OCC 2000–27
Subject: Risk-Based Capital -- Residual Interests
Description: Proposed Rule
Date: September 29, 2000



TO:	Chief Executive Officers of National Banks, Department and Division Heads, 
Examining Personnel, and Other Interested Parties

PURPOSE

This bulletin transmits a proposed rule on residual interests published in the Federal 
Register on September 27, 2000.  Comments on the proposed rule are due December 27, 
2000.

SUMMARY

The proposed rule would alter the risk-based capital treatment of certain residual interests 
in asset securitizations or other transfers of financial assets.  The proposed rule is 
intended to better align regulatory capital requirements with the risk exposure of residual 
interests, to encourage conservative valuation methods, and to restrict excessive 
concentrations in these assets.

Background

The proposal is intended to address concerns previously raised in the December 1999 
Interagency Guidance on Asset Securitization.  This guidance expressed concern that 
some institutions were not holding adequate capital against residual interests, were not 
valuing these assets properly, and were holding excessive amounts of these assets in 
relation to capital.  That document also indicated that regulatory restrictions were actively 
being considered that would limit or eliminate the amount of certain residual interests 
permitted in regulatory capital.

Generally, residual interests are non-investment grade or unrated assets retained by an 
issuing institution in order to provide credit support for more senior positions in a 
securitization or other financial asset transfer.  Many residual interests are exposed to 
significant credit and interest rate risk that make their valuation extremely sensitive to 
changes in underlying credit and prepayment assumptions. These residual interests also 
generally lack an active market through which a readily available market price can be 
obtained.  As a result, such residual interests raise valuation and liquidity concerns, and 
large concentrations of such illiquid and volatile assets in relation to capital can threaten 
the safety and soundness of a banking organization.

Scope

Residual interests subject to the proposed rule are defined as on-balance-sheet assets that 
are retained by a seller in an asset transfer and that are structured to absorb more than a 
pro-rata share of credit loss through subordination provisions or other credit enhancement 
techniques.  Residual interests purchased from a third party are not subject to the 
proposed rule.  Residual interests, as defined, include interest-only strips receivable, 
spread accounts, cash collateral accounts, retained subordinated interests, and other 
similar forms of on-balance-sheet assets that function as credit enhancements.  

Proposed Capital Treatment

The proposed treatment would amend the leverage and risk-based capital requirements in 
the following manner:

? Require that "dollar-for-dollar" capital be held against the amount of residual interests 
that are retained on balance sheet by an institution resulting from securitization 
activities, even if this amount exceeds the full capital charge typically held against the 
assets transferred; and,

? Restrict undue concentrations in residual interests by including them within a 25 
percent of Tier 1 capital sublimit already established for non-mortgage servicing 
assets and purchased credit card relationships for regulatory capital purposes.  Any 
amounts above this limit would be deducted from Tier 1 capital.

Comments on the Proposal

The OCC encourages all interested parties to review and comment on the attached 
proposal.  Please forward all comments to Communication Division, 250 E Street SW, 
Washington, DC 20219, Attention Docket No. 00-17.

FOR FURTHER INFORMATION CONTACT:

Amrit Sekhon, risk specialist, Capital Policy, at 202/874-5211; or Ron Shimabukuro, 
senior attorney, or Laura Goldman, senior attorney, Legislative and Regulatory Activities 
Division, at 202/874-5090.


________________________
Jonathan L. Fiechter
Senior Deputy Comptroller
International and Economic Affairs


 Attachment -- 65 FR 57993