has

sold. The following are examples of recourse

arrangements:

(i) Credit-enhancing representations and

warranties made on the transferred assets;

(ii) Loan servicing assets retained pursuant

to an agreement under which the bank:

(A) Is responsible for losses associated with

the loans being serviced, or

(B) Is responsible for making mortgage

servicer cash advances (unless the advances

are not a recourse obligation because they

meet the conditions specified in section

II.B.5(a)(11) of this Appendix A).

(iii) Retained subordinated interests that

absorb more than their pro rata share of

losses from the underlying assets;

(iv) Assets sold under an agreement to

repurchase, if the assets are not already

included on the balance sheet;

(v) Loan strips sold without contractual

recourse where the maturity of the

transferred portion of the loan is shorter than

the maturity of the commitment under which

the loan is drawn;

(vi) Credit derivative contracts under

which the bank retains more than its pro rata

share of credit risk on transferred assets;

(vii) Clean-up calls at inception that are

greater than 10 percent of the balance of the

original pool of transferred loans. Clean-up

calls that are 10 percent or less of the original

pool balance that are exercisable at the

option of the bank are not recourse

arrangements; and

(viii.) Liquidity facilities that provide

liquidity support to ABCP (other than eligible

ABCP liquidity facilities).

) Clean-up calls at inception that are

greater than 10 percent of the balance of the

original pool of transferred loans. Clean-up

calls that are 10 percent or less of the original

pool balance that are exercisable at the

option of the bank are not recourse

arrangements; and

(viii.) Liquidity facilities that provide

liquidity support to ABCP (other than eligible

ABCP liquidity facilities).

(14) Residual interest means any on-

balance sheet asset that represents an interest

(including a beneficial interest) created by a

transfer

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