Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements
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FDIC Financial Institution Letters › Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements
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Vol. 77
Thursday,
No. 169
August 30, 2012
Part III
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 3
Federal Reserve System
12 CFR Part 217
Federal Deposit Insurance Corporation
12 CFR Part 324
Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets;
Market Discipline and Disclosure Requirements; Proposed Rule
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 3
[Docket ID OCC–2012–0009]
RIN 1557–AD46
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Regulations H, Q, and Y; Docket No. R–
1442]
RIN 7100 AD 87
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 324
RIN 3064–AD96
Regulatory Capital Rules:
Standardized Approach for Risk-
Weighted Assets; Market Discipline
and Disclosure Requirements
AGENCY: Office of the Comptroller of the
Currency, Treasury; Board of Governors
of the Federal Reserve System; and the
Federal Deposit Insurance Corporation.
ACTION: Joint notice of proposed
rulemaking.
SUMMARY: The Office of the Comptroller
of the Currency (OCC), the Board of
Governors of the Federal Reserve
System (Board), and the Federal Deposit
Insurance Corporation (FDIC)
(collectively, the agencies) are seeking
comment on three notices of proposed
rulemaking (NPRs) that would revise
and replace the agencies’ current capital
rules.
This NPR (Standardized Approach
NPR) includes proposed changes to the
agencies’ general risk-based capital
requirements for determining risk-
weighted assets (that is, the calculation
of the denominator of a banking
organization’s risk-based capital ratios)
e seeking
comment on three notices of proposed
rulemaking (NPRs) that would revise
and replace the agencies’ current capital
rules.
This NPR (Standardized Approach
NPR) includes proposed changes to the
agencies’ general risk-based capital
requirements for determining risk-
weighted assets (that is, the calculation
of the denominator of a banking
organization’s risk-based capital ratios).
The proposed changes would revise and
harmonize the agencies’ rules for
calculating risk-weighted assets to
enhance risk-sensitivity and address
weaknesses identified over recent years,
including by incorporating certain
international capital standards of the
Basel Committee on Banking
Supervision (BCBS) set forth in the
standardized approach of the
‘‘International Convergence of Capital
Measurement and Capital Standards: A
Revised Framework’’ (Basel II), as
revised by the BCBS between 2006 and
2009, and other proposals addressed in
recent consultative papers of the BCBS.
In this NPR, the agencies also propose
alternatives to credit ratings for
calculating risk-weighted assets for
certain assets, consistent with section
939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of
2010 (Dodd-Frank Act). The revisions
include methodologies for determining
risk-weighted assets for residential
mortgages, securitization exposures, and
counterparty credit risk. The changes in
the Standardized Approach NPR are
proposed to take effect on January 1,
2015, with an option for early adoption.
The Standardized Approach NPR also
would introduce disclosure
requirements that would apply to top-
tier banking organizations domiciled in
the United States with $50 billion or
more in total assets, including
disclosures related to regulatory capital
instruments. In connection with the
proposed changes to the agencies’
capital rules in this NPR, the agencies
are also seeking comment on the two
related NPRs published elsewhere in
today’s Federal Register
ements that would apply to top-
tier banking organizations domiciled in
the United States with $50 billion or
more in total assets, including
disclosures related to regulatory capital
instruments. In connection with the
proposed changes to the agencies’
capital rules in this NPR, the agencies
are also seeking comment on the two
related NPRs published elsewhere in
today’s Federal Register. The two
related NPR’s are discussed further in
the SUPPLEMENTARY INFORMATION.
DATES: Comments must be submitted on
or before October 22, 2012.
ADDRESSES: Comments should be
directed to:
OCC: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by the
Federal eRulemaking Portal or email, if
possible. Please use the title ‘‘Regulatory
Capital Rules: Standardized Approach
for Risk-weighted Assets; Market
Discipline and Disclosure
Requirements’’ to facilitate the
organization and distribution of the
comments. You may submit comments
by any of the following methods:
• Federal eRulemaking Portal—
‘‘regulations.gov’’: Go to http://
www.regulations.gov. Click ‘‘Advanced
Search.’’ Select ‘‘Document Type’’ of
‘‘Proposed Rule,’’ and in ‘‘By Keyword
or ID’’ box, enter Docket ID ‘‘OCC–
2012–0009,’’and click ‘‘Search.’’ If
proposed rules for more than one
agency are listed, in the ‘‘Agency’’
column, locate the notice of proposed
rulemaking for the OCC. Comments can
be filtered by Agency using the filtering
tools on the left side of the screen. In the
‘‘Actions’’ column, click on ‘‘Submit a
Comment’’ or ‘‘Open Docket Folder’’ to
submit or view public comments and to
view supporting and related materials
for this rulemaking action.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov,
including instructions for submitting or
viewing public comments, viewing
other supporting and related materials,
and viewing the docket after the close
of the comment period
’ to
submit or view public comments and to
view supporting and related materials
for this rulemaking action.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov,
including instructions for submitting or
viewing public comments, viewing
other supporting and related materials,
and viewing the docket after the close
of the comment period.
• Email:
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
ID OCC–2012–0009.’’ In general, OCC
will enter all comments received into
the docket and publish them on the
Regulations.gov Web site without
change, including any business or
personal information that you provide
such as name and address information,
email addresses, or phone numbers.
Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
notice by any of the following methods:
• Viewing Comments Electronically:
Go to http://www.regulations.gov. Click
‘‘Advanced search.’’ Select ‘‘Document
Type’’ of ‘‘Public Submission’’ and in
‘‘By Keyword or ID’’ box enter Docket ID
‘‘OCC–2012–0009,’’ and click ‘‘Search.’’
If comments from more than one agency
are listed, the ‘‘Agency’’ column will
indicate which comments were received
by the OCC. Comments can be filtered
by Agency using the filtering tools on
the left side of the screen.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 250 E Street SW.,
Washington, DC 20219
OCC–2012–0009,’’ and click ‘‘Search.’’
If comments from more than one agency
are listed, the ‘‘Agency’’ column will
indicate which comments were received
by the OCC. Comments can be filtered
by Agency using the filtering tools on
the left side of the screen.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 250 E Street SW.,
Washington, DC 20219. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
(202) 874–4700. Upon arrival, visitors
will be required to present valid
government-issued photo identification
and to submit to security screening in
order to inspect and photocopy
comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
Board: When submitting comments,
please consider submitting your
comments by email or fax because paper
mail in the Washington, DC area and at
the Board may be subject to delay. You
may submit comments, identified by
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
Docket No. R–1442; RIN No. 7100 AD
87, by any of the following methods:
• Agency Web Site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email: regs.comments@federal
reserve.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
emaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email: regs.comments@federal
reserve.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., Washington, DC 20551)
between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit comments by
any of the following methods:
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Agency Web site: http://www.FDIC.
gov/regulations/laws/federal/
propose.html.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/Legal
ESS, Federal Deposit Insurance
Corporation, 550 17th Street NW.,
Washington, DC 20429.
• Hand Delivered/Courier: The guard
station at the rear of the 550 17th Street
Building (located on F Street), on
business days between 7:00 a.m. and
5:00 p.m.
• Email: comments@FDIC.gov.
• Instructions: Comments submitted
must include ‘‘FDIC’’ and ‘‘RIN 3064–
AD 96.’’ Comments received will be
posted without change to http://www.
FDIC.gov/regulations/laws/federal/
propose.html, including any personal
information provided
station at the rear of the 550 17th Street
Building (located on F Street), on
business days between 7:00 a.m. and
5:00 p.m.
• Email: comments@FDIC.gov.
• Instructions: Comments submitted
must include ‘‘FDIC’’ and ‘‘RIN 3064–
AD 96.’’ Comments received will be
posted without change to http://www.
FDIC.gov/regulations/laws/federal/
propose.html, including any personal
information provided.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Senior Risk
Expert, (202) 874–6022, David Elkes,
Risk Expert, (202) 874–3846, or Mark
Ginsberg, Risk Expert, (202) 927–4580,
or Ron Shimabukuro, Senior Counsel,
Patrick Tierney, Counsel, or Carl
Kaminski, Senior Attorney, Legislative
and Regulatory Activities Division,
(202) 874–5090, Office of the
Comptroller of the Currency, 250 E
Street SW., Washington, DC 20219.
Board: Anna Lee Hewko, Assistant
Director, (202) 530–6260, Thomas
Boemio, Manager, (202) 452–2982, or
Constance M. Horsley, Manager, (202)
452–5239, Capital and Regulatory
Policy, Division of Banking Supervision
and Regulation; or Benjamin
McDonough, Senior Counsel, (202) 452–
2036, April C. Snyder, Senior Counsel,
(202) 452–3099, or Christine Graham,
Senior Attorney, (202) 452–3005, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551. For
the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), (202) 263–4869.
FDIC: Bobby R
Regulation; or Benjamin
McDonough, Senior Counsel, (202) 452–
2036, April C. Snyder, Senior Counsel,
(202) 452–3099, or Christine Graham,
Senior Attorney, (202) 452–3005, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551. For
the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), (202) 263–4869.
FDIC: Bobby R. Bean, Associate
Director, bbean@fdic.gov; Ryan
Billingsley, Chief, Capital Policy
Section, rbillingsley@fdic.gov; Karl
Reitz, Chief, Capital Markets Strategies
Section, kreitz@fdic.gov, Division of
Risk Management Supervision; David
Riley, Senior Policy Analyst,
dariley@fdic.gov, Capital Markets
Branch, Division of Risk Management
Supervision, (202) 898–6888; or Mark
Handzlik, Counsel, mhandzlik@fdic.gov,
Michael Phillips, Counsel,
mphillips@fdic.gov, Greg Feder,
Counsel, gfeder@fdic.gov, or Ryan
Clougherty, Senior Attorney,
rclougherty@fdic.gov; Supervision
Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street
NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION: The Office
of the Comptroller of the Currency
(OCC), the Board of Governors of the
Federal Reserve System (Board), and the
Federal Deposit Insurance Corporation
(FDIC) (collectively, the agencies) are
seeking comment on three notices of
proposed rulemaking (NPRs) that would
revise and replace the agencies’ current
capital rules.
This NPR (Standardized Approach
NPR) includes proposed changes to the
agencies’ general risk-based capital
requirements for determining risk-
weighted assets (that is, the calculation
of the denominator of a banking
organization’s risk-based capital ratios)
e
seeking comment on three notices of
proposed rulemaking (NPRs) that would
revise and replace the agencies’ current
capital rules.
This NPR (Standardized Approach
NPR) includes proposed changes to the
agencies’ general risk-based capital
requirements for determining risk-
weighted assets (that is, the calculation
of the denominator of a banking
organization’s risk-based capital ratios).
The proposed changes would revise and
harmonize the agencies’ rules for
calculating risk-weighted assets to
enhance risk-sensitivity and address
weaknesses identified over recent years,
including by incorporating certain
international capital standards of the
Basel Committee on Banking
Supervision (BCBS) set forth in the
standardized approach of the
‘‘International Convergence of Capital
Measurement and Capital Standards: A
Revised Framework’’ (Basel II), as
revised by the BCBS between 2006 and
2009, and other proposals addressed in
recent consultative papers of the BCBS.
In this NPR, the agencies also propose
alternatives to credit ratings for
calculating risk-weighted assets for
certain assets, consistent with section
939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of
2010 (Dodd-Frank Act). The revisions
include methodologies for determining
risk-weighted assets for residential
mortgages, securitization exposures, and
counterparty credit risk. The changes in
this Standardized Approach NPR are
proposed to take effect on January 1,
2015, with an option for early adoption.
The Standardized Approach NPR also
would introduce disclosure
requirements that would apply to top-
tier banking organizations domiciled in
the United States with $50 billion or
more in total assets, including
disclosures related to regulatory capital
instruments.
In connection with the proposed
changes to the agencies’ capital rules in
this NPR, the agencies are also seeking
comment on the two related NPRs
published elsewhere in today’s Federal
Register
ments that would apply to top-
tier banking organizations domiciled in
the United States with $50 billion or
more in total assets, including
disclosures related to regulatory capital
instruments.
In connection with the proposed
changes to the agencies’ capital rules in
this NPR, the agencies are also seeking
comment on the two related NPRs
published elsewhere in today’s Federal
Register. In the notice titled ‘‘Regulatory
Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum
Regulatory Capital Ratios, Capital
Adequacy, Prompt Corrective Action,
and Transition Provisions’’ (Basel III
NPR), the agencies are proposing to
revise their minimum risk-based capital
requirements and criteria for regulatory
capital, as well as establish a capital
conservation buffer framework,
consistent with Basel III.
The proposals in this NPR and the
Basel III NPR would apply to all
banking organizations that are currently
subject to minimum capital
requirements (including national banks,
state member banks, state nonmember
banks, state and federal savings
associations, and top-tier bank holding
companies domiciled in the United
States not subject to the Board’s Small
Bank Holding Company Policy
Statement), as well as top-tier savings
and loan holding companies domiciled
in the United States (together, banking
organizations).
In the notice titled ‘‘Regulatory
Capital Rules: Advanced Approaches
Risk-Based Capital Rule; Market Risk
Capital Rule,’’ (Advanced Approaches
and Market Risk NPR) the agencies are
proposing to revise the advanced
approaches risk-based capital rules,
which are applicable only to the largest
internationally active banking
organizations, consistent with Basel III
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Approaches
and Market Risk NPR) the agencies are
proposing to revise the advanced
approaches risk-based capital rules,
which are applicable only to the largest
internationally active banking
organizations, consistent with Basel III
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
1 Sections marked with an asterisk generally
would not apply to less complex banking
organizations.
and other changes to the BCBS’s capital
standards.
Table of Contents 1
I. Introduction and Overview. Overview of
the proposed standardized approach for
calculation of risk-weighted assets and
summary of proposals contained in two
other NPRs.
II. Standardized Approach for Risk-Weighted
Assets
A. Calculation of Standardized Total Risk-
weighted Assets. A discussion of how a
banking organization would determine
risk-weighted asset amounts.
B. Risk-weighted Assets for General Credit
Risk. A description of general credit risk
exposures and the methodologies for
calculating risk-weighted assets for such
exposures.
1. Exposures to Sovereigns. A description
of the treatment of exposures to the U.S.
government and other sovereigns.
2. Exposures to Certain Supranational
Entities and Multilateral Development
Banks. A description of the treatment of
exposures to Multilateral Development
Banks and other supranational entities.
3. Exposures to Government-sponsored
Entities. A description of the treatment
of exposures to government-sponsored
entities (such as the Federal National
Mortgage Association and the Federal
Home Loan Mortgage Corporation).
4. Exposures to Depository Institutions,
Foreign Banks, and Credit Unions. A
description of the treatment for
exposures to U.S. depository institutions,
foreign banks, and credit unions.
5. Exposures to Public Sector Entities
n of the treatment
of exposures to government-sponsored
entities (such as the Federal National
Mortgage Association and the Federal
Home Loan Mortgage Corporation).
4. Exposures to Depository Institutions,
Foreign Banks, and Credit Unions. A
description of the treatment for
exposures to U.S. depository institutions,
foreign banks, and credit unions.
5. Exposures to Public Sector Entities. A
description of the treatment for
exposures to Public Sector Entities,
general obligation and revenue bonds.
6. Corporate Exposures. A description of
the treatment for corporate exposures.
7. Residential Mortgage Exposures. A
description of the more risk-sensitive
treatment for first- and junior-lien
residential mortgage exposures.
8. Pre-sold Construction Loans and
Statutory Multifamily Mortgages. A
description of the treatment for pre-sold
construction loans and statutory
multifamily mortgages.
9. High Volatility Commercial Real Estate
Exposures. A description of the
requirement to assign higher risk weights
to certain commercial real estate
exposures.
10. Past Due Exposures. A description of
the requirement to assign higher risk
weights to certain past due loans.
11. Other Assets. A description of the
treatment for exposures that are not
assigned to specific risk weight
categories, including cash and gold
bullion held by a banking organization.
C. Off-balance Sheet Items. A discussion of
the requirements for calculating the
exposure amount of an off-balance sheet
item.
D. Over-the-Counter Derivative Contracts*.
A discussion of the requirements for
calculating risk-weighted asset amounts
for exposures to over-the-counter (OTC)
derivative contracts.
E. Cleared Transactions.
1. Overview. A discussion of the
requirements for calculating risk-
weighted asset amounts for derivatives
and repo-style transactions that are
cleared through central counterparties
and for default fund contributions to
central counterparties.
2
quirements for
calculating risk-weighted asset amounts
for exposures to over-the-counter (OTC)
derivative contracts.
E. Cleared Transactions.
1. Overview. A discussion of the
requirements for calculating risk-
weighted asset amounts for derivatives
and repo-style transactions that are
cleared through central counterparties
and for default fund contributions to
central counterparties.
2. Risk-weighted Asset Amount for
Clearing Member Clients and Clearing
Members. A description of the
calculation of the trade exposure amount
and the appropriate risk weight.
3. Default Fund Contribution*. A
description of the risk-based capital
requirement for default fund
contributions of clearing members.
F. Credit Risk Mitigation.
1. Guarantees and Credit Derivatives
a. Eligibility Requirements. A description
of the eligibility requirements for credit
risk mitigation, including guarantees and
credit derivatives.
b. Substitution Approach. A description of
the substitution approach for recognizing
credit risk mitigation of guarantees and
credit derivatives.
c. Maturity Mismatch Haircut. An
explanation of the requirement for
adjusting the exposure amount of a
credit risk mitigant to reflect any
maturity mismatch between a hedged
exposure and the credit risk mitigant.
d. Adjustment for Credit Derivatives
without Restructuring as a Credit Event*.
A description of requirements to adjust
the notional amount of a credit
derivative that does not include
restructuring as a credit event in its
governing contracts.
e. Currency Mismatch Adjustment*. A
description of the requirement to adjust
the notional amount of an eligible
guarantee or eligible credit derivative
that is denominated in a currency
different from that in which the hedged
exposure is denominated.
f. Multiple Credit Risk Mitigants*. A
description of the calculation of risk-
weighted asset amounts when multiple
credit risk mitigants cover a single
exposure.
2. Collateralized Transactions
requirement to adjust
the notional amount of an eligible
guarantee or eligible credit derivative
that is denominated in a currency
different from that in which the hedged
exposure is denominated.
f. Multiple Credit Risk Mitigants*. A
description of the calculation of risk-
weighted asset amounts when multiple
credit risk mitigants cover a single
exposure.
2. Collateralized Transactions. A
discussion of options and requirements
for recognizing collateral credit risk
mitigation, including eligibility criteria,
risk management requirements, and
methodologies for calculating exposure
amount of eligible collateral.
a. Eligible Collateral. A description of
eligible collateral, including the
definition of financial collateral.
b. Risk Management Guidance for
Recognizing Collateral. A description of
the steps a banking organization should
take to ensure the eligibility of collateral
prior to recognizing the collateral for
credit risk mitigation purposes.
c. Simple Approach. A description of the
approach to assign a risk weight to the
collateralized portion of the exposure.
d. Collateral Haircut Approach*. A
description of how a banking
organization would be permitted to use
a collateral haircut approach with
supervisory haircuts to recognize the risk
mitigating effect of collateral that secures
certain types of transactions.
e. Standard Supervisory Haircuts*. A
description of the standard supervisory
market price volatility haircuts based on
residual maturity and exposure type.
f. Own Estimates of Haircuts*. A
description of the qualitative and
quantitative standards and requirements
for a banking organization to use
internally estimated haircuts.
g. Simple Value-at-risk*. A description of
an alternative that the agencies may
consider to permit a banking
organization estimate the exposure
amount for transactions subject to certain
netting agreements using a value-at-risk
model.
h. Internal Models Methodology*
e qualitative and
quantitative standards and requirements
for a banking organization to use
internally estimated haircuts.
g. Simple Value-at-risk*. A description of
an alternative that the agencies may
consider to permit a banking
organization estimate the exposure
amount for transactions subject to certain
netting agreements using a value-at-risk
model.
h. Internal Models Methodology*. A
description of an alternative that the
agencies may consider to permit a
banking organization to use the internal
models methodology to calculate the
exposure amount for the counterparty
credit exposure for OTC derivatives,
eligible margin loans, and repo-style
transactions.
G. Unsettled Transactions*. A description
of the methodology for calculating the
risk-weighted asset amount for unsettled
delivery-versus-payment and payment-
versus-payment transactions.
H. Risk-weighted Assets for Securitization
Exposures
1. Overview of the Securitization
Framework and Definitions. A
description of the securitization
framework designed to address the credit
risk of exposures that involve the
tranching of the credit risk of one or
more underlying financial exposures
under the proposal.
2. Operational Requirements for
Securitization Exposures. A description
of operational and due diligence
requirements for securitization
exposures and eligibility of clean-up
calls.
a. Due Diligence Requirements. A
description of the due diligence
requirements that a banking organization
would have to conduct and document
prior to acquisition of exposures and
periodically thereafter.
b. Operational Requirements for
Traditional Securitizations*. A
description of the operational
requirements for traditional
securitizations.
c. Operational Requirements for Synthetic
Securitizations. A discussion of the
operational requirements for synthetic
securitizations.
d. Clean-Up Calls. A discussion of the
definition and eligibility of clean-up
calls.
3
periodically thereafter.
b. Operational Requirements for
Traditional Securitizations*. A
description of the operational
requirements for traditional
securitizations.
c. Operational Requirements for Synthetic
Securitizations. A discussion of the
operational requirements for synthetic
securitizations.
d. Clean-Up Calls. A discussion of the
definition and eligibility of clean-up
calls.
3. Risk-weighted Asset Amounts for
Securitization Exposures
a. Exposure Amount of a Securitization
Exposure. A description of the proposed
methodology for calculating the
exposure amount of a securitization
exposure.
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2 Public Law 111–203, 124 Stat. 1376 (2010).
3 Small bank holding companies would continue
to be subject to the Small Bank Holding Company
Policy Statement. The proposed rule’s application
to all savings and loan holding companies
(including small savings and loan holding
companies) is consistent with the transfer of
supervisory responsibilities to the Board and the
requirements of section 171 of the Dodd-Frank Act.
Section 171 of the Dodd-Frank Act by its terms does
not apply to small bank holding companies, but
there is no exemption from the requirements of
section 171 for small savings and loan holding
companies. See 12 U.S.C. 5371.
b. Gains-On-Sale and Credit-enhancing
Interest-only Strips. A description of
proposed deduction requirements for
gains-on-sale and credit-enhancing
interest-only strips.
c. Exceptions under the Securitization
Framework. A description of exceptions
to certain requirements under the
proposed securitization framework.
d. Overlapping Exposures. A description of
the provisions to limit the double
counting of risks associated with
securitization exposures.
e. Servicer Cash Advances
tion requirements for
gains-on-sale and credit-enhancing
interest-only strips.
c. Exceptions under the Securitization
Framework. A description of exceptions
to certain requirements under the
proposed securitization framework.
d. Overlapping Exposures. A description of
the provisions to limit the double
counting of risks associated with
securitization exposures.
e. Servicer Cash Advances. A description
of the treatment for servicer cash
advances.
f. Implicit Support. A discussion of
regulatory consequences where a
banking organization provides implicit
(non-contractual) support to a
securitization transaction.
4. Simplified Supervisory Formula
Approach*. A discussion of the
simplified supervisory formula
methodology for calculating the risk-
weighted asset amounts of securitization
exposures.
5. Gross-up Approach. A description of the
gross-up approach for calculating risk-
weighted asset amounts for
securitization exposures.
6. Alternative Treatments for Certain Types
of Securitization Exposures*. A
description of requirements related to
exposures to asset-backed commercial
paper programs.
7. Credit Risk Mitigation for Securitization
Exposures. A discussion of the
requirements for recognizing credit risk
mitigation for securitization exposures.
8. Nth-to-default Credit Derivatives*. A
description of the requirements for
calculating risk-weighted asset amounts
for nth-to-default credit derivatives.
I. Equity Exposures. A description of the
requirements for calculating risk-
weighted asset amounts for equity
exposures, including calculation of
exposure amount, recognition of equity
hedges, and methodologies for assigning
risk weights to different categories of
equity exposures.
1. Introduction. A description of the
treatment for equity exposures.
2. Exposure Measurement. A description of
how a banking organization would
determine the adjusted carrying value for
equity exposures.
3. Equity Exposure Risk Weights
calculation of
exposure amount, recognition of equity
hedges, and methodologies for assigning
risk weights to different categories of
equity exposures.
1. Introduction. A description of the
treatment for equity exposures.
2. Exposure Measurement. A description of
how a banking organization would
determine the adjusted carrying value for
equity exposures.
3. Equity Exposure Risk Weights. A
description of how a banking
organization would determine the risk-
weighted asset amount for each equity
exposure.
4. Non-significant Equity Exposures. A
description of the proposed treatment for
non-significant equity exposures.
5. Hedged Transactions*. A description of
the proposed treatment for hedged
transactions.
6. Measures of Hedge Effectiveness*. A
description of the measures of hedge
effectiveness.
7. Equity Exposures to Investment Funds
a. Full Look-through Approach. A
description of the proposed full look-
through approach.
b. Simple Modified Look-through
Approach. A description of the simple
modified look-through approach.
c. Alternative Modified Look-through
Approach. A description of the
alternative modified look-through
approach.
III. Insurance-Related Activities*. A
discussion of the proposed treatment for
certain instruments and exposures unique
to insurance underwriting activities.
IV. Market Discipline and Disclosure
Requirements*.
A. Proposed Disclosure Requirements. A
discussion of the proposed disclosure
requirements for top-tier entities with
$50 billion or more in total assets that
are not subject to the advanced
approaches rule.
B. Frequency of Disclosures. Describes the
proposed frequency of required
disclosures.
C. Location of Disclosures and Audit
Requirements. A description of the
location of disclosures and audit
requirements.
D. Proprietary and Confidential
Information. Describes the treatment of
proprietary and confidential information
as part of the proposed disclosure
requirements.
E. Specific Public Disclosure
Requirements
res. Describes the
proposed frequency of required
disclosures.
C. Location of Disclosures and Audit
Requirements. A description of the
location of disclosures and audit
requirements.
D. Proprietary and Confidential
Information. Describes the treatment of
proprietary and confidential information
as part of the proposed disclosure
requirements.
E. Specific Public Disclosure
Requirements. A description of the
specific public disclosure requirements
in tables 14.1–14.10 of the proposal.
V. List of Acronyms That Appear in the
Proposal
VI. Regulatory Flexibility Act Analysis
VII. Paperwork Reduction Act
VIII. Plain Language
IX. OCC Unfunded Mandates Reform Act of
1995 Determination
Addendum 1: Summary of this NPR as it
would Generally Apply to Community
Banking Organizations
Addendum 2: Definitions Used in the
Proposal
I. Introduction and Overview
The Office of the Comptroller of the
Currency (OCC), Board of Governors of
the Federal Reserve System (Board), and
the Federal Deposit Insurance
Corporation (FDIC) (collectively, the
agencies) are proposing comprehensive
revisions to their regulatory capital
framework through three concurrent
notices of proposed rulemaking (NPRs).
In this NPR (Standardized Approach
NPR), the agencies are proposing to
revise certain aspects of the general risk-
based capital requirements that address
the calculation of risk-weighted assets.
The agencies believe the proposed
changes included in this NPR would
both enhance the overall risk-sensitivity
of the calculation of a banking
organization’s total risk-weighted assets
and be consistent with relevant
provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (Dodd-Frank Act).2 Although many
of the proposed changes included in
this NPR are not specifically included in
the Basel capital framework, the
agencies believe that these proposed
changes are generally consistent with
the goals of the international framework
l risk-weighted assets
and be consistent with relevant
provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (Dodd-Frank Act).2 Although many
of the proposed changes included in
this NPR are not specifically included in
the Basel capital framework, the
agencies believe that these proposed
changes are generally consistent with
the goals of the international framework.
This NPR contains a standardized
approach for determining risk-weighted
assets. This NPR would apply to all
banking organizations currently subject
to minimum capital requirements,
including national banks, state member
banks, state nonmember banks, state
and federal savings associations, top-tier
bank holding companies domiciled in
the United States not subject to the
Board’s Small Bank Holding Company
Policy Statement (12 CFR part 225,
appendix C), as well as top-tier savings
and loan holding companies domiciled
in the United States (together, banking
organizations).3 The proposed effective
date for the provisions of this NPR is
January 1, 2015, with an option for early
adoption.
In a separate NPR (Basel III NPR), the
agencies are proposing to revise their
capital regulations to incorporate
agreements reached by the Basel
Committee on Banking Supervision
(BCBS) in ‘‘Basel III: A Global
Regulatory Framework for More
Resilient Banks and Banking Systems’’
(Basel III). The Basel III NPR would
revise the definition of regulatory
capital and minimum capital ratios,
establish capital buffers, create a
supplementary leverage ratio for
advanced approach banking
organizations, and revise the agencies’
Prompt Corrective Action (PCA)
regulations.
The agencies are proposing in a third
NPR (Advanced Approaches and Market
Risk NPR) to incorporate additional
aspects of the Basel III framework into
the advanced approaches risk-based
capital rule (advanced approaches rule)
tal buffers, create a
supplementary leverage ratio for
advanced approach banking
organizations, and revise the agencies’
Prompt Corrective Action (PCA)
regulations.
The agencies are proposing in a third
NPR (Advanced Approaches and Market
Risk NPR) to incorporate additional
aspects of the Basel III framework into
the advanced approaches risk-based
capital rule (advanced approaches rule).
Additionally, in the Advanced
Approaches and Market Risk NPR, the
Board proposes to apply the advanced
approaches rule to savings and loan
holding companies, and the Board,
FDIC, and OCC propose to apply the
market risk capital rule (market risk
rule) to savings and loan holding
companies and to state and federal
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4 12 U.S.C. 1831o; 12 CFR part 6, 12 CFR part 165
(OCC); 12 CFR 208.43 (Board), 12 CFR 325.105, 12
CFR 390.455 (FDIC).
5 See BCBS, ‘‘International Convergence of
Capital Measurement and Capital Standards: A
Revised Framework,’’ (June 2006), available at
http://www.bis.org/publ/bcbs128.htm (Basel II).
6 See BCBS, ‘‘Enhancements to the Basel II
Framework,’’ (July 2009), available at http://
www.bis.org/publ/bcbs157.htm.
7 Dodd-Frank Act, section 939A (15 U.S.C. 78o–
7, note).
8 Section 939A of the Dodd-Frank Act provides
that not later than 1 year after the date of
enactment, each Federal agency shall review: (1)
Any regulation issued by such agency that requires
the use of an assessment of the credit-worthiness of
a security or money market instrument; and (2) any
references to or requirements in such regulations
regarding credit ratings
U.S.C. 78o–
7, note).
8 Section 939A of the Dodd-Frank Act provides
that not later than 1 year after the date of
enactment, each Federal agency shall review: (1)
Any regulation issued by such agency that requires
the use of an assessment of the credit-worthiness of
a security or money market instrument; and (2) any
references to or requirements in such regulations
regarding credit ratings. Section 939A further
provides that each such agency ‘‘shall modify any
such regulations identified by the review * * * to
remove any reference to or requirement of reliance
on credit ratings and to substitute in such
regulations such standard of credit-worthiness as
each respective agency shall determine as
appropriate for such regulations.’’ See 15 U.S.C.
78o–7 note.
9 Banking organizations should refer to the Basel
III NPR to see a complete table of the key provisions
of the proposal.
savings associations that meet the scope
requirements of these rules,
respectively. Thus, the Advanced
Approaches and Market Risk NPR is
applicable only to banking organizations
that are or would be subject to the
advanced approaches rule (advanced
approaches banking organizations) or
the market risk rule, and to savings and
loan holding companies and state and
federal savings associations that would
be subject to the advanced approaches
rule or market risk rule.
All banking organizations, including
organizations subject to the advanced
approaches rule, should review both the
Basel III NPR and the Standardized
Approach NPR
dvanced
approaches banking organizations) or
the market risk rule, and to savings and
loan holding companies and state and
federal savings associations that would
be subject to the advanced approaches
rule or market risk rule.
All banking organizations, including
organizations subject to the advanced
approaches rule, should review both the
Basel III NPR and the Standardized
Approach NPR. The requirements
proposed in the Basel III NPR and the
Standardized Approach NPR are
proposed to become the ‘‘generally
applicable’’ capital requirements for
purposes of section 171 of the Dodd-
Frank Act because they would be the
capital requirements for insured
depository institutions under section 38
of the Federal Deposit Insurance Act,
without regard to asset size or foreign
financial exposure.4
The agencies believe that it is
important to publish all of the proposed
capital rules at the same time so that
banking organizations can evaluate the
overall potential impact of the proposals
on their operations. The proposals are
divided into three separate NPRs to
reflect the distinct objectives of each
proposal, to allow interested parties to
better understand the various aspects of
the overall capital framework, including
which aspects of the proposals would
apply to which banking organizations,
and to help interested parties better
focus their comments on areas of
particular interest. Additionally, the
agencies believe that separating the
proposed requirements into three NPRs
makes it easier for banking
organizations of all sizes to more easily
understand which proposed changes are
related to the agencies’ objective to
improve the quality and increase the
quantity of capital and which are related
to the agencies’ objective to enhance the
overall risk-sensitivity of the calculation
of a banking organization’s total risk-
weighted assets
rements into three NPRs
makes it easier for banking
organizations of all sizes to more easily
understand which proposed changes are
related to the agencies’ objective to
improve the quality and increase the
quantity of capital and which are related
to the agencies’ objective to enhance the
overall risk-sensitivity of the calculation
of a banking organization’s total risk-
weighted assets. The agencies believe
that the proposed changes contained in
the three NPRs will result in capital
requirements that will improve
institutions’ ability to withstand periods
of economic stress and better reflect
their risk profiles. The agencies have
carefully considered the potential
impact of the three NPRs on all banking
organizations, including community
banking organizations, and sought to
minimize the potential burden of these
changes wherever possible.
This NPR proposes new
methodologies for determining risk-
weighted assets in the agencies’ general
capital rules, incorporating elements of
the Basel II standardized approach 5 as
modified by the 2009 ‘‘Enhancements to
the Basel II Framework’’ (2009
Enhancements) 6 and recent consultative
papers published by the BCBS. This
NPR also proposes alternative standards
of creditworthiness consistent with
section 939A of the Dodd-Frank Act.7
The proposed revisions in this NPR
include revisions to recognition of
credit risk mitigation, including a
greater recognition of financial collateral
and a wider range of eligible guarantors.
They also include risk weighting of
equity exposures and past due loans,
operational requirements for
securitization exposures, more favorable
capital treatment for derivatives and
repo-style transactions cleared through
central counterparties, and disclosure
requirements that would apply to top-
tier banking organizations with $50
billion or more in total assets that are
not subject to the advanced approaches
rule
ing of
equity exposures and past due loans,
operational requirements for
securitization exposures, more favorable
capital treatment for derivatives and
repo-style transactions cleared through
central counterparties, and disclosure
requirements that would apply to top-
tier banking organizations with $50
billion or more in total assets that are
not subject to the advanced approaches
rule. In addition, the proposed risk
weights for residential mortgage
exposures in this NPR enhance risk-
sensitivity for capital requirements
associated with these exposures.
Similarly, the proposals in this NPR
would require a higher risk weighting
for certain commercial real estate
exposures that typically have higher
credit risk. The agencies believe these
proposals would more appropriately
align capital requirements with these
exposures and contribute to the
resilience of both individual banking
organizations and the banking system.
Some of the proposed changes in this
NPR are not specifically included in the
Basel capital framework. However, the
agencies believe that these proposed
changes are generally consistent with
the goals of that framework. For
example, the Basel capital framework
seeks to enhance the risk-sensitivity of
the international risk-based capital
requirements by mapping capital
requirements for certain exposures to
credit ratings provided by credit rating
agencies. Instead of mapping risk
weights to credit ratings, the agencies
are proposing alternative standards of
creditworthiness to assign risk weights
to certain exposures, including
exposures to sovereigns, companies, and
securitization exposures, in a manner
consistent with section 939A of the
Dodd-Frank Act.8 These alternative
creditworthiness standards and risk-
based capital requirements have been
designed to be consistent with safety
and soundness while also exhibiting
risk-sensitivity to the extent possible
o assign risk weights
to certain exposures, including
exposures to sovereigns, companies, and
securitization exposures, in a manner
consistent with section 939A of the
Dodd-Frank Act.8 These alternative
creditworthiness standards and risk-
based capital requirements have been
designed to be consistent with safety
and soundness while also exhibiting
risk-sensitivity to the extent possible.
Furthermore, these capital requirements
are intended to be similar to those
generated under the Basel framework.
Table 1 summarizes key proposed
requirements in this NPR and illustrates
how these changes compare to the
agencies’ general risk-based capital
rules.9 The remaining sections of this
notice describe in detail each element of
the proposal, how the proposal would
differ from the current general risk-
based capital rules, and examples for
how a banking organization would
calculate risk-weighted asset amounts.
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TABLE 1—KEY PROVISIONS OF THE PROPOSED REQUIREMENTS AS COMPARED TO THE GENERAL RISK-BASED CAPITAL
RULES
Aspect of proposed requirements
Proposed treatment
Risk-weighted Assets
Credit exposures to:
U.S. government and its agencies ...............
Unchanged.
U.S. government-sponsored entities.
U.S.
depository
institutions
and
credit
unions.
U.S. public sector entities, such as states
and municipalities (section 32 of subpart
D).
Credit exposures to:
Foreign sovereigns .......................................
Introduces a more risk-sensitive treatment using the Country Risk Classification measure pro-
duced by the Organization for Economic Co-operation and Development.
Foreign banks .............................................
ns.
U.S. public sector entities, such as states
and municipalities (section 32 of subpart
D).
Credit exposures to:
Foreign sovereigns .......................................
Introduces a more risk-sensitive treatment using the Country Risk Classification measure pro-
duced by the Organization for Economic Co-operation and Development.
Foreign banks ..............................................
Foreign public sector entities (section 32 of
subpart D)
Corporate exposures (section 32 of subpart D)
Assigns a 100 percent risk weight to corporate exposures, including exposures to securities
firms.
Residential mortgage exposures (section 32 of
subpart D).
Introduces a more risk-sensitive treatment based on several criteria, including certain loan
characteristics and the loan-to-value-ratio of the exposure.
High volatility commercial real estate exposures
(section 32 of subpart D).
Applies a 150 percent risk weight to certain credit facilities that finance the acquisition, devel-
opment or construction of real property.
Past due exposures (section 32 of subpart D) ...
Applies a 150 percent risk weight to exposures that are not sovereign exposures or residential
mortgage exposures and that are more than 90 days past due or on nonaccrual.
Securitization exposures (sections 41–45 of
subpart D).
Maintains the gross-up approach for securitization exposures.
Replaces the current ratings-based approach with a formula-based approach for determining a
securitization exposure’s risk weight based on the underlying assets and exposure’s relative
position in the securitization’s structure.
Equity exposures (sections 51–53 of subpart D)
Introduces more risk-sensitive treatment for equity exposures.
Off-balance Sheet Items (section 33 of subpart
D).
Revises the measure of the counterparty credit risk of repo-style transactions.
Raises the credit conversion factor for most short-term commitments from zero percent to 20
percent.
Derivative Contracts (section 34 of subpart D) ..
.
Equity exposures (sections 51–53 of subpart D)
Introduces more risk-sensitive treatment for equity exposures.
Off-balance Sheet Items (section 33 of subpart
D).
Revises the measure of the counterparty credit risk of repo-style transactions.
Raises the credit conversion factor for most short-term commitments from zero percent to 20
percent.
Derivative Contracts (section 34 of subpart D) ...
Removes the 50 percent risk weight cap for derivative contracts.
Cleared Transactions (section 35 of subpart D)
Provides preferential capital requirements for cleared derivative and repo-style transactions
(as compared to requirements for non-cleared transactions) with central counterparties that
meet specified standards. Also requires that a clearing member of a central counterparty
calculate a capital requirement for its default fund contributions to that central counterparty.
Credit Risk Mitigation (section 36 of subpart D)
Provides a more comprehensive recognition of collateral and guarantees.
Disclosure Requirements (sections 61–63 of
subpart D).
Introduces qualitative and quantitative disclosure requirements, including regarding regulatory
capital instruments, for banking organizations with total consolidated assets of $50 billion or
more that are not subject to the separate advanced approaches disclosure requirements.
This NPR proposes that, beginning on
January 1, 2015, a banking organization
would be required to calculate risk-
weighted assets using the methodologies
described herein. Until then, the
banking organization may calculate risk-
weighted assets using the methodologies
in the current general risk-based capital
rules.
Some of the proposed requirements in
this NPR are not applicable to smaller,
less complex banking organizations
nuary 1, 2015, a banking organization
would be required to calculate risk-
weighted assets using the methodologies
described herein. Until then, the
banking organization may calculate risk-
weighted assets using the methodologies
in the current general risk-based capital
rules.
Some of the proposed requirements in
this NPR are not applicable to smaller,
less complex banking organizations. To
assist these banking organizations in
rapidly identifying the elements of these
proposals that would apply to them, this
NPR and the Basel III NPR provide, as
addenda to the corresponding
preambles, a summary of the proposed
changes in those NPRs as they would
generally apply to smaller, less complex
banking organizations. This NPR also
contains a second addendum to the
preamble, which directs the reader to
the definitions proposed under the
Basel III NPR because they are
applicable to the Standardized
Approach NPR as well.
Question 1: The agencies seek
comment on the advantages and
disadvantages of the proposed
standardized approach rule as it would
apply to smaller and less complex
banking organizations (community
banking organizations). What specific
changes, if any, to the rule would
accomplish the agencies’ goals of
establishing improved risk-sensitivity
and quality of capital in an appropriate
manner? For example, in which areas
might the proposed standardized
approach for calculating risk-weighted
assets include simpler approaches for
community banking organizations or
longer transition periods? Provide
specific suggestions.
Question 2: The agencies also seek
comment on the advantages and
disadvantages of allowing certain
community banking organizations to
continue to calculate their risk-weighted
assets based on the methodology in the
current general risk-based capital rules,
as modified to meet the new Basel III
requirements and any changes required
under U.S. law, and as incorporated into
a comprehensive regulatory framework
cies also seek
comment on the advantages and
disadvantages of allowing certain
community banking organizations to
continue to calculate their risk-weighted
assets based on the methodology in the
current general risk-based capital rules,
as modified to meet the new Basel III
requirements and any changes required
under U.S. law, and as incorporated into
a comprehensive regulatory framework.
For example, under this type of
alternative approach, community
banking organizations would be subject
to the proposed new PCA thresholds, a
capital conservation buffer, and other
Basel III revisions to the capital
framework including the definition of
capital, as well as any changes related
to section 939A of the Dodd-Frank Act.
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10 Section 171 of the Dodd-Frank Act provides
that all banking organizations must be subject to
minimum capital requirements that cannot be less
than the ‘‘generally applicable risk-based capital
rules’’ established by the appropriate federal
banking agency to apply to insured depository
institutions under section 38 of the Federal Deposit
Insurance Act, regardless of total consolidated asset
size or foreign financial exposure; which shall serve
as a floor for any capital requirements the agency
may require.
11 See generally 12 CFR part 3, appendix A,
section III; 12 CFR 167.6 (OCC); 12 CFR parts 208
and 225, appendix A, section III (Board); 12 CFR
part 325, appendix A, sections II.C and II.D and 12
CFR 390.466 (FDIC).
12 The proposed rules would incorporate the
market risk rule into the integrated regulatory
framework as subpart F. See the Advanced
Approaches and Market Risk NPR for further
discussion.
13 A U.S. government agency would be defined in
the proposal as an instrumentality of the U.S
pendix A, section III (Board); 12 CFR
part 325, appendix A, sections II.C and II.D and 12
CFR 390.466 (FDIC).
12 The proposed rules would incorporate the
market risk rule into the integrated regulatory
framework as subpart F. See the Advanced
Approaches and Market Risk NPR for further
discussion.
13 A U.S. government agency would be defined in
the proposal as an instrumentality of the U.S.
government whose obligations are fully and
explicitly guaranteed as to the timely payment of
principal and interest by the full faith and credit of
the U.S. government.
14 Similar to the current general risk-based capital
rules, a claim would not be considered
unconditionally guaranteed by a central
government if the validity of the guarantee is
dependent upon some affirmative action by the
holder or a third party. See 12 CFR part 3, appendix
A, section 1(c)(11) and 12 CFR 167.6 (OCC); 12 CFR
parts 208 and 225, appendix A, section III.C.1
(Board); 12 CFR part 325, appendix A, section II.C.
(footnote 35) and 12 CFR 390.466 (FDIC).
15 Loss-sharing agreements entered into by the
FDIC with acquirers of assets from failed
institutions are considered conditional guarantees
for risk-based capital purposes due to contractual
conditions that acquirers must meet. The
guaranteed portion of assets subject to a loss-
sharing agreement may be assigned a 20 percent
risk weight. Because the structural arrangements for
these agreements vary depending on the specific
terms of each agreement, institutions should
consult with their primary federal supervisor to
As modified with these revisions,
community banking organizations
would continue using most of the same
risk weights as under the current
general risk-based capital rules,
including for commercial and
residential mortgage exposures.
Under this approach, banking
organizations other than community
banking organizations would use the
proposed standardized approach risk
weights to calculate the denominator of
the risk-based capital ratio
ing organizations
would continue using most of the same
risk weights as under the current
general risk-based capital rules,
including for commercial and
residential mortgage exposures.
Under this approach, banking
organizations other than community
banking organizations would use the
proposed standardized approach risk
weights to calculate the denominator of
the risk-based capital ratio. The agencies
request comment on the criteria they
should consider when determining
which banking organizations, if any,
should be permitted to continue to
calculate their risk-weighted assets
using the methodology in the current
general risk-based capital rules (revised
as described above). Which banking
organizations, consistent with section
171 of the Dodd-Frank Act, should be
required to use the standardized
approach? 10 What factors should the
agencies consider in making this
determination?
II. Standardized Approach for Risk-
weighted Assets
A. Calculation of Standardized Total
Risk-weighted Assets
Similar to the current general risk-
based capital rules, under the proposal,
a banking organization would calculate
its total risk-weighted assets by adding
together its on- and off-balance sheet
risk-weighted asset amounts and making
any relevant adjustments to incorporate
required capital deductions.11 Banking
organizations subject to the market risk
rule would be required to supplement
their total risk-weighted assets as
provided by the market risk rule.12 Risk-
weighted asset amounts generally would
be determined by assigning on-balance
sheet assets to broad risk-weight
categories according to the counterparty,
or, if relevant, the guarantor or
collateral
quired capital deductions.11 Banking
organizations subject to the market risk
rule would be required to supplement
their total risk-weighted assets as
provided by the market risk rule.12 Risk-
weighted asset amounts generally would
be determined by assigning on-balance
sheet assets to broad risk-weight
categories according to the counterparty,
or, if relevant, the guarantor or
collateral. Similarly, risk-weighted asset
amounts for off-balance sheet items
would be calculated using a two-step
process: (1) Multiplying the amount of
the off-balance sheet exposure by a
credit conversion factor (CCF) to
determine a credit equivalent amount,
and (2) assigning the credit equivalent
amount to a relevant risk-weight
category.
A banking organization would
determine its standardized total risk-
weighted assets by calculating the sum
of: (1) Its risk-weighted assets for
general credit risk, cleared transactions,
default fund contributions, unsettled
transactions, securitization exposures,
and equity exposures, each as defined
below, plus (ii) market risk-weighted
assets, if applicable, less (iii) the
banking organization’s allowance for
loan and lease losses (ALLL) that is not
included in tier 2 capital (as described
in section 20 of the proposal). The
sections below describe in more detail
how a banking organization would
determine the risk-weighted asset
amounts for its exposures.
B. Risk-weighted Assets for General
Credit Risk
Under this NPR, total risk-weighted
assets for general credit risk is the sum
of the risk-weighted asset amounts as
calculated under section 31(a) of the
proposal. As proposed, general credit
risk exposures would include a banking
organization’s on-balance sheet
exposures, over-the-counter (OTC)
derivative contracts, off-balance sheet
commitments, trade and transaction-
related contingencies, guarantees, repo-
style transactions, financial standby
letters of credit, forward agreements, or
other similar transactions
er section 31(a) of the
proposal. As proposed, general credit
risk exposures would include a banking
organization’s on-balance sheet
exposures, over-the-counter (OTC)
derivative contracts, off-balance sheet
commitments, trade and transaction-
related contingencies, guarantees, repo-
style transactions, financial standby
letters of credit, forward agreements, or
other similar transactions. General
credit risk exposures would generally
exclude unsettled transactions, cleared
transactions, default fund contributions,
securitization exposures, and equity
exposures, each as the agencies propose
to define. Section 32 describes the
proposed risk weights that would apply
to sovereign exposures; exposures to
certain supranational entities and
multilateral development banks (MDBs);
exposures to government-sponsored
entities (GSEs); exposures to depository
institutions, foreign banks, and credit
unions; exposures to public sector
entities (PSEs); corporate exposures;
residential mortgage exposures; pre-sold
residential construction loans; statutory
multifamily mortgages; high volatility
commercial real estate (HVCRE)
exposures; past due exposures; and
other assets (including cash, gold
bullion, certain mortgage servicing
assets (MSAs) and deferred tax assets
(DTAs)).
Generally, the exposure amount for
the on-balance sheet component of an
exposure is the banking organization’s
carrying value for the exposure as
determined under generally accepted
accounting principles (GAAP). The
exposure amount for an off-balance
sheet component of an exposure is
typically determined by multiplying the
notional amount of the off-balance sheet
component by the appropriate CCF as
determined under section 33
on-balance sheet component of an
exposure is the banking organization’s
carrying value for the exposure as
determined under generally accepted
accounting principles (GAAP). The
exposure amount for an off-balance
sheet component of an exposure is
typically determined by multiplying the
notional amount of the off-balance sheet
component by the appropriate CCF as
determined under section 33. The
exposure amount for an OTC derivative
contract or cleared transaction that is a
derivative would be determined under
section 34 while exposure amounts for
collateralized OTC derivative contracts,
collateralized cleared transactions that
are derivatives, repo-style transactions,
and eligible margin loans would be
determined under section 37 of the
proposal.
1. Exposures to Sovereigns
The agencies propose to retain the
current rules’ risk weights for exposures
to and claims directly and
unconditionally guaranteed by the U. S.
government or its agencies.13
Accordingly, exposures to the U. S.
government, its central bank, or a U.S.
government agency and the portion of
an exposure that is directly and
unconditionally guaranteed by the U. S.
government, the U.S. central bank, or a
U.S. government agency would receive
a zero percent risk weight.14 Consistent
with the current risk-based capital rules,
the portion of a deposit insured by the
FDIC or the National Credit Union
Administration also may be assigned a
zero percent risk weight. An exposure
conditionally guaranteed by the U.S.
government, its central bank, or a U.S.
government agency would receive a 20
percent risk weight.15
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ional Credit Union
Administration also may be assigned a
zero percent risk weight. An exposure
conditionally guaranteed by the U.S.
government, its central bank, or a U.S.
government agency would receive a 20
percent risk weight.15
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determine the appropriate risk-based capital
treatment for specific loss-sharing agreements.
16 12 CFR part 3, appendix A, section 3 and 12
CFR 167.6 (OCC); 12 CFR parts 208 and 225,
appendix A, section III.C.1 (Board); 12 CFR part
325, appendix A, section II.C and 12 CFR 390.466
(FDIC).
17 For more information on the OECD country risk
classification methodology, see OECD, ‘‘Country
Risk Classification,’’ available at http://
www.oecd.org/document/49/
0,3746,en_2649_34169_1901105_1_1_1_1,00.html.
18 See Dodd-Frank Act, section 931 (15 U.S.C.
78o–7 note).
19 See http://www.oecd.org/document/49/
0,2340,en_2649_34171_1901105_1_1_1_1,00.html.
20 OECD, ‘‘Premium and Related Conditions:
Explanation of the Premium Rules of the
Arrangement on Officially Supported Export
Credits (the Knaepen Package),’’ (July 6, 2004),
available at http://www.oecd.org/officialdocuments/
publicdisplaydocumentpdf/?cote=TD/PG(2004)10/
FINAL&docLanguage=En.
The agencies’ general risk-based
capital rules generally assign risk
weights to direct exposures to
sovereigns and exposures directly
guaranteed by sovereigns based on
whether the sovereign is a member of
the Organization for Economic Co-
operation and Development (OECD)
and, as applicable, whether the
exposure is unconditionally or
conditionally guaranteed by the
sovereign.16
Under the proposal, a sovereign
would be defined as a central
government (including the U.S.
government) or an agency, department,
ministry, or central bank of a central
government
her the sovereign is a member of
the Organization for Economic Co-
operation and Development (OECD)
and, as applicable, whether the
exposure is unconditionally or
conditionally guaranteed by the
sovereign.16
Under the proposal, a sovereign
would be defined as a central
government (including the U.S.
government) or an agency, department,
ministry, or central bank of a central
government. The risk weight for a
sovereign exposure would be
determined using OECD Country Risk
Classifications (CRCs) (the CRC
methodology).17 The OECD’s CRCs are
an assessment of a country’s credit risk,
used to set interest rate charges for
transactions covered by the OECD
arrangement on export credits.
The agencies believe that use of CRCs
in the proposal is permissible under
section 939A of the Dodd-Frank Act and
that section 939A was not intended to
apply to assessments of
creditworthiness of organizations such
as the OECD. Section 939A is part of
Subtitle C of Title IX of the Dodd-Frank
Act, which, among other things,
enhances regulation by the U.S.
Securities and Exchange Commission
(SEC) of credit rating agencies,
including Nationally Recognized
Statistical Rating Organizations
(NRSROs) registered with the SEC.
Section 939, in Subtitle C of Title IX,
removes references to credit ratings and
NRSROs from federal statutes. In the
introductory ‘‘findings’’ section to
Subtitle C, which is entitled
‘‘Improvements to the Regulation of
Credit Ratings Agencies,’’ Congress
characterized credit rating agencies as
organizations that play a critical
‘‘gatekeeper’’ role in the debt markets
and perform evaluative and analytical
services on behalf of clients, and whose
activities are fundamentally commercial
in character.18 Furthermore, the
legislative history of section 939A
focuses on the conflicts of interest of
credit rating agencies in providing
credit ratings to their clients, and the
problem of government ‘‘sanctioning’’ of
the credit rating agencies’ credit ratings
by having them incor
ive and analytical
services on behalf of clients, and whose
activities are fundamentally commercial
in character.18 Furthermore, the
legislative history of section 939A
focuses on the conflicts of interest of
credit rating agencies in providing
credit ratings to their clients, and the
problem of government ‘‘sanctioning’’ of
the credit rating agencies’ credit ratings
by having them incorporated into
federal regulations. The OECD is not a
commercial entity that produces credit
assessments for fee-paying clients, nor
does it provide the sort of evaluative
and analytical services as credit rating
agencies. Additionally, the agencies
note that the use of the CRCs is limited
in the proposal.
The CRC methodology, established in
1999, classifies countries into categories
based on the application of two basic
components: the country risk
assessment model (CRAM), which is an
econometric model that produces a
quantitative assessment of country
credit risk, and the qualitative
assessment of the CRAM results, which
integrates political risk and other risk
factors not fully captured by the CRAM.
The two components of the CRC
methodology are combined and result in
countries being classified into one of
eight risk categories (0–7), with
countries assigned to the zero category
having the lowest possible risk
assessment and countries assigned to
the 7 category having the highest
possible risk assessment.
The OECD regularly updates CRCs for
more than 150 countries and makes the
assessments publicly available on its
Web site.19 Accordingly, the agencies
believe that the CRC approach should
not represent undue burden to banking
organizations. The use of the CRC
methodology is consistent with the
Basel II standardized approach, which,
as an alternative to credit ratings,
provides for risk weights to be assigned
to sovereign exposures according to
country risk scores provided by export
credit agencies.
The agencies recognize that CRCs
have certain limitations
approach should
not represent undue burden to banking
organizations. The use of the CRC
methodology is consistent with the
Basel II standardized approach, which,
as an alternative to credit ratings,
provides for risk weights to be assigned
to sovereign exposures according to
country risk scores provided by export
credit agencies.
The agencies recognize that CRCs
have certain limitations. Although the
OECD has published a general
description of the methodology for CRC
determinations, the methodology is
largely principles-based and does not
provide details regarding the specific
information and data considered to
support a CRC. Additionally, while the
OECD reviews qualitative factors for
each sovereign on a monthly basis,
quantitative financial and economic
information used to assign CRCs is
available only annually in some cases,
and payment performance is updated
quarterly. Also, OECD-member
sovereigns that are defined to be ‘‘high-
income countries’’ by the World Bank
are assigned a CRC of zero, the most
favorable classification.20 Despite these
limitations, the agencies consider CRCs
to be a reasonable alternative to credit
ratings for sovereign exposures and the
proposed CRC methodology to be more
granular and risk-sensitive than the
current risk-weighting methodology
based on OECD membership.
The agencies also propose to require
a banking organization to apply a 150
percent risk weight to sovereign
exposures immediately upon
determining that an event of sovereign
default has occurred or if an event of
sovereign default has occurred during
the previous five years. Sovereign
default would be defined as a
noncompliance by a sovereign with its
external debt service obligations or the
inability or unwillingness of a sovereign
government to service an existing loan
according to its original terms, as
evidenced by failure to pay principal
and interest timely and fully, arrearages,
or restructuring
ign default has occurred during
the previous five years. Sovereign
default would be defined as a
noncompliance by a sovereign with its
external debt service obligations or the
inability or unwillingness of a sovereign
government to service an existing loan
according to its original terms, as
evidenced by failure to pay principal
and interest timely and fully, arrearages,
or restructuring. A default would
include a voluntary or involuntary
restructuring that results in a sovereign
not servicing an existing obligation in
accordance with the obligation’s
original terms.
The agencies are proposing to map
risk weights to CRCs in a manner
consistent with the Basel II standardized
approach, which provides risk weights
for foreign sovereigns based on country
risk scores. The proposed risk weights
for sovereign exposures are set forth in
table 2.
TABLE 2—PROPOSED RISK WEIGHTS
FOR SOVEREIGN EXPOSURES
Risk weight
(in percent)
Sovereign CRC:
0–1 .................................
0
2 .....................................
20
3 .....................................
50
4–6 .................................
100
7 .....................................
150
No CRC ................................
100
Sovereign Default .................
150
If a banking supervisor in a sovereign
jurisdiction allows banking
organizations in that jurisdiction to
apply a lower risk weight to an exposure
to that sovereign than table 2 provides,
a U.S. banking organization would be
able to assign the lower risk weight to
an exposure to that sovereign, provided
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nizations in that jurisdiction to
apply a lower risk weight to an exposure
to that sovereign than table 2 provides,
a U.S. banking organization would be
able to assign the lower risk weight to
an exposure to that sovereign, provided
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21 12 CFR part 3, appendix A section 3(a)(2)(vii),
and 2 CFR part 167.6(a)(1)(ii)(F) (OCC); 12 CFR part
208, and 225, appendix A, section III.C.2.b (Board);
12 CFR part 325, appendix A, section II.C, and 12
CFR part 390.466(a)(1)(ii)(F) (FDIC). GSEs include
the Federal Home Loan Mortgage Corporation
(FHLMC), the Federal National Mortgage
Association (FNMA), the Farm Credit System, and
the Federal Home Loan Bank System.
22 A depository institution is defined in section 3
of the Federal Deposit Insurance Act (12 U.S.C.
1813(c)(1)). Under this proposal, a credit union
refers to an insured credit union as defined under
the Federal Credit Union Act (12 U.S.C. 1752(7)).
23 Foreign bank means a foreign bank as defined
in section 211.2 of the Federal Reserve Board’s
Regulation K (12 CFR 211.2), that is not a
depository institution. For purposes of this
proposal, home country means the country where
an entity is incorporated, chartered, or similarly
established.
24 See BCBS, ‘‘Treatment of Trade Finance under
the Basel Capital Framework,’’ (October 2011),
available at http://www.bis.org/publ/bcbs205.pdf.
‘‘Low income country’’ is a designation used by the
World Bank to classify economies (see World Bank,
the exposure is denominated in the
sovereign’s currency and the U.S.
banking organization has at least an
equivalent amount of liabilities in that
foreign currency.
Question 3: The agencies solicit
comment on the proposed methodology
for risk weighting sovereign exposures
bl/bcbs205.pdf.
‘‘Low income country’’ is a designation used by the
World Bank to classify economies (see World Bank,
the exposure is denominated in the
sovereign’s currency and the U.S.
banking organization has at least an
equivalent amount of liabilities in that
foreign currency.
Question 3: The agencies solicit
comment on the proposed methodology
for risk weighting sovereign exposures.
Are there other alternative
methodologies for risk weighting
sovereign exposures that would be more
appropriate? Provide specific examples
and supporting data.
2. Exposures to Certain Supranational
Entities and Multilateral Development
Banks
Under the general risk-based capital
rules, exposures to certain supranational
entities and multilateral development
banks (MDB) receive a 20 percent risk
weight. Consistent with the Basel
framework’s treatment of exposures to
supranational entities, the agencies
propose to apply a zero percent risk
weight to exposures to the Bank for
International Settlements, the European
Central Bank, the European
Commission, and the International
Monetary Fund.
Similarly, the agencies propose to
apply a zero percent risk weight to
exposures to an MDB in accordance
with the Basel framework. The proposal
would define an MDB to include the
International Bank for Reconstruction
and Development, the Multilateral
Investment Guarantee Agency, the
International Finance Corporation, the
Inter-American Development Bank, the
Asian Development Bank, the African
Development Bank, the European Bank
for Reconstruction and Development,
the European Investment Bank, the
European Investment Fund, the Nordic
Investment Bank, the Caribbean
Development Bank, the Islamic
Development Bank, the Council of
Europe Development Bank, and any
other multilateral lending institution or
regional development bank in which the
U.S. government is a shareholder or
contributing member or which the
primary federal supervisor determines
poses comparable credit risk
ank, the
European Investment Fund, the Nordic
Investment Bank, the Caribbean
Development Bank, the Islamic
Development Bank, the Council of
Europe Development Bank, and any
other multilateral lending institution or
regional development bank in which the
U.S. government is a shareholder or
contributing member or which the
primary federal supervisor determines
poses comparable credit risk.
The agencies believe this treatment is
appropriate in light of the generally
high-credit quality of MDBs, their strong
shareholder support, and a shareholder
structure comprised of a significant
proportion of sovereign entities with
strong creditworthiness. Exposures to
regional development banks and
multilateral lending institutions that are
not covered under the definition of
MDB generally would be treated as
corporate exposures.
3. Exposures to Government-Sponsored
Entities
The agencies are proposing to assign
a 20 percent risk weight to exposures to
GSEs that are not equity exposures and
a 100 percent risk weight to preferred
stock issued by a GSE. While this is
consistent with the current treatment
under the FDIC and Board’s rules, it
would represent a change to the OCC’s
general risk-based capital rules for
national banks, which currently allow a
banking organization to apply a 20
percent risk weight to GSE preferred
stock.21
Although the GSEs currently are in
the conservatorship of the Federal
Housing Finance Agency and receive
capital support from the U.S. Treasury,
they remain privately-owned
corporations, and their obligations do
not have the explicit guarantee of the
full faith and credit of the United States.
The agencies have long held the view
that obligations of the GSEs should not
be accorded the same treatment as
obligations that carry the explicit
guarantee of the U.S. government.
Therefore, the agencies propose to
continue to apply a 20 percent risk
weight to debt exposures to GSEs.
4
eir obligations do
not have the explicit guarantee of the
full faith and credit of the United States.
The agencies have long held the view
that obligations of the GSEs should not
be accorded the same treatment as
obligations that carry the explicit
guarantee of the U.S. government.
Therefore, the agencies propose to
continue to apply a 20 percent risk
weight to debt exposures to GSEs.
4. Exposures to Depository Institutions,
Foreign Banks, and Credit Unions
The general risk-based capital rules
assign a 20 percent risk weight to all
exposures to U.S. depository
institutions and foreign banks
incorporated in an OECD country.
Short-term exposures to foreign banks
incorporated in a non-OECD country
receive a 20 percent risk weight and
long-term exposures to such entities
receive a 100 percent risk weight. The
Basel II standardized approach allows
for risk weights for a claim on a bank
to be one risk weight category higher
than the risk weight assigned to the
sovereign exposures of a bank’s home
country. As described below, the
agencies’ propose treatment for
depository institutions, foreign banks,
and credit unions that is consistent with
this approach.
Under the proposal, exposures to U.S.
depository institutions and credit
unions would be assigned a 20 percent
risk weight.22 For exposures to foreign
banks, the proposal would include risk
weights based on the CRC applicable to
the entity’s home country, in
accordance with table 3.23 Specifically,
an exposure to a foreign bank would
receive a risk weight one category
higher than the risk weight assigned to
a direct exposure to the entity’s home
country, as illustrated in table 3.
Exposures to a foreign bank in a country
that does not have a CRC would receive
a 100 percent risk weight
ed on the CRC applicable to
the entity’s home country, in
accordance with table 3.23 Specifically,
an exposure to a foreign bank would
receive a risk weight one category
higher than the risk weight assigned to
a direct exposure to the entity’s home
country, as illustrated in table 3.
Exposures to a foreign bank in a country
that does not have a CRC would receive
a 100 percent risk weight. A banking
organization would be required to
assign a 150 percent risk weight to an
exposure to a foreign bank immediately
upon determining that an event of
sovereign default has occurred in the
bank’s home country, or if an event of
sovereign default has occurred in the
foreign bank’s home country during the
previous five years.
TABLE 3—PROPOSED RISK WEIGHTS
FOR EXPOSURES TO FOREIGN BANKS
Risk weight
(in percent)
Sovereign CRC:
0–1 .................................
20
2 .....................................
50
3 .....................................
100
4–7 .................................
150
No CRC .........................
100
Sovereign Default ..........
150
Exposures to a depository institution
or foreign bank that are includable in
the regulatory capital of that entity
would receive a risk weight of 100
percent, unless the exposure is (i) An
equity exposure, (ii) a significant
investment in the capital of an
unconsolidated financial institution in
the form of common stock under section
22 of the proposal, (iii) an exposure that
is deducted from regulatory capital
under section 22 of the proposal, or (iv)
an exposure that is subject to the 150
percent risk weight under section 32 of
the proposal.
In 2011, the BCBS revised certain
aspects of the Basel capital framework
to address potential adverse effects of
the framework on trade finance in low
income countries.24 In particular, the
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weight under section 32 of
the proposal.
In 2011, the BCBS revised certain
aspects of the Basel capital framework
to address potential adverse effects of
the framework on trade finance in low
income countries.24 In particular, the
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‘‘How We Classify Countries,’’ available at http://
data.worldbank.org/about/country-classifications).
25 The BCBS indicated that it removed the
sovereign floor for such exposures to make access
to trade finance instruments easier and less
expensive for low income countries. Absent
removal of the floor, the risk weight assigned to
these exposures, where the issuing banking
organization is incorporated in a low income
country, typically would be 100 percent.
26 Political subdivisions of the United States
would include a state, county, city, town or other
municipal corporation, a public authority, and
generally any publicly owned entity that is an
instrument of a state or municipal corporation.
framework was revised to remove the
sovereign floor for trade finance-related
claims on banking organizations under
the Basel II standardized approach.25
The proposed requirements would
incorporate this revision and permit a
banking organization to assign a 20
percent risk weight to self-liquidating,
trade-related contingent items that arise
from the movement of goods and that
have a maturity of three months or less.
The Basel capital framework treats
exposures to securities firms that meet
certain requirements like exposures to
depository institutions. However, the
agencies do not believe that the risk
profile of these firms is sufficiently
similar to depository institutions to
justify that treatment
ingent items that arise
from the movement of goods and that
have a maturity of three months or less.
The Basel capital framework treats
exposures to securities firms that meet
certain requirements like exposures to
depository institutions. However, the
agencies do not believe that the risk
profile of these firms is sufficiently
similar to depository institutions to
justify that treatment. Accordingly, the
agencies propose to require banking
organizations to treat exposures to
securities firms as corporate exposures,
which parallels the treatment of bank
holding companies and savings and
loan holding companies, as described in
section II.B.6 of this preamble.
5. Exposures to Public Sector Entities
The agencies’ general risk-based
capital rules assign a 20 percent risk
weight to general obligations of states
and other political subdivisions of
OECD countries.26 However, exposures
that rely on repayment from specific
projects (for example, revenue bonds)
are assigned a risk weight of 50 percent.
Other exposures to state and political
subdivisions of OECD countries
(including industrial revenue bonds)
and exposures to political subdivisions
of non-OECD countries receive a risk
weight of 100 percent. The risk weights
assigned to revenue obligations are
higher than the risk weight assigned to
general obligations because repayment
of revenue obligations depends on
specific projects, which present more
risk relative to a general repayment
obligation of a state or political
subdivision of a sovereign.
The agencies are proposing to apply
the same risk weights to exposures to
U.S. states and municipalities as the
general risk-based capital rules apply.
Under the proposal, these political
subdivisions would be included in the
definition of public sector entity PSE.
Consistent with both the current rules
and the Basel capital framework, the
agencies propose to define a PSE as a
state, local authority, or other
governmental subdivision below the
level of a sovereign
states and municipalities as the
general risk-based capital rules apply.
Under the proposal, these political
subdivisions would be included in the
definition of public sector entity PSE.
Consistent with both the current rules
and the Basel capital framework, the
agencies propose to define a PSE as a
state, local authority, or other
governmental subdivision below the
level of a sovereign. This definition
would not include government-owned
commercial companies that engage in
activities involving trade, commerce, or
profit that are generally conducted or
performed in the private sector.
Under the proposal, a banking
organization would assign a 20 percent
risk weight to a general obligation
exposure to a PSE that is organized
under the laws of the United States or
any state or political subdivision thereof
and a 50 percent risk weight to a
revenue obligation exposure to such a
PSE. A general obligation would be
defined as a bond or similar obligation
that is backed by the full faith and credit
of a PSE. A revenue obligation would be
defined as a bond or similar obligation
that is an obligation of a PSE, but which
the PSE is committed to repay with
revenues from a specific project
financed rather than general tax funds.
Similar to the Basel framework’s use
of home country risk weights to assign
a risk weight to a PSE exposure, the
agencies propose to require a banking
organization to apply a risk weight to an
exposure to a non-U.S. PSE based on (1)
the CRC applicable to the PSE’s home
country and (2) whether the exposure is
a general obligation or a revenue
obligation, in accordance with table 4.
The risk weights assigned to revenue
obligations would be higher than the
risk weights assigned to a general
obligation issued by the same PSE, as
set forth in table 4. Similar to exposures
to a foreign bank, exposures to a non-
U.S. PSE in a country that does not have
a CRC rating would receive a 100
percent risk weight. Exposures to a non-
U.S
e
obligation, in accordance with table 4.
The risk weights assigned to revenue
obligations would be higher than the
risk weights assigned to a general
obligation issued by the same PSE, as
set forth in table 4. Similar to exposures
to a foreign bank, exposures to a non-
U.S. PSE in a country that does not have
a CRC rating would receive a 100
percent risk weight. Exposures to a non-
U.S. PSE in a country that has defaulted
on any outstanding sovereign exposure
or that has defaulted on any sovereign
exposure during the previous five years
would receive a 150 percent risk weight.
Table 4 illustrates the proposed risk
weights for exposures to non-U.S. PSEs.
TABLE 4—PROPOSED RISK WEIGHTS FOR EXPOSURES TO NON-U.S. PSE GENERAL OBLIGATIONS AND REVENUE
OBLIGATIONS
[In percent]
Risk weight for
exposures to
non-U.S. PSE
general
obligations
Risk weight for
exposures to
non-U.S. PSE
revenue
obligations
Sovereign CRC:
0–1 ........................................................................................................................................................
20
50
2 ............................................................................................................................................................
50
100
3 ............................................................................................................................................................
100
100
4–7 ........................................................................................................................................................
150
150
No CRC .......................................................................................................................................................
100
100
Sovereign Default .......................................................................................................................................
...................................................................
150
150
No CRC .......................................................................................................................................................
100
100
Sovereign Default ........................................................................................................................................
150
150
In certain cases, under the general
risk-based capital rules, the agencies
have allowed a banking organization to
rely on the risk weight that a foreign
banking supervisor allows to assign to
PSEs in that supervisor’s country.
Consistent with that approach, the
agencies propose to allow a banking
organization to apply a risk weight to an
exposure to a non-U.S. PSE according to
the risk weight that the foreign banking
organization supervisor allows to assign
to it. In no event, however, may the risk
weight for an exposure to a non-U.S.
PSE be lower than the risk weight
assigned to direct exposures to that
PSE’s home country.
Question 4: The agencies request
comment on the proposed treatment of
exposures to PSEs.
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
27 See, for example, 76 FR 73526 (Nov. 29, 2011)
and 76 FR 73777 (Nov. 29, 2011).
28 See 12 CFR part 3, appendix A, section 3(c)(iii)
and 12 CFR part 167.6(a)(1)(iii) (OCC); 12 CFR parts
208 and 225, appendix A, section III.C.3 (Board); 12
CFR part 325, appendix A, section II.C.3 and 12
CFR 390.461 (definition of ‘‘qualifying mortgage
loan’’) (FDIC).
6. Corporate Exposures
Under the agencies’ general risk-based
capital rules, credit exposures to
companies that are not depository
institutions or securitization vehicles
generally are assigned to the 100 percent
risk weight category
25, appendix A, section III.C.3 (Board); 12
CFR part 325, appendix A, section II.C.3 and 12
CFR 390.461 (definition of ‘‘qualifying mortgage
loan’’) (FDIC).
6. Corporate Exposures
Under the agencies’ general risk-based
capital rules, credit exposures to
companies that are not depository
institutions or securitization vehicles
generally are assigned to the 100 percent
risk weight category. A 20 percent risk
weight is assigned to claims on, or
guaranteed by, a securities firm
incorporated in an OECD country, that
satisfy certain conditions.
The proposed requirements would be
generally consistent with the general
risk-based capital rules and require
banking organizations to assign a 100
percent risk weight to all corporate
exposures. The proposal would define a
corporate exposure as an exposure to a
company that is not an exposure to a
sovereign, the Bank for International
Settlements, the European Central Bank,
the European Commission, the
International Monetary Fund, an MDB,
a depository institution, a foreign bank,
or a credit union, a PSE, a GSE, a
residential mortgage exposure, a pre-
sold construction loan, a statutory
multifamily mortgage, an HVCRE
exposure, a cleared transaction, a
default fund contribution, a
securitization exposure, an equity
exposure, or an unsettled transaction. In
contrast to the agencies’ general risk-
based capital rules, securities firms
would be subject to the same treatment
as corporate exposures.
The agencies evaluated a number of
alternatives to credit ratings to provide
a more granular risk weight treatment
for corporate exposures.27 However,
each of these alternatives was viewed as
either having significant drawbacks,
being too operationally complex, or as
not being sufficiently developed to be
proposed in this NPR.
7. Residential Mortgage Exposures
The general risk-based capital rules
assign exposures secured by one-to-four
family residential properties to either
the 50 percent or the 100 percent risk-
weight category
ver,
each of these alternatives was viewed as
either having significant drawbacks,
being too operationally complex, or as
not being sufficiently developed to be
proposed in this NPR.
7. Residential Mortgage Exposures
The general risk-based capital rules
assign exposures secured by one-to-four
family residential properties to either
the 50 percent or the 100 percent risk-
weight category. Exposures secured by a
first lien on a one-to-four family
residential property that meet certain
prudential underwriting criteria and
that are paying according to their terms
generally receive a 50 percent risk
weight.28 The Basel II standardized
approach similarly applies a broad
treatment to residential mortgages,
assigning a risk weight of 35 percent for
most first-lien residential mortgage
exposures that meet certain prudential
criteria, such as the existence of a
substantial margin of additional security
over the amount of the loan.
During the recent market turmoil, the
U.S. housing market experienced
significant deterioration and
unprecedented levels of mortgage loan
defaults and home foreclosures. The
causes for the significant increase in
loan defaults and home foreclosures
included inadequate underwriting
standards; the proliferation of high-risk
mortgage products, such as so-called
pay-option adjustable rate mortgages,
which provide for negative amortization
and significant payment shock to the
borrower; the practice of issuing
mortgage loans to borrowers with
unverified or undocumented income;
and a precipitous decline in housing
prices coupled with a rise in
unemployment. Given the
characteristics of the U.S. residential
mortgage market and this recent
experience, the agencies believe that a
wider range of risk weights based on key
risk factors is more appropriate for the
U.S. residential mortgage market.
Therefore, the agencies are proposing a
risk-weight framework that is different
from both the general risk-based capital
rules and the Basel capital framework
the
characteristics of the U.S. residential
mortgage market and this recent
experience, the agencies believe that a
wider range of risk weights based on key
risk factors is more appropriate for the
U.S. residential mortgage market.
Therefore, the agencies are proposing a
risk-weight framework that is different
from both the general risk-based capital
rules and the Basel capital framework.
a. Categorization of Residential
Mortgage Exposures; Loan-to-Value.
The proposed definition of a
residential mortgage exposure would be
an exposure that is primarily secured by
a first or subsequent lien on one-to-four
family residential property (and not a
securitization exposure, equity
exposure, statutory multifamily
mortgage, or presold construction loan).
The definition of residential mortgage
exposure also would include an
exposure that is primarily secured by a
first or subsequent lien on residential
property that is not one-to-four family if
the original and outstanding amount of
the exposure is $1 million or less. A
first-lien residential mortgage exposure
would be a residential mortgage
exposure secured by a first lien or by
first and junior lien(s) where no other
party holds an intervening lien. A
junior-lien residential mortgage
exposure would be a residential
mortgage exposure that is not a first-lien
residential mortgage exposure.
The NPR would maintain the current
risk-based capital treatment for
residential mortgage exposures that are
guaranteed by the U.S. government or
its agency. Accordingly, residential
mortgage exposures that are
unconditionally guaranteed by the U.S.
government or a U.S. agency would
receive a zero percent risk weight, and
residential mortgage exposures that are
conditionally guaranteed by the U.S.
government or a U.S. agency would
receive a 20 percent risk weight.
Under the NPR, a banking
organization would divide residential
mortgage exposures that are not
guaranteed by the U.S. government or
one of its agencies into two categories
government or a U.S. agency would
receive a zero percent risk weight, and
residential mortgage exposures that are
conditionally guaranteed by the U.S.
government or a U.S. agency would
receive a 20 percent risk weight.
Under the NPR, a banking
organization would divide residential
mortgage exposures that are not
guaranteed by the U.S. government or
one of its agencies into two categories.
The agencies propose to apply relatively
low risk weights for residential
mortgage exposures that do not have
product features associated with higher
credit risk, and higher risk weights for
nontraditional loans that present greater
risk. As described further below, the
risk weight assigned to a residential
mortgage exposure will also depend on
the loan’s loan-to-value ratio.
The standards for category 1
residential mortgage exposures reflect
those underwriting and product features
that have demonstrated a lower risk of
default both through supervisory
experience and observations from the
recent foreclosure crisis. Thus, the
definition generally excludes mortgage
products that include terms or other
characteristics that the agencies have
found to be indicative of higher risk. For
example, the standards include
consideration and documentation of a
borrower’s ability to repay, and would
exclude certain higher risk product
features, such as deferral of principal
and balloon loans. Category 1
residential mortgages also would not
include any junior lien mortgages. All
residential mortgages that would not
meet the definition of category 1
residential mortgage would be category
2 residential mortgages
onsideration and documentation of a
borrower’s ability to repay, and would
exclude certain higher risk product
features, such as deferral of principal
and balloon loans. Category 1
residential mortgages also would not
include any junior lien mortgages. All
residential mortgages that would not
meet the definition of category 1
residential mortgage would be category
2 residential mortgages. See section 2 of
the proposed rules for the definitions of
‘‘category 1 residential mortgage’’ in the
related notice titled ‘‘Regulatory Capital
Rules: Regulatory Capital,
Implementation of Basel III, Minimum
Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and
Prompt Corrective Action.’’
The agencies believe that the
proposed divergence in risk weights for
category 1 and category 2 residential
mortgage exposures appropriately
reflects differences in risk between
mortgages in the two categories. Because
category 2 residential mortgage
exposures generally are of higher risk
than category 1 residential mortgage
exposures, the minimum proposed risk
weight for a category 2 residential
mortgage exposure is 100 percent.
Under the general risk-based capital
rules, a banking organization must
assign a minimum 100 percent risk
weight to an exposure secured by a
junior lien on residential property,
unless the banking organization also
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is 100 percent.
Under the general risk-based capital
rules, a banking organization must
assign a minimum 100 percent risk
weight to an exposure secured by a
junior lien on residential property,
unless the banking organization also
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
29 See, for example, ‘‘Interagency Guidance on
Nontraditional Mortgage Product Risks,’’ 71 FR
58609 (Oct. 4, 2006) and ‘‘Statement on Subprime
Mortgage Lending,’’ 72 FR 37569 (July 10, 2007). In
addition, there is ongoing implementation of certain
aspects of the mortgage reform initiatives under
various sections of the Dodd-Frank Act. For
example, section 1141 of the Dodd-Frank Act
amended the Truth in Lending Act to prohibit
creditors from making mortgage loans without
regard to a consumer’s repayment ability. See 15
U.S.C. 1639c.
30 12 CFR part 34, subpart C (OCC); 12 CFR part
208, subpart E and 12 CFR part 225, subpart G
(Board); 12 CFR part 323 and 12 CFR part 390,
subpart X (FDIC).
31 12 CFR part 34, subpart D and 12 CFR part 160
(OCC); 12 CFR part 208, subpart E (Board); 12 CFR
part 323 and 12 CFR 390.442 (FDIC).
holds the first lien and there are no
intervening liens. The agencies also
propose to require a banking
organization that holds both a first and
junior lien on the same property to
combine the exposures into one first-
lien residential mortgage exposure for
purposes of determining the loan-to-
value (LTV) and risk weight for the
combined exposure. However, a banking
organization could only categorize the
combined exposure as a category 1
residential mortgage exposure if the
terms and characteristics of both
mortgages meet all of the criteria for
category 1 residential mortgage
exposures
nto one first-
lien residential mortgage exposure for
purposes of determining the loan-to-
value (LTV) and risk weight for the
combined exposure. However, a banking
organization could only categorize the
combined exposure as a category 1
residential mortgage exposure if the
terms and characteristics of both
mortgages meet all of the criteria for
category 1 residential mortgage
exposures. This requirement would
ensure that no residential mortgage
products associated with higher risk
may be categorized as category 1
residential mortgage exposures.
Except as described in the preceding
paragraph, under this NPR, a banking
organization would classify all junior-
lien residential mortgage exposures as
category 2 residential mortgage
exposures in light of the increased risk
associated with junior liens
demonstrated in the recent foreclosure
crisis.
The proposed risk weighting would
depend on not only the mortgage
exposure’s status as a category 1 or
category 2 residential mortgage
exposure, but also on the mortgage
exposure’s LTV ratio. The amount of
equity a borrower has in a residential
property is highly correlated with
default risk, and the agencies believe
that it is appropriate that LTV be an
important component in assigning risk
weights to residential mortgage
exposures. However, the agencies stress
that the use of LTV ratios to assign risk
weights to residential mortgage
exposures is not a substitute for, and
does not otherwise release a banking
organization from, its responsibility to
have prudent loan underwriting and
risk management practices consistent
with the size, type, and risk of its
mortgage business.29
The agencies are proposing in this
NPR to require a banking organization to
calculate the LTV ratios of a residential
mortgage exposure as follows
osures is not a substitute for, and
does not otherwise release a banking
organization from, its responsibility to
have prudent loan underwriting and
risk management practices consistent
with the size, type, and risk of its
mortgage business.29
The agencies are proposing in this
NPR to require a banking organization to
calculate the LTV ratios of a residential
mortgage exposure as follows. The
denominator of the LTV ratio, that is,
the value of the property, would be
equal to the lesser of the actual
acquisition cost for the property (for a
purchase transaction) or the estimate of
a property’s value at the origination of
the loan or at the time of restructuring
or modification. The estimate of value
would be based on an appraisal or
evaluation of the property in
conformance with the agencies’
appraisal regulations 30 and should
conform to the ‘‘Interagency Appraisal
and Evaluation Guideline’’ and the
‘‘Real Estate Lending Guidelines.’’ 31 If a
banking organization’s first-lien
residential mortgage exposure consists
of both first and junior liens on a
property, a banking organization would
update the estimate of value at the
origination of the junior-lien mortgage.
The loan amount for a first-lien
residential mortgage exposure is the
unpaid principal balance of the loan
unless the first-lien residential mortgage
exposure was a combination of a first
and junior lien. In that case, the loan
amount would be the sum of the unpaid
principal balance of the first lien and
the maximum contractual principal
amount of the junior lien. The loan
amount of a junior-lien residential
mortgage exposure is the maximum
contractual principal amount of the
exposure, plus the maximum
contractual principal amounts of all
senior exposures secured by the same
residential property on the date of
origination of the junior-lien residential
mortgage exposure
e first lien and
the maximum contractual principal
amount of the junior lien. The loan
amount of a junior-lien residential
mortgage exposure is the maximum
contractual principal amount of the
exposure, plus the maximum
contractual principal amounts of all
senior exposures secured by the same
residential property on the date of
origination of the junior-lien residential
mortgage exposure.
As proposed, a banking organization
would not calculate a separate risk-
weighted asset amount for the funded
and unfunded portions of a residential
mortgage exposure. Instead, the
proposal would require only the
calculation of a single LTV ratio
representing a combined funded and
unfunded amount when calculating the
LTV ratio. Thus, the loan amount of a
first-lien residential mortgage exposure
would equal the funded principal
amount (or combined exposures
provided there is no intervening lien)
plus the exposure amount of any
unfunded commitment (that is, the
unfunded amount of the maximum
contractual amount of any commitment
multiplied by the appropriate CCF). The
loan amount of a junior-lien residential
mortgage exposure would equal the sum
of: (1) The funded principal amount of
the exposure, (2) the exposure amount
of any undrawn commitment associated
with the junior-lien exposure, and (3)
the exposure amount of any senior
exposure held by a third party on the
date of origination of the junior-lien
exposure. If a senior exposure held by
a third party includes an undrawn
commitment, such as a HELOC or a
negative amortization feature, the loan
amount for a junior-lien residential
mortgage exposure would include the
maximum contractual amount of that
commitment.
The agencies believe that the LTV
information should be readily available
from the mortgage loan documents and
thus should not present an issue for
banking organizations in calculating the
risk-based capital under the proposed
requirements
mortization feature, the loan
amount for a junior-lien residential
mortgage exposure would include the
maximum contractual amount of that
commitment.
The agencies believe that the LTV
information should be readily available
from the mortgage loan documents and
thus should not present an issue for
banking organizations in calculating the
risk-based capital under the proposed
requirements.
A banking organization would not be
able to recognize private mortgage
insurance (PMI) when calculating the
LTV ratio of a residential mortgage
exposure. The agencies believe that, due
to the varying degree of financial
strength of mortgage providers, it would
not be prudent to recognize PMI for
purposes of the general risk-based
capital rules.
Question 5: The agencies solicit
comments on all aspects of this NPR for
determining the risk weights of
residential mortgage loans, including
the use of the LTV ratio to determine the
risk-based capital treatment. What
alternative criteria or approaches to
categorizing mortgage loans would
enable the agencies to appropriately and
consistently differentiate among the
levels of risk inherent in different
mortgage exposures? For example,
should all residential mortgages that
meet the ‘‘qualified mortgage’’ criteria to
be established for the purposes of the
Truth in Lending Act pursuant to
section 1412 of the Dodd-Frank Act be
included in category 1? For category 1
residential mortgage exposures with
interest rates that adjust or reset, would
a proposed limit based directly on the
amount the mortgage payment increases
rather than on a change in interest rate
be more appropriate? Why or why not?
Does this proposal appropriately
address loans with balloon payments
and the risk of reverse mortgage loans?
Why or why not? Provide detailed
explanations and supporting data
wherever possible
interest rates that adjust or reset, would
a proposed limit based directly on the
amount the mortgage payment increases
rather than on a change in interest rate
be more appropriate? Why or why not?
Does this proposal appropriately
address loans with balloon payments
and the risk of reverse mortgage loans?
Why or why not? Provide detailed
explanations and supporting data
wherever possible.
Question 6: The agencies solicit
comment on whether to allow banking
organizations to recognize mortgage
insurance for purposes of calculating
the LTV ratio of a residential mortgage
exposure under the standardized
approach. What criteria could the
agencies use to ensure that only
financially sound PMI providers are
recognized?
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
32 The RTCRRI Act mandates that each agency
provide in its capital regulations (i) a 50 percent
risk weight for certain one-to-four-family residential
pre-sold construction loans and multifamily
residential loans that meet specific statutory criteria
in the RTCRRI Act and any other underwriting
criteria imposed by the agencies, and (ii) a 100
percent risk weight for one-to-four-family
residential pre-sold construction loans for
residences for which the purchase contract is
cancelled. 12 U.S.C. 1831n, note.
b. Risk Weights for Residential Mortgage
Exposures
As proposed, a banking organization
would determine the risk weight for a
residential mortgage exposure using
table 5 based on the loan’s LTV ratio
and whether it is a category 1 or
category 2 residential mortgage
exposure
ial pre-sold construction loans for
residences for which the purchase contract is
cancelled. 12 U.S.C. 1831n, note.
b. Risk Weights for Residential Mortgage
Exposures
As proposed, a banking organization
would determine the risk weight for a
residential mortgage exposure using
table 5 based on the loan’s LTV ratio
and whether it is a category 1 or
category 2 residential mortgage
exposure.
TABLE 5—PROPOSED RISK WEIGHTS FOR RESIDENTIAL MORTGAGE EXPOSURES
Loan-to-value ratio
(in percent)
Category 1
residential
mortgage exposure
(in percent)
Category 2
residential
mortgage exposure
(in percent)
Less than or equal to 60 .....................................................................................................................
35
100
Greater than 60 and less than or equal to 80 .....................................................................................
50
100
Greater than 80 and less than or equal to 90 .....................................................................................
75
150
Greater than 90 ...................................................................................................................................
100
200
As an example risk weight
calculation, a category 1 residential
mortgage loan that has a loan amount of
$100,000 and a property value of
$125,000 at origination would result in
an LTV of 80 percent and would be
assigned a risk weight of 50 percent. If,
at the time of restructuring the loan at
a later date, the loan amount is $92,000
and the value of the property is
determined to be $110,000, the LTV
would be 84 percent and the applicable
risk weight would be 75 percent.
c. Modified or Restructured Residential
Mortgage Exposures
Under the current general risk-based
capital rules, a residential mortgage may
be assigned to the 50 percent risk weight
category only if it is performing in
accordance with its original terms or not
restructured
roperty is
determined to be $110,000, the LTV
would be 84 percent and the applicable
risk weight would be 75 percent.
c. Modified or Restructured Residential
Mortgage Exposures
Under the current general risk-based
capital rules, a residential mortgage may
be assigned to the 50 percent risk weight
category only if it is performing in
accordance with its original terms or not
restructured. The recent crises and
ongoing problems in the housing market
have demonstrated the profound
negative effect foreclosures have on
homeowners and their communities.
Where practicable, modification or
restructuring of a residential mortgage
can be an effective means for a borrower
to avoid default and foreclosure and for
a banking organization to reduce risk of
loss.
The agencies have recognized the
importance of the prudent use of
mortgage restructuring and modification
in a banking organization’s risk
management and believe that
restructuring or modification can reduce
the risk of a residential mortgage
exposure. Therefore, in this NPR, the
agencies are not proposing to
automatically raise the risk weight for a
residential mortgage exposure if it is
restructured or modified. Instead, under
this NPR, a banking organization would
categorize a modified or restructured
residential mortgage exposure as a
category 1 or category 2 residential
mortgage exposure in accordance with
the terms and characteristics of the
exposure after the modification or
restructuring.
Additionally, to ensure that the
banking organization applies a risk
weight to a restructured or modified
mortgage that most accurately reflects
its risk profile, a banking organization
could only apply (1) a risk weight lower
than 100 percent to a category 1
residential mortgage exposure or (2) a
risk weight lower than 200 percent to a
category 2 residential mortgage
exposure if the banking organization
updated the LTV ratio of the exposure
at the time of the modification or
restructuring
mortgage that most accurately reflects
its risk profile, a banking organization
could only apply (1) a risk weight lower
than 100 percent to a category 1
residential mortgage exposure or (2) a
risk weight lower than 200 percent to a
category 2 residential mortgage
exposure if the banking organization
updated the LTV ratio of the exposure
at the time of the modification or
restructuring.
In further recognition of the
importance of residential mortgage
modifications and restructuring, a
residential mortgage exposure modified
or restructured on a permanent or trial
basis solely pursuant to the U.S.
Treasury’s Home Affordable Mortgage
Program (HAMP) would not be
restructured or modified under the
proposed requirements and would
receive the risk weight provided in table
5.
The agencies believe that treating
mortgage loans modified pursuant to
HAMP in this manner is appropriate in
light of the special and unique incentive
features of HAMP, and the fact that the
program is offered by the U.S.
government to achieve the public policy
objective of promoting sustainable loan
modifications for homeowners at risk of
foreclosure in a way that balances the
interests of borrowers, servicers, and
lenders. The program includes specific
debt-to-income ratio requirements,
which should better ensure the
borrower’s ability to repay the modified
loan, and it provides for the U.S.
Treasury Department to match
reductions in monthly payments dollar-
for-dollar to reduce the borrower’s front-
end debt-to-income ratio.
Additionally, the program provides
financial incentives for servicers and
lenders to take actions to reduce the
likelihood of defaults, as well as for
servicers and borrowers designed to
help borrowers remain current on
modified loans. The structure and
amount of these cash payments align the
financial incentives of servicers,
lenders, and borrowers to encourage and
increase the likelihood of participating
borrowers remaining current on their
mortgages
rs and
lenders to take actions to reduce the
likelihood of defaults, as well as for
servicers and borrowers designed to
help borrowers remain current on
modified loans. The structure and
amount of these cash payments align the
financial incentives of servicers,
lenders, and borrowers to encourage and
increase the likelihood of participating
borrowers remaining current on their
mortgages. Each of these incentives is
important to the agencies’ determination
with respect to the appropriate
regulatory capital treatment of mortgage
loans modified under HAMP.
Question 7: The agencies request
comment on whether loan modifications
made pursuant to federal or state
housing programs warrant specific
provisions in the agencies’ risk-based
capital regulations at all, and if they do
what criteria should be considered
when determining the appropriate risk-
based capital treatment for modified
residential mortgages, given the risk
characteristics of loans that require
modification.
8. Pre-sold Construction Loans and
Statutory Multifamily Mortgages
The general risk-based capital rules
assign either a 50 percent or a 100
percent risk weight to certain one-to-
four family residential pre-sold
construction loans and to multifamily
residential loans, consistent with the
Resolution Trust Corporation
Refinancing, Restructuring, and
Improvement Act of 1991 (RTCRRI
Act).32 This NPR would maintain this
general treatment while clarifying and
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oans and to multifamily
residential loans, consistent with the
Resolution Trust Corporation
Refinancing, Restructuring, and
Improvement Act of 1991 (RTCRRI
Act).32 This NPR would maintain this
general treatment while clarifying and
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Federal Register / Vol. 77, No. 169 / Thursday, August 30, 2012 / Proposed Rules
updating the way the general risk-based
capital rules define these exposures.
Under this NPR, a pre-sold
construction loan would be subject to a
50 percent risk weight unless the
purchase contract is cancelled. This
NPR would define a pre-sold
construction loan as any one-to-four
family residential construction loan to a
builder that meets the requirements of
section 618(a)(1) or (2) of the RTCRRI
Act and the agencies’ existing
regulations. A multifamily mortgage that
does not meet the proposed definition of
a statutory multifamily mortgage would
be treated as a corporate exposure. The
proposed definitions are in section 2 of
the proposed rules in the related notice
titled ‘‘Regulatory Capital Rules:
Regulatory Capital, Implementation of
Basel III, Minimum Regulatory Capital
Ratios, Capital Adequacy, Transition
Provisions, and Prompt Corrective
Action.’’
9. High Volatility Commercial Real
Estate Exposures
In this NPR, the agencies are
including a new risk-based capital
treatment for certain commercial real
estate exposures that currently receive a
100 percent risk weight under the
general risk-based capital rules.
Supervisory experience has
demonstrated that certain acquisition,
development, and construction (ADC)
loans exposures present unique risks for
which the agencies believe banking
organizations should hold additional
capital
risk-based capital
treatment for certain commercial real
estate exposures that currently receive a
100 percent risk weight under the
general risk-based capital rules.
Supervisory experience has
demonstrated that certain acquisition,
development, and construction (ADC)
loans exposures present unique risks for
which the agencies believe banking
organizations should hold additional
capital. Accordingly, the agencies
propose to require banking
organizations to assign a 150 percent
risk weight to any High Volatility
Commercial Real Estate Exposure
(HVCRE). The proposal would define an
HVCRE exposure to include any credit
facility that finances or has financed the
acquisition, development, or
construction (ADC) of real property,
unless the facility finances one- to four-
family residential mortgage property, or
commercial real estate projects that
meet certain prudential criteria,
including with respect to the LTV ratio
and capital contributions or expense
contributions of the borrower. See the
definition of ‘‘high volatility
commercial real estate exposure’’ in
section 2 of the proposed rules in the
related notice entitled ‘‘Regulatory
Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum
Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and
Prompt Corrective Action’’.
A commercial real estate loan that is
not an HVCRE exposure would be
treated as a corporate exposure.
Question 8: The agencies solicit
comment on the proposed treatment for
HVCRE exposures.
10. Past Due Exposures
Under the general risk-based capital
rules, the risk weight of a loan does not
change if the loan becomes past due,
with the exception of certain residential
mortgage loans. The Basel II
standardized approach provides risk
weights ranging from 50 to 150 percent
for loans that are more than 90 days past
due to reflect the increased risk of loss
for
HVCRE exposures.
10. Past Due Exposures
Under the general risk-based capital
rules, the risk weight of a loan does not
change if the loan becomes past due,
with the exception of certain residential
mortgage loans. The Basel II
standardized approach provides risk
weights ranging from 50 to 150 percent
for loans that are more than 90 days past
due to reflect the increased risk of loss.
The agencies believe that a higher risk
is appropriate for past due exposures to
reflect the increased risk associated with
such exposures
Accordingly, consistent with the
Basel capital framework and to reflect
impaired credit quality of such
exposures, the agencies propose that a
banking organization assign a risk
weight of 150 percent to an exposure
that is not guaranteed or not secured
(and that is not a sovereign exposure or
a residential mortgage exposure) if it is
90 days or more past due or on
nonaccrual. A banking organization may
assign a risk weight to the collateralized
or guaranteed portion of the past due
exposure if the collateral, guarantee, or
credit derivative meets the proposed
requirements for recognition described
in sections 36 and 37.
Question 9: The agencies solicit
comments on the proposed treatment of
past due exposures.
11. Other Assets
In this NPR, the agencies propose to
apply the following risk weights for
exposures not otherwise assigned to a
specific risk weight category, which are
generally consistent with the risk
weights in the general risk-based capital
rules:
cognition described
in sections 36 and 37.
Question 9: The agencies solicit
comments on the proposed treatment of
past due exposures.
11. Other Assets
In this NPR, the agencies propose to
apply the following risk weights for
exposures not otherwise assigned to a
specific risk weight category, which are
generally consistent with the risk
weights in the general risk-based capital
rules:
(1) A zero percent risk weight to cash
owned and held in all of a banking
organization’s offices or in transit; gold
bullion held in the banking
organization’s own vaults, or held in
another depository institution’s vaults
on an allocated basis to the extent gold
bullion assets are offset by gold bullion
liabilities; and to exposures that arise
from the settlement of cash transactions
(such as equities, fixed income, spot
foreign exchange and spot commodities)
with a central counterparty where there
is no assumption of ongoing
counterparty credit risk by the central
counterparty after settlement of the
trade and associated default fund
contributions;
(2) A 20 percent risk weight to cash
items in the process of collection; and
(3) A 100 percent risk weight to all
assets not specifically assigned a
different risk weight under this NPR
(other than exposures that would be
deducted from tier 1 or tier 2 capital).
In addition, subject to proposed
transition arrangements, a banking
organization would assign:
(1) A 100 percent risk weight to DTAs
arising from temporary differences that
the banking organization could realize
through net operating loss carrybacks;
and
ifically assigned a
different risk weight under this NPR
(other than exposures that would be
deducted from tier 1 or tier 2 capital).
In addition, subject to proposed
transition arrangements, a banking
organization would assign:
(1) A 100 percent risk weight to DTAs
arising from temporary differences that
the banking organization could realize
through net operating loss carrybacks;
and
(2) A 250 percent risk weight to MSAs
and DTAs arising from temporary
differences that the banking
organization could not realize through
net operating loss carrybacks that are
not deducted from common equity tier
1 capital pursuant to section 22(d) of the
proposal.
The proposed requirements would
provide limited flexibility to address
situations where exposures of a
depository institution holding company
or nonbank financial company
supervised by the Board, that are not
exposures typically held by depository
institutions, do not fit wholly within the
terms of another risk-weight category.
Under the proposal, such exposures
could be assigned to the risk weight
category applicable under the capital
rules for bank holding companies,
provided that (1) the depository
institution holding company or nonbank
financial company is not authorized to
hold the asset under applicable law
other than debt previously contracted or
similar authority; and (2) the risks
associated with the asset are
substantially similar to the risks of
assets that are otherwise assigned to a
risk weight category of less than 100
percent under subpart D of the proposal.
C. Off-balance Sheet Items
Under this NPR, as under the general
risk-based capital rules, a banking
organization would calculate the
exposure amount of an off-balance sheet
item by multiplying the off-balance
sheet component, which is usually the
notional amount, by the applicable
credit conversion factor (CCF)
isk weight category of less than 100
percent under subpart D of the proposal.
C. Off-balance Sheet Items
Under this NPR, as under the general
risk-based capital rules, a banking
organization would calculate the
exposure amount of an off-balance sheet
item by multiplying the off-balance
sheet component, which is usually the
notional amount, by the applicable
credit conversion factor (CCF). This
treatment would be applied to off-
balance sheet items, such as
commitments, contingent items,
guarantees, certain repo-style
transactions, financial standby letters of
credit, and forward agreements.
Also similar to the general risk-based
capital rules, a banking organization
would apply a zero percent CCF to the
unused portion of commitments that are
unconditionally cancelable by the
banking organization. For purposes of
this NPR, a commitment would mean
any legally binding arrangement that
obligates a banking organization to
extend credit or to purchase assets.
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33 12 CFR 3, appendix A, section 4(a)(11) and 12
CFR 167.6(b) (OCC); 12 CFR parts 208 and 225
appendix A, section III.B.3.a.xii (Board); 12 CFR
part 325, appendix A, section II.B.5(a) and 12 CFR
390.466(b) (FDIC).
34 12 CFR part 3, appendix A, section 4(a)(8) and
12 CFR 167.6(b) (OCC); 12 CFR part 208, appendix
A, section II.B.3.a.ii.1 and 12 CFR part 225,
appendix A, section III.B.3.a.ii.(1) (Board); and 12
CFR part 325, appendix A, section II.B.5(a) and 12
CFR part 390.466(b) (FDIC).
35 Section 165(k) of the Dodd-Frank Act (12
U.S.C. 5365(k)). This section defines an off-balance
sheet activity as an existing liability of a company
that is not currently a balance sheet liability, but
may become one upon the happening of some
future event
,
appendix A, section III.B.3.a.ii.(1) (Board); and 12
CFR part 325, appendix A, section II.B.5(a) and 12
CFR part 390.466(b) (FDIC).
35 Section 165(k) of the Dodd-Frank Act (12
U.S.C. 5365(k)). This section defines an off-balance
sheet activity as an existing liability of a company
that is not currently a balance sheet liability, but
may become one upon the happening of some
future event. Such transactions may include direct
credit substitutes in which a banking organization
substitutes its own credit for a third party;
irrevocable letters of credit; risk participations in
bankers’ acceptances; sale and repurchase
agreements; asset sales with recourse against the
seller; interest rate swaps; credit swaps;
commodities contracts; forward contracts; securities
contracts; and such other activities or transactions
as the Board may define through a rulemaking.
36 The general risk-based capital rules for savings
associations regarding the calculation of credit
equivalent amounts for derivative contracts differ
from the rules for other banking organizations. (See
12 CFR 167(a)(2) (federal savings associations) and
12 CFR 390.466(a)(2) (state savings associations)).
The savings association rules address only interest
rate and foreign exchange rate contracts and include
certain other differences. Accordingly, the
description of the general risk-based capital rules in
this preamble primarily reflects the rules applicable
Unconditionally cancelable would mean
a commitment that a banking
organization may, at any time, with or
without cause, refuse to extend credit
under the commitment (to the extent
permitted under applicable law). In the
case of a residential mortgage exposure
that is a line of credit, a banking
organization would be deemed able to
unconditionally cancel the commitment
if it can, at its option, prohibit
additional extensions of credit, reduce
the credit line, and terminate the
commitment to the full extent permitted
by applicable law
r the commitment (to the extent
permitted under applicable law). In the
case of a residential mortgage exposure
that is a line of credit, a banking
organization would be deemed able to
unconditionally cancel the commitment
if it can, at its option, prohibit
additional extensions of credit, reduce
the credit line, and terminate the
commitment to the full extent permitted
by applicable law. If a banking
organization provides a commitment
that is structured as a syndication, it
would only be required to calculate the
exposure amount for its pro rata share
of the commitment.
The agencies propose to increase a
CCF from zero percent to 20 percent for
commitments with an original maturity
of one year or less that are not
unconditionally cancelable by a banking
organization, as consistent with the
Basel II standardized approach. The
proposed requirements would maintain
the 20 percent CCF for self-liquidating,
trade-related contingent items that arise
from the movement of goods with an
original maturity of one year or less.
As under the general risk-based
capital rules, a banking organization
would apply a 50 percent CCF to
commitments with an original maturity
of more than one year that are not
unconditionally cancelable by the
banking organization; and to
transaction-related contingent items,
including performance bonds, bid
bonds, warranties, and performance
standby letters of credit.
Under this NPR, a banking
organization would be required to apply
a 100 percent CCF to off-balance sheet
guarantees, repurchase agreements,
securities lending or borrowing
transactions, financial standby letters of
credit; forward agreements, and other
similar exposures. The off-balance sheet
component of a repurchase agreement
would equal the sum of the current
market values of all positions the
banking organization has sold subject to
repurchase
ply
a 100 percent CCF to off-balance sheet
guarantees, repurchase agreements,
securities lending or borrowing
transactions, financial standby letters of
credit; forward agreements, and other
similar exposures. The off-balance sheet
component of a repurchase agreement
would equal the sum of the current
market values of all positions the
banking organization has sold subject to
repurchase. The off-balance sheet
component of a securities lending
transaction would be the sum of the
current market values of all positions
the banking organization has lent under
the transaction. For securities borrowing
transactions, the off-balance sheet
component would be the sum of the
current market values of all non-cash
positions the banking organization has
posted as collateral under the
transaction. In certain circumstances, a
banking organization may instead
determine the exposure amount of the
transaction as described in section II.F.2
of this preamble and section 37 of the
proposal.
The calculation of the off-balance
sheet component for repurchase
agreements, and securities lending and
borrowing transactions described above
represents a change to the general risk-
based capital treatment for such
transactions. Under the general risk-
based capital rules, capital is required
for any on-balance sheet exposure that
arises from a repo-style transaction (that
is, a repurchase agreement, reverse
repurchase agreement, securities
lending transaction, and securities
borrowing transaction). For example,
capital is required against the cash
receivable that a banking organization
generates when it borrows a security
and posts cash collateral to obtain the
security. However, a banking
organization faces counterparty credit
risk on a repo-style transaction,
regardless of whether the transaction
generates an on-balance sheet exposure
ction, and securities
borrowing transaction). For example,
capital is required against the cash
receivable that a banking organization
generates when it borrows a security
and posts cash collateral to obtain the
security. However, a banking
organization faces counterparty credit
risk on a repo-style transaction,
regardless of whether the transaction
generates an on-balance sheet exposure.
Therefore, in contrast to the general
risk-based capital rules, this NPR would
require a banking organization to hold
risk-based capital against all repo-style
transactions, regardless of whether they
generate on-balance sheet exposures, as
described in section 37 of the proposal.
Under the general risk-based capital
rules, a banking organization is subject
to a risk-based capital requirement
when it provides credit-enhancing
representations and warranties on assets
sold or otherwise transferred to third
parties as such positions are considered
recourse arrangements.33 However, the
general risk-based capital rules do not
impose a risk-based capital requirement
on assets sold or transferred with
representations and warranties that
contain (1) Certain early default clauses,
(2) certain premium refund clauses that
cover assets guaranteed, in whole or in
part, by the U.S. government, a U.S.
government agency, or a U.S. GSE; or (3)
warranties that permit the return of
assets in instances of fraud,
misrepresentation, or incomplete
documentation.34
Under this NPR, if a banking
organization provides a credit-
enhancing representation or warranty
on assets it sold or otherwise transferred
to third parties, including in cases of
early default clauses or premium-refund
clauses, the banking organization would
treat such an arrangement as an off-
balance sheet guarantee and apply a 100
percent credit conversion factor (CCF) to
the exposure amount
s NPR, if a banking
organization provides a credit-
enhancing representation or warranty
on assets it sold or otherwise transferred
to third parties, including in cases of
early default clauses or premium-refund
clauses, the banking organization would
treat such an arrangement as an off-
balance sheet guarantee and apply a 100
percent credit conversion factor (CCF) to
the exposure amount. The agencies are
proposing a different treatment than the
one under the general risk-based capital
rules because the agencies believe that
a banking organization should hold
capital for such exposures while credit-
enhancing representations and
warranties are in place.
Question 10: The agencies solicit
comment on the proposed treatment of
credit-enhancing representations and
warranties.
The proposed risk-based capital
treatment for off-balance sheet items is
consistent with section 165(k) of the
Dodd-Frank Act which provides that, in
the case of a bank holding company
with $50 billion or more in total
consolidated assets the computation of
capital for purposes of meeting capital
requirements shall take into account any
off-balance-sheet activities of the
company.35 The proposal complies with
the requirements of section 165(k) of the
Dodd-Frank Act by requiring a bank
holding company to hold risk-based
capital for its off-balance sheet
exposures, as described in sections 31,
33, 34 and 35 of the proposal.
D. Over-the-counter Derivative
Contracts
In this NPR, the agencies propose
generally to retain the treatment of over-
the-counter (OTC) derivatives provided
under the general risk-based capital
rules, which is similar to the current
exposure method for determining the
exposure amount for OTC derivative
contracts contained in the Basel II
standardized approach.36 The proposed
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s provided
under the general risk-based capital
rules, which is similar to the current
exposure method for determining the
exposure amount for OTC derivative
contracts contained in the Basel II
standardized approach.36 The proposed
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to state and national banks and bank holding
companies.
37 For a derivative contract with multiple
exchanges of principal, the conversion factor is
multiplied by the number of remaining payments in
the derivative contract.
38 For a derivative contract that is structured such
that on specified dates any outstanding exposure is
settled and the terms are reset so that the market
value of the contract is zero, the remaining maturity
equals the time until the next reset date. For an
interest rate derivative contract with a remaining
maturity of greater than one year that meets these
criteria, the minimum conversion factor is 0.005.
39 A banking organization would use the column
labeled ‘‘Credit (investment-grade reference asset)’’
for a credit derivative whose reference asset is an
outstanding unsecured long-term debt security
without credit enhancement that is investment
grade. A banking organization would use the
column labeled ‘‘Credit (non-investment-grade
reference asset)’’ for all other credit derivatives.
revisions to the treatment of the OTC
derivative contracts include an updated
definition of an OTC derivative contract,
a revised conversion factor matrix for
calculating the potential future exposure
(PFE), a revision of the criteria for
recognizing the netting benefits of
qualifying master netting agreements
and of financial collateral, and the
removal of the 50 percent risk weight
limit for OTC derivative contracts
he OTC
derivative contracts include an updated
definition of an OTC derivative contract,
a revised conversion factor matrix for
calculating the potential future exposure
(PFE), a revision of the criteria for
recognizing the netting benefits of
qualifying master netting agreements
and of financial collateral, and the
removal of the 50 percent risk weight
limit for OTC derivative contracts.
Under the proposed requirements, as
under the general risk-based capital
rules, a banking organization would be
required to hold risk-based capital for
counterparty credit risk for OTC
derivative contracts. As defined in this
NPR, a derivative contract is a financial
contract whose value is derived from
the values of one or more underlying
assets, reference rates, or indices of asset
values or reference rates. A derivative
contract would include an interest rate,
exchange rate, equity, or a commodity
derivative contract, a credit derivative,
and any other instrument that poses
similar counterparty credit risks. Under
the proposal, derivative contracts also
would include unsettled securities,
commodities, and foreign exchange
transactions with a contractual
settlement or delivery lag that is longer
than the lesser of the market standard
for the particular instrument or five
business days. This applies, for
example, to mortgage-backed securities
transactions that the GSEs conduct in
the To-Be-Announced market.
An OTC derivative contract would not
include a derivative contract that is a
cleared transaction, which would be
subject to a specific treatment as
described in section II.E of this
preamble
of the market standard
for the particular instrument or five
business days. This applies, for
example, to mortgage-backed securities
transactions that the GSEs conduct in
the To-Be-Announced market.
An OTC derivative contract would not
include a derivative contract that is a
cleared transaction, which would be
subject to a specific treatment as
described in section II.E of this
preamble. OTC derivative contracts
would, however, include an exposure of
a banking organization that is a clearing
member to its clearing member client
where the banking organization is either
acting as a financial intermediary and
enters into an offsetting transaction with
a central counterparty (CCP) or where
the banking organization provides a
guarantee to the CCP on the
performance of the client. These
transactions may not be treated as
cleared transactions because the
banking organization remains exposed
directly to the risk of the individual
counterparty.
To determine the risk-weighted asset
amount for an OTC derivative contract
under the proposal, a banking
organization would first determine its
exposure amount for the contract and
then apply to that amount a risk weight
based on the counterparty, eligible
guarantor, or recognized collateral.
For a single OTC derivative contract
that is not subject to a qualifying master
netting agreement (as defined further
below in this section), the exposure
amount would be the sum of (1) the
banking organization’s current credit
exposure, which would be the greater of
the mark-to-market value or zero, and
isk weight
based on the counterparty, eligible
guarantor, or recognized collateral.
For a single OTC derivative contract
that is not subject to a qualifying master
netting agreement (as defined further
below in this section), the exposure
amount would be the sum of (1) the
banking organization’s current credit
exposure, which would be the greater of
the mark-to-market value or zero, and
(2) PFE, which would be calculated by
multiplying the notional principal
amount of the OTC derivative contract
by the appropriate conversion factor, in
accordance with table 6 below.
Under this NPR, the conversion factor
matrix would be revised to include the
additional categories of OTC derivative
contracts as illustrated in table 6. For an
OTC derivative contract that does not
fall within one of the specified
categories in table 6, the PFE would be
calculated using the appropriate ‘‘other’’
conversion factor.
TABLE 6—CONVERSION FACTOR MATRIX FOR OTC DERIVATIVE CONTRACTS 37
Remaining ma-
turity 38
Interest rate
Foreign exchange
rate and gold
Credit (invest-
ment-grade ref-
erence asset) 39
Credit (non-invest-
ment-grade ref-
erence asset)
Equity
Precious metals
(except gold)
Other
One year or
less ...............
0.00
0.01
0.05
0.10
0.06
0.07
0.10
Greater than
one year and
less than or
equal to five
years .............
0.005
0.05
0.05
0.10
0.08
0.07
0.12
Greater than
five years ......
0.015
0.075
0.05
0.10
0.10
0.08
0.15
For multiple OTC derivative contracts
subject to a qualifying master netting
agreement, the exposure amount would
be calculated by adding the net current
credit exposure and the adjusted sum of
the PFE amounts for all OTC derivative
contracts subject to the qualifying
master netting agreement. The net
current credit exposure would be the
greater of zero and the net sum of all
positive and negative mark-to-market
values of the individual OTC derivative
contracts subject to the qualifying
master netting agreement
d by adding the net current
credit exposure and the adjusted sum of
the PFE amounts for all OTC derivative
contracts subject to the qualifying
master netting agreement. The net
current credit exposure would be the
greater of zero and the net sum of all
positive and negative mark-to-market
values of the individual OTC derivative
contracts subject to the qualifying
master netting agreement. The adjusted
sum of the PFE amounts would be
calculated as described in section
34(a)(2)(ii) of the proposal.
Under the general risk-based capital
rules, a banking organization must enter
into a bilateral master netting agreement
with its counterparty and obtain a
written and well-reasoned legal opinion
of the enforceability of the netting
agreement for each of its netting
agreements that cover OTC derivative
contracts to recognize the netting
benefit. Similarly, under this NPR, to
recognize netting of multiple OTC
derivative contracts, the contracts
would be required to be subject to a
qualifying master netting agreement;
however, for most transactions, a
banking organization may rely on
sufficient legal review instead of an
opinion on the enforceability of the
netting agreement as described below.
Under this NPR, a qualifying master
netting agreement would be defined as
any written, legally enforceable netting
agreement, that creates a single legal
obligation for all individual transactions
covered by the agreement upon an event
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er this NPR, a qualifying master
netting agreement would be defined as
any written, legally enforceable netting
agreement, that creates a single legal
obligation for all individual transactions
covered by the agreement upon an event
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40 See section II.F.2d of this preamble for a
discussion of the proposed definition of a repo-style
transaction.
41 See, ‘‘Capitalisation of Banking Organization
Exposures to Central Counterparties’’ (November
2011) (CCP consultative release), available at
http://www.bis.org/publ/bcbs206.pdf. Once the CCP
consultative release is finalized, the agencies expect
to take into account the BCBS revisions and
incorporate them into the agencies’ capital rules
through the regular rulemaking process, as
appropriate.
of default (including receivership,
insolvency, liquidation, or similar
proceeding) provided that certain
conditions are met. These conditions
include requirements with respect to the
banking organization’s right to terminate
the contract and lien date collateral and
meeting certain standards with respect
to legal review of the agreement to
ensure it meets the criteria in the
definition.
The legal review must be sufficient so
that the banking organization may
conclude with a well-founded basis
that, among other things the contract
would be found legal, binding, and
enforceable under the law of the
relevant jurisdiction and that the
contract meets the other requirements of
the definition. In some cases, the legal
review requirement could be met by
reasoned reliance on a commissioned
legal opinion or an in-house counsel
analysis
ganization may
conclude with a well-founded basis
that, among other things the contract
would be found legal, binding, and
enforceable under the law of the
relevant jurisdiction and that the
contract meets the other requirements of
the definition. In some cases, the legal
review requirement could be met by
reasoned reliance on a commissioned
legal opinion or an in-house counsel
analysis. In other cases, for example,
those involving certain new derivative
transactions or derivative counterparties
in jurisdictions where a banking
organization has little experience, the
banking organization would be expected
to obtain an explicit, written legal
opinion from external or internal legal
counsel addressing the particular
situation. See the definition of
‘‘qualifying master netting agreement’’
in section 2 of the proposed rules in the
related notice titled ‘‘Regulatory Capital
Rules: Regulatory Capital,
Implementation of Basel III, Minimum
Regulatory Capital Ratios, Capital
Adequacy, Transition Provisions, and
Prompt Corrective Action.’’
If an OTC derivative contract is
collateralized by financial collateral, a
banking organization would first
determine the exposure amount of the
OTC derivative contract as described in
this section. Next, to recognize the
credit risk mitigation benefits of the
financial collateral, a banking
organization could use the simple
approach for collateralized transactions
as described in section 37(b) of the
proposal. Alternatively, if the financial
collateral is marked-to-market on a daily
basis and subject to a daily margin
maintenance requirement, a banking
organization could adjust the exposure
amount of the contract using the
collateral haircut approach described in
section 37(c) of the proposal
use the simple
approach for collateralized transactions
as described in section 37(b) of the
proposal. Alternatively, if the financial
collateral is marked-to-market on a daily
basis and subject to a daily margin
maintenance requirement, a banking
organization could adjust the exposure
amount of the contract using the
collateral haircut approach described in
section 37(c) of the proposal.
Under this NPR, a banking
organization would be required to treat
an equity derivative contract as an
equity exposure and compute its risk-
weighted asset amount according to the
proposed calculation requirements
described in section 52 (unless the
contract is a covered position under
subpart F of the proposal). If the
banking organization risk weights a
contract under the Simple Risk-Weight
Approach described in section 52, it
may choose not to hold risk-based
capital against the counterparty risk of
the equity contract, so long as it does so
for all such contracts. Where the OTC
equity contracts are subject to a
qualified master netting agreement, a
banking organization would either
include or exclude all of the contracts
from any measure used to determine
counterparty credit risk exposures. If the
banking organization is treating an OTC
equity derivative contract as a covered
position under subpart F, it would
calculate a risk-based capital
requirement for counterparty credit risk
of the contract under section 34.
Similarly, if a banking organization
purchases a credit derivative that is
recognized under section 36 of the
proposal as a credit risk mitigant for an
exposure that is not a covered position
under subpart F of the proposal, it
would not be required to compute a
separate counterparty credit risk capital
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