# FDIC FIL-87-2004: Capital Standards

> Federal · Agency guidance · Superseded

URL: https://www.frixlaw.com/law-library/statutes/FDIC_FIL04087

## Section

- **Citation:** FDIC FIL-87-2004
- **Heading:** Capital Standards
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** Superseded
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** FDIC Financial Institution Letters / Capital Standards

## Text

44908
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
other documentary evidence, or both.
*
*
*
*
*
(c) Service. For provisions relating to
who may serve a subpoena issued under
this section, see 8 CFR 287.4(c).
*
*
*
*
*
Dated: July 21, 2004.
John Ashcroft,
Attorney General.
[FR Doc. 04–17118 Filed 7–27–04; 8:45 am]
BILLING CODE 4410–30–P
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 3
[Docket No. 04–19]
RIN 1557–AC76
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R–1162]
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 325
RIN 3064–AC75
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[No. 2004–36]
RIN 1550–AB79
Risk-Based Capital Guidelines; Capital
Adequacy Guidelines; Capital
Maintenance: Consolidation of Asset-
Backed Commercial Paper Programs
and Other Related Issues
AGENCIES: Office of the Comptroller of
the Currency, Treasury; Board of
Governors of the Federal Reserve
System; Federal Deposit Insurance
Corporation; and Office of Thrift
Supervision, Treasury.
ACTION: Final rule
RIN 1550–AB79
Risk-Based Capital Guidelines; Capital
Adequacy Guidelines; Capital
Maintenance: Consolidation of Asset-
Backed Commercial Paper Programs
and Other Related Issues
AGENCIES: Office of the Comptroller of
the Currency, Treasury; Board of
Governors of the Federal Reserve
System; Federal Deposit Insurance
Corporation; and Office of Thrift
Supervision, Treasury.
ACTION: Final rule.
SUMMARY: The Office of the Comptroller
of the Currency (OCC), Board of
Governors of the Federal Reserve
System (Board), Federal Deposit
Insurance Corporation (FDIC), and
Office of Thrift Supervision (OTS)
(collectively, the agencies) are amending
their risk-based capital standards by
removing a sunset provision that would
preclude a certain capital treatment for
asset-backed commercial paper (ABCP)
programs after a certain date. The final
rule will permanently permit
sponsoring banks, bank holding
companies, and thrifts (collectively,
sponsoring banking organizations) to
exclude from their risk-weighted asset
base those assets in ABCP programs that
are consolidated onto sponsoring
banking organizations’ balance sheets as
a result of Financial Accounting
Standards Board Interpretation No. 46,
Consolidation of Variable Interest
Entities, as revised (FIN 46–R).
The agencies also are implementing
more risk-sensitive risk-based capital
standards for credit exposures arising
from involvement with ABCP. This final
rule generally requires banking
organizations to hold risk-based capital
against eligible ABCP liquidity facilities
with an original maturity of one year or
less that provide liquidity support to
ABCP by imposing a 10 percent credit
conversion factor on such facilities.
The agencies have decided not to
implement the proposed risk-based
capital charge for securitizations of
revolving retail credit facilities (for
example, credit card receivables) that
incorporate early amortization
provisions
cilities
with an original maturity of one year or
less that provide liquidity support to
ABCP by imposing a 10 percent credit
conversion factor on such facilities.
The agencies have decided not to
implement the proposed risk-based
capital charge for securitizations of
revolving retail credit facilities (for
example, credit card receivables) that
incorporate early amortization
provisions. In addition, the agencies are
making technical amendments to their
risk-based capital standards by deleting
tables and attachments that summarize
risk categories, credit conversion
factors, and transitional arrangements.
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 that
provide support to ABCP will be treated
as ‘‘eligible ABCP liquidity facilities,’’
regardless of their compliance with the
definition of ‘‘eligible ABCP liquidity
facilities’’ in the final rule, until
September 30, 2005. On that date and
thereafter, liquidity facilities that do not
meet the final rule’s definition of
‘‘eligible ABCP liquidity facility’’ will
be treated as recourse obligations or
direct credit substitutes.
FOR FURTHER INFORMATION CONTACT:
OCC: Amrit Sekhon, Risk Expert,
Capital Policy Division, (202) 874–5211;
Laura Goldman, Counsel, or Ron
Shimabukuro, Special Counsel,
Legislative and Regulatory Activities
Division, (202) 874–5090, Office of the
Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219.
Board: Thomas R. Boemio, Senior
Project Manager, Policy, (202) 452–
2982, David Kerns, Supervisory
Financial Analyst, (202) 452–2428,
Barbara Bouchard, Deputy Associate
Director, (202) 452–3072, Division of
Banking Supervision and Regulation; or
Mark E. Van Der Weide, Senior Counsel,
sion, (202) 874–5090, Office of the
Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219.
Board: Thomas R. Boemio, Senior
Project Manager, Policy, (202) 452–
2982, David Kerns, Supervisory
Financial Analyst, (202) 452–2428,
Barbara Bouchard, Deputy Associate
Director, (202) 452–3072, Division of
Banking Supervision and Regulation; or
Mark E. Van Der Weide, Senior Counsel,
(202) 452–2263, Legal Division. For the
hearing impaired only,
Telecommunication Device for the Deaf
(TDD), (202) 263–4869.
FDIC: Jason C. Cave, Chief, Policy
Section, Capital Markets Branch, (202)
898–3548, Robert F. Storch, Chief
Accountant, (202) 898–8906, Division of
Supervision and Consumer Protection;
Michael B. Phillips, Counsel, (202) 898–
3581, Supervision and Legislation
Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street,
NW., Washington, DC 20429.
OTS: Christine A. Smith, Project
Manager, (202) 906–5740; or Karen
Osterloh, Special Counsel, Regulation
and Legislation Division, Chief
Counsel’s Office, (202) 906–6639, Office
of Thrift Supervision, 1700 G Street,
NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
A. Asset-Backed Commercial Paper
Programs
An asset-backed commercial paper
(ABCP) program typically is a program
through which a banking organization
provides funding to its corporate
customers by sponsoring and
administering a bankruptcy-remote
special purpose entity that purchases
asset pools from, or extends loans to,
those customers.1 The asset pools in an
ABCP program might include, for
example, trade receivables, consumer
loans, or asset-backed securities. The
ABCP program raises cash to provide
funding to the banking organization’s
customers through the issuance of
externally rated commercial paper into
the market. Typically, the sponsoring
banking organization provides liquidity
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es, consumer
loans, or asset-backed securities. The
ABCP program raises cash to provide
funding to the banking organization’s
customers through the issuance of
externally rated commercial paper into
the market. Typically, the sponsoring
banking organization provides liquidity
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44909
Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations
2 For the purposes of this final rule, a banking
organization is considered the sponsor of an ABCP
program if it establishes the 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.
3 Under FIN 46–R, the FASB broadened the
criteria for determining when one entity is deemed
to have a controlling financial interest in another
entity and, therefore, when an entity must
consolidate another entity in its financial
statements. An entity generally does not need to be
analyzed under FIN 46–R if it is designed to have
adequate capital, as described in FIN 46–R, and its
shareholders control the entity with their voting or
similar rights and are proportionally allocated its
profits and losses. If the entity fails these criteria,
it typically is deemed a VIE and each stakeholder
in the entity (a group that can include, but is not
limited to, legal-form equity holders, creditors,
sponsors, guarantors, and servicers) must assess
whether it is the entity’s ‘‘primary beneficiary’’
using the FIN 46–R criteria. This analysis considers
whether effective control exists by evaluating the
entity’s risks and rewards
criteria,
it typically is deemed a VIE and each stakeholder
in the entity (a group that can include, but is not
limited to, legal-form equity holders, creditors,
sponsors, guarantors, and servicers) must assess
whether it is the entity’s ‘‘primary beneficiary’’
using the FIN 46–R criteria. This analysis considers
whether effective control exists by evaluating the
entity’s risks and rewards. In the end, the
stakeholder who holds the majority of the entity’s
risks or rewards (or both) is the primary beneficiary
and must consolidate the VIE.
4 The risk-based capital standards of the agencies
are based on the July 1988 Accord on International
Convergence of Capital Measurements and Capital
Standards adopted by the Basel Committee on
Banking Supervision. The Basel Committee,
however, is currently in the process of revising the
1988 Accord. See the proposed revision of the Basel
Capital Accord, dated June 2004, issued by the
Basel Committee.
and credit enhancements to the ABCP
program, which aid the program in
obtaining high credit ratings that
facilitate the issuance of the commercial
paper.2
B. ABCP Programs and FIN 46–R
In January 2003, the Financial
Accounting Standards Board (FASB)
issued FASB Interpretation No. 46,
‘‘Consolidation of Variable Interest
Entities’’ (FIN 46). FIN 46 required the
consolidation of variable interest
entities (VIEs) onto the balance sheets of
companies deemed to be the primary
beneficiaries of those entities by no later
than the end of the first annual
reporting period beginning after June 15,
2003. FIN 46 was then revised by FASB
in December 2003 (that is, FIN 46–R)
and generally was effective for public
banking organizations by March 31,
2004. FIN 46–R clarified several issues
relating to the consolidation of VIEs and
provided multiple and delayed effective
dates, but did not directly affect issues
relevant to this rulemaking
annual
reporting period beginning after June 15,
2003. FIN 46 was then revised by FASB
in December 2003 (that is, FIN 46–R)
and generally was effective for public
banking organizations by March 31,
2004. FIN 46–R clarified several issues
relating to the consolidation of VIEs and
provided multiple and delayed effective
dates, but did not directly affect issues
relevant to this rulemaking.
FIN 46–R requires the consolidation
of many ABCP programs onto the
balance sheets of banking
organizations.3 In contrast, under pre-
FIN 46 accounting standards, the
sponsors of ABCP programs normally
were not required to consolidate the
assets of these programs. Banking
organizations that are required to
consolidate ABCP program assets must
include all of the program assets (mostly
receivables and securities) and
liabilities (mainly commercial paper) on
their balance sheets for purposes of the
bank Reports of Condition and Income
(Call Report), the Thrift Financial
Report (TFR), and the bank holding
company financial statements (FR Y–9C
Report). If no changes were made to
regulatory capital standards, the
resulting increase in the asset base
would lower the tier 1 leverage and risk-
based capital ratios of banking
organizations that must consolidate the
assets held in ABCP programs.
C. Interim Final and Proposed Rules
The agencies believe that the
consolidation of ABCP program assets
generally would result in risk-based
capital requirements that do not
appropriately reflect the risks faced by
banking organizations involved with the
programs. Sponsoring banking
organizations generally face limited risk
exposure to ABCP programs. This risk
usually is confined to the credit
enhancements and liquidity facility
arrangements that sponsoring banking
organizations provide to these programs
result in risk-based
capital requirements that do not
appropriately reflect the risks faced by
banking organizations involved with the
programs. Sponsoring banking
organizations generally face limited risk
exposure to ABCP programs. This risk
usually is confined to the credit
enhancements and liquidity facility
arrangements that sponsoring banking
organizations provide to these programs.
In addition, operational controls and
structural provisions, along with
overcollateralization or other credit
enhancements provided by the
companies that sell assets into ABCP
programs, mitigate the risks to which
sponsoring banking organizations are
exposed.
Because of the limited risks, the
agencies adopted an interim final rule
with a request for comment that
permitted sponsoring banking
organizations, through the end of the
first quarter of 2004, to exclude from
risk-weighted assets (for purposes of
calculating the risk-based capital ratios)
ABCP program assets that require
consolidation under FIN 46–R (October
2003 interim final rule). See 68 FR
56530 (October 1, 2003). The agencies
also amended their risk-based capital
rules to exclude from tier 1 and total
capital any minority interest in
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
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.
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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44910
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
d
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)
e
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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44912
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.
E
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
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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
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(c) * * *
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(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.
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(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.
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e
program’s credit and investment policy.
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(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.
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(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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17 Participations in commitments are treated in
accordance with section 4 of this Appendix A.
Section 2. Components of Capital
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(a) * * *
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(3) Minority interests in the equity
accounts of consolidated subsidiaries,
except that the following are not
included in Tier 1 capital or total
capital:
(i) Minority interests in a small
business investment company or
investment fund that holds nonfinancial
equity investments and minority
interests in a subsidiary that is engaged
in a nonfinancial activities and is held
under one of the legal authorities listed
in section 1(c)(23) of this appendix A.
(ii) 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.
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Section 3. Risk Categories/Weights for
On-Balance Sheet Assets and Off-
Balance Sheet Items
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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.
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Section 3. Risk Categories/Weights for
On-Balance Sheet Assets and Off-
Balance Sheet Items
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(a) * * *
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(4) * * *
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(iii) Asset-or mortgage backed
securities that are externally rated are
risk weighted in accordance with
section 4(d) of this appendix A.
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(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
A.
ed
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
A.
(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. * * *
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(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;
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(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;
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(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;
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(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.
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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.
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Section 4. Recourse, Direct Credit
Substitutes and Positions in
Securitizations
(a) * * *
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(4) * * *
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(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.
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(11) * * *
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(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.
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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
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Section 2. Definitions
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t the
option of the bank are not recourse
arrangements; and
(viii) Noneligible asset-backed
commercial paper liquidity facilities.
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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
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Section 2. Definitions
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(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.
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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
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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.
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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:
1
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
2
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;
6
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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44918
Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations
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.
b
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.
5
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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44919
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
8
s
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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28JYR1

44920
Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations
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.
x
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 cr

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## Nearby sections

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/FDIC_FIL04087. Check the current official text before relying on it. Not legal advice.