Regulatory Capital Standards Notice of Proposed Rulemaking Regarding Risk-Based Capital: Impact of Modifications to Generally Accepted Accounting Principles, Consolidation of Asset-Backed Commercial Paper Programs, and Other Related Issues

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FDIC Financial Institution Letters › Regulatory Capital Standards Notice of Proposed Rulemaking Regarding Risk-Based Capital: Impact of Modifications to Generally Accepted Accounting Principles, Consolidation of Asset-Backed Commercial Paper Programs, and Other Related Issues

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

Docket ID: OCC-2009-0012

RIN 1557- AD26

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

Regulations H and Y; Docket No. R-xxxx

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064- AD48

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

No. OTS-2009-0015

RIN 1550-AC36

Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital

Maintenance: Regulatory Capital; Impact of Modifications to Generally

Accepted Accounting Principles; Consolidation of Asset-Backed Commercial

Paper Programs; and Other Related Issues

AGENCIES: Office of the Comptroller of the Currency, Department of the

Treasury; Board of Governors of the Federal Reserve System; Federal Deposit

Insurance Corporation; and Office of Thrift Supervision, Department of the

Treasury.

ACTION: Notice of proposed rulemaking with request for public comment.

SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of

Governors of the Federal Reserve System (Board), Federal Deposit Insurance

Corporation (FDIC), and the Office of Thrift Supervision (OTS) (collectively, the

agencies) are requesting comment on a proposal to (i) modify their general risk-

based and advanced risk-based capital adequacy frameworks to eliminate the

exclusion of certain consolidated asset-backed commercial paper programs from

risk-weighted assets and (ii) provide a reservation of authority in their general risk-

based and advanced risk-based capital adequacy frameworks to permit the agencies

to require banking organizations to treat entities that are not consolidated under

accounting standards as if they were consolidated for risk-based capital purposes,

commensurate with the risk relationship of the banking organization to the

structure

d (ii) provide a reservation of authority in their general risk-

based and advanced risk-based capital adequacy frameworks to permit the agencies

to require banking organizations to treat entities that are not consolidated under

accounting standards as if they were consolidated for risk-based capital purposes,

commensurate with the risk relationship of the banking organization to the

structure. The agencies are issuing this proposal and request for comment to better

align capital requirements with the actual risk of certain exposures and to obtain

information and views from the public on the effect on regulatory capital that will

result from the implementation of the Financial Accounting Standard Board’s

(FASB) Statement of Financial Accounting Standards No. 166, Accounting for

Transfers of Financial Assets, an Amendment of FASB Statement No. 140 and

Statement of Financial Accounting Standards No. 167, Amendments to FASB

Interpretation No. 46(R).

DATES: Comments on this notice of proposed rulemaking must be received by

[INSERT DATE 30 DAYS AFTER PUBLICATION IN THE FEDERAL

ADDRESSES: Comments should be directed to:

OCC: Because paper mail in the Washington, DC area and at the agencies is

subject to delay, commenters are encouraged to submit comments by the Federal

eRulemaking Portal or e-mail, if possible. Please use the title “Risk-Based Capital

Guidelines; Capital Adequacy Guidelines; Capital Maintenance: Regulatory

Capital; Impact of Modifications to Generally Accepted Accounting Principles;

Consolidation of Asset-Backed Commercial Paper Programs; and Other Related

Issues” to facilitate the organization and distribution of the comments. You may

submit comments by any of the following methods:

• Federal eRulemaking Portal – “Regulations.gov”: Go to

http://www.regulations.gov

al Maintenance: Regulatory

Capital; Impact of Modifications to Generally Accepted Accounting Principles;

Consolidation of Asset-Backed Commercial Paper Programs; and Other Related

Issues” to facilitate the organization and distribution of the comments. You may

submit comments by any of the following methods:

• Federal eRulemaking Portal – “Regulations.gov”: Go to

http://www.regulations.gov. Under the “More Search Options” tab click next

to the “Advanced Docket Search” option where indicated, select

“Comptroller of the Currency” from the agency drop-down menu, then click

“Submit.” In the “Docket ID” column, select “OCC-2009-0012” to submit

or view public comments and to view supporting and related materials for

this proposed rule. The “How to Use This Site” link on the Regulations.gov

home page provides information on using Regulations.gov, including

instructions for submitting or viewing public comments, viewing other

supporting and related materials, and viewing the docket after the close of

the comment period.

• E-mail: regs.comments@occ.treas.gov.

• Mail: Office of the Comptroller of the Currency, 250 E Street, SW., Mail

Stop 2-3, Washington, DC 20219.

• Fax: (202) 874-5274.

• Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3, Washington,

DC 20219.

Instructions: You must include “OCC” as the agency name and “Docket

Number OCC-2009-0012” in your comment. In general, the OCC will enter all

comments received into the docket and publish them on the Regulations.gov Web

site without change, including any business or personal information that you

provide such as name and address information, e-mail addresses, or phone

numbers. Comments received, including attachments and other supporting

materials, are part of the public record and subject to public disclosure. Do not

enclose any information in your comment or supporting materials that you consider

confidential or inappropriate for public disclosure

or personal information that you

provide such as name and address information, e-mail addresses, or phone

numbers. Comments received, including attachments and other supporting

materials, are part of the public record and subject to public disclosure. Do not

enclose any information in your comment or supporting materials that you consider

confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this

proposed rule by any of the following methods:

• Viewing Comments Electronically: Go to http://www.regulations.gov,

under the “More Search Options” tab click next to the “Advanced Document

Search” option where indicated, select “Comptroller of the Currency” from

the agency drop-down menu, then click “Submit.” In the “Docket ID”

column, select “OCC-2009-0012” to view public comments for this

rulemaking action.

• Viewing Comments Personally: You may personally inspect and

photocopy comments at the OCC, 250 E Street, SW., Washington, DC. For

security reasons, the OCC requires that visitors make an appointment to

inspect comments. You may do so by calling (202) 874-4700. Upon

arrival, visitors will be required to present valid government-issued photo

identification and to submit to security screening in order to inspect and

photocopy comments.

• Docket: You may also view or request available background documents

and project summaries using the methods described above.

make an appointment to

inspect comments. You may do so by calling (202) 874-4700. Upon

arrival, visitors will be required to present valid government-issued photo

identification and to submit to security screening in order to inspect and

photocopy comments.

• Docket: You may also view or request available background documents

and project summaries using the methods described above.

Board: You may submit comments, identified by Docket No. R-xxxx, by any of

the following methods:

• Agency Web Site: http://www.federalreserve.gov. Follow the instructions for

submitting comments at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the

instructions for submitting comments.

• E-mail: regs.comments@federalreserve.gov. Include docket number in the

subject line of the message.

• FAX: (202) 452-3819 or (202) 452-3102.

• Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal

Reserve System, 20th Street and Constitution Avenue, NW, Washington, DC

20551.

All public comments are available from the Board’s Web site at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted,

unless modified for technical reasons. Accordingly, your comments will not be

edited to remove any identifying or contact information. Public comments may

also be viewed electronically or in paper form in Room MP-500 of the Board’s

Martin Building (20th and C Street, NW) between 9:00 a.m. and 5:00 p.m. on

weekdays.

FDIC: You may submit comments by any of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the

instructions for submitting comments.

• Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html

cally or in paper form in Room MP-500 of the Board’s

Martin Building (20th and C Street, NW) between 9:00 a.m. and 5:00 p.m. on

weekdays.

FDIC: You may submit comments by any of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the

instructions for submitting comments.

• Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html

• Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal

ESS, Federal Deposit Insurance Corporation, 550 17th Street, NW,

Washington, DC 20429.

• Hand Delivered/Courier: The guard station at the rear of the 550 17th Street

Building (located on F Street), on business days between 7:00 a.m. and 5:00

p.m.

• E-mail: comments@FDIC.gov.

Instructions: Comments submitted must include “FDIC” and “RIN 3064-AD48.”

Comments received will be posted without change to

http://www.FDIC.gov/regulations/laws/federal/propose.html, including any

personal information provided.

OTS: You may submit comments, identified by OTS-2009-0015, by any of the

following methods:

● Federal eRulemaking Portal: “Regulations.gov”: Go to

http://www.regulations.gov. Under the “more Search Options” tab click next to the

‘‘Advanced Docket Search’’ option where indicated, select ‘‘Office of Thrift

Supervision’’ from the agency dropdown menu, then click “Submit.” In the

‘‘Docket ID’’ column, select ‘‘OTS-2009-0015” to submit or view public

comments and to view supporting and related materials for this proposed

rulemaking. The ‘‘How to Use This Site’’ link on the Regulations.gov home page

provides information on using Regulations.gov, including instructions for

submitting or viewing public comments, viewing other supporting and related

materials, and viewing the docket after the close of the comment period.

● Mail: Regulation Comments, Chief Counsel’s Office, Office of Thrift

Supervision, 1700 G Street, NW., Washington, DC 20552, Attention: OTS-2009-

0015.

● Facsimile: (202) 906-6518.

tion on using Regulations.gov, including instructions for

submitting or viewing public comments, viewing other supporting and related

materials, and viewing the docket after the close of the comment period.

● Mail: Regulation Comments, Chief Counsel’s Office, Office of Thrift

Supervision, 1700 G Street, NW., Washington, DC 20552, Attention: OTS-2009-

0015.

● Facsimile: (202) 906-6518.

● Hand Delivery/Courier: Guard’s Desk, East Lobby Entrance, 1700 G Street,

NW., from 9 a.m. to 4 p.m. on business days, Attention: Regulation Comments,

Chief Counsel’s Office, Attention: OTS-2009-0015.

● Instructions: All submissions received must include the agency name and

docket number for this rulemaking. All comments received will be posted without

change, including any personal information provided. Comments, including

attachments and other supporting materials received are part of the public record

and subject to public disclosure. Do not enclose any information in your comment

or supporting materials that you consider confidential or inappropriate for public

disclosure.

● Viewing Comments Electronically: Go to http://www.regulations.gov, under

the “More Search Options” tab click next to the “Advanced Document Search”

option where indicated, select ‘‘Office of Thrift Supervision’’ from the agency

drop-down menu, then click ‘‘Submit.’’ In the “Docket ID” column, select ‘‘OTS-

2009-0015” to view public comments for this notice of proposed rulemaking

action.

● Viewing Comments On-Site: You may inspect comments at the Public

Reading Room, 1700 G Street, NW., by appointment. To make an appointment for

access, call (202) 906–5922, send an e-mail to public.info@ots.treas.gov, or send a

facsimile transmission to (202) 906–6518. (Prior notice identifying the materials

you will be requesting will assist us in serving you.) We schedule appointments on

business days between 10 a.m. and 4 p.m

ect comments at the Public

Reading Room, 1700 G Street, NW., by appointment. To make an appointment for

access, call (202) 906–5922, send an e-mail to public.info@ots.treas.gov, or send a

facsimile transmission to (202) 906–6518. (Prior notice identifying the materials

you will be requesting will assist us in serving you.) We schedule appointments on

business days between 10 a.m. and 4 p.m. In most cases, appointments will be

available the next business day following the date we receive a request.

FOR FURTHER INFORMATION CONTACT:

OCC: Paul Podgorski, Risk Expert, Capital Policy Division, (202) 874-4755, or

Carl Kaminski, Senior Attorney, 202 874-5405, or Ron Shimabukuro, Senior

Counsel, Legislative and Regulatory Activities Division, (202) 874-5090, Office of

the Comptroller of the Currency, 250 E Street, SW, Washington, DC 20219.

Board: Barbara J. Bouchard, Associate Director, (202) 452-3072, or Anna Lee

Hewko, (202) 530-6260, Manager, Supervisory Policy and Guidance, Division of

Banking Supervision and Regulation; or April C. Snyder, Counsel, (202) 452-

3099, or Benjamin W. McDonough, Senior Attorney, (202) 452-2036, Legal

Division. For the hearing impaired only, Telecommunication Device for the Deaf

(TDD), (202) 263-4869.

FDIC: Jim Weinberger, Senior Policy Analyst, (202) 898-7034, Christine

Bouvier, Senior Policy Analyst (Bank Accounting), (202) 898-7289, Division of

Supervision and Consumer Protection; or Mark Handzlik, Senior Attorney, (202)

898-3990, or Michael Phillips, Counsel, (202) 898-3581, Supervision Branch,

Legal Division.

OTS: Teresa A. Scott, Senior Policy Analyst, (202) 906-6478, Capital Risk,

Christine Smith, Senior Policy Analyst, (202) 906-5740, Capital Risk, or Marvin

Shaw, Senior Attorney, (202) 906-6639, Legislation and Regulation Division,

Office of Thrift Supervision, 1700 G Street, NW, Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

unsel, (202) 898-3581, Supervision Branch,

Legal Division.

OTS: Teresa A. Scott, Senior Policy Analyst, (202) 906-6478, Capital Risk,

Christine Smith, Senior Policy Analyst, (202) 906-5740, Capital Risk, or Marvin

Shaw, Senior Attorney, (202) 906-6639, Legislation and Regulation Division,

Office of Thrift Supervision, 1700 G Street, NW, Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

The agencies’ regulatory capital regime for banking organizations2

incorporates both leverage and risk-based measures. The leverage measure3 uses

2 Unless otherwise indicated, the term “banking organization” includes banks,

savings associations, and bank holding companies (BHCs).

3 12 CFR part 3 (OCC);12 CFR part 208, appendix B and 12 CFR part 225

appendix D (Board); 12 CFR part 325.3 (FDIC); 12 CFR 567.8 (OTS).

on-balance sheet assets as the basis for setting capital requirements that are

intended to limit the degree to which a banking organization can leverage its equity

capital base. The risk-based measures (the general risk-based capital rules4 and the

advanced approaches rules5) establish capital requirements intended to reflect the

risks associated with on-balance sheet exposures as well as off-balance sheet

exposures, such as guarantees, commitments, and derivative transactions. The

agencies use generally accepted accounting principles (GAAP), as established by

FASB, as the initial basis for determining whether an exposure is treated as on- or

off-balance sheet for regulatory capital purposes.

The GAAP treatment for structured finance transactions using a special

purpose entity (SPE) generally has been governed by the requirements of

Statement of Financial Accounting Standards No. 140, Accounting for Transfers

and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140)

and FASB Interpretation No

ated as on- or

off-balance sheet for regulatory capital purposes.

The GAAP treatment for structured finance transactions using a special

purpose entity (SPE) generally has been governed by the requirements of

Statement of Financial Accounting Standards No. 140, Accounting for Transfers

and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140)

and FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN

46(R)).67 Under FAS 140 (as in effect through the end of 2009), transfers of assets

to an entity that meets the definition of a qualifying special purpose entity (QSPE)

are usually recognized as sales, which permits the transferor to remove the assets

4 12 CFR part 3, appendix A (OCC); 12 CFR parts 208 and 225, appendix A

(Board); 12 CFR part 325, appendix A (FDIC); and 12 CFR part 567, subpart B

(OTS). The risk-based capital rules generally do not apply to bank holding

companies with $500 million or less in consolidated assets.

5 12 CFR part 3, appendix C (OCC); 12 CFR part 208, appendix F and 12 CFR

part 225, appendix G (Board); 12 CFR part 325, appendix D (FDIC); 12 CFR 567,

Appendix C (OTS).

6 All references made to Statements of Financial Accounting Standards adopted

by the FASB have been included in the FASB Accounting Standards Codification

that became effective on July 1, 2009.

7 Statement of Financial Accounting Standards No. 140 (FASB 2005) and

Interpretation No. 46R (FASB 2003).

ppendix G (Board); 12 CFR part 325, appendix D (FDIC); 12 CFR 567,

Appendix C (OTS).

6 All references made to Statements of Financial Accounting Standards adopted

by the FASB have been included in the FASB Accounting Standards Codification

that became effective on July 1, 2009.

7 Statement of Financial Accounting Standards No. 140 (FASB 2005) and

Interpretation No. 46R (FASB 2003).

from its balance sheet.8 In addition, FIN 46(R) specifically excludes QSPEs from

its scope despite the fact that many QSPEs would have otherwise been deemed

variable interest entities (VIEs) subject to FIN 46(R) and possible consolidation.

On June 12, 2009, FASB finalized modifications to FAS 140 and FIN 46(R)

(the 2009 GAAP modifications) through Statement of Financial Accounting

Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment

of FASB Statement No. 140 (FAS 166) and Statement of Financial Accounting

Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167).

FAS 166 and FAS 167 are effective for the first annual financial statement

reporting periods that begin after November 15, 2009 and for interim and annual

periods thereafter.9

As discussed in further detail below, the 2009 GAAP modifications, among

other things, remove the concept of a QSPE from GAAP and alter the

consolidation analysis for VIEs, thereby subjecting many VIEs that are not

consolidated under current GAAP standards to consolidation requirements. These

changes will require some banking organizations to consolidate the assets,

liabilities, and equity of certain VIEs onto their balance sheets for financial and

regulatory reporting purposes.

the concept of a QSPE from GAAP and alter the

consolidation analysis for VIEs, thereby subjecting many VIEs that are not

consolidated under current GAAP standards to consolidation requirements. These

changes will require some banking organizations to consolidate the assets,

liabilities, and equity of certain VIEs onto their balance sheets for financial and

regulatory reporting purposes.

II. The 2009 GAAP Modifications

Under FAS 167, a VIE is an entity whose equity investment at risk is

insufficient to permit the entity to finance its activities without additional

subordinated financial support (for example, an entity with nominal common

equity) and/or whose equity investors do not have rights or obligations with respect

to the entity typical of equity investors. For example, a VIE generally exists when

8 The transfers are recognized as sales as long as they meet other criteria contained

in the 2005 version of FAS 140, as amended. See FAS 140, paragraph 9.

9 FAS 166 p. i. and FAS 167 p. i.

the administrators of an entity hold a nominal common equity interest, and debt

holders hold the rest of the economic interests in the entity (which frequently are

issued in various degrees of subordination). Similarly, an entity is a VIE if its

equity holders, as a group, lack the right to make decisions about the entity’s

activities, the obligation to absorb the expected losses of the entity, or the right to

receive the expected residual returns of the entity.10 Thus, for example, an entity

whose debt holders, rather than its common equity holders, have all essential

voting rights and the rights to receive all revenue generated by the entity’s assets,

generally would be a VIE.

Determining whether a specific company is required to consolidate a VIE

under FAS 167 depends on a qualitative analysis of whether that company has a

“controlling financial interest” in the VIE

an entity

whose debt holders, rather than its common equity holders, have all essential

voting rights and the rights to receive all revenue generated by the entity’s assets,

generally would be a VIE.

Determining whether a specific company is required to consolidate a VIE

under FAS 167 depends on a qualitative analysis of whether that company has a

“controlling financial interest” in the VIE. The analysis focuses on the company’s

power over and interest in the VIE, rather than on quantitative equity ownership

thresholds. A company has a controlling financial interest in a VIE if it has (1) the

power to direct matters that most significantly impact the activities of the VIE,

including, but not limited to, activities that impact the VIE’s economic

performance (for example, servicing activities); and (2) either the obligation to

absorb losses of the VIE that could potentially be significant to the VIE, or the

right to receive benefits from the VIE that could potentially be significant to the

VIE, or both.11

A company’s analysis of whether it must consolidate a VIE must incorporate

the above criteria and take into account the company’s interest(s) in the VIE and

the characteristics of the VIE, including the involvement of other VIE interest

10 FAS 167, appendix D, paragraphs 5 and 6.

11 See FAS 167, appendix D, paragraphs 14 and 14A-14G.

A company’s analysis of whether it must consolidate a VIE must incorporate

the above criteria and take into account the company’s interest(s) in the VIE and

the characteristics of the VIE, including the involvement of other VIE interest

10 FAS 167, appendix D, paragraphs 5 and 6.

11 See FAS 167, appendix D, paragraphs 14 and 14A-14G.

holders.12 FAS 167 also requires a company to conduct ongoing assessments using

the above criteria to determine whether a VIE is subject to consolidation.13

FAS 166 amends FAS 140 by removing the QSPE concept from GAAP,

strengthening the requirements for recognizing the transfer of financial assets to a

third party, and requiring companies to make additional disclosures about any

continuing involvement they may have in financial assets that they transfer.14 As a

result, a company that transferred financial assets to a SPE that previously met the

definition of a QSPE must now evaluate whether it must consolidate the assets,

liabilities, and equity of the SPE pursuant to FAS 167. Furthermore, under the

additional disclosure requirements in FAS 166, companies must detail in their

financial statements their continuing involvement -- through recourse or guarantee

arrangements, servicing arrangements, or other relationships -- in any financial

assets that they transfer to an SPE (whether or not a company is required to

consolidate the SPE following the transfer). These disclosure requirements apply

as long as a transferring company is involved in financial assets that it has

transferred.15

The 2009 GAAP modifications do not provide for the grandfathering of

existing financial structures. As of January 1, 2010, banking organizations will be

12 See FAS 167, appendix D, paragraphs 14C-14E

the transfer). These disclosure requirements apply

as long as a transferring company is involved in financial assets that it has

transferred.15

The 2009 GAAP modifications do not provide for the grandfathering of

existing financial structures. As of January 1, 2010, banking organizations will be

12 See FAS 167, appendix D, paragraphs 14C-14E. If a company determines that

power is shared among multiple parties so that no one party is deemed to have a

controlling financial interest, it is not required to consolidate the VIE. FAS 167,

appendix D, paragraph 14D. It is expected that some VIEs will not be

consolidated by any company.

13 See FAS 167 p. ii.

14 See FAS 166, appendix D, paragraphs 16A-17.

15 See FAS 166, appendix D, paragraph 16D. FAS 166 also requires companies to

periodically provide additional information about gains and losses resulting from

transfers of financial assets. See id., paragraph 17.

required to consolidate and recognize on their balance sheets many previously

unconsolidated VIEs. These newly-consolidated entities will therefore be included

in relevant regulatory reports of banking organizations, such as the bank Reports of

Condition and Income (Call Reports), the Thrift Financial Report (TFR), and the

bank holding company financial statements (FR Y-9C Report). A preliminary

analysis of the 2009 GAAP modifications, as well as analysis derived from the

agencies’ supervisory information, indicates that the categories of off-balance

sheet exposures likely to be subject to consolidation on an originating or servicing

banking organization’s balance sheet include:

•

Certain asset-backed commercial paper (ABCP) conduits;

•

Revolving securitizations structured as master trusts, including credit

card and home equity line of credit (HELOC) securitizations;

•

Certain mortgage loan securitizations not guaranteed by the U.S.

government or a U.S

kely to be subject to consolidation on an originating or servicing

banking organization’s balance sheet include:

•

Certain asset-backed commercial paper (ABCP) conduits;

•

Revolving securitizations structured as master trusts, including credit

card and home equity line of credit (HELOC) securitizations;

•

Certain mortgage loan securitizations not guaranteed by the U.S.

government or a U.S. government-sponsored agency;

•

Certain term loan securitizations in which a banking organization

retains a residual interest and servicing rights, including some student

loan and automobile loan securitizations; and

•

Other SPEs, such as certain tender option bond (TOB) trusts that were

designed as QSPEs.

The 2009 GAAP modifications may also require banking organizations to

recognize on their balance sheets certain loan participations and other exposures

not related to asset securitization. In addition, banking organizations may need to

establish loan loss reserves16 to cover incurred losses on the assets consolidated

16 Under GAAP, an allowance for loan losses (ALLL) should be recognized when

events have occurred indicating that it is probable that an asset has been impaired

or that a loss has been incurred as of the balance sheet date and that the amount of

the loss can be reasonably estimated. Under the risk-based capital rules, the ALLL

pursuant to the 2009 GAAP modifications. Each banking organization must

determine which structures and exposures must be consolidated onto its balance

sheet, and assess other appropriate adjustments to relevant financial reports, as a

result of the 2009 GAAP modifications.

Question 1: Which types of VIEs will banking organizations have to consolidate

onto their balance sheets due to the 2009 GAAP modifications, which types are not

expected to be subject to consolidation, and why? Which types are likely to be

restructured to avoid consolidation?

III

sess other appropriate adjustments to relevant financial reports, as a

result of the 2009 GAAP modifications.

Question 1: Which types of VIEs will banking organizations have to consolidate

onto their balance sheets due to the 2009 GAAP modifications, which types are not

expected to be subject to consolidation, and why? Which types are likely to be

restructured to avoid consolidation?

III. Regulatory Capital and the 2009 GAAP Modifications

The agencies’ capital standards generally use GAAP treatment of an

exposure as a starting point for assessing regulatory capital requirements for that

exposure. For example, if certain assets of a banking organization are transferred

to a VIE through a secured financing but remain on the banking organization’s

balance sheet under GAAP, the VIE’s assets are risk-weighted like other

consolidated assets. However, if the assets are securitized through sale to a VIE

that the banking organization does not consolidate under GAAP, generally the

banking organization is required to hold risk-based capital only against its

contractual exposures to the VIE.17 The contractual exposures may take the form

of on-balance sheet exposures such as asset-backed securities and residual

interests, and off-balance sheet exposures such as liquidity facilities. The 2009

GAAP modifications generally would increase the amount of exposures recognized

on banking organizations’ balance sheets. Accordingly, under the agencies’

is a component of tier 2 capital and, therefore, included in the numerator of the

total risk-based capital ratio. However, the amount of ALLL that may be included

in tier 2 capital is limited to 1.25 percentage points of gross risk-weighted assets

is a component of tier 2 capital and, therefore, included in the numerator of the

total risk-based capital ratio. However, the amount of ALLL that may be included

in tier 2 capital is limited to 1.25 percentage points of gross risk-weighted assets.

17 12 CFR part 3, appendix A, § 3(a)(5) (OCC); 12 CFR parts 208 and 225,

appendix A § III.B.3.g (Board); 12 CFR part 325, appendix A, § II.B.6.b (FDIC);

12 CFR 567.6(a)(2)(vi)(B) (OTS).

current regulatory capital requirements, the 2009 GAAP modifications generally

would result in higher regulatory capital requirements for those banking

organizations that must consolidate VIEs.

Under the agencies’ leverage capital requirements, tier 1 capital is assessed

against a measure of a banking organization’s total assets, net of the ALLL and

certain other exposures.18 Therefore, previously unconsolidated assets that now

must be recognized on a banking organization’s balance sheet due to the 2009

GAAP modifications will increase the denominator of the banking organization’s

leverage ratio. Although the 2009 GAAP modifications will also affect the

numerator of the risk-based and leverage capital ratios, in many cases both the

risk-based and leverage capital ratios of affected banking organizations will

decrease following implementation of the 2009 GAAP modifications.

The risk-based capital rules specify the components of regulatory capital and

recognize variations of risk levels among different exposures through different

risk-weight assignments

of the risk-based and leverage capital ratios, in many cases both the

risk-based and leverage capital ratios of affected banking organizations will

decrease following implementation of the 2009 GAAP modifications.

The risk-based capital rules specify the components of regulatory capital and

recognize variations of risk levels among different exposures through different

risk-weight assignments. Although since 1995 the agencies have used financial

information reported under GAAP as the starting point for banking organizations’

regulatory reporting requirements,19 the risk-based capital rules adjust GAAP

balance sheet inputs where appropriate to capture an exposure’s risk or the ability

of elements of capital to absorb loss.20

18 See 12 CFR 3.2(a) (OCC); 12 CFR part 208, appendix B §II.b and 12 CFR part

225, appendix D, § II.b (Board); 12 CFR 325.2(m) (FDIC); 12 CFR 567.5(b)(4)

(OTS).

19 Although Federal law requires that the accounting principles applicable to bank

“reports or statements” be consistent with, or no less stringent than GAAP, it does

not require the Federal banking agencies to adhere to GAAP when determining

compliance with regulatory capital requirements. See 12 U.S.C. 1831n(a)(2) and

12 U.S.C. 1831n(b).

20 A notable example where the risk-based capital rules differ from GAAP is in the

requirement that banking organizations hold capital against the contingent risk of a

h, or no less stringent than GAAP, it does

not require the Federal banking agencies to adhere to GAAP when determining

compliance with regulatory capital requirements. See 12 U.S.C. 1831n(a)(2) and

12 U.S.C. 1831n(b).

20 A notable example where the risk-based capital rules differ from GAAP is in the

requirement that banking organizations hold capital against the contingent risk of a

In their consideration of the 2009 GAAP modifications and the interaction of

the modifications with the regulatory capital requirements, the agencies have

determined that the qualitative analysis required under FAS 167, as well as

enhanced requirements for recognizing transfers of financial assets under FAS 166,

converge in many respects with the agencies’ assessment of a banking

organization’s risk exposure to a structured finance transaction and other

transactions affected by the 2009 GAAP modifications.

In the case of some structures that banking organizations were not required

to consolidate prior to the 2009 GAAP modifications, the recent turmoil in the

financial markets has demonstrated the extent to which the credit risk exposure of

the sponsoring banking organization to such structures (and their related assets) has

in fact been greater than the agencies estimated, and more associated with non-

contractual considerations than the agencies had expected. For example, recent

performance data on structures involving revolving assets21 show that banking

organizations have often provided non-contractual (implicit) support to prevent

senior securities of the structure from being downgraded, thereby mitigating

reputational risk and the associated alienation of investors, and preserving access

to cost-efficient funding

an the agencies had expected. For example, recent

performance data on structures involving revolving assets21 show that banking

organizations have often provided non-contractual (implicit) support to prevent

senior securities of the structure from being downgraded, thereby mitigating

reputational risk and the associated alienation of investors, and preserving access

to cost-efficient funding.

number of off-balance sheet exposures, such as loan commitments and letters of

credit, as well as against the counterparty credit risk of derivatives. As a further

example, while GAAP includes goodwill and intangibles in total stockholders’

equity, certain of these items are deducted from stockholders’ equity when

calculating regulatory capital. See 12 CFR part 3, appendix A, § 2(c) (OCC);

12 CFR parts 208 and 225, appendix A, §§ II and III.A (Board); 12 CFR part 325,

appendix A, §§ I. and II.D. (FDIC); 12 CFR 567.5(a)(1)(v) and 567.5(a)(2) (OTS).

21 Typical structures of this type include securitizations that are backed by credit

card or HELOC receivables, single and multi-seller ABCP conduits, and structured

investment vehicles.

In light of this recent experience, the agencies believe that the broader

accounting consolidation requirements implemented by the 2009 GAAP

modifications will result in a regulatory capital treatment that more appropriately

reflects the risks to which banking organizations are exposed. Additionally, the

2009 GAAP modifications require that a banking organization regularly update its

consolidation analysis with respect to VIEs, and the enhanced requirements for

recognition of asset transfers and ongoing disclosure requirements for financial

assets with which the banking organization maintains some relationship

reflects the risks to which banking organizations are exposed. Additionally, the

2009 GAAP modifications require that a banking organization regularly update its

consolidation analysis with respect to VIEs, and the enhanced requirements for

recognition of asset transfers and ongoing disclosure requirements for financial

assets with which the banking organization maintains some relationship. These

requirements are consistent with the agencies’ view that the capital treatment of

some previously unconsolidated VIEs do not reflect the actual risk to which the

banking organization may be exposed.

Question 2: Are there features and characteristics of securitization transactions or

other transactions with VIEs, other SPEs, or other entities that are more or less

likely to elicit banking organizations’ provision of non-contractual (implicit)

support under stressed or other circumstances due to reputational risk, business

model, or other reasons? Commenters should describe such features and

characteristics and the methods of support that may be provided. The agencies are

particularly interested in comments regarding credit card securitizations, structured

investment vehicles, money market funds, hedge funds, and other entities that are

likely beneficiaries of non-contractual support.

The banking agencies have carefully considered the probable effect on

banking organizations’ regulatory capital ratios that will result from the 2009

GAAP modifications, and the possible alignments between these effects and the

risk-based principles of the risk-based capital rules. The agencies have also

carefully considered the potential financial impact of the 2009 GAAP

modifications on banking organizations. As part of this consideration, the agencies

reviewed relevant data from banking organizations’ public financial filings and

GAAP modifications, and the possible alignments between these effects and the

risk-based principles of the risk-based capital rules. The agencies have also

carefully considered the potential financial impact of the 2009 GAAP

modifications on banking organizations. As part of this consideration, the agencies

reviewed relevant data from banking organizations’ public financial filings and

regulatory reports as well as information obtained from the supervisory process,

including the results of the Supervisory Capital Assessment Program (SCAP). The

SCAP evaluated the capital position of the nineteen largest U.S. banking

organizations, which are also the banking organizations most involved in asset

securitization. As part of the SCAP, participating banking organizations' capital

adequacy was assessed using consolidation assumptions consistent with standards

ultimately included in FAS 166 and FAS 167.22

Having considered this information, including the SCAP results, the

agencies do not, at this time, find that a compelling basis exists for modifying their

regulatory capital requirements to alter the effect of the 2009 GAAP modifications

on banking organizations’ minimum regulatory capital requirements. Furthermore,

as discussed above, the banking agencies believe that the capital treatment of many

exposures that would be consolidated under the new accounting standards aligns

with risk-based capital principles and results in more appropriate risk-based capital

charges

ements to alter the effect of the 2009 GAAP modifications

on banking organizations’ minimum regulatory capital requirements. Furthermore,

as discussed above, the banking agencies believe that the capital treatment of many

exposures that would be consolidated under the new accounting standards aligns

with risk-based capital principles and results in more appropriate risk-based capital

charges. The agencies also believe that it is most appropriate for the leverage ratio

to continue to reflect the total on-balance sheet assets of a banking organization, in

keeping with its role as a supplement to the risk-based capital measure that limits

the maximum degree to which a banking organization can leverage its equity

capital base.23

22 A description of the design and implementation of the SCAP can be found at

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090424a1.pdf.

Additionally, an overview of the results of the SCAP, including regulatory capital

ratios calculated pro forma assuming implementation of the 2009 GAAP

modifications, can be accessed at

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf.

23 12 CFR 3.6 (b) and (c) (OCC); 12 CFR part 208, appendix B, § I.a. and 12 CFR

part 225, appendix D, § I.a (Board); 12 CFR part 325, appendix B (FDIC); 12 CFR

567.5 (OTS).

Question 3: What effect will the 2009 GAAP modifications have on banking

organizations’ financial positions, lending, and activities? How will the

modifications impact lending typically financed by securitization and lending in

general? How may the modifications affect the financial markets? What

proportion of the impact is related to regulatory capital requirements?

Commenters should provide specific responses and supporting data.

Question 4: As is generally the case with respect to changes in accounting rules,

the 2009 GAAP modifications would immediately affect banking organizations’

capital requirements

general? How may the modifications affect the financial markets? What

proportion of the impact is related to regulatory capital requirements?

Commenters should provide specific responses and supporting data.

Question 4: As is generally the case with respect to changes in accounting rules,

the 2009 GAAP modifications would immediately affect banking organizations’

capital requirements. The agencies specifically request comment on the impact of

immediate application of the 2009 GAAP modifications on the regulatory capital

requirements of banking organizations that were not included in the SCAP. In

light of the potential impact at this point in the economic cycle of the 2009 GAAP

modifications on regulatory capital requirements, the agencies solicit comment on

whether there are significant costs and burdens (or benefits) associated with

immediate application of the 2009 GAAP modifications to regulatory capital

requirements. If there are significant costs and burdens, or other relevant

considerations, should the agencies consider a phase-in of the capital requirements

that would result from the 2009 GAAP modifications? Commenters should

provide specific and detailed rationales and supporting evidence and data to

support their positions.

Additionally, if a phase-in of the impact of the GAAP modifications is

appropriate, what type of phase-in should be considered? For example, would a

phase-in over the course of a four-quarter period, as described below, for

transactions entered into on or prior to December 31, 2009, reduce costs or burdens

without reducing benefits?

Under a four-quarter phase-in approach, the amount of a newly-consolidated

VIE’s assets that would be subject to the phase-in would be limited to the

hase-in should be considered? For example, would a

phase-in over the course of a four-quarter period, as described below, for

transactions entered into on or prior to December 31, 2009, reduce costs or burdens

without reducing benefits?

Under a four-quarter phase-in approach, the amount of a newly-consolidated

VIE’s assets that would be subject to the phase-in would be limited to the

aggregate value of the assets held by the entity as of December 31, 2009. During

such a phase-in, banking organizations would be required to hold capital (for

purposes of calculating both the leverage and risk-based capital ratios)

incrementally against 25 percent of exposures subject to consolidation due to the

2009 GAAP modifications for each of the first three quarters of 2010, and against

100 percent of the exposures thereafter. For example, if, as a result of the 2009

GAAP modifications, a banking organization would have to consolidate $10

billion of assets associated with transactions entered into before December 31,

2009, it would be required to include $2.5 billion of these assets in its regulatory

capital ratios the first quarter 2010, $5 billion the second, $7.5 billion the third, and

the full $10 billion of assets in the fourth quarter and future reporting periods.

During such a phase-in period, the amount of capital that an institution holds

against all of its exposures to a single VIE as of December 31, 2009, would not be

reduced as a result of this phase-in. For example, if a banking organization is

effectively required to hold risk-based capital against all exposures in a VIE due to

a provision of implicit recourse, that capital treatment would continue throughout

2010

n period, the amount of capital that an institution holds

against all of its exposures to a single VIE as of December 31, 2009, would not be

reduced as a result of this phase-in. For example, if a banking organization is

effectively required to hold risk-based capital against all exposures in a VIE due to

a provision of implicit recourse, that capital treatment would continue throughout

2010. For another example, if in the first quarter of the phase-in the amount of

capital required for a banking organization’s credit enhancements to a

securitization on December 31, 2009, exceeds the amount of capital required for

25 percent (the first quarter phase-in amount) of the newly consolidated underlying

assets, the banking organization would be required to hold the greater amount of

capital.

Regulatory capital rules establish only a minimum capital requirement. In

all cases, banking organizations should hold capital commensurate with the level

and nature of the risks to which they are exposed. Supervisors will review a

banking organization’s securitization activities on an individual transaction and

business-line basis, and may require a banking organization to increase its capital if

they conclude that its capital position is not commensurate with its risk.24

IV. Asset-Backed Commercial Paper Programs

The agencies propose to eliminate existing provisions in the risk-based

capital rules that permit a banking organization that is required to consolidate

under GAAP an ABCP program for which the banking organization acts as

sponsor, to exclude the consolidated ABCP program assets from risk-weighted

assets and instead assess the risk-based capital requirement against any contractual

exposures of the organization arising from such ABCP programs.25 The agencies

also propose to eliminate the associated provision in the general risk-based capital

rules (incorporated by reference in the advanced approaches) that excludes from

tier 1 capital the minority interest in a consolidated ABCP progr

assets and instead assess the risk-based capital requirement against any contractual

exposures of the organization arising from such ABCP programs.25 The agencies

also propose to eliminate the associated provision in the general risk-based capital

rules (incorporated by reference in the advanced approaches) that excludes from

tier 1 capital the minority interest in a consolidated ABCP program not included in

a banking organization’s risk-weighted assets.26

The agencies initially implemented these provisions in the general risk-based

capital rules in 2004 in response to changes in GAAP that required consolidation

of certain ABCP conduits by sponsors. The provisions were driven largely by the

24 12 CFR part 3.4(b) (OCC); 12 CFR parts 208 and 225, appendix A §I (Board);

12 CFR part 325, appendix A § IIA (FDIC); 12 CFR 567.11 (OTS).

25 12 CFR part 3, appendix A, § 3(a)(5) and 12 CFR part 3, appendix C § 42(l)

(OCC); 12 CFR part 208, appendix A, § III.B.6.b and appendix F § 42(l) and 12

CFR part 225, appendix A, § III.B.6.b and appendix G § 42(l) (Board); 12 CFR

part 325, appendix A, § II.B.6.b and 12 CFR part 325, appendix D, § 424(l)

(FDIC); 12 CFR 567.6(a)(2)(vi)(E) and 12 CFR part 567, appendix C, § 42(l)

(OTS).

26 12 CFR part 3, appendix A, § 2(a)(3)(ii) (OCC); 12 CFR parts 208 and 225,

appendix A, § II A.1.c (Board); 12 CFR part 325, appendix A, § I.A.1.(d) (FDIC);

12 CFR 567.5(a)(iii)(OTS). See 12 CFR part 3, appendix C § 11(a) (OCC); 12

CFR part 208, appendix F, § 11(a) and 12 CFR part 225, appendix G, § 11(a)

(Board) ; 12 CFR part 325, appendix D, § 11(a) (FDIC); 12 CFR part 567,

appendix C, § 11(a) (OTS).

ppendix A, § 2(a)(3)(ii) (OCC); 12 CFR parts 208 and 225,

appendix A, § II A.1.c (Board); 12 CFR part 325, appendix A, § I.A.1.(d) (FDIC);

12 CFR 567.5(a)(iii)(OTS). See 12 CFR part 3, appendix C § 11(a) (OCC); 12

CFR part 208, appendix F, § 11(a) and 12 CFR part 225, appendix G, § 11(a)

(Board) ; 12 CFR part 325, appendix D, § 11(a) (FDIC); 12 CFR part 567,

appendix C, § 11(a) (OTS).

agencies’ belief at the time that banking organizations sponsoring ABCP conduits

generally faced limited risk exposures to ABCP programs, because these exposures

generally were confined to the credit enhancements and liquidity facility

arrangements banking organizations provide to these programs.27

Additionally, the agencies believed previously that operational controls and

structural provisions, as well as overcollateralization or other credit enhancements

provided by the companies that sell assets into ABCP programs, could further

mitigate the risk to which sponsoring banking organizations were exposed.

However, in light of the increased incidence of banking organizations providing

non-contractual support to these programs, as well as the general credit risk

concerns discussed above, the agencies have reconsidered the appropriateness of

excluding consolidated ABCP program assets from risk-weighted assets and have

determined that continuing the exclusion is no longer justified. Under the

proposal, if a banking organization is required to consolidate an entity associated

with an ABCP program under GAAP, it must hold regulatory capital against the

assets of the entity. It would not be permitted to calculate its risk-based capital

requirements with respect to the entity based on its contractual exposure to the

entity.

ntinuing the exclusion is no longer justified. Under the

proposal, if a banking organization is required to consolidate an entity associated

with an ABCP program under GAAP, it must hold regulatory capital against the

assets of the entity. It would not be permitted to calculate its risk-based capital

requirements with respect to the entity based on its contractual exposure to the

entity.

V. Reservation of Authority

The agencies expect that there may be instances when a banking

organization structures a financial transaction with an SPE to avoid consolidation

under FAS 166 and FAS 167, and the resulting capital treatment is not

commensurate with the actual risk relationship of the banking organization to the

entity. Under this proposal, the banking organization’s primary Federal supervisor

would retain the authority to require the banking organization to treat the entity as

27 See 69 FR 44908 (July 28, 2004).

if it were consolidated onto the banking organization’s balance sheet for risk-based

capital purposes.

Question 5: The agencies request comment on all aspects of this proposed rule,

including the proposal to remove the exclusion of consolidated ABCP program

assets from risk-weighted assets under the risk-based capital rules, the proposed

reservation of authority provisions, and the regulatory capital treatment that would

result from the 2009 GAAP modifications absent changes to the agencies’

regulatory capital requirements

st comment on all aspects of this proposed rule,

including the proposal to remove the exclusion of consolidated ABCP program

assets from risk-weighted assets under the risk-based capital rules, the proposed

reservation of authority provisions, and the regulatory capital treatment that would

result from the 2009 GAAP modifications absent changes to the agencies’

regulatory capital requirements.

Question 6: Does this proposal raise competitive equity concerns with respect to

accounting and regulatory capital treatments in other jurisdictions or with respect

to international accounting standards?

Although the agencies believe that GAAP, as modified, should remain the

starting point for calculating regulatory capital ratios and that the capital

requirements resulting from the 2009 GAAP modifications generally will result in

a more appropriate reflection of credit risk, the agencies recognize that the

principles underlying the 2009 GAAP modifications -- power, benefits, and

obligation to bear losses -- and the resulting consolidation treatment, may not in all

situations and respects correspond to a treatment that would result from a more

pure risk focus.

Question 7: Among the structures that likely will be consolidated under the 2009

GAAP modifications, for which types, if any, should the agencies consider

assessing a different risk-based capital requirement than the capital treatment that

will result from the implementation of the modifications? How are commenters’

views influenced by proposals for reforming the securitization markets that require

securitizers to retain a percentage of the credit risk on any asset that is transferred,

sold or conveyed through a securitization? Commenters should provide a detailed

explanation and supporting empirical analysis of why the features and

from the implementation of the modifications? How are commenters’

views influenced by proposals for reforming the securitization markets that require

securitizers to retain a percentage of the credit risk on any asset that is transferred,

sold or conveyed through a securitization? Commenters should provide a detailed

explanation and supporting empirical analysis of why the features and

characteristics of these structure types merit an alternative treatment, how the risks

of the structures should be measured, and what an appropriate alternative capital

treatment would be. Responses should also discuss in detail with supporting

evidence how such different capital treatment may or may not give rise to capital

arbitrage opportunities.

Question 8: Servicers of securitized residential mortgages who participate in the

Treasury’s Making Home Affordable Program (MHAP) receive certain incentive

payments in connection with loans modified under the program. If a structure

must be consolidated solely due to loan modifications under MHAP, should these

assets be included in the leverage and risk-based capital requirements?

Commenters should specify the rationale for an alternative treatment and what an

appropriate alternative capital requirement would be.

Question 9: Which features and characteristics of transactions that may not be

subject to consolidation after the 2009 GAAP modifications become effective

should be subject to risk-based capital requirements as if consolidated in order to

more appropriately reflect risk?

Question 10: Will securitized loans that remain on the balance sheet be subjected

to the same ALLL provisioning process, including applicable loss rates, as similar

loans that are not securitized? If the answer is no, please explain

he 2009 GAAP modifications become effective

should be subject to risk-based capital requirements as if consolidated in order to

more appropriately reflect risk?

Question 10: Will securitized loans that remain on the balance sheet be subjected

to the same ALLL provisioning process, including applicable loss rates, as similar

loans that are not securitized? If the answer is no, please explain. If the answer is

yes, how would banking organizations reflect the benefits of risk sharing if

investors in securitized, on-balance sheet loans absorb realized credit losses?

Commenters should provide quantification of such benefits, and any other effects

of loss sharing, wherever possible. Additionally, are there policy alternatives to

address any unique challenges the pending change in accounting standards present

with regard to the ALLL provisioning process including, for example, the current

constraint on the amount of provisions that are includible in tier 2 capital?

Commenters should provide quantification of the effects of the current limits on

the includibility of provisions in tier 2 capital and the extent to which the 2009

GAAP modifications and the changes in regulatory capital requirements proposed

in this NPR effect those limits.

VI.

Regulatory Analysis

Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), generally

requires that, in connection with a notice of proposed rulemaking, an agency

prepare and make available for public comment an initial regulatory flexibility

analysis that describes the impact of a proposed rule on small entities.28 Under

regulations issued by the Small Business Administration,29 a small entity includes

a commercial bank, bank holding company, or savings association with assets of

$175 million or less (a small banking organization)

lemaking, an agency

prepare and make available for public comment an initial regulatory flexibility

analysis that describes the impact of a proposed rule on small entities.28 Under

regulations issued by the Small Business Administration,29 a small entity includes

a commercial bank, bank holding company, or savings association with assets of

$175 million or less (a small banking organization). [As of [appropriate date],

there were approximately 2,586 small bank holding companies, 394 small savings

associations, 850 small national banks, 432 small state member banks, and 2,922

small state nonmember banks.] As a general matter, the Board’s general risk-

based capital rules apply only to a bank holding company that has consolidated

assets of $500 million or more. Therefore, the proposed changes to the Board’s

capital adequacy guidelines for bank holding companies will not affect small bank

holding companies.

Other than the proposed modifications to the risk-based capital rules that

would no longer allow banking organizations to exclude consolidated ABCP

programs from risk-weighted assets, the proposed rule does not impose any

additional obligations, restrictions, burdens, or reporting, recordkeeping or

compliance requirements on banks or savings associations, including small

28 See 5 U.S.C. 603(a).

29 See 13 CFR 121.201.

banking organizations, nor does it duplicate, overlap or conflict with other Federal

rules. The agencies [expect] that the proposed modifications to the general risk-

based capital rules would not materially affect small banking organizations

because they do not sponsor ABCP programs. [Further analysis to come.]

Paperwork Reduction Act

In accordance with the requirements of the Paperwork Reduction Act of

1995 (44 U.S.C. 3506), the agencies have reviewed the proposed rule to assess any

information collections

he proposed modifications to the general risk-

based capital rules would not materially affect small banking organizations

because they do not sponsor ABCP programs. [Further analysis to come.]

Paperwork Reduction Act

In accordance with the requirements of the Paperwork Reduction Act of

1995 (44 U.S.C. 3506), the agencies have reviewed the proposed rule to assess any

information collections. There are no collections of information as defined by the

Paperwork Reduction Act in the proposed rule.

[PRA staff to discuss whether reservation of authority may require further

analysis.]

OCC/OTS Executive Order 12866

Executive Order 12866 requires federal agencies to prepare a regulatory

impact analysis for agency actions that are found to be “significant regulatory

actions.” Significant regulatory actions include, among other things, rulemakings

that “have an annual effect on the economy of $100 million or more or adversely

affect in a material way the economy, a sector of the economy, productivity,

competition, jobs, the environment, public health or safety, or state, local, or tribal

governments or communities.” The OCC and the OTS each determined that its

portion of the proposed rule is not a significant regulatory action under Executive

Order 12866.

OCC/OTS Unfunded Mandates Reform Act of 1995 Determination

The Unfunded Mandates Reform Act of 199530 (UMRA) requires that an

agency prepare a budgetary impact statement before promulgating a rule that

includes a federal mandate that may result in the expenditure by state, local, and

30 See Pub. L. 104-4.

on under Executive

Order 12866.

OCC/OTS Unfunded Mandates Reform Act of 1995 Determination

The Unfunded Mandates Reform Act of 199530 (UMRA) requires that an

agency prepare a budgetary impact statement before promulgating a rule that

includes a federal mandate that may result in the expenditure by state, local, and

30 See Pub. L. 104-4.

tribal governments, in the aggregate, or by the private sector of $100 million or

more (adjusted annually for inflation) in any one year. If a budgetary impact

statement is required, section 205 of the UMRA also requires an agency to identify

and consider a reasonable number of regulatory alternatives before promulgating a

rule. The OCC and the OTS each have determined that its proposed rule will not

result in expenditures by State, local, and tribal governments, in the aggregate, or

by the private sector, of $100 million or more in any one year. Accordingly,

neither the OCC nor the OTS has prepared a budgetary impact statement or

specifically addressed the regulatory alternatives considered.

Solicitation of Comments on Use of Plain Language

Section 722 of the GLBA required the agencies to use plain language in all

proposed and final rules published after January 1, 2000. The agencies invite

comment on how to make this proposed rule easier to understand. For example:

• Have the agencies organized the material to suit your needs? If not, how

could they present the rule more clearly?

• Are the requirements in the rule clearly stated? If not, how could the rule be

more clearly stated?

• Do the regulations contain technical language or jargon that is not clear? If

so, which language requires clarification?

• Would a different format (grouping and order of sections, use of headings,

paragraphing) make the regulation easier to understand? If so, what changes

would achieve that?

• Is this section format adequate? If not, which of the sections should be

changed and how?

• What other changes c

contain technical language or jargon that is not clear? If

so, which language requires clarification?

• Would a different format (grouping and order of sections, use of headings,

paragraphing) make the regulation easier to understand? If so, what changes

would achieve that?

• Is this section format adequate? If not, which of the sections should be

changed and how?

• What other changes can the agencies incorporate to make the regulation

easier to understand?

List of Subjects

12 CFR Part 3

Administrative practice and procedure, Banks, Banking, Capital, National banks,

Reporting and recordkeeping requirements, Risk.

12 CFR Part 208

Confidential business information, Crime, Currency, Federal Reserve System,

Mortgages, Reporting and recordkeeping requirements, Risk.

12 CFR Part 225

Administrative Practice and Procedure, Banks, banking, Federal Reserve System,

Holding companies, Reporting and recordkeeping requirements, Securities.

12 CFR Part 325

Administrative practice and procedure, Banks, banking, Capital Adequacy,

Reporting and recordkeeping requirements, Savings associations, State nonmember

banks.

12 CFR Part 567

Capital, Reporting and recordkeeping requirements, Risk, Savings associations.

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

For the reasons stated in the common preamble, the Office of the Comptroller of

the Currency proposes to amend Part 3 of chapter I of Title 12, Code of Federal

Regulations as follows:

PART 3—MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

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.

2. Section 3.4 is amended by adding paragraph (c) to read as follows:

§ 3.4 Reservation of authority.

* * * * *

pter I of Title 12, Code of Federal

Regulations as follows:

PART 3—MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

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.

2. Section 3.4 is amended by adding paragraph (c) to read as follows:

§ 3.4 Reservation of authority.

* * * * *

subject to consolidation on the bank’s balance sheet does not appropriately reflect

the risks imposed on the bank. Accordingly, the OCC may require the bank to

treat the exposure as if it were consolidated onto the bank’s balance sheet for the

purpose of determining compliance with the bank’s minimum risk-based capital

requirements set forth in Appendix A or Appendix C to this Part. The OCC will

look to the substance of and risk associated with the transaction as well as other

relevant factors the OCC deems appropriate in determining whether to require such

treatment and in determining the bank’s compliance with minimum risk-based

capital requirements.

Appendix A to Part 3 – Risk Based Capital Guidelines

Section 2 [Amended]

In appendix A to Part 3, in section 2, remove and reserve paragraph

(a)(3)(ii).

In appendix A to Part 3, in section 3, remove and reserve paragraph

(a)(5) and revise paragraph (a)(6) to read as follows.

Section 3. * * *

* * * * *

ank’s compliance with minimum risk-based

capital requirements.

Appendix A to Part 3 – Risk Based Capital Guidelines

Section 2 [Amended]

In appendix A to Part 3, in section 2, remove and reserve paragraph

(a)(3)(ii).

In appendix A to Part 3, in section 3, remove and reserve paragraph

(a)(5) and revise paragraph (a)(6) to read as follows.

Section 3. * * *

* * * * *

(a) * * *

(6) Other variable interest entities subject to consolidation. If a bank is

required to consolidate the assets of a variable interest entity under generally

accepted accounting principles, the bank must assess a risk-based capital charge

based on the appropriate risk weight of the consolidated assets in accordance with

sections 3(a) and 4 of this appendix A. Any direct credit substitutes and recourse

obligations (including residual interests), and loans that a bank may provide to

such a variable interest entity are not subject to any capital charge under section 4

of this appendix A.

In appendix C to Part 3, in section 1, redesignate paragraph (c)(3) as

paragraph (c)(4), and add a new paragraph (3) to read as follows:

Appendix C to Part 3—Capital Adequacy Guidelines for Banks: Internal-

Ratings-Based and Advanced Measurement Approaches

* * * * *

Section 1. * * *

(c)* * *

* * * * *

(3) Regulatory capital treatment of unconsolidated entities. If the OCC

determines that the capital treatment for a banking organization’s exposure or other

relationship to an entity not consolidated on the bank’s balance sheet is not

commensurate with the actual risk relationship of the banking organization to the

entity, for risk-based capital purposes, it may require the banking organization to

treat the entity as if it were consolidated onto the bank’s balance sheet and require

the bank to hold capital against the entity’s exposures

or other

relationship to an entity not consolidated on the bank’s balance sheet is not

commensurate with the actual risk relationship of the banking organization to the

entity, for risk-based capital purposes, it may require the banking organization to

treat the entity as if it were consolidated onto the bank’s balance sheet and require

the bank to hold capital against the entity’s exposures. The OCC will look to the

substance of and risk associated with the transaction as well as other relevant

factors the OCC deems appropriate in determining whether to require such

treatment and in determining the bank’s compliance with minimum risk-based

capital requirements. In making a determination under this paragraph, the OCC

will apply notice and response procedures in the same manner and to the same

extent as the notice and response procedures in 12 CFR 3.12.

Revise Appendix C to part 3 by removing section 42(l) and

redesignating section 42(m) as section 42(l) as follows:

Appendix C to Part 3—Capital Adequacy Guidelines for Banks: Internal-

Ratings-Based and Advanced Measurement Approaches

* * * * *

Part V. * * * * *

Section 42. * * * * *

(l) Nth-to-default credit derivatives * * *

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

For the reasons stated in the common preamble, the Board of Governors of

Federal Reserve System amends parts 208 and 225 of Chapter II of title 12 of the

Code of Federal Regulations as follows:

PART 208 – MEMBERSHIP OF STATE BANKING INSTITUTIONS IN

THE FEDERAL RESERVE SYSTEM (REGULATION H)

1. The authority for part 208 continues to read as follows:

Authority : 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 371d, 461,

481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),1833(j), 1828(o)1831, 1831o,

1831p-1, 1831r-1, 1831w, 1831x 1835a, 1882, 2901-2907, 3105, 3310, 3331-3351,

and 3905-3909; 15 U.S.C

HIP OF STATE BANKING INSTITUTIONS IN

THE FEDERAL RESERVE SYSTEM (REGULATION H)

1. The authority for part 208 continues to read as follows:

Authority : 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 371d, 461,

481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),1833(j), 1828(o)1831, 1831o,

1831p-1, 1831r-1, 1831w, 1831x 1835a, 1882, 2901-2907, 3105, 3310, 3331-3351,

and 3905-3909; 15 U.S.C. 78b, 78I(b), 78l(i),780-4(c)(5), 78q, 78q-1, and 78w,

1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b,

4106 and 4128.

2. In appendix A to part 208, amend section I by adding the following

paragraph immediately prior to the last undesignated paragraph:

Appendix A to Part 208 – Capital Adequacy Guidelines for State Member

Banks: Risk-Based Measure

I.* * *

If the Federal Reserve determines that the capital treatment for a bank’s

exposure or other relationship to an entity not consolidated on the bank’s balance

sheet is not commensurate with the actual risk relationship of the bank to the

entity, for risk-based capital purposes, it may require the bank to treat the entity as

if it were consolidated onto the bank’s balance sheet and require the bank to hold

capital against the entity’s exposures.

* * * * *

3. In appendix A to part 208, revise paragraph (c) of section II.A.1 by

removing the last sentence as follows:

Appendix A to Part 208 – Capital Adequacy Guidelines for State Member

Banks: Risk-Based Measure

* * * * *

II. * * *

A. * * *

1. * * *

* * * * *

c. Minority interest in equity accounts of consolidated subsidiaries. This element

is included in tier 1 capital because, as a general rule, it represents equity that is

freely available to absorb losses in operating subsidiaries whose assets are included

in a bank's risk-weighted asset base

State Member

Banks: Risk-Based Measure

* * * * *

II. * * *

A. * * *

1. * * *

* * * * *

c. Minority interest in equity accounts of consolidated subsidiaries. This element

is included in tier 1 capital because, as a general rule, it represents equity that is

freely available to absorb losses in operating subsidiaries whose assets are included

in a bank's risk-weighted asset base. While not subject to an explicit sublimit

within tier 1, banks are expected to avoid using minority interest in the equity

accounts of consolidated subsidiaries as an avenue for introducing into their capital

structures elements that might not otherwise qualify as tier 1 capital or that would,

in effect, result in an excessive reliance on preferred stock within tier 1. Minority

interests in small business investment companies, investment funds that hold

nonfinancial equity investments (as defined in section II.B.5.b. 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. [Removed]. * * * * *

4. In appendix A to part 208, remove paragraph (b) of section III.B.6 and

redesignate paragraph (c) of section III.B.6 as paragraph (b) as follows:

Appendix A to Part 208 – Capital Adequacy Guidelines for State Member

Banks: Risk-Based Measure

* * * * *

III. * * *

B.* * *

* * * * *

6. * * *

b. 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.

c. [Removed]

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.

c. [Removed]

5. In appendix F to part 208, add a new paragraph (3) to section 1(c) and

redesignate paragraph (3) as paragraph (4) as follows:

Appendix F to Part 208 – Capital Adequacy Guidelines for Banks: Internal-

Ratings-Based and Advanced Measurement Approaches

* * * * *

1. * * *

(c)* * *

* * * * *

(3) Regulatory capital treatment of unconsolidated entities. If the Federal

Reserve determines that the capital treatment for a bank’s exposure or other

relationship to an entity not consolidated on the bank’s balance sheet is not

commensurate with the actual risk relationship of the bank to the entity, for risk-

based capital purposes, it may require the bank to treat the entity as if it were

consolidated onto the bank’s balance sheet and require the bank to hold capital

against the entity’s exposures.

(4) Other supervisory authority. Nothing in this appendix limits the

authority of the Federal Reserve under any other provision of law or regulation to

take supervisory or enforcement action, including action to address unsafe or

unsound practices or conditions, deficient capital levels, or violations of law.

6. Revise appendix F to part 208 by removing section 42(l) and

redesignating section 42(m) as section 42(l) as follows::

Appendix F to Part 208 – Capital Adequacy Guidelines for Banks: Internal-

Ratings-Based and Advanced Measurement Approaches

* * * * *

Part V. * * * * *

Section 42. * * * * *

nsafe or

unsound practices or conditions, deficient capital levels, or violations of law.

6. Revise appendix F to part 208 by removing section 42(l) and

redesignating section 42(m) as section 42(l) as follows::

Appendix F to Part 208 – Capital Adequacy Guidelines for Banks: Internal-

Ratings-Based and Advanced Measurement Approaches

* * * * *

Part V. * * * * *

Section 42. * * * * *

(l) Nth-to-default credit derivatives * * *

PART 225 – BANK HOLDING COMPANIES AND CHANGE IN BANK

CONTROL (REGULATION Y)

1. The authority for part 225 continues to read as follows:

Authority : 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,

1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 3909; 15

U.S.C. 1681s, 1681w, 6801 and 6805.

2. In appendix A to part 225, amend section I by adding the following

paragraph immediately prior to the last undesignated paragraph:

Appendix A to Part 225 – Capital Adequacy Guidelines for Bank Holding

Companies: Risk-Based Measure

I.* * *

If the Federal Reserve determines that the capital treatment for a banking

organization’s exposure or other relationship to an entity not consolidated on the

banking organization’s balance sheet is not commensurate with the actual risk

relationship of the banking organization to the entity, for risk-based capital

purposes, it may require the banking organization to treat the entity as if it were

consolidated onto the banking organization’s balance sheet and require the banking

organization to hold capital against the entity’s exposures.

3. In appendix A to part 225, revise paragraph (iii) of section II.A.1.c by

removing the last sentence as follows:

Appendix A to Part 225 – Capital Adequacy Guidelines for Bank Holding

Companies: Risk-Based Measure

* * * * *

II. * * *

A. * * *

1. * * *

the banking organization’s balance sheet and require the banking

organization to hold capital against the entity’s exposures.

3. In appendix A to part 225, revise paragraph (iii) of section II.A.1.c by

removing the last sentence as follows:

Appendix A to Part 225 – Capital Adequacy Guidelines for Bank Holding

Companies: Risk-Based Measure

* * * * *

II. * * *

A. * * *

1. * * *

* * * * *

c. * * *

* * * * *

iii. Minority interest in equity accounts of consolidated subsidiaries. Minority

interest in the common and preferred stockholders' equity accounts of a

consolidated subsidiary (minority interest) represents stockholders' equity

associated with common or preferred equity instruments issued by a banking

organization's consolidated subsidiary that are held by investors other than the

banking organization. Minority interest is included in tier 1 capital because, as a

general rule, it represents equity that is freely available to absorb losses in the

issuing subsidiary. Nonetheless, minority interest typically is not available to

absorb losses in the banking organization as a whole, a feature that is a particular

concern when the minority interest is issued by a subsidiary that is neither a U.S.

depository institution nor a foreign bank. For this reason, this appendix

distinguishes among three types of qualifying minority interest. Class A minority

interest is minority interest related to qualifying common and noncumulative

perpetual preferred equity instruments issued directly (that is, not through a

subsidiary) by a consolidated U.S. depository institution31 [change to 9] or foreign

bank32 [change to 10] subsidiary of a banking organization. Class A minority

interest is not subject to a formal limitation within tier 1 capital. Class B minority

31 U.S

umulative

perpetual preferred equity instruments issued directly (that is, not through a

subsidiary) by a consolidated U.S. depository institution31 [change to 9] or foreign

bank32 [change to 10] subsidiary of a banking organization. Class A minority

interest is not subject to a formal limitation within tier 1 capital. Class B minority

31 U.S. depository institutions are defined to include branches (foreign and domestic) of

federally insured banks and depository institutions chartered and headquartered in the 50 states

of the United States, the District of Columbia, Puerto Rico, and U.S. territories and possessions.

The definition encompasses banks, mutual or stock savings banks, savings or building and loan

associations, cooperative banks, credit unions, and international banking facilities of domestic

banks.

32 For this purpose, a foreign bank is defined as an institution that engages in the business of

banking; is recognized as a bank by the bank supervisory or monetary authorities of the country

of its organization or principal banking operations; receives deposits to a substantial extent in the

regular course of business; and has the power to accept demand deposits.

interest is minority interest related to qualifying cumulative perpetual preferred

equity instruments issued directly by a consolidated U.S. depository institution or

foreign bank subsidiary of a banking organization. Class B minority interest is a

restricted core capital element subject to the limitations set forth in section

II.A.1.b.i. of this appendix, but is not subject to a tier 2 sub-limit. Class C minority

interest is minority interest related to qualifying common or perpetual preferred

stock issued by a banking organization's consolidated subsidiary that is neither a

U.S. depository institution nor a foreign bank

interest is a

restricted core capital element subject to the limitations set forth in section

II.A.1.b.i. of this appendix, but is not subject to a tier 2 sub-limit. Class C minority

interest is minority interest related to qualifying common or perpetual preferred

stock issued by a banking organization's consolidated subsidiary that is neither a

U.S. depository institution nor a foreign bank. Class C minority interest is eligible

for inclusion in tier 1 capital as a restricted core capital element and is subject to

the limitations set forth in sections II.A.1.b.i. and II.A.2.d.iv. of this appendix.

Minority interest in small business investment companies, investment funds that

hold nonfinancial equity investments (as defined in section II.B.5.b. of this

appendix), and subsidiaries engaged in nonfinancial activities are not included in

the banking organization's tier 1 or total capital if the banking organization's

interest in the company or fund is held under one of the legal authorities listed in

section II.B.5.b. of this appendix. [Removed].

* * * * *

4. In appendix A to part 225, remove paragraph (b) of section III.B.6 and

redesignate paragraph (c) of section III.B.6 as paragraph (b) as follows:

Appendix A to Part 225 – Capital Adequacy Guidelines for Bank Holding

Companies: Risk-Based Measure

* * * * *

III. * * *

B.* * *

* * * * *

6. * * *

b. If a bank holding company has multiple overlapping exposures (such as a

program-wide credit enhancement and multiple pool-specific liquidity facilities) to

an ABCP program that is not consolidated for risk-based capital purposes, the bank

holding company is not required to hold duplicative risk-based capital under this

appendix against the overlapping position. Instead, the bank holding company

should apply to the overlapping position the applicable risk-based capital treatment

that results in the highest capital charge.

c. [Removed]

es) to

an ABCP program that is not consolidated for risk-based capital purposes, the bank

holding company is not required to hold duplicative risk-based capital under this

appendix against the overlapping position. Instead, the bank holding company

should apply to the overlapping position the applicable risk-based capital treatment

that results in the highest capital charge.

c. [Removed]

In appendix G to part 225, add a new paragraph (3) to section 1(c) and

redesignate paragraph (3) as paragraph (4) as follows:

Appendix F to Part 208 – Capital Adequacy Guidelines for Banks: Internal-

Ratings-Based and Advanced Measurement Approaches

* * * * *

1. * * *

(c)* * *

* * * * *

(3) Regulatory capital treatment of unconsolidated entities. If the Federal

Reserve determines that the capital treatment for a banking organization’s

exposure or other relationship to an entity not consolidated on the banking

organization’s balance sheet is not commensurate with the actual risk relationship

of the banking organization to the entity, for risk-based capital purposes, it may

require the banking organization to treat the entity as if it were consolidated onto

the banking organization’s balance sheet and require the banking organization to

hold capital against the entity’s exposures.

(4) Other supervisory authority. Nothing in this appendix limits the authority of

the Federal Reserve under any other provision of law or regulation to take

supervisory or enforcement action, including action to address unsafe or unsound

practices or conditions, deficient capital levels, or violations of law.

6. Revise appendix G to part 225 by removing section 42(l) and

redesignating section 42(m) as section 42(l) as follows::

Appendix G to Part 225 – Capital Adequacy Guidelines for Bank Holding

Companies: Internal-Ratings-Based and Advanced Measurement Approaches

* * * * *

Part V. * * * * *

Section 42. * * * * *

practices or conditions, deficient capital levels, or violations of law.

6. Revise appendix G to part 225 by removing section 42(l) and

redesignating section 42(m) as section 42(l) as follows::

Appendix G to Part 225 – Capital Adequacy Guidelines for Bank Holding

Companies: Internal-Ratings-Based and Advanced Measurement Approaches

* * * * *

Part V. * * * * *

Section 42. * * * * *

(l) Nth-to-default credit derivatives * * *

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority for Issuance

For the reasons stated in the common preamble, the Federal Deposit Insurance

Corporation amends Part 325 of Chapter III of Title 12, Code of the Federal

Regulations as follows:

PART 325 – CAPITAL MAINTENANCE

1. The authority citation for part 325 continues to read as follows:

Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c),

1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o,

1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat. 1761, 1789, 1790, (12

U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 2236, as amended by Pub. L.

103-325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105

Stat. 2236, 2386, as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12

U.S.C. 1828 note).

2. In Appendix A to part 325, revise section I.A.1.(d) to read as follows:

Appendix A to Part 325 – Statement of Policy on Risk Based Capital

* * * * *

I. * * *

A. * * *

1. * * * * *

t. 2236, as amended by Pub. L.

103-325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105

Stat. 2236, 2386, as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12

U.S.C. 1828 note).

2. In Appendix A to part 325, revise section I.A.1.(d) to read as follows:

Appendix A to Part 325 – Statement of Policy on Risk Based Capital

* * * * *

I. * * *

A. * * *

1. * * * * *

(d) Minority interests in small business investment companies, investment funds

that hold nonfinancial equity investments (as defined in section II.B.(6)(ii) of this

appendix A), and subsidiaries that are engaged in non-financial activities are not

included in the bank’s Tier 1 or total capital base if the bank’s interest in the

company or fund is held under one of the legal authorities listed in section

II.B.(6)(ii) of this appendix A.

3. In Appendix A to part 325, revise section II.A. by adding a new

paragraph 4. as follows:

Appendix A to Part 325 – Statement of Policy on Risk Based Capital

* * * * *

II. * * *

A. * * * * *

4. The Director of the Division of Supervision and Consumer Protection (DSC)

may, on a case-by-case basis, determine that the regulatory capital treatment for an

exposure to a transaction that is not subject to consolidation on the balance sheet is

not commensurate with the risk of the exposure and the relationship of the bank to

the transaction. In making this determination, the Director of DSC may require the

bank to treat the transaction as if it were consolidated on the balance sheet of the

bank for regulatory capital purposes and calculate the appropriate regulatory

capital ratios accordingly.

4. Revise Appendix A to part 325 by removing section II.B.6.b. and

redesignating section II.B.6.c. as section II.B.6.b. as follows:

Appendix A to Part 325 – Statement of Policy on Risk Based Capital

* * * * *

II. * * *

B. * * * * *

6. * * * * *

on the balance sheet of the

bank for regulatory capital purposes and calculate the appropriate regulatory

capital ratios accordingly.

4. Revise Appendix A to part 325 by removing section II.B.6.b. and

redesignating section II.B.6.c. as section II.B.6.b. as follows:

Appendix A to Part 325 – Statement of Policy on Risk Based Capital

* * * * *

II. * * *

B. * * * * *

6. * * * * *

b. 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 capital under duplicative risk-based capital requirements under this appendix

against the overlapping position. * * *

In Appendix D to part 325, revise section 1(c) by redesignating

paragraph (3) as paragraph (4) and inserting a new paragraph (3) as follows:

Appendix D to Part 325 – Capital Adequacy Guidelines for Banks:

Internal-Ratings-Based and Advanced Measurement Approaches

Part I. * * *

Section 1. * * * * *

(3) The FDIC may, on a case-by-case basis, determine that the regulatory

capital treatment for an exposure to a transaction that is not subject to

consolidation on the balance sheet is not commensurate with the risk of the

exposure and the relationship of the bank to the transaction. In making this

determination, the FDIC may require the bank to treat the transaction as if it

were consolidated on the balance sheet of the bank for regulatory capital

purposes and calculate the appropriate regulatory capital ratios accordingly.

(4) Other supervisory authority. * * *

Revise Appendix D to part 325 by removing section 42(l) and

redesignating section 42(m) as section 42(l) as follows:

Appendix D to Part 325 – Capital Adequacy Guidelines for Banks: Internal-

Ratings-Based and Advanced Measurement Approaches

* * * * *

Part V. * * * * *

Section 42. * * * * *

ropriate regulatory capital ratios accordingly.

(4) Other supervisory authority. * * *

Revise Appendix D to part 325 by removing section 42(l) and

redesignating section 42(m) as section 42(l) as follows:

Appendix D to Part 325 – Capital Adequacy Guidelines for Banks: Internal-

Ratings-Based and Advanced Measurement Approaches

* * * * *

Part V. * * * * *

Section 42. * * * * *

(l) Nth-to-default credit derivatives * * *

Department of the Treasury

Office of Thrift Supervision

12 CFR Chapter V

For reasons set forth in the common preamble, the Office of Thrift

Supervision amends part 567 of Chapter V of title 12 of the Code of Federal

Regulations as follows:

PART 567 – CAPITAL

1. The authority for citation for part 567 continues to read as follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828 (note)

2. Section 567.5 (a)(1)(iii) is amended to read as follows:

§ 567.5 Components of capital.

* * * * *

(a) * * *

(1) * * *

(iii) Minority interests in the equity accounts of the subsidiaries that are

fully consolidated.

* * * * *

3. Section 567.6 is amended by deleting paragraphs (a)(2)(vi)(E)(3)(i) and

(ii).

4. Section 567.6 is amended by redesignating paragraph (a)(2)(vi)(E)(3)(iii)

as (a)(2)(vi)(E)(3).

* * * * *

(a) * * *

(3) If a savings association has multiple overlapping exposures (such as a

program-wide credit enhancement and a liquidity facility) to an ABCP

program that is not consolidated for risk-based capital purposes, the savings

association is not required to hold duplicative risk-based capital under this

edesignating paragraph (a)(2)(vi)(E)(3)(iii)

as (a)(2)(vi)(E)(3).

* * * * *

(a) * * *

(3) If a savings association has multiple overlapping exposures (such as a

program-wide credit enhancement and a liquidity facility) to an ABCP

program that is not consolidated for risk-based capital purposes, the savings

association is not required to hold duplicative risk-based capital under this

part against the overlapping position. Instead, the savings association should

apply to the overlapping position the applicable risk-based capital treatment

that results in the highest capital charge.

Section 567.11 is amended by adding paragraphs (c)(3) and

redesignating paragraph (c)(3) as paragraph (c)(4). Section 567.11 is

amended by adding paragraph (d) to read as follows:

§ 567.11 Reservation of authority.

* * * * *

(3) OTS may find that the capital treatment for an exposure to a

transaction not subject to consolidation on the savings association’s balance

sheet does not appropriately reflect the risks imposed on the savings

association. Accordingly, OTS may require the savings association to treat

the transaction as if it were consolidated on the savings association’s balance

sheet. OTS will look to the substance of and risk associated with the

transaction as well as other relevant factors in determining whether to

require such treatment and in calculating regulatory capital as OTS deems

appropriate.

(4) If this part does not specifically assign a risk weight, credit

equivalent amount, or credit conversion factor, OTS may assign any risk

weight, credit equivalent amount or credit conversion factor that it deems

appropriate. In making this determination, OTS will consider the risks

associated with the asset or off-balance sheet item as well as other relevant

factors.

eems

appropriate.

(4) If this part does not specifically assign a risk weight, credit

equivalent amount, or credit conversion factor, OTS may assign any risk

weight, credit equivalent amount or credit conversion factor that it deems

appropriate. In making this determination, OTS will consider the risks

associated with the asset or off-balance sheet item as well as other relevant

factors.

(d) In making a determination under this paragraph (c) of this section, the

OTS will notify the savings association of the determination and solicit a

response from the savings association. After review of the response by the

savings association, the OTS shall issue a final supervisory decision

regarding the determination made under paragraph (c) of this section.

6. In Appendix C to part 567, add a new paragraph (c)(3) to Part 1, Section

1 and redesignate paragraph (c)(3) as paragraph (c)(4) as follows:

Appendix C to Part 567 - Risk-Based Capital Requirements – Internal

Ratings-Based and Advanced Measurement Approaches

* * * * *

(3) Regulatory capital treatment of unconsolidated entities. OTS may find

that the capital treatment for an exposure to a transaction not subject to

consolidation on the savings association’s balance sheet does not

appropriately reflect the risks imposed on the savings association.

Accordingly, OTS may require the savings association to treat the

transaction as if it were consolidated on the savings association’s balance

sheet. OTS will look to the substance of and risk associated with the

transaction as well as other relevant factors in determining whether to

require such treatment and in calculating regulatory capital as OTS deems

appropriate.

vings association.

Accordingly, OTS may require the savings association to treat the

transaction as if it were consolidated on the savings association’s balance

sheet. OTS will look to the substance of and risk associated with the

transaction as well as other relevant factors in determining whether to

require such treatment and in calculating regulatory capital as OTS deems

appropriate.

(4) Other supervisory authority. Nothing in this appendix limits the

authority of the OTS under any other provision of law or regulation to take

supervisory or enforcement action, including action to address unsafe or

unsound practices or conditions, deficient capital levels, or violations of law.

7. Revise appendix C to part 567 by removing section 42(l) and

redesignating section 42(m) as section 42(l) as follows:

Appendix C to Part 567 – Risk-Based Capital Requirements: Internal-

Ratings-Based and Advanced Measurement Approaches

* * * * *

Part V. * * * * *

Section 42. * * * * *

(l) Nth-to-default credit derivatives * * *

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.