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6000 - Bank Holding Company Act
Appendices to Subparts
Appendix ACapital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
I. Overview
The Board of Governors of the Federal Reserve System has adopted a
risk-based capital measure to assist in the assessment of the capital
adequacy of bank holding companies ("banking
organizations"). 1
The principal objectives of this measure are to: (i) Make regulatory
capital requirements more sensitive to differences in risk profiles
among
{{10-31-07 p.6111}}banking organizations; (ii)
factor off-balance sheet exposures into the assessment of capital
adequacy; (iii) minimize disincentives to holding liquid, low-risk
assets; and (iv) achieve greater consistency in the evaluation of the
capital adequacy of major banking organizations throughout the
world. 2
The risk-based capital guidelines include both a definition of
capital and a framework for calculating weighted risk assets by
assigning assets and off-balance sheet items to broad risk categories.
An institution's risk-based capital ratio is calculated by dividing its
qualifying capital (the numerator of the ratio) by its weighted risk
assets (the denominator). 3
The definition of qualifying capital is outlined below in section II,
and the procedures for calculating weighted risk assets are discussed
in section III. Attachment I illustrates a sample calculation of
weighted risk assets and the risk-based capital ratio.
In addition, when certain organizations that engage in trading
activities calculate their risk-based capital ratio under this appendix
A, they must also refer to appendix E of this part, which incorporates
capital charges for certain market risks into the risk-based capital
ratio. When calculating their risk-based capital ratio under this
appendix A, such organizations are required to refer to appendix E of
this part for supplemental rules to determine qualifying and excess
capital, calculate risk-weighted assets, calculate market risk
equivalent assets, and calculate risk-based capital ratios adjusted for
market risk.
The risk-based capital guidelines also establish a schedule for
achieving a minimum supervisory standard for the ratio of qualifying
capital to weighted risk assets and provide for transitional
arrangements during a phase-in period to facilitate adoption and
implementation of the measure at the end of 1992. These interim
standards and transitional arrangements are set forth in section IV.
The risk-based guidelines apply on a consolidated basis to any bank
holding company with consolidated assets of $500 million or more. The
risk-based guidelines also apply on a consolidated basis to any bank
holding company with consolidated assets of less than $500 million if
the holding company (i) is engaged in significant nonbanking activities
either directly or through a nonbank subsidiary; (ii) conducts
significant off-balance sheet activities (including securitization and
asset management or administration) either directly or through a
nonbank subsidiary; or (iii) has a material amount of debt or equity
securities outstanding (other than trust preferred securities) that are
registered with the Securities and Exchange Commission (SEC). The
Federal Reserve may apply the risk-based guidelines at its discretion
to any bank holding company, regardless of asset size, if such action
is warranted for supervisory purposes. 4
The risk-based guidelines are to be used in the inspection and
supervisory process as well as in the analysis of applications acted
upon by the Federal Reserve. Thus, in considering an application filed
by a bank holding company, the Federal Reserve will take into account
the organization's risk-based capital ratio, the reasonableness of its
capital plans, and the degree of progress it has demonstrated toward
meeting the interim and final risk-based capital standards.
The risk-based capital ratio focuses principally on broad categories
of credit risk, although the framework for assigning assets and
off-balance sheet items to risk categories does incorporate elements of
transfer risk, as well as limited instances of interest rate and market
risk. The risk-based ratio does not, however, incorporate other factors
that can affect an organization's financial condition. These
factors include overall interest rate exposure; liquidity, funding and
market risks; the quality and level of earnings;
investment
{{10-31-07 p.6112}}or loan portfolio concentrations; the
quality of loans and investments; the effectiveness of loan and
investment policies; and management's ability to monitor and control
financial and operating risks.
In addition to evaluating capital ratios, an overall assessment of
capital adequacy must take account of these other factors, including,
in particular, the level and severity of problem and classified assets.
For this reason, the final supervisory judgment on an organization's
capital adequacy may differ significantly from conclusions that might
be drawn solely from the level of the organization's risk-based capital
ratio.
The risk-based capital guidelines establish minimum
ratios of capital to weighted risk assets. In light of the
considerations just discussed, banking organizations generally are
expected to operate well above the minimum risk-based ratios. In
particular, banking organizations contemplating significant expansion
proposals are expected to maintain strong capital levels substantially
above the minimum ratios and should not allow significant diminution of
financial strength below these strong levels to fund their expansion
plans. Institutions with high or inordinate levels of risk are also
expected to operate above minimum capital standards. In all cases,
institutions should hold capital commensurate with the level and nature
of the risks to which they are exposed. Banking organizations that do
not meet the minimum risk-based standard, or that are otherwise
considered to be inadequately capitalized, are expected to develop and
implement plans acceptable to the Federal Reserve for achieving
adequate levels of capital within a reasonable period of time.
The Board will monitor the implementation and effect of these
guidelines in relation to domestic and international developments in
the banking industry. When necessary and appropriate, the Board will
consider the need to modify the guidelines in light of any significant
changes in the economy, financial markets, banking practices, or other
relevant factors.
II. Definition of Qualifying Capital for the Risk-Based Capital
Ratio
(i) A banking organization's qualifying total capital consists of
two types of capital components: "core capital elements" (tier 1
capital elements) and "supplementary capital elements" (tier 2
capital elements). These capital elements and the various limits,
restrictions, and deductions to which they are subject, are discussed
below. To qualify as an element of tier 1 or tier 2 capital, an
instrument must be fully paid up and effectively unsecured.
Accordingly, if a banking organization has purchased, or has directly
or indirectly funded the purchase of, its own capital instrument, that
instrument generally is disqualified from inclusion in regulatory
capital. A qualifying tier 1 or tier 2 capital instrument must be
subordinated to all senior indebtedness of the organization. If issued
by a bank, it also must be subordinated to claims of depositors. In
addition, the instrument must not contain or be covered by any
covenants, terms, or restrictions that are inconsistent with safe and
sound banking practices.
(ii) On a case-by-case basis, the Federal Reserve may determine
whether, and to what extent, any instrument that does not fit wholly
within the terms of a capital element set forth below, or that does not
have the characteristics or the ability to absorb losses commensurate
with the capital treatment specified below, will qualify as an element
of tier 1 or tier 2 capital. In making such a determination, the
Federal Reserve will consider the similarity of the instrument to
instruments explicitly addressed in the guidelines; the ability of the
instrument to absorb losses, particularly while the organization
operates as a going concern; the maturity and redemption features of
the instrument; and other relevant terms and factors.
(iii) The redemption of capital instruments before stated maturity
could have a significant impact on an organization's overall capital
structure. Consequently, an organization should consult with the
Federal Reserve before redeeming any equity or other capital instrument
included in tier 1 or tier 2 capital prior to stated maturity if such
redemption could have a material effect on the level or composition of
the organization's capital base. Such consultation generally would not
be necessary when the instrument is to be redeemed with the proceeds
of, or replaced by, a like amount of a capital instrument that is of
equal or higher quality with regard to terms and maturity and the
Federal Reserve considers the organization's capital position to be
fully sufficient.
{{4-29-05 p.6113}}
A. The Definition and Components of Qualifying Capital
1. Tier 1 capital. Tier 1 capital generally is defined
as the sum of core capital elements less any amounts of goodwill, other
intangible assets, interest-only strips receivables, deferred tax
assets, nonfinancial equity investments, and other items that are
required to be deducted in accordance with section II.B. of this
appendix. Tier 1 capital must represent at least 50 percent of
qualifying total capital.
a. Core capital elements (tier 1 capital elements). The
elements qualifying for inclusion in the tier 1 component of a banking
organization's qualifying total capital are:
i. Qualifying common stockholders' equity;
ii. Qualifying noncumulative perpetual preferred stock (including
related surplus);
iii. Minority interest related to qualifying common or
noncumulative perpetual preferred stock directly issued by a
consolidated U.S. depository institution or foreign bank subsidiary
(Class A minority interest); and
iv. Restricted core capital elements. The aggregate of these items
is limited within tier 1 capital as set forth in section II.A.1.b. of
this appendix. These elements are defined to include:
(1) Qualifying cumulative perpetual preferred stock (including
related surplus);
(2) Minority interest related to qualifying cumulative perpetual
preferred stock directly issued by a consolidated U.S. depository
institution or foreign bank subsidiary (Class B minority interest);
(3) Minority interest related to qualifying common stockholders'
equity or perpetual preferred stock issued by a consolidated subsidiary
that is neither a U.S. depository institution nor a foreign bank (Class
C minority interest); and
(4) Qualifying trust preferred securities.
b. Limits on restricted core capital
elements--i. Limits. (1) The aggregate amount of restricted core
capital elements that may be included in the tier 1 capital of a
banking organization must not exceed 25 percent of the sum of all core
capital elements, including restricted core capital elements, net of
goodwill less any associated deferred tax liability. Stated
differently, the aggregate amount of restricted core capital elements
is limited to one-third of the sum of core capital elements, excluding
restricted core capital elements, net of goodwill less any associated
deferred tax liability.
(2) In addition, the aggregate amount of restricted core capital
elements (other than qualifying mandatory convertible preferred
securities 5
) that may be included in the tier 1 capital of an internationally
active banking organization 6
must not exceed 15 percent of the sum of all core capital elements,
including restricted core capital elements, net of goodwill less any
associated deferred tax liability.
(3) Amounts of restricted core capital elements in excess of this
limit generally may be included in tier 2 capital. The excess amounts
of restricted core capital elements that are in the form of Class C
minority interest and qualifying trust preferred securities are subject
to further limitation within tier 2 capital in accordance with section
II.A.2.d.iv. of this appendix. A banking organization may attribute
excess amounts of restricted core capital elements first to any
qualifying cumulative perpetual preferred stock or to Class B minority
interest, and second to qualifying trust preferred securities or to
Class C minority interest, which are subject to a tier 2 sublimit.
ii. Transition.
(1) The quantitative limits for restricted core capital elements
set forth in sections II.A.1.b.i. and II.A.2.d.iv. of this appendix
become effective on March 31, 2009. Prior to that time, a banking
organization with restricted core capital elements in amounts that
cause it to exceed these limits must consult with the Federal Reserve
on a plan for ensuring that the banking organization is not unduly
relying on these elements in its capital base and,
{{4-29-05 p.6114}}where appropriate, for reducing such
reliance to ensure that the organization complies with these limits as
of March 31, 2009.
(2) Until March 31, 2009, the aggregate amount of qualifying
cumulative perpetual preferred stock (including related surplus) and
qualifying trust preferred securities that a banking organization may
include in tier 1 capital is limited to 25 percent of the sum of the
following core capital elements: qualifying common stockholders'
equity, Qualifying noncumulative and cumulative perpetual preferred
stock (including related surplus), qualifying minority interest in the
equity accounts of consolidated subsidiaries, and qualifying trust
preferred securities. Amounts of qualifying cumulative perpetual
preferred stock (including related surplus) and qualifying trust
preferred securities in excess of this limit may be included in tier 2
capital.
(3) Until March 31, 2009, internationally active banking
organizations generally are expected to limit the amount of qualifying
cumulative perpetual preferred stock (including related surplus) and
qualifying trust preferred securities included in tier 1 capital to 15
percent of the sum of core capital elements set forth in section
II.A.1.b.ii.2. of this appendix.
c. Definitions and requirements for core capital
elements--i. Qualifying common stockholders' equity.
(1) Definition. Qualifying common stockholders' equity
is limited to common stock; related surplus; and retained earnings,
including capital reserves and adjustments for the cumulative effect of
foreign currency translation, net of any treasury stock, less net
unrealized holding losses on available-for-sale equity securities with
readily determinable fair values. For this purpose, net unrealized
holding gains on such equity securities and net unrealized holding
gains (losses) on available-for-sale debt securities are not included
in qualifying common stockholders' equity.
(2) Restrictions on terms and features. A capital
instrument that has a stated maturity date or that has a preference
with regard to liquidation or the payment of dividends is not deemed to
be a component of qualifying common stockholders' equity, regardless
of whether or not it is called common equity. Terms or features that
grant other preferences also may call into question whether the capital
instrument would be deemed to be qualifying common stockholders'
equity. Features that require, or provide significant incentives for,
the issuer to redeem the instrument for cash or cash equivalents will
render the instrument ineligible as a component of qualifying common
stockholders' equity.
(3) Reliance on voting common stockholders' equity.
Although section II.A.1. of this appendix allows for the inclusion of
elements other than common stockholders' equity within tier 1 capital,
voting common stockholders' equity, which is the most desirable
capital element from a supervisory standpoint, generally should be the
dominant element within tier 1 capital. Thus, banking organizations
should avoid over-reliance on preferred stock and nonvoting elements
within tier 1 capital. Such nonvoting elements can include portions of
common stockholders' equity where, for example, a banking organization
has a class of nonvoting common equity, or a class of voting common
equity that has substantially fewer voting rights per share than
another class of voting common equity. Where a banking organization
relies excessively on nonvoting elements within tier 1 capital, the
Federal Reserve generally will require the banking organization to
allocate a portion of the nonvoting elements to tier 2 capital.
ii. Qualifying perpetual preferred stock.
(1) Qualifying requirements. Perpetual preferred stock
qualifying for inclusion in tier 1 capital has no maturity date and
cannot be redeemed at the option of the holder. Perpetual preferred
stock will qualify for inclusion in tier 1 capital only if it can
absorb losses while the issuer operates as a going concern.
(2) Restrictions on terms and features. Perpetual
preferred stock included in tier 1 capital may not have any provisions
restricting the banking organization's ability or legal right to defer
or waive dividends, other than provisions requiring prior or concurrent
deferral or waiver of payments on more junior instruments, which the
Federal Reserve generally expects in such instruments consistent with
the notion that the most junior capital elements should absorb losses
first. Dividend deferrals or waivers for preferred stock, which the
Federal Reserve expects will occur either voluntarily or at its
direction when an organization is in a weakened condition, must not be
subject to arrangements that would diminish the ability of the deferral
to shore up the banking organization's resources. Any
{{4-29-05 p.6115}}perpetual preferred stock with a feature
permitting redemption at the option of the issuer may qualify as tier 1
capital only if the redemption is subject to prior approval of the
Federal Reserve. Features that require, or create significant
incentives for the issuer to redeem the instrument for cash or cash
equivalents will render the instrument ineligible for inclusion in tier
1 capital. For example, perpetual preferred stock that has a
credit-sensitive dividend feature--that is, a dividend rate that is
reset periodically based, in whole or in part, on the banking
organization's current credit standing--generally does not qualify for
inclusion in tier 1 capital. 7
Similarly, perpetual preferred stock that has a dividend rate step-up
or a market value conversion feature--that is, a feature whereby the
holder must or can convert the preferred stock into common stock at the
market price prevailing at the time of conversion--generally does not
qualify for inclusion in tier 1
capital. 8
Perpetual preferred stock that does not qualify for inclusion in tier 1
capital generally will qualify for inclusion in tier 2 capital.
(3) Noncumulative and cumulative features. Perpetual
preferred stock that is noncumulative generally may not permit the
accumulation or payment of unpaid dividends in any form, including in
the form of common stock. Perpetual preferred stock that provides for
the accumulation or future payment of unpaid dividends is deemed to be
cumulative, regardless of whether or not it is called noncumulative.
iii. Qualifying minority interest. Minority interest in
the common and preferred stockholders' equity accounts of a
consolidated subsidiary (minority interest) represents stockholders'
equity associated with common or preferred equity instruments issued by
a banking organization's consolidated subsidiary that are held by
investors other than the banking organization. Minority interest is
included in tier 1 capital because, as a general rule, it represents
equity that is freely available to absorb losses in the issuing
subsidiary. Nonetheless, minority interest typically is not available
to absorb losses in the banking organization as a whole, a feature that
is a particular concern when the minority interest is issued by a
subsidiary that is neither a U.S. depository institution nor a foreign
bank. For this reason, this appendix distinguishes among three types of
qualifying minority interest. Class A minority interest is minority
interest related to qualifying common and noncumulative perpetual
preferred equity instruments issued directly (that is, not through a
subsidiary) by a consolidated U.S. depository
institution 9
or foreign bank 10
subsidiary of a banking organization. Class A minority interest is not
subject to a formal limitation within tier 1 capital. Class B minority
interest is minority interest related to qualifying cumulative
perpetual preferred equity instruments issued directly by a
consolidated U.S. depository institution or foreign bank subsidiary of
a banking organization. Class B minority interest is a restricted core
capital element subject to the limitations set forth in section
II.A.1.b.i. of this appendix, but is not subject to a tier 2 sub-limit.
Class C minority interest is minority interest related to qualifying
common or perpetual preferred stock issued by a banking organization's
consolidated subsidiary that is neither a U.S. depository institution
nor a foreign bank. Class C minority interest is eligible for inclusion
in tier 1 capital as a restricted core capital element and is subject
to the limitations set forth in sections II.A.1.b.i. and II.A.2.d.iv.
of this appendix. Minority interest in small business investment
companies, investment funds that hold nonfinancial equity investments
(as defined in section II.B.5.b. of this appendix), and subsidiaries
engaged in nonfinancial activities are not included in the banking
organization's tier 1 or total capital if the banking
organization's
{{4-29-05 p.6116}}interest in the company or fund is held
under one of the legal authorities listed in section II.B.5.b. of this
appendix. In addition, minority interest in consolidated asset-backed
commercial paper programs (ABCP) (as defined in section III.B.6. of
this appendix) that are sponsored by a banking organization are not
included in the organization's tier 1 or total capital if the
organization excludes the consolidated assets of such programs from
risk-weighted assets pursuant to section III.B.6. of this appendix.
iv. Qualifying trust preferred securities.
(1) A banking organization that wishes to issue trust preferred
securities and include them in tier 1 capital must first consult with
the Federal Reserve. Trust preferred securities are defined as undated
preferred securities issued by a trust or similar entity sponsored (but
generally not consolidated) by a banking organization that is sole
common equity holder of the trust. Qualifying trust preferred
securities must allow for dividends to be deferred for at least twenty
consecutive quarters without an event of default, unless an event of
default leading to acceleration permitted under section II.A.1.c.iv.(2)
has occurred. The required notification period for such deferral must
be reasonably short, no more than 15 business days prior to the payment
date. Qualifying trust preferred securities are otherwise subject to
the same restrictions on terms and features as qualifying perpetual
preferred stock under section II.A.1.c.ii.(2) of this appendix.
(2) The sole asset of the trust must be a junior subordinated note
issued by the sponsoring banking organization that has a minimum
maturity of thirty years, is subordinated with regard to both
liquidation and priority of periodic payments to all senior and
subordinated debt of the sponsoring banking organization (other than
other junior subordinated notes underlying trust preferred securities).
Otherwise the terms of a junior subordinated note must mirror those of
the preferred securities issued by the
trust. 11
The note must comply with section II.A.2.d. of this appendix and the
Federal Reserve's subordinated debt policy statement set forth in 12
CFR 250.166 12
except that the note may provide for an event of default and the
acceleration of principal and accrued interest upon (a) nonpayment of
interest for 20 or more consecutive quarters or (b) termination of the
trust without redemption of the trust preferred securities,
distribution of the notes to investors, or assumption of the obligation
by a successor to the banking organization.
(3) In the last five years before the maturity of the note, the
outstanding amount of the associated trust preferred securities is
excluded from tier 1 capital and included in tier 2 capital, where the
trust preferred securities are subject to the amortization provisions
and quantitative restrictions set forth in section II.A.2.d.iii. and
iv. of this appendix as if the trust preferred securities were
limited-life preferred stock.
2. Supplementary capital elements (Tier 2 capital
elements). The Tier 2 component of an institution's qualifying
capital may consist of the following items that are defined as
supplementary capital elements:
(i) Allowance for loan and lease losses (subject to limitations
discussed below);
(ii) Perpetual preferred stock and related surplus (subject to
conditions discussed below);
{{4-29-05 p.6117}}
(iii) Hybrid capital instruments (as defined below), perpetual
debt, and mandatory convertible debt securities;
(iv) Term subordinated debt and intermediate-term preferred stock,
including related surplus (subject to limitations discussed below);
(v) Unrealized holding gains on equity securities (subject to
limitations discussed in section II.A.2.e. of this appendix).
The maximum amount of tier 2 capital that may be included in an
institution's qualifying total capital is limited to 100 percent of
tier 1 capital (net of goodwill, other intangible assets, interest-only
strips receivables and nonfinancial equity investments that are
required to be deducted in accordance with section II.B. of
this appendix A).
The elements of supplementary capital are discussed in greater
detail below.
a. Allowance for loan and lease losses. Allowances
for loan and lease losses are reserves that have been established
through a charge against earnings to absorb future losses on loans or
lease financing receivables. Allowances for loan and lease losses
exclude "allocated transfer risk
reserves," 13
and reserves created against identified losses.
During the transition period, the risk-based capital guidelines
provide for reducing the amount of this allowance that may be included
in an institution's total capital. Initially, it is unlimited. However,
by year-end 1990, the amount of the allowance for loan and lease losses
that will qualify as capital will be limited to 1.5 percent of an
institution's weighted risk assets. By the end of the transition
period, the amount of the allowance qualifying for inclusion in Tier 2
capital may not exceed 1.25 percent of weighted risk
assets. 14
b. Perpetual preferred stock. Perpetual preferred
stock (and related surplus) that meets the requirements set forth in
section II.A.1.c.ii.(1) of this appendix is eligible for inclusion in
tier 2 capital without
limit. 15
c. Hybrid capital instruments, perpetual debt, and mandatory
convertible debt securities. Hybrid capital instruments include
instruments that are essentially permanent in nature and that have
certain characteristics of both equity and debt. Such instruments may
be included in Tier 2 without limit. The general criteria hybrid
capital instruments must meet in order to qualify for inclusion in Tier
2 capital are listed below:
(1) The instrument must be unsecured; fully paid-up and
subordinated to general creditors. If issued by a bank, it must also be
subordinated to claims or depositors.
(2) The instrument must not be redeemable at the option of the
holder prior to maturity, except with the prior approval of the Federal
Reserve. (Consistent with the Board's criteria for perpetual debt and
mandatory convertible securities, this requirement implies that holders
of such instruments may not accelerate the payment of principal except
in the event of bankruptcy, insolvency, or reorganization.)
(3) The instrument must be available to participate in losses while
the issuer is operating as a going concern. (Term subordinated debt
would not meet this requirement.) To satisfy this requirement, the
instrument must convert to common or perpetual preferred stock in the
event that the accumulated losses exceed the sum of the retained
earnings and capital surplus accounts of the issuer.
(4) The instrument must provide the option for the issuer to defer
interest payments if: a) the issuer does not report a profit in the
preceding annual period (defined as combined
{{4-29-05 p.6118}}profits for the most recent four
quarters), and b) the issuer eliminates cash dividends on
common and preferred stock.
Perpetual debt and mandatory convertible debt securities that meet
the criteria set forth in 12 CFR
Part 225, appendix B, also qualify as unlimited elements of
Tier 2 capital for bank holding companies.
d. Subordinated debt and intermediate-term preferred
stock--i. Five-year minimum maturity. Subordinated debt and
intermediate-term preferred stock must have an original weighted
average maturity of at least five years to qualify as tier 2 capital.
If the holder has the option to require the issuer to redeem, repay, or
repurchase the instrument prior to the original stated maturity,
maturity would be defined, for risk-based capital purposes, as the
earliest possible date on which the holder can put the instrument back
to the issuing banking organization.
ii. Other restrictions on subordinated debt.
Subordinated debt included in tier 2 capital must comply with the
Federal Reserve's subordinated debt policy statement set forth in 12
CFR 250.166. 16
Accordingly, such subordinated debt must meet the following
requirements:
(1) The subordinated debt must be unsecured.
(2) The subordinated debt must clearly state on its face that it is
not a deposit and is not insured by a Federal agency.
(3) The subordinated debt must not have credit-sensitive features
or other provisions that are inconsistent with safe and sound banking
practice.
(4) Subordinated debt issued by a subsidiary U.S. depository
institution or foreign bank of a bank holding company must be
subordinated in right of payment to the claims of all the
institution's general creditors and depositors, and generally must not
contain provisions permitting debt holders to accelerate payment of
principal or interest upon the occurrence of any event other than
receivership of the institution. Subordinated debt issued by a bank
holding company or its subsidiaries that are neither U.S. depository
institutions nor foreign banks must be subordinated to all senior
indebtedness of the issuer; that is, the debt must be subordinated at a
minimum to all borrowed money, similar obligations arising from
off-balance sheet guarantees and direct credit substitutes, and
obligations associated with derivative products such as interest rate
and foreign exchange contracts, commodity contracts, and similar
arrangements.
Subordinated debt issued by a bank holding company or any of its
subsidiaries that is not a U.S. depository institution or foreign bank
must not contain provisions permitting debt holders to accelerate the
payment of principal or interest upon the occurrence of any event other
than the bankruptcy of the bank holding company or the receivership of
a major subsidiary depository institution. Thus, a provision permitting
acceleration in the event that any other affiliate of the bank holding
company issuer enters into bankruptcy or receivership makes the
instrument ineligible for inclusion in tier 2 capital.
iii. Discounting in last five years. As a limited-life
capital instrument approaches maturity, it begins to take on
characteristics of a short-term obligation. For this reason, the
outstanding amount of term subordinated debt and limited-life preferred
stock eligible for inclusion in tier 2 capital is reduced, or
discounted, as these instruments approach maturity: one-fifth of the
outstanding amount is excluded each year during the instrument's last
five years before maturity. When remaining maturity is less than one
year, the instrument is excluded from tier 2 capital.
iv. Limits. The aggregate amount of term subordinated
debt (excluding mandatory convertible debt) and limited-life preferred
stock as well as, beginning March 31, 2009, qualifying trust preferred
securities and Class C minority interest in excess of the limits set
forth in section II.A.1.b.i. of this appendix that may be included in
tier 2 capital is limited to 50 percent of tier 1 capital (net of
goodwill and other intangible assets required to be deducted in
accordance with section II.B.1.b. of this appendix). Amounts of
these
{{4-29-05 p.6119}}instruments in excess of this limit,
although not included in tier 2 capital, will be taken into account by
the Federal Reserve in its overall assessment of a banking
organization's funding and financial condition.
B. Deductions from Capital and Other Adjustments
Certain assets are deducted from an organization's capital for the
purpose of calculating the risk-based capital
ratio. 17
These assets include:
(i)(a) Goodwill--deducted from the sum of core capital elements.
(b) Certain identifiable intangible assets, that is, intangible
assets other than goodwill--deducted from the sum of core capital
elements in accordance with section II.B.1.b. of this appendix.
(c) Certain credit-enhancing interest-only strips
receivables--deducted from the sum of core capital elements in
accordance with sections II.B.1.c. through e. of this appendix.
(ii) Investments in banking and finance subsidiaries that are not
consolidated for accounting or supervisory purposes, and investments in
other designated subsidiaries or associated companies at the discretion
of the Federal Reserve--deducted from total capital components (as
described in greater detail below).
(iii) Reciprocal holdings of capital instruments of banking
organizations--deducted from total capital components.
(v) Nonfinancial equity investments--portions are deducted from the
sum of core capital elements in accordance with section
II.B.5 of this appendix A.
(iv) Deferred tax assets--portions are deducted from the sum of
core capital elements in accordance with section II.B.4. of this
appendix A.
1. Goodwill, other intangible assets, and residual
interests.--a. Goodwill. Goodwill is an intangible asset that
represents the excess of the purchase price over the fair market value
of identifiable assets acquired less liabilities assumed in
acquisitions accounted for under the purchase method of accounting. Any
goodwill carried on the balance sheet of a bank holding company after
December 31, 1992, will be deducted from the sum of core capital
elements in determining Tier 1 capital for ratio calculation purposes.
Any goodwill in existence before March 12, 1988, is
"grandfathered" during the transition period and is not deducted
from core capital elements until after December 31, 1992. However, bank
holding company goodwill acquired as a result of a merger or
acquisition that was consummated on or after March 12, 1988, is
deducted immediately.
b. Other intangible assets. i. All servicing assets,
including servicing assets on assets other than mortgages (i.e.,
nonmortgage servicing assets) are included in this appendix as
identifiable intangible assets. The only types of identifiable
intangible assets that may be included in, that is, not deducted from,
an organization's capital are readily marketable mortgage servicing
assets, nonmortgage servicing assets, and purchased credit card
relation-ships. The total amount of these assets that may be included
in capital is subject to the limitations described below in sections
II.B.1.d. and e. of this appendix.
ii. The treatment of identifiable intangible assets set forth in
this section generally will be used in the calculation of a bank
holding company's capital ratios for supervisory and applications
purposes. However, in making an overall assessment of a bank holding
company's capital adequacy for applications purposes, the Board may,
if it deems appropriate, take into account the quality and composition
of an organization's capital, together with the quality and value of
its tangible and intangible assets.
c. Credit-enhancing interest-only strips receivables
(I/Os) i. Credit-enhancing I/Os are on-balance sheet assets that,
in form or in substance, represent a contractual right to receive some
or all of the interest due on transferred assets and expose the bank
holding company to credit risk directly or indirectly associated with
transferred assets that exceeds a pro rata share of the bank
holding company's claim on the assets, whether through subordination
provisions or other credit enhancement techniques. Such I/Os, whether
purchased or retained, including other similar "spread" assets,
may be included in, that is, not deducted from, a bank holding
company's capital subject to the limitations described below in
sections II.B.1.d. and e. of this appendix.
ii. Both purchased and retained credit-enhancing I/Os, on a non-tax
adjusted basis, are included in the total amount that is used for
purposes of determining whether a bank
{{4-29-05 p.6120}}holding company exceeds the tier 1
limitation described below in this section. In determining whether an
I/O or other types of spread assets serve as a credit enhancement, the
Federal Reserve will look to the economic substance of the transaction.
d. Fair value limitation. The amount of mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships that a bank holding company may include in capital
shall be the lesser of 90 percent of their fair value, as determined in
accordance with section II.B.1.f. of this appendix, or 100 percent of
their book value, as adjusted for capital purposes in accordance with
the instructions to the Consolidated Financial Statements for Bank
Holding Companies (FR Y--9C Report). The amount of credit-enhancing
I/Os that a bank holding company may include in capital shall be its
fair value. If both the application of the limits on mortgage servicing
assets, nonmortgage servicing assets, and purchased credit card
relationships and the adjustment of the balance sheet amount for these
assets would result in an amount being deducted from capital, the bank
holding company would deduct only the greater of the two amounts from
its core capital elements in determining tier 1 capital.
e. Tier 1 capital limitation. i. The total amount of
mortgage servicing assets, nonmortgage servicing assets, and purchased
credit card relationships that may be included in capital, in the
aggregate, cannot exceed 100 percent of tier 1 capital. Nonmortgage
servicing assets and purchased credit care relationships are subject,
in the aggregate, to a separate sublimit of 25 percent of tier 1
capital. In addition, the total amount of credit-enhancing I/Os (both
purchased and retained) that may be included in capital cannot exceed
25 percent of tier 1 capital. 18
ii. For purposes of calculating these limitations on mortgage
servicing assets, nonmortgage servicing assets, purchased credit card
relationships, and credit-enhancing I/Os, tier 1 capital is defined as
the sum of core capital elements, net of goodwill, and net of all
identifiable intangible assets other than mortgage servicing assets,
nonmortgage servicing assets, and purchased credit card relationships,
but prior to the deduction of any disallowed mortgage servicing assets,
any disallowed nonmortgage servicing assets, any disallowed purchased
credit card relationships, any disallowed credit-enhancing I/Os (both
purchased and retained), any disallowed deferred tax assets, and any
nonfinancial equity investments.
III. Bank holding companies may elect to deduct disallowed mortgage
servicing assets, disallowed nonmortgage servicing assets, and
disallowed credit-enhancing I/Os (both purchased and retained) on a
basis that is net of any associated deferred tax liability. Deferred
tax liabilities netted in this manner cannot also be netted against
deferred-tax assets when determining the amount of deferred-tax assets
that are dependent upon future taxable income.
f. Valuation. Bank holding companies must review the
book value of all intangible assets at least quarterly and make
adjustments to these values as necessary. The fair value of mortgage
servicing assets, nonmortgage servicing assets, purchased credit card
relationships, and credit-enhancing I/Os also must be determined at
least quarterly. This determination shall include adjustments for any
significant changes in original valuation assumptions, including
changes in prepayment estimates or account attrition rates. Examiners
will review both the book value and the fair value assigned to these
assets, together with supporting documentation, during the inspection
process. In addition, the Federal Reserve may require, on a
case-by-case basis, an independent valuation of a bank holding
company's intangible assets or credit-enhancing I/Os.
g. Growing organizations. Consistent with long-standing
Board policy, banking organizations experiencing substantial growth,
whether internally or by acquisition, are expected to maintain strong
capital positions substantially above minimum supervisory levels,
without significant reliance on intangible assets or credit-enhancing
I/Os.
2. Investments in certain subsidiaries.--a. Unconsolidated
banking or finance
{{4-29-05 p.6120.01}}subsidiaries. The aggregate amount
of investments in banking or finance
subsidiaries 19
whose financial statements are not consolidated for accounting or
regulatory reporting purposes, regardless of whether the investment is
made by the parent bank holding company or its direct or indirect
subsidiaries, will be deducted from the consolidated parent banking
organization's total capital
components. 20
Generally, investments for this purpose are defined as equity and debt
capital investments and any other instruments that are deemed to be
capital in the particular subsidiary.
Advances (that is, loans, extensions of credit, guarantees,
commitments, or any other forms of credit exposure) to the subsidiary
that are not deemed to be capital will generally not be deducted from
an organization's capital. Rather, such advances generally will be
included in the parent banking organization's consolidated assets and
be assigned to the 100 percent risk category, unless such obligations
are backed by recognized collateral or guarantees, in which case they
will be assigned to the risk category appropriate to such collateral or
guarantees. These advances may, however, also be deducted from the
consolidated parent banking organization's capital if, in the judgment
of the Federal Reserve, the risks stemming from such advances are
comparable to the risks associated with capital investments or if the
advances involve other risk factors that warrant such an adjustment to
capital for supervisory purposes. These other factors could include,
for example, the absence of collateral support.
Inasmuch as the assets of unconsolidated banking and finance
subsidiaries are not fully reflected in a banking organization's
consolidated total assets, such assets may be viewed as the equivalent
of off-balance sheet exposures since the operations of an
unconsolidated subsidiary could expose the parent organization and its
affiliates to considerable risk. For this reason, it is generally
appropriate to view the capital resources invested in these
unconsolidated entities as primarily supporting the risks inherent in
these off-balance sheet assets, and not generally available to support
risks or absorb losses elsewhere in the organization.
b. Other subsidiaries and investments. The deduction
of investments, regardless of whether they are made by the parent bank
holding company or by its direct or indirect subsidiaries, from a
consolidated banking organization's capital will also be applied in the
case of any subsidiaries, that, while consolidated for accounting
purposes, are not consolidated for certain specified supervisory or
regulatory purposes, such as to facilitate functional regulation. For
this purpose, aggregate capital investments (that is, the sum of any
equity or debt instruments that are deemed to be capital) in these
subsidiaries will be deducted from the consolidated parent banking
organization's total capital
components. 21
Advances (that is, loans, extensions of credit, guarantees,
commitments, or any other forms of credit exposure) to such
subsidiaries that are not deemed to be capital will generally not be
deducted from capital. Rather, such advances will normally be included
in the parent banking organization's consolidated assets and assigned
to the 100 percent risk category, unless such obligations are backed by
recognized collateral or guarantees, in which case they will be
assigned to the risk category appropriate to such collateral or
guarantees. These advances may, however, be deducted from the
consolidated parent banking organization's capital if, in the judgment
of the Federal Reserve, the risks stemming from such advances are
comparable to the risks associated with capital investments or if such
advances involve other risk factors that warrant such an
adjustment
{{4-29-05 p.6120.02}}to capital for supervisory purposes.
These other factors could include, for example, the absence of
collateral support. 22
In general, when investments in a consolidated subsidiary are
deducted from a consolidated parent banking organization's capital, the
subsidiary's assets will also be excluded from the consolidated assets
of the parent banking organization in order to assess the latter's
capital adequacy. 23
The Federal Reserve may also deduct from a banking organization's
capital, on a case-by-case basis, investments in certain other
subsidiaries in order to determine if the consolidated banking
organization meets minimum supervisory capital requirements without
reliance on the resources invested in such subsidiaries.
The Federal Reserve will not automatically deduct investments in
other unconsolidated subsidiaries or investments in joint ventures and
associated companies. 24
Nonetheless, the resources invested in these entities, like investments
in unconsolidated banking and finance subsidiaries, support assets not
consolidated with the rest of the banking organization's activities
and, therefore, may not be generally available to support additional
leverage or absorb losses elsewhere in the banking organization.
Moreover, experience has shown that banking organizations stand behind
the losses of affiliated institutions, such as joint ventures and
associated companies, in order to protect the reputation of the
organization as a whole. In some cases, this has led to losses that
have exceeded the investments in such organizations.
For this reason, the Federal Reserve will monitor the level and
nature of such investments for individual banking organizations and
may, on a case-by-case basis, deduct such investments from total
capital components, apply an appropriate risk-weighted capital charge
against the organization's proportionate share of the assets of its
associated companies, require a line-by-line consolidation of the
entity (in the event that the parent's control over the entity makes it
the functional equivalent of a subsidiary), or otherwise require the
organization to operate with a risk-based capital ratio above the
minimum.
In considering the appropriateness of such adjustments or actions,
the Federal Reserve will generally take into account whether:
(1) The parent banking organization has significant influence over
the financial or managerial policies or operations of the subsidiary,
joint venture, or associated company;
(2) The banking organization is the largest investor in the
affiliated company; or
(3) Other circumstances prevail that appear to closely tie the
activities of the affiliated company to the parent banking
organization.
3. Reciprocal holdings of banking organizations' capital
instruments. Reciprocal holdings of banking organizations'
capital instruments (that is, instruments that qualify as Tier 1 or
Tier 2 capital) will be deducted from an organization's total capital
components for the purpose of determining the numerator of the
risk-based capital ratio.
Reciprocal holdings are cross-holdings resulting from formal or
informal arrangements in which two or more banking organizations swap,
exchange, or otherwise agree to hold each other's capital instruments.
Generally, deductions will be limited to intentional cross-holdings. At
present, the Board does not intend to require banking organizations to
deduct nonreciprocal holdings of such capital
instruments. 25
{{4-29-05 p.6120.02-A}}
4. Deferred-tax assets. a. The amount of deferred-tax
assets that is dependent upon future taxable income, net of the
valuation allowance for deferred-tax assets, that may be included in,
that is, not deducted from, a bank holding company's capital may not
exceed the lesser of:
i. the amount of these deferred-tax assets that the bank holding
company is expected to realize within one year of the calendar
quarter-end date, based on its projections of future taxable income for
that year, 26
or
ii. 10 percent of Tier 1 capital.
b. The reported amount of deferred-tax assets, net of any valuation
allowance for deferred-tax assets, in excess of the lesser of these two
amounts is to be deducted from a banking organization's core capital
elements in determining tier 1 capital. For purposes of calculating the
10 percent limitation, tier 1 capital is defined as the sum of core
capital elements, net of goodwill, and net of all identifiable
intangible assets other than mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships, but prior to
the deduction of any disallowed mortgage servicing assets, any
disallowed nonmortgage servicing assets, any disallowed purchased
credit card relationships, any disallowed credit-enhancing I/Os, any
disallowed deferred-tax assets, and any nonfinancial equity
investments. There generally is no limit in tier 1 capital on the
amount of deferred-tax assets that can be realized from taxes paid in
prior carry-back years or from future reversals of existing taxable
temporary differences.
5. Nonfinancial equity investments--a. General.
A bank holding company must deduct from its core capital elements
the sum of the appropriate percentages (as determined below) of the
adjusted carrying value of all nonfinancial equity investments held by
the parent bank holding company or by its direct or indirect
subsidiaries. For purposes of this section II.B.5, investments held by
a bank holding company include all investments held directly or
indirectly by the bank holding company or any of its subsidiaries.
b. Scope of nonfinancial equity investments. A
nonfinancial equity investment means any equity investment held by the
bank holding company: under the merchant banking authority of section
4(k)(4)(H) of the BHC Act and subpart J of the Board's Regulation Y
(12 CFR 225.175 et seq.); under section 4(c)(6) or 4(c)(7) of BHC Act
in a nonfinancial company or in a company that makes investments in
nonfinancial companies; in a nonfinancial company through a small
business investment company (SBIC) under section 302(b) of the Small
Business Investment Act of 1958; 27
in a nonfinancial company under the portfolio investment provisions of
the Board's Regulation K (12 CFR 211.8(c)(3)); or in a nonfinancial
company under section 24 of the Federal Deposit Insurance Act (other
than section 24(f)). 28
A nonfinancial company is an entity that engages in any activity that
has not been determined to be financial in nature or incidental to
financial activities under section 4(k) of the Bank Holding Company Act
(12 U.S.C. 1843(k)).
{{4-29-05 p.6120.02-B}}
c. Amount of deduction from core capital. i. The bank
holding company must deduct from its core capital elements the sum of
the appropriate percentages, as set forth in Table 1, of the adjusted
carrying value of all nonfinancial equity investments held by the bank
holding company. The amount of the percentage deduction increases as
the aggregate amount of nonfinancial equity investments held by the
bank holding company increases as a percentage of the bank holding
company's Tier 1 capital.
TABLE 1.DEDUCTION FOR NONFINANCIAL EQUITY
INVESTMENTS
Aggregate
adjusted carrying value of all nonfinancial equity investments held
directly or indirectly by the bank holding company (as a percentage
of the Tier 1 capital of the parent banking
organization)1 |
Deduction from CoreCapital Elements (as
apercentage of the adjusted carrying valueof the
investment) |
Less than 15 percent |
8
percent. |
15 percent to 24.99 percent |
12
percent. |
25 percent and above |
25 percent.
|
1For purposes of calculating the adjusted carrying
value of nonfinancial equity investments as a percentage of Tier 1
capital, Tier 1 capital is defined as the sum of core capital elements
net of goodwill and net of all identifiable intangible assets other
than mortgage servicing assets, nonmortgage servicing assets and
purchased credit card relationships, but prior to the deduction for any
disallowed mortgage servicing assets, any disallowed nonmortgage
servicing assets, any disallowed purchased credit card relationships,
any disallowed credit enhancing I/Os, (both purchased and retained),
any disallowed deferred tax assets, and any nonfinancial equity
investments.
ii. These deductions are applied on a marginal basis to the
portions of the adjusted carrying value of nonfinancial equity
investments that fall within the specified ranges of the parent holding
company's Tier 1 capital. For example, if the adjusted carrying value
of all nonfinancial equity investments held by a bank holding company
equals 20 percent of the Tier 1 capital of the bank holding company,
then the amount of the deduction would be 8 percent of the adjusted
carrying value of all investments up to 15 percent of the company's
Tier 1 capital, and 12 percent of the adjusted carrying value of all
investments in excess of 15 percent of the company's Tier 1 capital.
iii. The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under this paragraph is
excluded from the bank holding company's risk-weighted assets for
purposes of computing the denominator of the company's risk-based
capital ratio. 29
iv. As noted in section I, this appendix establishes minimum
risk-based capital ratios and banking organizations are at all
times expected to maintain capital commensurate with the level and
nature of the risks to which they are exposed. The risk to a banking
organization from nonfinancial equity investments increases with its
concentration in such investments and strong capital levels above the
minimum requirements are particularly important when a banking
organization has a high degree of concentration in nonfinancial equity
investments (e.g, in excess of 50 percent of Tier 1 capital). The
Federal Reserve intends to monitor banking organizations and apply
heightened supervision to equity investment activities as appropriate,
including where the banking organization has a high degree of
concentration in nonfinancial equity investments, to ensure that each
organization maintains capital levels that are appropriate in light of
its equity investment activities. The Federal Reserve also reserves
authority to impose a higher capital charge in any case where the
circumstances, such as the level of risk of the particular investment
or portfolio of investments, the risk management systems of the banking
organization, or other information, indicate that a higher minimum
capital requirement is appropriate.
d. SBIC investments. i. No deduction is required for
nonfinancial equity investments that are held by a bank holding company
through one or more SBICs that are consolidated with the bank holding
company or in one or more SBICs that are not consolidated with the bank
holding company to the extent that all such investments, in the
aggregate, do not exceed 15
{{2-28-06 p.6120.02-B-1}}percent of the aggregate of the bank
holding company's pro rata interests in the Tier 1 capital of its
subsidiary banks. Any nonfinancial equity investment that is held
through or in an SBIC and not required to be deducted from Tier 1
capital under this section II.B.5.d. will be assigned a 100 percent
risk-weight and included in the parent holding company's consolidated
risk-weighted assets. 30
ii. To the extent the adjusted carrying value of all nonfinancial
equity investments that a bank holding company holds through one or
more SBICs that are consolidated with the bank holding company or in
one or more SBICs that are not consolidated with the bank holding
company exceeds, in the aggregate, 15 percent of the aggregate Tier 1
capital of the company's subsidiary banks, the appropriate percentage
of such amounts (as set forth in Table 1) must be deducted from the
bank holding company's core capital elements. In addition, the
aggregate adjusted carrying value of all nonfinancial equity
investments held through a consolidated SBIC and in a non-consolidated
SBIC (including any investments for which no deduction is required)
must be included in determining, for purposes of Table 1, the total
amount of nonfinancial equity investments held by the bank holding
company in relation to its Tier 1 capital.
e. Transition provisions. No deduction under this
section II.B.5 is required to be made with respect to the
adjusted carrying value of any nonfinancial equity investment (or
portion of such an investment) that was made by the bank holding
company prior to March 13, 2000, or that was made after such date
pursuant to a binding written
commitment 31
entered into by the bank holding company prior to March 13, 2000,
provided that in either case the bank holding company has continuously
held the investment since the relevant investment
date. 32
For purposes of this section II.B.5.e, a nonfinancial equity investment
made prior to March 13, 2000, includes any shares or other interests
received by the bank holding company through a stock split or stock
dividend on an investment made prior to March 13, 2000, provided the
bank holding company provides no consideration for the shares or
interests received and the transaction does not materially increase the
bank holding company's proportional interest in the company. The
exercise on or after March 13, 2000, of options or warrants acquired
prior to March 13, 2000, is not considered to be an investment made
prior to March 13, 2000, if the bank holding company provides any
consideration for the shares or interests received upon exercise of the
options or warrants. Any nonfinancial equity investment (or portion
thereof) that is not required to be deducted
{{2-28-06 p.6120.02-B-2}}from Tier 1 capital under this section
II.B.5.e. must be included in determining the total amount of
nonfinancial equity investments held by the bank holding company in
relation to its Tier 1 capital for purposes of Table 1. In addition,
any nonfinancial equity investment (or portion thereof) that is not
required to be deducted from Tier 1 capital under this section
II.B.5.e. will be assigned a 100-percent risk weight and included in
the bank holding company's consolidated risk-weighted assets.
f. Adjusted carrying value. i. For purposes of this
section II.B.5., the "adjusted carrying value" of
investments is the aggregate value at which the investments are carried
on the balance sheet of the consolidated bank holding company reduced
by any unrealized gains on those investments that are reflected in such
carrying value but excluded from the bank holding company's Tier 1
capital and associated deferred tax liabilities. For example, for
investments held as available-for-sale (AFS), the adjusted carrying
value of the investments would be the aggregate carrying value of the
investments (as reflected on the consolidated balance sheet of the bank
holding company) less any unrealized gains on those
investments that are included in other comprehensive income and not
reflected in Tier 1 capital, and associated deferred tax
liabilities. 33
ii. As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that is
consolidated for accounting purposes under generally accepted
accounting principles, the parent banking organization's adjusted
carrying value of the investment is determined under the equity method
of accounting (net of any intangibles associated with the investment
that are deducted from the consolidated bank company's core capital in
accordance with section II.B.1 of this Appendix). Even though the
assets of the nonfinancial company are consolidated for accounting
purposes, these assets (as well as the credit equivalent amounts of the
company's off-balance sheet items) should be excluded from the banking
organization's risk-weighted assets for regulatory capital purposes.
g. Equity investments. For purposes of this section
II.B.5, an equity investment means any equity instrument
(including common stock, preferred stock, partnership interests,
interests in limited liability companies, trust certificates and
warrants and call options that give the holder the right to purchase an
equity instrument), any equity feature of a debt instrument (such as a
warrant or call option), and any debt instrument that is convertible
into equity where the instrument or feature is held under one of the
legal authorities listed in section II.B.5.b. of this
appendix. An investment in any other instrument (including subordinated
debt) may be treated as an equity investment if, in the judgment of the
Federal Reserve, the instrument is the functional equivalent of equity
or exposes the state member bank to essentially the same risks as an
equity instrument.
Attachment II_Summary of Definition of Qualifying Capital for Bank
Holding Companies* [Using the Year-End 1992
Standard]
-
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -
Components |
Minimum
requirements |
- - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - |
CORE CAPITAL (Tier 1) |
Must equal or exceed 4% of
weighted-risk assets. |
Common stockholders' equity |
No
limit. |
Qualifying noncumulative perpetual preferred
stock.
|
No limit; bank holding companies should avoid undue
reliance on preferred stock in tier 1. |
Qualifying cumulative
perpetual preferred stock.
|
Limited to 25% of the sum of
common stock, qualifying perpetual stock, and minority
interests. |
Minority interest in equity accounts of
consolidated subsidiaries.
|
Organizations should avoid using
minority interests to introduce elements not other- wise qualifying
for tier 1 capital.
|
Less: Goodwill, other intangible assets,
credit-enhancing interest-only strips and nonfinancial equity
investments required to be deducted from
capital1
{{2-28-06 p.6120.02-B-3}} |
SUPPLEMENTARY CAPITAL (Tier
2) |
Total of tier 2 is limited to 100% of tier
1.2 |
Allowance for loan and lease losses |
Limited to 1.25%
of weighted-risk assets.2 |
Perpetual preferred stock |
No
limit within tier 2. |
Hybrid capital instruments and equity
contract notes. |
No limit within tier 2. |
Subordinated debt
and intermediate-term preferred stock (original weighted
average maturity of 5 years or more). |
Subordinated debt and
intermediate-term preferred stock are limited to 50% of tier
12; amortized for capital purposes as they approach
maturity. |
Revaluation reserves (equity and building). |
Not
included; organizations encouraged to disclose; may be evaluated on a
case-by-case basis for international comparisons; and taken into
account in making an overall assessment of capital. |
DEDUCTIONS
(from sum of tier 1 and tier 2) |
Investments in
unconsolidated subsidiaries.
|
As a general rule, one-half of the
aggregate investments will be deducted from tier 1 capital and
one-half from tier 2 capital.3 |
Reciprocal holdings of banking
organizations' capital securities |
Other deductions (such as
other subsidiaries or joint ventures) as determined by supervisory
authority. |
On a case-by-case basis or as a matter of
policy after a formal rulemaking. |
TOTAL CAPITAL (tier 1 +
tier 2 -- deductions).
|
Must equal or exceed 8% of
weighted-risk assets. |
- - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
-
| |
1 Requirements for the deduction of other intangible assets
and residual interests are set froth in section II.B.1. of this
appendix.
2 Amounts in excess of limitations are permitted but
do not qualify as capital.
3 A proportionately greater amount may be deducted
from tier 1 capital, if the risks associated with the subsidiary so
warrant.
* See discussion in section II of the guidelines for a
complete description of the requirements for, and the limitations on,
the components of qualifying capital.
III. Procedures for Computing Weighted Risk Assets
and Off-Balance Sheet Items
A. Procedures
Assets and credit equivalent amounts of off-balance sheet items of
bank holding companies are assigned to one of several broad risk
categories, according to the obligor, or, if relevant, the guarantor or
the nature of the collateral. The aggregate dollar value of the amount
in each category is then multiplied by the risk weight associated with
that category. The resulting weighted values from each of the risk
categories are added together, and this sum is the banking
organization's total weighted risk assets that comprise the denominator
of the risk-based capital ratio. Attachment I provides a sample
calculation.
Risk weights for all off-balance sheet items are determined by a
two-step process. First, the "credit equivalent amount" of
off-balance sheet items is determined, in most cases, by multiplying
the off-balance sheet item by a credit conversion factor. Second, the
credit equivalent amount is treated like any balance sheet asset and
generally is assigned to the
{{2-28-06 p.6120.02-B-4}}appropriate risk category according to
the obligor, or, if relevant, the guarantor or the nature of the
collateral.
In general, if a particular item qualifies for placement in more
than one risk category, it is assigned to the category that has the
lowest risk weight. A holding of a U.S. municipal revenue bond that is
fully guaranteed by a U.S. bank, for example, would be assigned the 20
percent risk weight appropriate to claims guaranteed by U.S. banks,
rather than the 50 percent risk weight appropriate to U.S. municipal
revenue bonds. 34
The terms "claims" and "securities" used in the context
of the discussion of risk weights, unless otherwise specified, refer to
loans or debt obligations of the entity on whom the claim is held.
Assets in the form of stock or equity holdings in commercial or
financial firms are assigned to the 100 percent risk category, unless
some other treatment is explicitly permitted.
The Federal Reserve will, on a case-by-case basis, determine the
appropriate risk weight for any asset or credit equivalent amount of an
off-balance sheet item that does not fit wholly within the terms of one
of the risk weight categories set forth below or that imposes risks on
a bank holding company that are incommensurate with the risk weight
otherwise specified below for the asset or off-balance sheet item. In
addition, the Federal Reserve will, on a case-by-case basis, determine
the appropriate credit conversion factor for any off-balance sheet item
that does not fit wholly within the terms of one of the credit
conversion factors set forth below or that imposes risks on a banking
organization that are incommensurate with the credit conversion factors
otherwise specified below for the off-balance sheet item. In making
such a determination, the Federal Reserve will consider the similarity
of the asset or off-balance sheet item to assets or off-balance sheet
items explicitly treated in the guidelines, as well as other relevant
factors.
B. Collateral, Guarantees, and Other Considerations
1. Collateral. The only forms of collateral that are
formally recognized by the riskbased capital framework are: cash
on deposit in a subsidiary lending institution; securities issued or
guaranteed by the central governments of the OECD-based group of
countries, 35
U.S. Government agencies, or U.S. Government-sponsored agencies; and
securities issued
{{4-28-06 p.6120.02-B-5}}by multilateral lending institutions or
regional development banks. Claims fully secured by such collateral
generally are assigned to the 20 percent risk-weight category.
Collateralized transactions meeting all the conditions described in
section III.C.1. may be assigned a zero percent risk weight.
With regard to collateralized claims that may be assigned to the 20
percent risk-weight category, the extent to which qualifying securities
are recognized as collateral is determined by their current market
value. If such a claim is only partially secured, that is, the market
value of the pledged securities is less than the face amount of a
balance-sheet asset or an off-balance-sheet item, the portion that is
covered by the market value of the qualifying collateral is assigned to
the 20 percent risk category, and the portion of the claim that is not
covered by collateral in the form of cash or a qualifying security is
assigned to the risk category appropriate to the obligor or, if
relevant, the guarantor.
2. Guarantees. Guarantees of the OECD and non-OECD
central governments, U.S. Government agencies, U.S.
Government-sponsored agencies, state and local governments of the
OECD-based group of countries, multilateral lending institutions and
regional development banks, U.S. depository institutions, and foreign
banks are also recognized. If a claim is partially guaranteed, that
is, coverage of the guarantee is less than the face amount of a balance
sheet asset or an off-balance sheet item, the portion that is not fully
covered by the guarantee is assigned to the risk category appropriate
to the obligor or, if relevant, to any collateral. The face amount of a
claim covered by two types of guarantees that have different risk
weights, such as a U.S. Government guarantee and a state
{{8-31-04 p.6120.02-C}}guarantee, is to be apportioned between
the two risk categories appropriate to the guarantors.
The existence of other forms of collateral or guarantees that the
risk-based capital framework does not formally recognize may be taken
into consideration in evaluating the risks inherent in an
organization's loan portfolio--which, in turn, would affect the overall
supervisory assessment of the organization's capital adequacy.
3. Recourse obligations, direct credit substitutes, residual
interests, and asset- and mortgage-backed securities. Direct
credit substitutes, assets transferred with recourse, and securities
issued in connection with asset securitizations and structured
financings are treated as described below. The term "asset
securitizations" or "securitizations" in this rule includes
structured financings, as well as asset securitization transactions.
a. Definitions--i. Credit derivative means a
contract that allows one party (the "protection purchaser") to
transfer the credit risk of an asset or off-balance sheet credit
exposure to another party (the "protection provider"). The value
of a credit derivative is dependent, at least in part, on the credit
performance of the "reference asset."
ii. Credit-enhancing representations and warranties
means representations and warranties that are made or assumed in
connection with a transfer of assets (including loan servicing assets)
and that obligate the bank holding company to protect investors from
losses arising from credit risk in the assets transferred or the loans
serviced. Credit-enhancing representations and warranties include
promises to protect a party from losses resulting from the default or
nonperformance of another party or from an insufficiency in the value
of the collateral. Credit-enhancing representations and warranties do
not include:
1. Early default clauses and similar warranties that
permit the return of, or premium refund clauses covering, 1--4 family
residential first mortgage loans that qualify for a 50 percent risk
weight for a period not to exceed 120 days from the date of transfer.
These warranties may cover only those loans that were originated within
1 year of the date of transfer;
2. Premium refund clauses that cover assets guaranteed,
in whole or in part, by the U.S. Government, a U.S. Government agency
or a government-sponsored enterprise, provided the premium refund
clauses are for a period not to exceed 120 days from the date of
transfer; or
3. Warranties that permit the return of assets in
instances of misrepresentation, fraud or incomplete documentation.
(iii) direct credit substitute means an arrangement in
which a bank holding company assumes, in form or in
substance, credit risk associated with an on- or off-balance sheet
credit exposure that was not previously owned by the bank holding
company (third-party asset) and the risk assumed by the bank holding
company exceeds the pro rata share of the bank holding
company's interest in the third-party asset. If the bank holding
company has no claim on the third-party asset, then the bank holding
company's assumption of any credit risk with respect to the
third-party asset is a direct credit substitute. Direct credit
substitutes include, but are not limited to:
1. Financial standby letters of credit that support
financial claims on a third party that exceed a bank holding company's
pro rata share of losses in the financial claim;
2. Guarantees, surety arrangements, credit derivatives,
and similar instruments backing financial claims that exceed a bank
holding company's pro rata share in the financial claim;
3. Purchased subordinated interests or securities that
absorb more than their pro rata share of losses from the
underlying assets;
4. Credit derivative contracts under which the bank
holding company assumes more than its pro rata share of
credit risk on a third party exposure;
5. Loans or lines of credit that provide credit
enhancement for the financial obligations of an account party;
6. Purchased loan servicing assets if the servicer is
responsible for credit losses or if the servicer makes or assumes
credit-enhancing representations and warranties with respect to the
loans serviced. Mortgage servicer cash advances that meet the
conditions of section III.B.3.a.viii. of this appendix are not direct
credit substitutes;
7. Clean-up calls on third party assets. Clean-up calls
that are 10 percent or less of the original pool balance that are
exercisable at the option of the bank holding company are not direct
credit substitutes; and
{{8-31-04 p.6120.02-D}}
8. Liquidity facilities that provide liquidity support
to ABCP (other than eligible ABCP liquidity facilities).
iv. Eligible ABCP liquidity facility means a liquidity
facility supporting ABCP, in form or in substance, that is subject to
an asset quality test at the time of draw that precludes funding
against assets that are 90 days or more past due or in default. In
addition, if the assets that an eligible ABCP liquidity facility is
required to fund against are externally rated assets or exposures at
the inception of the facility, the facility can be used to fund only
those assets or exposures that are externally rated investment grade at
the time of funding. Notwithstanding the eligibility requirements set
forth in the two preceding sentences, a liquidity facility will be
considered an eligible ABCP liquidity facility if the assets that are
funded under the liquidity facility and which do not meet the
eligibility requirements are guaranteed, either conditionally or
unconditionally, by the U.S. government or its agencies, or by the
central government of an OECD country.
v. Externally rated means that an instrument or
obligation has received a credit rating from a nationally recognized
statistical rating organization.
vi. Face amount means the notional principal, or face
value, amount of an off-balance sheet item; the amortized cost of an
asset not held for trading purposes; and the fair value of a trading
asset.
vii. Financial asset means cash or other monetary
instrument, evidence of debt, evidence of an ownership interest in an
entity, or a contract that conveys a right to receive or exchange cash
or another financial instrument from another party.
viii. Financial standby letter of credit means a letter
of credit or similar arrangement that represents an irrevocable
obligation to a third-party beneficiary:
1. To repay money borrowed by, or advanced to, or for
the account of, a second party (the account party), or
2. To make payment on behalf of the account party, in
the event that the account party fails to fulfill its obligation to the
beneficiary.
{{2-28-06 p.6120.03}}
ix. Liquidity Facility means a legally binding
commitment to provide liquidity support to ABCP by lending to, or
purchasing assets from, any structure, program, or conduit in the event
that funds are required to repay maturing ABCP.
x. Mortgage servicer cash advance means funds that a
residential mortgage loan servicer advances to ensure an uninterrupted
flow of payments, including advances made to cover foreclosure costs or
other expenses to facilitate the timely collection of the loan. A
mortgage servicer cash advance is not a recourse obligation or a direct
credit substitute if:
1. The servicer is entitled to full reimbursement and
this right is not subordinated to other claims on the cash flows from
the underlying asset pool; or
2. For any one loan, the servicer's obligation to make
nonreimbursable advances is contractually limited to an insignificant
amount of the outstanding principal balance of that loan.
xi. Nationally recognized statistical rating organization
(NRSRO) means an entity recognized by the Division of Market
Regulation of the Securities and Exchange Commission (or any successor
Division) (Commission) as a nationally recognized statistical rating
organization for various purposes, including the Commission's uniform
net capital requirements for brokers and dealers.
xii. Recourse means the retention, by a bank holding
company, in form or in substance, of any credit risk directly or
indirectly associated with an asset it has transferred and sold that
exceeds a pro rata share of the banking organization's
claim on the asset. If a banking organization has no claim on a
transferred asset, then the retention of any risk of credit loss is
recourse. A recourse obligation typically arises when a bank holding
company transfers assets and retains an explicit obligation to
repurchase the assets or absorb losses due to a default on the payment
of principal or interest or any other deficiency in the performance of
the underlying obligor or some other party. Recourse may also exist
implicitly if a bank holding company provides credit enhancement beyond
any contractual obligation to support assets it has sold. The following
are examples of recourse arrangements:
1. Credit-enhancing representations and warranties made
on the transferred assets;
2. Loan servicing assets retained pursuant to an
agreement under which the bank holding company will be responsible for
credit losses associated with the loans being serviced. Mortgage
servicer cash advances that meet the conditions of section III.B.3.a.x
of this appendix are not recourse arrangements;
3. Retained subordinated interests that absorb more than
their pro rata share of losses from the underlying assets;
4. Assets sold under an agreement to repurchase, if the
assets are not already included on the balance sheet;
5. Loan strips sold without contractual recourse where
the maturity of the transferred loan is shorter than the maturity of
the commitment under which the loan is drawn;
6. Credit derivatives issued that absorb more than the
bank holding company's pro rata share of losses from the
transferred assets;
7. Clean-up calls at inception that are greater than 10
percent of the balance of the original pool of transferred loans.
Clean-up calls that are 10 percent or less of the original pool balance
that are exercisable at the option of the bank holding company are not
recourse arrangements; and
8. Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
xiii. Residual interest means any on-balance sheet asset
that represents an interest (including a beneficial interest) created
by a transfer that qualifies as a sale (in accordance with generally
accepted accounting principles) of financial assets, whether through a
securitization or otherwise, and that exposes the bank holding company
to credit risk directly or indirectly associated with the transferred
assets that exceeds a pro rata share of the bank holding
company's claim on the assets, whether through subordination
provisions or other credit enhancement techniques. Residual interests
generally include credit-enhancing I/Os, spread accounts, cash
collateral accounts, retained subordinated interests, other forms of
over-collateralization, and similar assets that function as a credit
enhancement. Residual interests further include those exposures that,
in substance, cause the bank holding company to retain the credit risk
of an asset or exposure that had qualified as a residual interest
before it was sold. Residual interests generally do not include
interests purchased from a
{{2-28-06 p.6120.04}}third party, except that purchased
credit-enhancing I/Os are residual interests for purposes of this
appendix.
xiv. Risk participation means a participation in which
the originating party remains liable to the beneficiary for the full
amount of an obligation (e.g., a direct credit substitute)
notwithstanding that another party has acquired a participation in that
obligation.
xv. Securitization means the pooling and repackaging by
a special purpose entity of assets or other credit exposures into
securities that can be sold to investors. Securitization includes
transactions that create stratified credit risk positions whose
performance is dependent upon an underlying pool of credit exposures,
including loans and commitments.
xvi. Sponsor means a bank holding company that
establishes an ABCP program; approves the sellers permitted to
participate in the program; approves the asset pools to be purchased by
the program; or administers the program by monitoring the assets,
arranging for debt placement, compiling monthly reports, or ensuring
compliance with the program documents and with the program's credit
and investment policy.
xvii. Structured finance program means a program where
receivable interests and asset-backed securities issued by multiple
participants are purchased by a special purpose entity that repackages
those exposures into securities that can be sold to investors.
Structured finance programs allocate credit risks, generally, between
the participants and credit enhancement provided to the program.
xviii. Traded position means a position that is
externally rated, and is retained, assumed, or issued in connection
with an asset securitization, where there is a reasonable expectation
that, in the near future, the rating will be relied upon by
unaffiliated investors to purchase the position; or an unaffiliated
third party to enter into a transaction involving the position, such as
a purchase, loan, or repurchase agreement.
b. Credit equivalent amounts and risk weight of recourse
obligations and direct credit substitutes. i. Credit
equivalent amount. Except as otherwise provided in sections
III.B.3.c. through f. and III.B.5. of this appendix, the
credit-equivalent amount for a recourse obligation or direct credit
substitute is the full amount of the credit-enhanced assets for which
the bank holding company directly or indirectly retains or assumes
credit risk multiplied by a 100 percent conversion factor.
ii. Risk-weight factor. To determine the bank holding
company's risk-weight factor for off-balance sheet recourse
obligations and direct credit substitutes, the credit equivalent amount
is assigned to the risk category appropriate to the obligor in the
underlying transaction, after considering any associated guarantees or
collateral. For a direct credit substitute that is an on-balance sheet
asset (e.g., a purchased subordinated security), a bank holding company
must calculate risk-weighted assets using the amount of the direct
credit substitute and the full amount of the assets it supports, i.e.,
all the more senior positions in the structure. The treatment of direct
credit substitutes that have been syndicated or in which risk
participations have been conveyed or acquired is set forth in section
III.D.1 of this appendix.
c. Externally-rated positions: credit-equivalent amounts and
risk weights of recourse obligations, direct credit substitutes,
residual interests, and asset- and mortgage-backed securities
(including asset-backed commercial paper)--i. Traded
positions. With respect to a recourse obligation, direct credit
substitute, residual interest (other than a credit-enhancing I/O strip)
or asset- and mortgage-backed security (including asset-backed
commercial paper) that is a traded position and that has received an
external rating on a long-term position that is one grade below
investment grade or better or a short-term rating that is investment
grade, the bank holding company may multiply the face amount of the
position by the appropriate risk weight, determined in accordance with
the tables below. Stripped mortgage-backed securities and other similar
instruments, such as interest-only or principal-only strips that are
not credit enhancements, must be assigned to the 100 percent risk
category. If a traded position has received more that one external
rating, the lowest single rating will apply.
{{10-31-03 p.6120.04-A}}
Long-term
rating category |
Examples |
Risk weight(In
percent) |
Highest or second highest investment grade |
AAA,
AA |
20 |
Third highest investment
grade |
A |
50 |
Lowest investment
grade |
BBB |
100 |
One category below investment
grade |
BB |
200 |
Short-term
rating |
Examples |
Risk weight(In
percent) |
Highest investment grade |
A--1,
P--1 |
20 |
Second highest investment grade |
A--2,
P--2 |
50 |
Lowest investment grade |
A--3,
P--3 |
100
|
{{12-31-01 p.6120.05}}
ii. Non-traded positions. A recourse obligation, direct
credit substitute, or residual interest (but not a credit-enhancing I/O
strip) extended in connection with a securitization that is not a
traded position may be assigned a risk weight in accordance with
section III.B.3.c.i. of this appendix if:
1. It has been externally rated by more than one NRSRO;
2. It has received an external rating on a long-term
position that is one grade below investment grade or better or on a
short-term position that is investment grade by all NRSROs providing a
rating;
3. The ratings are publicly available; and
4. The ratings are based on the same criteria used to
rate traded positions.
If the ratings are different, the lowest rating will determine the
risk category to which the recourse obligation, direct credit
substitute, or residual interest will be assigned.
d. Senior positions not externally rated. For a recourse
obligation, direct credit substitute, residual interest, or asset- or
mortgage-backed security that is not externally rated but is senior or
preferred in all features to a traded position (including
collateralization and maturity), a bank holding company may apply a
risk weight to the face amount of the senior position in accordance
with section III.B.3.c.i. of this appendix, based on the traded
position, subject to any current or prospective supervisory guidance
and the bank holding company satisfying the Federal Reserve that this
treatment is appropriate. This section will apply only if the traded
subordinated position provides substantive credit support to the
unrated position until the unrated position matures.
e. Capital requirement for residual
interests--i. Capital requirement for credit-enhancing I/O
strips. After applying the concentration limit to credit-enhancing
I/O strips (both purchased and retained) in accordance with sections
II.B.2.c. through e. of this appendix, a bank holding company must
maintain risk-based capital for a credit-enhancing I/O strip (both
purchased and retained), regardless of the external rating on that
position, equal to the remaining amount of the credit-enhancing I/O
(net of any existing associated deferred tax liability), even if the
amount of risk-based capital required to be maintained exceeds the full
risk-based capital requirement for the assets transferred. Transactions
that, in substance, result in the retention of credit risk associated
with a transferred credit-enhancing I/O strip will be treated as if the
credit-enhancing I/O strip was retained by the bank holding company and
not transferred.
ii. Capital requirement for other interests. 1. If a
residual interest does not meet the requirements of sections III.B.3.c.
or d. of this appendix, a bank holding must maintain risk-based capital
equal to the remaining amount of the residual interest that is retained
on the balance sheet (net of any existing associated deferred tax
liability), even if the amount of risk-based capital required to be
maintained exceeds the full risk-based capital requirement for the
assets transferred. Transactions that, in substance, result in the
retention of credit risk associated with a transferred residual
interest will be treated as if the residual interest was retained by
the bank holding company and not transferred.
2. Where the aggregate capital requirement for residual
interests and other recourse obligations in connection with the same
transfer of assets exceed the full risk-based capital requirement for
those assets, a bank holding company must maintain risk-based capital
equal to the greater of the risk-based capital requirement for the
residual interest as calculated under section
III.B.3.e.ii.1. of this appendix or the full risk-based
capital requirement for the assets transferred.
f. Positions that are not rated by an NRSRO. A position
(but not a residual interest) maintained in connection with a
securitization and that is not rated by a NRSRO may be risk-weighted
based on the bank holding company's determination of the credit rating
of the position, as specified in the table below, multiplied by the
face amount of the position. In order to obtain this treatment, the
bank holding company's system for determining the credit rating of the
position must meet one of the three alternative standards set out in
sections III.B.3.f.i. through III.B.3.f.iii. of this
appendix.
Rating
category |
Examples |
Risk weight(In
percent) |
Highest or second highest investment
grade |
AAA, AA |
100 |
Third highest
investment grade |
A |
100 |
Lowest investment
grade |
BBB |
100 |
One category below investment
grade |
BB |
200
|
{{12-31-01 p.6120.06}}
i. Internal risk rating used for asset-backed programs.
A direct credit substitute (other than a purchased
credit-enhancing I/O) is assumed in connection with an asset-backed
commercial paper program sponsored by the bank holding company and the
bank holding company is able to demonstrate to the satisfaction of the
Federal Reserve, prior to relying upon its use, that the bank holding
company's internal credit risk rating system is adequate. Adequate
internal credit risk rating systems usually contain the following
criteria:
1. The internal credit risk system is an integral part
of the bank holding company's risk management system, which explicitly
incorporates the full range of risks arising from a bank holding
company's participation in securitization activities;
2. Internal credit ratings are linked to measurable
outcomes, such as the probability that the position will experience any
loss, the position's expected loss given default, and the degree of
variance in losses given default on that position;
3. The bank holding company's internal credit risk
system must separately consider the risk associated with the underlying
loans or borrowers, and the risk associated with the structure of a
particular securitization transaction;
4. The bank holding company's internal credit risk
system must identify gradations of risk among "pass" assets and
other risk positions;
5. The bank holding company must have clear, explicit
criteria that are used to classify assets into each internal risk
grade, including subjective factors;
6. The bank holding company must have independent credit
risk management or loan review personnel assigning or reviewing the
credit risk ratings;
7. The bank holding company must have an internal audit
procedure that periodically verifies that the internal credit risk
ratings are assigned in accordance with the established criteria;
8. The bank holding company must monitor the performance
of the internal credit risk ratings assigned to nonrated, nontraded
direct credit substitutes over time to determine the appropriateness of
the initial credit risk rating assignment and adjust individual credit
risk ratings, or the overall internal credit risk ratings system, as
needed; and
9. The internal credit risk system must make credit risk
rating assumptions that are consistent with, or more conservative than,
the credit risk rating assumptions and methodologies of NRSROs.
ii. Program Ratings. A direct credit substitute or
recourse obligation (other than a residual interest) is assumed or
retained in connection with a structured finance program and a NRSRO
has reviewed the terms of the program and stated a rating for positions
associated with the program. If the program has options for different
combinations of assets, standards, internal credit enhancements and
other relevant factors, and the NRSRO specifies ranges of rating
categories to them, the bank holding company may apply the rating
category that corresponds to the bank holding company's position. In
order to rely on a program rating, the bank holding company must
demonstrate to the Federal Reserve's satisfaction that the credit risk
rating assigned to the program meets the same standards generally used
by NRSROs for rating traded positions. The bank holding company must
also demonstrate to the Federal Reserve's satisfaction that the
criteria underlying the NRSRO's assignment of ratings for the program
are satisfied for the particular position. If a bank holding company
participates in a securitization sponsored by another party, the
Federal Reserve may authorize the bank holding company to use this
approach based on a programmatic rating obtained by the sponsor of the
program.
iii. Computer Program. The bank holding company is using
an acceptable credit assessment computer program to determine the
rating of a direct credit substitute or recourse obligation (but not
residual interest) issued in connection with a structured finance
program. A NRSRO must have developed the computer program, and the bank
holding company must demonstrate to the Federal Reserve's satisfaction
that ratings under the program correspond credibly and reliably with
the rating of traded positions.
g. Limitations on risk-based capital
requirements--i. Low-level exposure. If the maximum
contractual exposure to loss retained or assumed by a bank holding
company in connection with a recourse obligation or a direct credit
substitute is less than the effective risk-based capital requirement
for the enhanced assets, the risk-based capital requirement is limited
to the maximum contractual exposure, less any liability account
established in accordance with generally accepted accounting
principles. This limitation does not apply
{{4-29-05 p.6120.07}}when a bank holding company provides
credit enhancement beyond any contractual obligation to support assets
it has sold.
ii. Mortgage-related securities or participation certificates
retained in a mortgage loan swap. If a bank holding company holds
a mortgage-related security or a participation certificate as a result
of a mortgage loan swap with recourse, capital is required to support
the recourse obligation plus the percentage of the mortgage-related
security or participation certificate that is not covered by the
recourse obligation. The total amount of capital required for the
on-balance sheet asset and the recourse obligation, however, is limited
to the capital requirement for the underlying loans, calculated as if
the organizatioin continued to hold these loans as on-balance sheet
assets.
iii. Related on-balance sheet assets. If a recourse
obligation or direct credit substitute subject to section III.B.3. of
this appendix also appears as a balance sheet asset, the balance sheet
asset is not included in an organization's risk-weighted assets to the
extent the value of the balance sheet asset is already included in the
off-balance sheet credit equivalent amount for the recourse obligation
or direct credit substitute, except in the case of loan servicing
assets and similar arrangements with embedded recourse obligations or
direct credit substitutes. In that case, both the on-balance sheet
assets and the related recourse obligations and direct credit
substitutes are incorporated into the risk-based capital calculation.
4. Maturity. Maturity is generally not a factor in
assigning items to risk categories with the exception of claims on
non-OECD banks, commitments, and interest rate and foreign exchange
rate contracts. Except for commitments, short-term is defined as one
year or less remaining maturity and long-term is defined as
over one year remaining maturity. In the case of
commitments, short-term is defined as one year or less original
maturity and long-term is defined as over one year original
maturity.
5. Small Business Loans and Leases on Personal Property
Transferred with Recourse.
a. Notwithstanding other provisions of this appendix A, a
qualifying banking organization that has transferred small business
loans and leases on personal property (small business obligations) with
recourse shall include in weighted-risk assets only the amount of
retained recourse, provided two conditions are met. First, the
transaction must be treated as a sale under GAAP and, second, the
banking organization must establish pursuant to GAAP a non-capital
reserve sufficient to meet the organization's reasonably estimated
liability under the recourse arrangement. Only loans and leases to
businesses that meet the criteria for a small business concern
established by the Small Business Administration under section 3(a) of
the Small Business Act are eligible for this capital treatment.
b. For purposes of this appendix A, a banking organization is
qualifying if it meets the criteria for well capitalized or, by order
of the Board, adequately capitalized, as those criteria are set forth
in the Board's prompt corrective action regulation for state member
banks (12 CFR 208.40). For purposes of determining whether an
organization meets these criteria, its capital ratios must be
calculated without regard to the capital treatment for transfers of
small business obligations with recourse specified in section
III.B.5.a. of this appendix A. The total outstanding amount of recourse
retained by a qualifying banking organization on transfers of small
business obligations receiving the preferential capital treatment
cannot exceed 15 percent of the organization's total risk-based
capital. By order, the Board may approve a higher limit.
c. If a bank holding company ceases to be qualifying or exceeds
the 15 percent capital limitation, the preferential capital treatment
will continue to apply to any transfers of small business obligations
with recourse that were consummated during the time that the
organization was qualifying and did not exceed the capital limit.
6. Asset-backed commercial paper programs. a. An
asset-backed commercial paper (ABCP) program means a program that
primarily issues externally rated commercial paper backed by assets or
exposures held in a bankruptcy-remote, special purpose entity.
b. A bank holding company that qualifies as a primary beneficiary
and must consolidate an ABCP program that is defined as a variable
interest entity under GAAP may exclude the consolidated ABCP program
assets from risk-weighted assets provided that the bank holding company
is the sponsor of the ABCP program. If a bank holding company excludes
such consolidated ABCP program assets, the bank holding company must
assess the appropriate risk-based capital charge against any exposures
of the organization arising in connection with such ABCP programs,
including direct credit substitutes, recourse obliga-
{{4-29-05 p.6120.08}}tions, residual interests, liquidity
facilities, and loans, in accordance with sections III.B.3., III.C.,
and III.D. of this appendix.
c. If a bank holding company has multiple overlapping exposures
(such as a program-wide credit enhancement and multiple pool-specific
liquidity facilities) to an ABCP program that is not consolidated for
risk-based capital purposes, the bank holding company is not required
to hold duplicative risk-based capital under this appendix against the
overlapping position. Instead, the bank holding company should apply to
the overlapping position the applicable risk-based capital treatment
that results in the highest capital charge.
C. Risk Weights
Attachment III contains a listing of the risk categories, a summary
of the types of assets assigned to each category and the risk weight
associated with each category, that is, 0 percent, 20 percent, 50
percent, and 100 percent. A brief explanation of the components of each
category follows.
1. Category 1: zero percent. This category includes
cash (domestic and foreign) owned and held in all offices of subsidiary
depository institutions or in transit and gold bullion held in either a
subsidiary depository institution's own vaults or in another's vaults
on an allocated basis, to the extent it is offset by gold bullion
liabilities. 36
The category also includes all direct claims (including securities,
loans, and leases) on, and the portions of claims that are directly and
unconditionally guaranteed by, the central
governments 37
of theOECD countries and U.S. Government
agencies, 38
as well as all direct local currency claims on, and the portions of
local currency claims that are directly and unconditionally guaranteed
by, the central governments of non-OECD countries, to the extent
that subsidiary depository institutions have liabilities booked in
that currency. A claim is not considered to be 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.
Generally, securities guaranteed by the U.S. Government or its agencies
that are actively traded in financial markets, such as GNMA securities,
are considered to be unconditionally guaranteed.
This category also includes claims collateralized by cash on deposit
in the subsidiary lending institution or by securities issued or
guaranteed by OECD central governments or U.S. government agencies for
which a positive margin of collateral is maintained on a daily basis,
fully taking into account any change in the banking organization's
exposure to the obligor or counterparty under a claim in relation to
the market value of the collateral held in support of that claim.
2. Category 2: 20 percent: a. This category includes
cash items in the process of collection, both foreign and domestic;
short-term claims (including demand deposits) on, and the portions of
short-term claims that are guaranteed
by, 39
U.S. depository institutions 40
{{4-29-05 p.6120.09}}and foreign
banks; 41
and long-term claims on, and the portions of long-term claims that are
guaranteed by, U.S. depository institutions and OECD
banks. 42
b. This category also includes the portions of claims that are
conditionally guaranteed by OECD central governments and U.S.
Government agencies, as well as the portions of local currency claims
that are conditionally guaranteed by non-OECD central governments, to
the extent that subsidiary depository institutions have liabilities
booked in that currency. In addition, this category also includes
claims on, and the portions of claims that are guaranteed by, U.S.
government-sponsored 43
agencies and claims on, and the portions of claims guaranteed by, the
International Bank for Reconstruction and Development (World Bank), the
International Finance Corporation, the Interamerican Development Bank,
the Asian Development Bank, the African Development Bank, the European
Investment Bank, the European Bank for Reconstruction and Development,
the Nordic Investment Bank, and other multilateral lending institutions
or regional development banks in which the U.S. government is a
shareholder or contributing member. General obligation claims on, or
portions of claims guaranteed by the full faith and credit of, states
or other political subdivisions of the U.S. or other countries of the
OECD-based group are also assigned to this
category. 44
c. This category also includes the portions of claims (including
repurchase transactions) collateralized by cash on deposit in the
subsidiary lending institution or by securities issued or guaranteed by
OECD central governments or U.S. government agencies that do not
qualify for the zero percent risk-weight category; collateralized by
securities issued or guaranteed by U.S. Government-sponsored agencies;
or collateralized by securities issued by multilateral lending
institutions or regional development banks in which the U.S. government
is a shareholder or contributing member.
d. This category also includes
claims 45
on, or guaranteed by, a qualifying securities
firm 46
incorporated in the United States or other member of the OECD-based
group of
{{4-29-05 p.6120.10}}countries provided that: the qualifying
securities firm has a long-term issuer credit rating, or a rating on at
least one issue of long-term debt, in one of the three highest
investment grade rating categories from a nationally recognized
statistical rating organization; or the claim is guaranteed by the
firm's parent company and the parent company has such a rating. If
ratings are available from more than one rating agency, the lowest
rating will be used to determine whether the rating requirement has
been met. This category also includes a collateralized claim on a
qualifying securities firm in such a country, without regard to
satisfaction of the rating standard, provided the claim arises under a
contract that:
(1) Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed under standard industry
documentation;
(2) Is collateralized by debt or equity securities that are liquid
and readily marketable;
(3) Is marked-to-market daily;
(4) Is subject to a daily margin maintenance requirement under the
standard industry documentation; and
(5) Can be liquidated, terminated, or accelerated immediately in
bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or avoided, under applicable law of the
relevant jurisdiction. 47
3. Category 3: 50 percent. This category includes loans
fully secured by first liens 48
on 1- to 4-family residential properties, either owner-occupied or
rented, or on multifamily residential
properties, 49
that meet certain criteria. 50
Loans included in this category must have been made in accordance with
prudent underwriting standards; 51
be performing in accordance with their original terms; and not be 90
days or more past due or carried in nonaccrual status. The following
additional criteria must also be applied to a loan secured by a
multifamily residential property that is included in this category: all
principal and interest payments on the loan must have been made on time
for at least the year preceding placement in this category, or in the
case where the existing property owner is refinancing a loan on that
property, all principal and interest payments on the loan being
refinanced must have been made on time for at least the year preceding
placement in this category; amortization of the principal and interest
must occur over a period of not more than 30 years and the minimum
original maturity for repayment of principal must not be less than 7
years; and the annual net operating income (before debt service)
generated by the property during its most recent fiscal year must not
be less than 120 percent of the loan's current annual debt service (115
percent if the loan is based on a floating interest rate) or, in
the
{{2-28-06 p.6120.11}}case of a cooperative or other
not-for-profit housing project, the property must generate sufficient
cash flow to provide comparable protection to the institution. Also
included in this category are privately-issued mortgage-backed
securities provided that:
(1) The structure of the security meets the criteria described in
section III(B)(3) above;
(2) If the security is backed by a pool of conventional
mortgages, on 1- to 4-family residential or multifamily residential
properties, each underlying mortgage meets the criteria described above
in this section for eligibility for the 50 percent risk weight category
at the time the pool is originated;
(3) If the security is backed by privately-issued mortgage-backed
securities, each underlying security qualifies for the 50 percent risk
category; and
(4) If the security is backed by a pool of multifamily
residential mortgages, principal and interest payments on the security
are not 30 days or more past due. Privately-issued mortgage-backed
securities that do not meet these criteria or that do not qualify for a
lower risk weight are generally assigned to the 100 percent risk
category.
Also assigned to this category are revenue (non-general
obligation) bonds or similar obligations, including loans and leases,
that are obligations of states or other political subdivisions of the
U.S. (for example, municipal revenue bonds) or other countries of the
OECD-based group, but for which the government entity is committed to
repay the debt with revenues from the specific projects financed,
rather than from general tax funds.
Credit equivalent amounts of derivative contracts involving standard
risk obligors (that is, obligors whose loans or debt securities would
be assigned to the 100 percent risk category) are included in the 50
percent category, unless they are backed by collateral or guarantees
that allow them to be placed in a lower risk category.
4. Category 4: 100 percent. a. All assets not included
in the categories above are assigned to this category, which comprises
standard risk assets. The bulk of the assets typically found in a loan
portfolio would be assigned to the 100 percent category.
b. This category includes long-term claims on, and the portions
of long-term claims that are guaranteed by, non-OECD banks, and all
claims on non-OECD central governments that entail some degree of
transfer risk. 52
This category includes all claims on foreign and domestic private
sector obligors not included in the categories above (including loans
to nondepository financial institutions and bank holding companies);
claims on commercial firms owned by the public sector; customer
liabilities to the organization on acceptances outstanding involving
standard risk claims; 53
investments in fixed assets, premises, and other real estate owned;
common and preferred stock of corporations, including stock acquired
for debts previously contracted; all stripped mortgage-backed
securities and similar instruments; commercial and consumer loans
(except those assigned to lower risk categories due to recognized
guarantees or collateral and loans secured by residential property that
qualify for a lower risk weight). This category also includes claims
representing capital of a qualifying securities firm.
C. Also included in this category are
industrial-development bonds and similar obligations issued under the
auspices of states or political subdivisions of the OECD-based group of
countries for the benefit of a private party or enterprise where that
party or enterprise, not the government entity, is obligated to pay the
principal and interest, and all obligations of states or political
subdivisions of countries that do not belong to the OECD-based
group.
{{2-28-06 p.6120.12}}
d. The following assets also are assigned a risk weight of 100
percent if they have not been deducted from capital: investments in
unconsolidated companies, joint ventures, or associated companies;
instruments that qualify as capital issued by other banking
organizations; and any intangibles, including those that may have been
grandfathered into capital.
D. Off-Balance Sheet Items
The face amount of an off-balance sheet item is incorporated into
the risk-weighted assets in two steps. The face amount is first
multiplied by a credit conversion factor, except for direct credit
substitutes and recourse obligations as discussed in section III.D.1.
of this appendix. The resultant credit equivalent amount is assigned to
the appropriate risk category according to the obligor, or, if
relevant, the guarantor, the nature of the collateral, or external
credit ratings. 54
1. Items with a 100 percent conversion factor.
a. Except as otherwise provided in section III.B.3. of this
appendix, the full amount of an asset or transaction supported, in
whole or in part, by a direct credit substitute or a recourse
obligation. Direct credit substitutes and recourse obligations are
defined in section III.B.3. of this appendix.
b. Sale and repurchase agreements and forward agreements. Forward
agreements are legally binding contractual obligations to purchase
assets with certain drawdown at a specified future date. Such
obligations include forward purchases, forward forward deposits
placed, 55
and partly-paid shares and securities; they do not include commitments
to make residential mortgage loans or forward foreign exchange
contracts.
c. Securities lent by a banking organization are treated in one of
two ways, depending upon whether the lender is at risk of loss. If a
banking organization, as agent for a customer, lends the
customer's securities and does not indemnify the customer against
loss, then the transaction is excluded from the risk-based capital
calculation. If, alternatively, a banking organization lends its own
securities or, acting as agent for a customer, lends the customer's
securities and indemnifies the customer against loss, the
transaction is converted at 100 percent and assigned to the risk
weight category appropriate to the obligor, or, if applicable, to any
collateral delivered to the lending organization, or the independent
custodian acting on the lending organization's behalf. Where a banking
organization is acting as agent for a customer in a transaction
involving the lending or sale of securities that is collateralized by
cash delivered to the banking organization, the transaction is
deemed to be collateralized by cash on deposit in a subsidiary
depository institution for purposes of determining the appropriate
risk-weight category, provided that any indemnification is limited to
no more than the difference between the market value of the securities
and the cash collateral received and any reinvestment risk associated
with that cash collateral is borne by the customer.
d. In the case of direct credit substitutes in which a risk
participation 56
has been conveyed, the full amount of the assets that are supported, in
whole or in part, by the credit enhancement are converted to a credit
equivalent amount at 100 percent. However, the pro rata
share of the credit equivalent amount that has been conveyed
through a risk participation is assigned to whichever risk category is
lower: the risk category appropriate to the obligor, after considering
any relevant guarantees or collateral, or the risk category appropriate
to the institution acquiring the
participation. 57
Any remainder is assigned to the risk category appropriate to the
obligor, guarantor, or collateral. For example, the pro rata
share of the full amount of the assets supported, in whole or in part,
by a direct credit
{{2-28-06 p.6120.13}}substitute conveyed as a risk
participation to a U.S. domestic depository institution or foreign bank
is assigned to the 20 percent risk
category. 58
e. In the case of direct credit substitutes in which a risk
participation has been acquired, the acquiring banking organization's
percentage share of the direct credit substitute is multiplied by the
full amount of the assets that are supported, in whole or in part, by
the credit enhancement and converted to a credit equivalent amount at
100 percent. The credit equivalent amount of an acquisition of a risk
participation in a direct credit substitute is assigned to the risk
category appropriate to the account party obligor or, if relevant, the
nature of the collateral or guarantees.
f. In the case of direct credit substitutes that take the form of a
syndication where each banking organization is obligated only for its
pro rata share of the risk and there is no recourse to the originating
banking organization, each banking organization will only include its
pro rata share of the assets supported, in whole or in part, by the
direct credit substitute in its risk-based capital
calculation. 59
2. Items with a 50 percent conversion factor. a.
Transaction-related contingencies are converted at 50 percent. Such
contingencies include bid bonds, performance bonds, warranties, standby
letters of credit related to particular transactions, and performance
standby letters of credit, as well as acquisitions of risk
participation in performance standby letters of credit. Performance
standby letters of credit represent obligations backing the performance
of nonfinancial or commercial contracts or undertakings. To the extent
permitted by law or regulation, performance standby letters of credit
include arrangements backing, among other things, subcontractors' and
suppliers' performance, labor and materials contracts, and construction
bids.
b. The unused portion of commitments with an original
maturity exceeding one year, including underwriting commitments,
and commercial and consumer credit commitments also are converted at 50
percent. Original maturity is defined as the length of time between the
date the commitment is issued and the earliest date on which: (1) The
banking organization can, at its option, unconditionally (without
cause) cancel the commitment; 60
and (2) the banking organization is scheduled to (and as a normal
practice actually does) review the facility to determine whether or not
it should be extended. Such reviews must continue to be conducted at
least annually for such a facility to qualify as a short-term
commitment.
c. i. Commitments are defined as any legally binding arrangements
that obligate a banking organization to extend credit in the form of
loans or leases; to purchase loans, securities, or other assets; or to
participate in loans and leases. They also include overdraft
facilities, revolving credit, home equity and mortgage lines of credit,
and similar transactions. Normally, commitments involve a written
contract or agreement and a commitment fee, or some other form of
consideration. Commitments are included in weighted risk assets
regardless of whether they contain "material adverse change"
clauses or other provisions that are intended to relieve the issuer of
its funding obligation under certain conditions. In the case of
commitments structured as syndications, where the banking organization
is obligated solely for its pro rata share, only the banking
organization's proportional share of the syndicated commitment is taken
into account in calculating the risk-based capital ratio.
ii. Banking organizations that are subject to the market risk rules
are required to convert the notional amount of eligible ABCP liquidity
facilities, in form or in substance, with an original maturity of over
one year that are carried in the trading account at 50 percent to
determine the appropriate credit equivalent amount even though those
facilities are structured or characterized as derivatives or other
trading book assets. Liquidity facilities that support ABCP, in form or
in substance, (including those positions to which the market risk rules
may not be applied as set forth in section 2(a) of appendix E of this
part) that
{{2-28-06 p.6120.14}}are not eligible ABCP liquidity
facilities are to be considered resource obligations or direct credit
substitutes, and assessed the appropriate risk-based capital treatment
in accordance with section III.B.3. of this appendix.
d. Once a commitment has been converted at 50 percent, any portion
that has been conveyed to U.S. depository institutions or OECD banks as
participations in which the originating banking organization retains
the full obligation to the borrower if the participating bank fails to
pay when the instrument is drawn, is assigned to the 20 percent risk
category. This treatment is analogous to that accorded to conveyances
of risk participations in standby letters of credit. The acquisition of
a participation in a commitment by a banking organization is converted
at 50 percent and assigned to the risk category appropriate to the
account party obligor or, if relevant, the nature of the collateral or
guarantees.
e. Revolving underwriting facilities (RUFs), note issuance
facilities (NIFs), and other similar arrangements also are converted at
50 percent regardless of maturity. These are facilities under which a
borrower can issue on a revolving basis short-term paper in its own
name, but for which the underwriting organizations have a legally
binding commitment either to purchase any notes the borrower is unable
to sell by the roll-over date or to advance funds to the borrower.
3. Items with a 20 percent conversion factor.
Short-term, self-liquidating trade-related contingencies which arise
from the movement of goods are converted at 20 percent. Such
contingencies generally include commercial letters of credit and other
documentary letters of credit collateralized by the underlying
shipments.
4. Items with a 10 percent conversion
factor. a. Unused portions of eligible ABCP liquidity facilities
with an original maturity of one year or less also are converted at 10
percent.
b. Banking organizations that are subject to the market risk rules
are required to convert the notional amount of eligible ABCP liquidity
facilities, in form or in substance, with an original maturity of one
year or less that are carried in the trading account at 10 percent to
determine the appropriate credit equivalent amount even though those
facilities are structured or characterized as derivatives or other
trading book assets. Liquidity facilities that support ABCP, in form or
in substance, (including those positions to which the market risk rules
may not be applied as set forth in section 2(a) of appendix E of this
part) that are not eligible ABCP liquidity facilities are to be
considered recourse obligations or direct credit substitutes and
assessed the appropriate risk-based capital requirement in accordance
with section III.B.3. of this appendix.
5. Items with a zero percent conversion factor. These
include unused portions of commitments (with the exception of eligible
ABCP liquidity facilities) an original maturity of one year or less, or
which are unconditionally cancelable at any time, provided a separate
credit decision is made before each drawing under the facility. Unused
portions of lines of credit on retail credit cards and related plans
are deemed to be short-term commitments if the banking organization has
the unconditional right to cancel the line of credit at any time, in
accordance with applicable law.
E. Derivative Contracts (Interest Rate, Exchange Rate,
Commodity- (including precious metals) and Equity-Linked Contracts)
1. Scope. Credit equivalent amounts are computed for
each of the following off-balance-sheet derivative contracts:
a. Interest Rate Contracts. These include single currency interest
rate swaps, basis swaps, forward rate agreements, interest rate options
purchased (including caps, collars, and floors purchased), and any
other instrument linked to interest rates that gives rise to similar
credit risks (including when-issued securities and forward forward
deposits accepted).
b. Exchange Rate Contracts. These include cross-currency interest
rate swaps, forward foreign exchange contracts, currency options
purchased, and any other instrument linked to exchange rates that gives
rise to similar credit risks.
c. Equity Derivative Contracts. These include equity-linked swaps,
equity-linked options purchased, forward equity-linked contracts, and
any other instrument linked to equities that gives rise to similar
credit risks.
d. Commodity (including precious metal) Derivative Contracts. These
include commodity-linked swaps, commodity-linked options purchased,
forward commodity-linked contracts, and any other instrument linked to
commodities that gives rise to similar credit risks.
{{4-29-05 p.6120.15}}
e. Exceptions. Exchange rate contracts with an original maturity of
fourteen or fewer calendar days and derivative contracts traded on
exchanges that require daily receipt and payment of cash variation
margin may be excluded from the risk-based ratio calculation. Gold
contracts are accorded the same treatment as exchange rate contracts
except that gold contracts with an original maturity of fourteen or
fewer calendar days are included in the risk-based ratio calculation.
Over-the-counter options purchased are included and treated in the same
way as other derivative contracts.
2. Calculation of credit equivalent amounts. a. The
credit equivalent amount of a derivative contract that is not subject
to a qualifying bilateral netting contract in accordance with section
III.E.3. of this appendix A is equal to the sum of (i) the
current exposure (sometimes referred to as the replacement cost) of the
contract; and (ii) an estimate of the potential future credit exposure
of the contract.
b. The current exposure is determined by the mark-to-market value
of the contract. If the mark-to-market value is positive, then the
current exposure is equal to that mark-to-market value. If the
mark-to-market value is zero or negative, then the current exposure is
zero. Mark-to-market values are measured in dollars, regardless of the
currency or currencies specified in the contract and should reflect
changes in underlying rates, prices, and indices, as well as
counterparty credit quality.
c. The potential future credit exposure of a contract, including a
contract with a negative mark-to-market value, is estimated by
multiplying the notional principal amount of the contract by a credit
conversion factor. Banking organizations should use, subject to
examiner review, the effective rather than the apparent or stated
notional amount in this calculation. The credit conversion factors are:
CONVERSION FACTORS [in percent]
Remaining
maturity |
Interest rate |
Exchange rate and
gold |
Equity |
Commodity, excluding precious
metals |
Precious metals, ex-cept gold |
One year or
less |
0.0% |
1.0% |
6.0% |
10.0% |
7.0% |
Over one
to five years |
0.5% |
5.0% |
8.0% |
12.0% |
7.0%
|
Over five
years |
1.5% |
7.5% |
10.0% |
15.0% |
8.0%
|
d. For a 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 is equal
to the time until the next reset date. For an interest rate contract
with a remaining maturity of more than one year that meets these
criteria, the minimum conversion factor is 0.5 percent.
e. For a contract with multiple exchanges of principal, the
conversion factor is multiplied by the number of remaining payments in
the contract. A derivative contract not included in the definitions of
interest rate, exchange rate, equity, or commodity contracts as set
forth in section III.E.1. of this appendix A is subject to
the same conversion factors as a commodity, excluding precious metals.
f. No potential future exposure is calculated for a single currency
interest rate swap in which payments are made based upon two floating
rate indices (a so called floating/floating or basis swap); the credit
exposure on such a contract is evaluated solely on the basis of the
mark-to-market value.
g. The Board notes that the conversion factors set forth above,
which are based on observed volatilities of the particular types of
instruments, are subject to review and modification in light of
changing volatilities or market conditions.
3. Netting. a. For purposes of this appendix A, netting
refers to the offsetting of positive and negative mark-to-market values
when determining a current exposure to be used in the calculation of a
credit equivalent amount. Any legally enforceable form of bilateral
netting (that is, netting with a single counterparty) of derivative
contracts is recognized for purposes of calculating the credit
equivalent amount provided that:
{{4-29-05 p.6120.16}}
i. The netting is accomplished under a written netting contract
that creates a single legal obligation, covering all included
individual contracts, with the effect that the banking organization
would have a claim to receive, or obligation to pay, only the net
amount of the sum of the positive and negative mark-to-market values on
included individual contracts in the event that a counterparty, or a
counterparty to whom the contract has been validly assigned, fails to
perform due to any of the following events: default, insolvency,
liquidation, or similar circumstances.
ii. The banking organization obtains a written and reasoned legal
opinion(s) representing that in the event of a legal
challenge--including one resulting from default, insolvency,
liquidation, or similar circumstances--the relevant court and
administrative authorities would find the banking organization's
exposure to be the net amount under:
1. The law of the jurisdiction in which the counterparty
is chartered or the equivalent location in the case of noncorporate
entities, and if a branch of the counterparty is involved, then also
under the law of the jurisdiction in which the branch is located;
2. The law that governs the individual contracts covered
by the netting contract; and
3. The law that governs the netting contract.
iii. The banking organization establishes and maintains procedures
to ensure that the legal characteristics of netting contracts are kept
under review in the light of possible changes in relevant law.
iv. The banking organization maintains in its files documentation
adequate to support the netting of derivative contracts, including a
copy of the bilateral netting contract and necessary legal opinions.
b. A contract containing a walkaway clause is not eligible for
netting for purposes of calculating the credit equivalent
amount. 61
c. A banking organization netting individual contracts for the
purpose of calculating credit equivalent amounts of derivative
contracts represents that it has met the requirements of this appendix
A and all the appropriate documents are in the banking organization's
files and available for inspection by the Federal Reserve. The Federal
Reserve may determine that a banking organization's files are
inadequate or that a netting contract, or any of its underlying
individual contracts, may not be legally enforceable under any one of
the bodies of law described in section III.E.3.a.ii. of this
appendix A. If such a determination is made, the netting contract may
be disqualified from recognition for risk-based capital purposes or
underlying individual contracts may be treated as though they are not
subject to the netting contract.
d. The credit equivalent amount of contracts that are subject to a
qualifying bilateral netting contract is calculated by adding (i) the
current exposure of the netting contract (net current exposure) and
(ii) the sum of the estimates of potential future credit exposures on
all individual contracts subject to the netting contract (gross
potential future exposure) adjusted to reflect the effects of the
netting contract. 62
e. The net current exposure is the sum of all positive and negative
mark-to-market values of the individual contracts included in the
netting contract. If the net sum of the mark-to-market values is
positive, then the net current exposure is equal to that sum. If the
net sum of the mark-to-market values is zero or negative, then the net
current exposure is zero. The Federal Reserve may determine that a
netting contract qualifies for risk-based capital netting treatment
even though certain individual contracts included under the netting
contract may not qualify. In such instances, the nonqualifying
contracts should be treated as individual contracts that are not
subject to the netting contract.
f. Gross potential future exposure, or Agross is calculated by
summing the estimates of potential future exposure (determined in
accordance with section III.E.2. of this Appendix A) for
each individual contract subject to the qualifying bilateral netting
contract.
g. The effects of the bilateral netting contract on the gross
potential future exposure are recognized through the application of a
formula that results in an adjusted add-on amount
{{10-31-07 p.6120.16-A}}(Anet). The formula, which employs
the ratio of net current exposure to gross current exposure (NGR), is
expressed as:
Anet=(0.4×Agross)+0.6(NGR×Agross)
h. The NGR may be calculated in accordance with either the
counterparty-by-counterparty approach or the aggregate approach.
i. Under the counterparty-by-counterparty approach, the NGR is the
ratio of the net current exposure for a netting contract to the gross
current exposure of the netting contract. The gross current exposure is
the sum of the current exposure of all individual contracts subject to
the netting contract calculated in accordance with section
III.E.2. of this appendix A. Net negative mark-to-market
values for individual netting contracts with the same counterparty may
not be used to offset net positive mark-to-market values for other
netting contracts with the same counterparty.
ii. Under the aggregate approach, the NGR is the ratio of the sum
of all of the net current exposures for qualifying bilateral netting
contracts to the sum of all of the gross current exposures for those
netting contracts (each gross current exposure is calculated in the
same manner as in section III.E.3.h.i. of this appendix A).
Net negative mark-to-market values for individual counterparties may
not be used to offset net positive current exposures for other
counterparties.
iii. A banking organization must use consistently either the
counterparty-by-counterparty approach or the aggregate approach to
calculate the NGR. Regardless of the approach used, the NGR should be
applied individually to each qualifying bilateral netting contract to
determine the adjusted add-on for that netting contract.
i. In the event a netting contract covers contracts that are
normally excluded from the risk-based ratio calculation--for example,
exchange rate contracts with an original maturity of fourteen or fewer
calendar days or instruments traded on exchanges that require daily
payment and receipt of cash variation margin--an institution may elect
to either include or exclude all mark-to-market values of such
contracts when determining net current exposure, provided the method
chosen is applied consistently.
4. Risk Weights. Once the credit equivalent amount for a
derivative contract, or a group of derivative contracts subject to a
qualifying bilateral netting contract, has been determined, that amount
is assigned to the risk category appropriate to the counterparty, or,
if relevant, the guarantor or the nature of any
collateral. 63
However, the maximum risk weight applicable to the credit equivalent
amount of such contracts is 50 percent.
5. Avoidance of double counting. a. In certain cases,
credit exposures arising from the derivative contracts covered by
section III.E. of this appendix A may already be reflected,
in part, on the balance sheet. To avoid double counting such exposures
in the assessment of capital adequacy and, perhaps, assigning
inappropriate risk weights, counterparty credit exposures arising from
the derivative instruments covered by these guidelines may need to be
excluded from balance sheet assets in calculating a banking
organization's risk-based capital ratios.
b. Examples of the calculation of credit equivalent amounts for
contracts covered under this section III.E. are contained in
attachment V of this appendix A.
1 Supervisory ratios that relate capital to total assets for
bank holding companies are outlined in appendices B and D of this
part. Go Back to Text
2 The risk-based capital measure is based upon a framework
developed jointly by supervisory authorities from the countries
represented on the Basle Committee on Banking Regulations and
Supervisory Practices (Basle Supervisors' Committee) and endorsed by
the Group of Ten Central Bank Governors. The framework is described
in a paper prepared by the BSC entitled ``International Convergence of
Capital Measurement,'' July 1988. Go Back to Text
3 Banking organizations will initially be expected to utilize
period-end amounts in calculating their risk-based capital ratios. When
necessary and appropriate, ratios based on average balances may also be
calculated on a case-by-case basis. Moreover, to the extent banking
organizations have data on average balances that can be used to
calculate risk-based ratios, the Federal Reserve will take such data
into account. Go Back to Text
4 [Reserved]. Go Back to Text
5Qualifying mandatory convertible preferred securities
generally consist of the joint issuance by a bank holding company to
investors of trust preferred securities and a forward purchase
contract, which the investors fully collateralize with the securities,
that obligates the investors to purchase a fixed amount of the bank
holding company's common stock, generally in three years. A bank
holding company wishing to issue mandatorily convertible preferred
securities and include them in tier 1 capital must consult with the
Federal Reserve prior to issuance to ensure that the securities' terms
are consistent with tier 1 capital treatment. Go Back to Text
6For this purpose, an internationally active banking
organization is a banking organization that (1) as of its most recent
year-end FR Y--9C reports total consolidated assets equal to $250
billion or more or (2) on a consolidated basis, reports total
on-balance-sheet foreign exposure of $10 billion or more on its filings
of the most recent year-end FFIEC 009 Country Exposure Report. Go Back to Text
7Traditional floating-rate or adjustable-rate perpetual
preferred stock (that is, perpetual preferred stock in which the
dividend rate is not affected by the issuer's credit standing or
financial condition but is adjusted periodically in relation to an
independent index based solely on general market interest rates),
however, generally qualified for inclusion in tier 1 capital provided
all other requirements are met. Go Back to Text
8Traditional convertible perpetual preferred stock, which the
holder must or can convert into a fixed number of common shares at a
preset price, generally qualifies for inclusion in tier 1 capital
provided all other requirements are met. Go Back to Text
9U.S. depository institutions are defined to include branches
(foreign and domestic) of federally insured banks and depository
institutions chartered and headquartered in the 50 states of the United
States, the District of Columbia, Puerto Rico, and U.S. territories and
possessions. The definition encompasses banks, mutual or stock savings
banks, savings or building and loan associations, cooperative banks,
credit unions, and international banking facilities of domestic
banks. Go Back to Text
10For this purpose, a foreign bank is defined as an institution
that engages in the business of banking; is recognized as a bank by the
bank supervisory or monetary authorities of the country of its
organization or principal banking operations; receives deposits to a
substantial extent in the regular course of business; and has the power
to accept demand deposits. Go Back to Text
11Under generally accepted accounting principles, the trust
issuing the preferred securities generally is not consolidated on the
banking organization's balance sheet; rather the underlying
subordinated note is recorded as a liability on the organization's
balance sheet. Only the amount of the trust preferred securities
issued, which generally is equal to the amount of the underlying
subordinated note less the amount of the sponsoring banking
organization's common equity investment in the trust (which is
recorded as an asset on the banking organization's consolidated
balance sheet), may be included in tier 1 capital. Because this
calculation method effectively deducts the banking organization's
common stock investment in the trust in computing the numerator of the
capital ratio, the common equity investment in the trust should be
excluded from the calculation of risk-weighted assets in accordance
with footnote 17 of this appendix. Where a banking organiation has
issued trust preferred securities as part of a pooled issuance, the
organization generally must not buy back a security issued from the
pool. Where a banking organization does hold such a security (for
example, as a result of an acquisition of another banking
organization), the amount of the trust preferred securities includable
in regulatory capital must, consistent with section II.(i) of this
Appendix, be reduced by the notional amount of the banking
organization's investment in the security issued by the pooling
entity. Go Back to Text
12Trust preferred securities issued before April 15, 2005,
generally would be includable in tier 1 capital despite noncompliance
with sections II.A.1.c.iv. or II.A.2.d. of this appendix or 12 CFR
250.166 provided the non-complying terms of the instrument (i) have
been commonly used by banking organizations, (ii) does not provide an
unreasonably high degree of protection to the holder in circumstances
other than bankruptcy of the banking organization, and (iii) do not
effectively allow a holder in due course of the note to stand ahead of
senior or subordinated debt holders in the event of bankruptcy of the
banking organization. Go Back to Text
13Allocated transfer risk reserves are reserves that have been
established in accordance with section 905(a) of the International
Lending Supervision Act of 1983, 12, U.S.C. 3904(a), against certain
assets whose value U.S. supervisory authorities have found to be
significantly impaired by protracted transfer risk problems. Go Back to Text
14 The amount of the allowance for loan and lease losses that
may be included in Tier 2 capital is based on a percentage of gross
weighted risk assets. A banking organization may deduct reserves for
loan and lease losses in excess of the amount permitted to be included
in Tier 2 capital, as well as allocated transfer risk reserves, from
the sum of gross weighted risk assets and use the resulting net sum of
weighted risk assets in computing the denominator of the risk-based
capital ratio. Go Back to Text
15Long-term preferred stock with an original maturity of
20-years or more (including related surplus) will also qualify in this
category as an element of tier 2 capital. If the holder of such an
instrument has the right to require the issuer to redeem, repay, or
repurchase the instrument prior to the original stated maturity,
maturity would be defined for risk-based capital purposes as the
earliest possible date on which the holder can put the instrument back
to the issuing banking organization. In the last five years before the
maturity of the stock, it must be treated as limited-life preferred
stock, subject to the amortization provisions and quantitative
restrictions set forth in sections II.A.2.d.iii. and iv. of this
appendix. Go Back to Text
16The subordinated debt policy statement set forth in 12 CFR
250.166 notes that certain terms found in subordinated debt may provide
protection to investors without adversely affecting the overall
benefits of the instrument to the issuing banking organization and,
thus, would be acceptable for subordinated debt included in capital.
For example, a provision that prohibits a bank holding company from
merging, consolidating, or selling substantially all of its assets
unless the new entity redeems or assumes the subordinated debt or that
designates the failure to pay principal and interest on a timely basis
as an event of default would be acceptable, so long as the occurrence
of such events does not allow the debt holders to accelerate the
payment of principal or interest on the debt. Go Back to Text
17 Any assets deducted from capital in computing the numerator
of the ratio are not included in weighted risk assets in computing the
denominator of the ratio. Go Back to Text
18Amounts of servicing assets, purchased credit card
relationships, and credit-enhancing I/Os (both retained and purchased)
in excess of these limitations, as well as all other identifiable
intangible assets, including core deposit intangibles and favorable
leaseholds, are to be deducted from a bank holding company's core
capital elements in determining tier 1 capital. However, identifiable
intangible assets (other than mortgage servicing assets and purchased
credit card relationships) acquired on or before February 19, 1992,
generally will not be deducted from capital for supervisory purposes,
although they will continue to be deducted for applications purposes.
Go Back to Text
19 For this purpose, a banking and finance subsidiary generally
is defined as any company engaged in banking or finance in which the
parent institution holds directly or indirectly more than 50 percent of
the outstanding voting stock, or which is otherwise controlled or
capable of being controlled by the parent institution. For purpose of
this section, the definition of banking and finance subsidiary does not
include a trust or other special purpose entity used to issue trust
preferred securities. Go Back to Text
20 An exception to this deduction would be made in the case of
shares acquired in the regular course of securing or collecting a debt
previously contracted in good faith. The requirements for consolidation
are spelled out in the instructions to the FR Y--9C Report. Go Back to Text
21 Investments in unconsolidated subsidiaries will be deducted
from both Tier 1 and Tier 2 capital rule, one-half (50
percent) of the aggregate amount of capital investments will be
deducted from the bank holding company's Tier 1 capital and one-half
(50 percent) from its Tier 2 capital. However, the Federal Reserve may,
on a case-by-case basis, deduct a proportionately greater amount from
Tier 1 if the risks associated with the subsidiary so warrant. If the
amount deductible from Tier 2 capital exceeds actual Tier 2 capital,
the excess would be deducted from Tier 1 capital. Bank holding
companies' risk-based capital ratios, net of these deductions, must
exceed the minimum standards set forth in section IV. Go Back to Text
22 In assessing the overall capital adequacy of a banking
organization, the Federal Reserve may also consider the organization's
fully consolidated capital position. Go Back to Text
23 If the subsidiary's assets are consolidated with the parent
banking organization for financial reporting purposes, this adjustment
will involve excluding the subsidiary's assets on a line-by-line basis
from the consolidated parent organization's assets. The parent banking
organization's capital ratio will then be calculated on a consolidated
basis with the exception that the assets of the excluded subsidiary
will not be consolidated with the remainder of the parent banking
organization. Go Back to Text
24 The definition of such entities is contained in the
instructions to the Consolidated Financial Statements for Bank Holding
Companies. Under regulatory reporting procedures, associated companies
and joint ventures generally are defined as companies in which the
banking organization owns 20 to 50 percent of the voting stock. Go Back to Text
25 Deductions of holdings of capital securities also would not
be made in the case of interstate "stake out" investments that
comply with the Board's Policy Statement on Nonvoting Equity
Investments, 12 CFR 225.143 (Federal Reserve Regulatory Service
4--172.1; 68 Federal Reserve Bulletin 413 (1982)). In addition,
holdings of capital instruments issued by other banking organizations
but taken in satisfaction of debts previously contracted would be
exempt from any deduction from capital. The Board intends to monitor
nonreciprocal holdings of other banking organizations' capital
instruments and to provide
information on such holdings to the Basle Supervisors' Committee as
called for under the Basle capital framework. Go Back to Text
26 To determine the amount of expected deferred-tax assets
realizable in the next 12 months, an institution should assume that all
existing temporary differences fully reverse as of the report date.
Projected future taxable income should not include net operating loss
carry-forwards to be used during that year or the amount of existing
temporary differences a bank holding company expects to reverse within
the year. Such projections should include the estimated effect of tax
planning strategies that the organization expects to implement to
realize net operating losses or tax-credit carry-forwards that would
otherwise expire during the year. Institutions do not have to prepare a
new 12 month projection each quarter. Rather, on interim report dates,
institutions may use the future taxable income projections for their
current fiscal year, adjusted for any significant changes that have
occurred or are expected to occur. Go Back to Text
27An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in an SBIC that is not consolidated
with the parent banking organization is treated as a nonfinancial
equity investment. Go Back to Text
28See 12 U.S.C. 1843(c)(6), (c)(7) and (k)(4)(H); 15 U.S.C.
682(b); 12 CFR 211.5(b)(1)(iii); and 12 U.S.C. 1831a. In a case in
which the Board of Directors of the FDIC, acting directly in
exceptional cases and after a review of the proposed activity, has
permitted a lesser capital deduction for an investment approved by the
Board of Directors under section 24 of the Federal Deposit Insurance
Act, such deduction shall also apply to the consolidated bank holding
company capital calculation so long as the bank's investments under
section 24 and SBIC investments represent, in the aggregate, less than
15 percent of the Tier 1 capital of the bank. Go Back to Text
29For example, if 8 percent of the adjusted carrying value of a
nonfinancial equity investment is deducted from Tier 1 capital, the
entire adjusted carrying value of the investment will be excluded from
risk-weighted assets in calculating the denominator for the risk-based
capital ratio. Go Back to Text
30If a bank holding company has an investment in an SBIC that
is consolidated for accounting purposes but that is not wholly owned by
the bank holding company, the adjusted carrying value of the bank
holding company's nonfinancial equity investments through the SBIC is
equal to the holding company's proportionate share of the adjusted
carrying value of the SBIC's equity investments in nonfinancial
companies. The remainder of the SBIC's adjusted carrying value (i.e.,
the minority interest holders' proportionate share) is excluded from
the risk-weighted assets of the bank holding company. If a bank holding
company has an investment in a SBIC that is not consolidated for
accounting purposes and has current information that identifies the
percentage of the SBIC's assets that are equity investments in
nonfinancial companies, the bank holding company may reduce the
adjusted carrying value of its investment in the SBIC proportionately
to reflect the percentage of the adjusted carrying value of the SBIC's
assets that are not equity investments in nonfinancial companies. If a
bank holding company reduces the adjusted carrying value of its
investment in a non-consolidated SBIC to reflect financial investments
of the SBIC, the amount of the adjustment will be risk weighted at 100
percent and included in the bank's risk-weighted assets. Go Back to Text
31A "binding written commitment" means a legally binding
written agreement that requires the banking organization to acquire
shares or other equity of the company, or make a capital contribution
to the company, under terms and conditions set forth in the agreement.
Options, warrants, and other agreements that give a banking
organization the right to acquire equity or make an investment, but do
not require the banking organization to take such actions, are not
considered a binding written commitment for purposes of this section
II.B.5. Go Back to Text
32For example, if a bank holding company made an equity
investment in 100 shares of a nonfinancial company prior to March 13,
2000, that investment would not be subject to a deduction under this
section II.B.5. However, if the bank holding company made
any additional equity investment in the company after March 13, 2000,
such as by purchasing additional shares of the company (including
through the exercise of options or warrants acquired before or after
March 13, 2000) or by making a capital contribution to the company, and
such investment was not made pursuant to a binding written commitment
entered into before March 13, 2000, the adjusted carrying value of the
additional investment would be subject to a deduction under this
section II.B.5. In addition, if the bank holding company
sold and repurchased shares of the company after March 13, 2000, the
adjusted carrying value of the re-acquired shares would be subject to a
deduction under this section II.B.5. Go Back to Text
33Unrealized gains on AFS investments may be included in
supplementary capital to the extent permitted under section II.A.2.e of
this appendix A. In addition, the unrealized losses on AFS equity
investments are deducted from Tier 1 capital in accordance with section
II.A.1.a of this appendix A. Go Back to Text
34 An investment in shares of a fund whose portfolio consists
solely of various securities or money market instruments that, if held
separately, would be assigned to different risk categories, is
generally assigned to the risk category appropriate to the highest
risk-weighted security or instrument that the fund is permitted to hold
in accordance with its stated investment objectives. However, in no
case will indirect holdings through shares in such funds be assigned to
the zero percent risk category. For example, if a fund is permitted to
hold U.S. Treasuries and commercial paper, shares in that fund would
generally be assigned the 100 percent risk weight appropriate to
commercial paper, regardless of the actual composition of the fund's
investments at any particular time. Shares in a fund that may invest
only in U.S. Treasury securities would generally be assigned to the 20
percent risk category. If, in order to maintain a necessary degree of
short-term liquidity, a fund is permitted to hold an insignificant
amount of its assets in short-term, highly liquid securities of
superior credit quality that do not qualify for a preferential risk
weight, such securities will generally not be taken into account in
determining the risk category into which the banking organization's
holding in the overall fund should be assigned. Regardless of the
composition of the fund's securities, if the fund engages in any
activities that appear speculative in nature (for example, use of
futures, forwards, or option contracts for purposes other than to
reduce interest rate risk) or has any other characteristics that are
inconsistent with the preferential risk weighting assigned to the
fund's investments, holdings in the fund will be assigned to the 100
percent risk category. During the examination process, the treatment of
shares in such funds that are assigned to a lower risk weight will be
subject to examiner review to ensure that they have been assigned an
appropriate risk weight. Go Back to Text
35 The OECD-based group of countries comprises all full members
of the Organization for Economic Cooperation and Development (OECD)
regardless of entry date, as well as countries that have concluded
special lending arrangements with the International Monetary Fund (IMF)
associated with the IMF's General Arrangements to Borrow, but excludes
any country that has rescheduled its external sovereign debt within the
previous five years. As of November 1995, the OECD included the
following countries: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan,
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United
States; and Saudi Arabia had concluded special lending arrangements
with the IMF associated with the IMF's General Arrangements to Borrow.
A rescheduling of external sovereign debt generally would include any
renegotiation of terms arising from a country's inability or
unwillingness to meet its external debt service obligations, but
generally would not include renegotiations of debt in the normal course
of business, such as a renegotiation to allow the borrower to take
advantage of a decline in interest rates or other change in market
conditions. Go Back to Text
36 All other holdings of bullion are assigned to the 100
percent risk category. Go Back to Text
37 A central government is defined to include departments and
ministries, including the central bank of the central government. The
U.S. central bank includes the 12 Federal Reserve banks, and stock held
in these banks as a condition of membership is assigned to the zero
percent risk category. The definition of central government does not
include state, provincial, or local governments; or commercial
enterprises owned by the central government. In addition, it does not
include local government entities or commercial enterprises whose
obligations are guaranteed by the central government; although any
claims on such entities guaranteed by central governments are placed in
the same general risk category as other claims guaranteed by central
governments. OECD central governments are defined as central
governments of the OECD-based group of countries: non-OECD central
governments are defined as central governments of countries that do not
belong to the OECD-based group of countries. Go Back to Text
38A U.S. Government agency is defined 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. Such agencies include the
Government National Mortgage Association (GNMA), the Veterans
Administration (VA), the Federal Housing Administration (FHA), the
Export-Import Bank (Exim Bank), the Overseas Private Investment
Corporation (OPIC), the Commodity Credit Corporation (CCC), and the
Small Business Administration (SBA). Go Back to Text
39 Claims guaranteed by U.S. depository institutions and
foreign banks include risk participations in both bankers acceptances
and standby letters of credit, as well as participations in
commitments, that are conveyed to U.S. depository institutions or
foreign banks. Go Back to Text
40 U.S. depository institutions are defined to include branches
(foreign and domestic) of federally-insured banks and depository
institutions chartered and headquartered in the 50 states of the United
States, the District of Columbia,
Puerto Rico, and U.S. territories and possessions. The definition
encompasses banks, mutual or stock savings banks, savings or building
and loan associations, cooperative banks, credit unions, and
international banking facilities or domestic banks. U.S.chartered
depository institutions owned by foreigners are also included in the
definition. However, branches and agencies of foreign banks located in
the U.S., as well as all bank holding companies, are excluded. Go Back to Text
41 Foreign banks are distinguished as either OECD banks or
non-OECD banks. OECD banks include banks and their branches (foreign
and domestic) organized under the laws of countries (other than the
U.S.) that belong to the OECD-based group of countries. Non-OECD banks
include banks and their branches (foreign and domestic) organized under
the laws of countries that do not belong to the OECD-based group of
countries. For this purpose, a bank is defined as an institution that
engages in the business of banking; is recognized as a bank by the bank
supervisory or monetary authorities of the country of its organization
or principal banking operations; receives deposits to a substantial
extent in the regular course of business; and has the power to accept
demand deposits. Go Back to Text
42 Long-term claims on, or guaranteed by non-OECD banks and all
claims on bank holding companies are assigned to the 100 percent risk
category, as are holdings of bank-issued securities that qualify as
capital of the issuing banks. Go Back to Text
43 For this purpose, U.S. government-sponsored agencies are
defined as agencies originally established or chartered by the federal
government to serve public purposes specified by the U.S. Congress
but whose obligations are not explicitly guaranteed by the
full faith and credit of the U.S. Government. These agencies include
the Federal Home Loan Mortgage Corporation (FHLMC), the Federal
National Mortgage Association (FNMA), the Farm Credit System, the
Federal Home Loan Bank System, and the Student Loan Marketing
Association (SLMA). Claims on U.S. government-sponsored agencies
include capital stock in a Federal Home Loan bank that is held as a
condition of membership in that bank. Go Back to Text
44 Claims on, or guaranteed by, states or other political
subdivisions of countries that do not belong to the OECD-based group of
countries are placed in the 100 percent risk category. Go Back to Text
45 Claims on a qualifying securities firm that are instruments
the firm, or its parent company, uses to satisfy its applicable capital
requirement are not eligible for this risk weight. Go Back to Text
46 With regard to securities firms incorporated in the United
States, qualifying securities firms are those securities firms that are
broker-dealers registered with the Securities and Exchange Commission
and are in compliance with the SEC's net capital rule, 17 CFR
240.15c3--1. With regard to securities firms incorporated in other
countries in the OECD-based group of countries, qualifying securities
firms are those securities firms that a banking organization is able to
demonstrate are subject to consolidated supervision and regulation
(covering their direct and indirect subsidiaries, but not necessarily
their
parent organizations) comparable to
that imposed on banks in OECD countries. Such regulation must include
risk-based capital requirements comparable to those applied to banks
under the Accord on International Convergence of Capital Measurement
and Capital Standards (1988, as amended in 1998) (Basel Accord). Go Back to Text
47 For example, a claim is exempt from the automatic stay in
bankruptcy in the United States if it arises under a securities
contract or repurchase agreement subject to section 555 or 559 of the
Bankruptcy Code, respectively (11 U.S.C. 555 or 559), a qualified
financial contract under section 11(e)(8) of the Federal Deposit
Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between
financial institutions under sections 401--407 of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401--4407),
or the Board's Regulation EE (12 CFR Part 231). Go Back to Text
48 If a banking organization holds the first and junior
lien(s) on a residential property and no other party holds an
intervening lien, the transaction is treated as a single loan secured
by a first lien for the purpose of determining the loan-to-value
ratio. Go Back to Text
49 Loans that qualify as loans secured by one- to four-family
residential properties or multifamily residential properties are listed
in the instructions to the FR Y--9C Report. In addition, for risk-based
capital purposes, loans secured by one- to four-family residential
properties include loans to builders with substantial project equity
for the construction of one- to four- family residences that have been
presold under firm contracts to purchasers who have obtained firm
commitments for permanent qualifying mortgage loans and have made
substantial earnest money deposits. Go Back to Text
50 Residential property loans that do not meet all the
specified criteria or that are made for the purpose of speculative
property development are placed in the 100 percent risk category. Go Back to Text
51 Prudent underwriting standards include a conservative ratio
of the current loan balance to the value of the property. In the case
of a loan secured by multifamily residential property, the
loan-to-value ratio is not conservative if it exceeds 80 percent (75
percent if the loan is based on a floating interest rate). Prudent
underwriting standards also dictate that a loan-to-value ratio used in
the case of originating a loan to acquire a property would not be
deemed conservative unless the value is based on the lower of the
acquisition cost of the property or appraised (or if appropriate,
evaluated)
value. Otherwise, the loan-to-value
ratio generally would be based upon the value of the property as
determined by the most current appraisal, or if appropriate, the most
current evaluation. All appraisals must be made in a manner consistent
with the federal banking agencies' real estate appraisal regulations
and guidelines and with the banking organization's own appraisal
guidelines. Go Back to Text
52 Such assets include all non-local currency claims on, and
the portions of claims that are guaranteed by, non-OECD central
governments and those portions of local currency claims on, or
guaranteed by, non-OECD central governments that exceed the local
currency liabilities held by subsidiary depository institutions. Go Back to Text
53 Customer liabilities on acceptances outstanding involving
non-standard risk claims, such as claims on U.S. depository
institutions, are assigned to the risk category appropriate to the
identity of the obligor or, if relevant, the nature of the collateral
or guarantees backing the claims. Portions of acceptances conveyed as
risk participations to U.S. depository institutions or foreign banks
are assigned to the 20 percent risk category appropriate to short-term
claims guaranteed by U.S. depository institutions and foreign banks. Go Back to Text
54 The sufficiency of collateral and guarantees for
off-balance sheet items is determined by the market value of the
collateral or the amount of the guarantee in relation to the face
amount of the item, except for derivative contracts, for which this
determination is generally made in relation to the credit equivalent
amount. Collateral and guarantees are subject to the same provisions
noted under section III.B. of this appendix A. Go Back to Text
55 Forward forward deposits accepted are treated as interest
rate contracts. Go Back to Text
56 That is, a participation in which the originating banking
organization remains liable to the beneficiary for the full amount of
the direct credit substitute if the party that has acquired the
participation fails to pay when the instrument is drawn. Go Back to Text
57 A risk participation in bankers acceptances conveyed to
other institutions is also assigned to the risk category appropriate to
the institution acquiring the participation or, if relevant, the
guarantor or nature of the collateral. Go Back to Text
58 Risk participations with a remaining maturity of over one
year that are conveyed to non-OECD banks are to be assigned to the 100
percent risk category, unless a lower risk category is appropriate to
the obligor, guarantor, or collateral. Go Back to Text
59 For example, if a banking organization has a 10 percent
share of a $10 syndicated direct credit substitute that provides credit
support to a $100 loan, then the banking organization's $1 pro
rata share in the enhancement means that a $10 pro rate
share of the loan is included in risk weighted assets. Go Back to Text
60 In the case of consumer home equity or mortgage lines of
credit secured by liens on 1--4 family residential properties, the bank
is deemed able to unconditionally cancel the commitment for the purpose
of this criterion if, at its option, it can prohibit additional
extensions of credit, reduce the credit line, and terminate the
commitment to the full extent permitted by relevant federal law. Go Back to Text
61 A walkaway clause is a provision in a netting contract that
permits a non-defaulting counterparty to make lower payments than it
would make otherwise under the contract, or no payment at all, to a
defaulter or to the estate of a defaulter, even if the defaulter or the
estate of a defaulter is a net creditor under the contract. Go Back to Text
62 For purposes of calculating potential future credit
exposure to a netting counterparty for foreign exchange contracts and
other similar contracts in which notional principal is equivalent to
cash flows, total notional principal is defined as the net receipts
falling due on each value date in each currency. Go Back to Text
63 For derivative contracts, sufficiency of collateral or
guarantee is generally determined by the market value of the collateral
or the amount of the guarantee in relation to the credit equivalent
amount. Collateral and guarantees are subject to the same provisions
noted under section III.B. of this appendix A. Go Back to Text
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