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7500 - FRB Regulations
{{10-31-03 p.7586.31}}
PART 206LIMITATIONS ON INTERBANK LIABILITIES (REGULATION F)
Sec. 206.1
Authority, purpose, and scope.
206.2
Definitions.
206.3
Prudential standards.
206.4
Credit exposure.
206.5
Capital levels of correspondents.
206.6
Waiver.
AUTHORITY: 12 U.S.C. 371b--2.
SOURCE: The provisions of this Part 206 appear at 57 Fed. Reg.
60106, December 18, 1992, effective December 19, 1992, and 58 Fed. Reg.
50512, September 28, 1993, except as otherwise
noted.
§ 206.1 Authority, purpose, and scope.
(a) Authority and purpose. This part (Regulation F, 12
CFR Part 206) is issued by the Board of Governors of the Federal
Reserve System (Board) under authority of section 23 of the Federal
Reserve Act (12 U.S.C. 371b-2). The purpose of this part is to limit
the risks that the failure of a depository institution would pose to
insured depository institutions.
(b) Scope. This part applies to all depository
institutions insured by the Federal Deposit Insurance Corporation.
[Codified to 12 C.F.R. § 206.1]
[Section 206.1 amended at 68 Fed. Reg. 53283, September 10,
2003]
§ 206.2 Definitions.
As used in this part, unless the context requires otherwise:
(a) Bank means an insured depository institution, as
defined in section 3 of the Federal Deposit Insurance Act
(12 U.S.C. 1813), and includes
an insured national bank, state bank, District bank, or savings
association, and an insured branch of a foreign bank.
(b) Commonly-controlled correspondent means a
correspondent that is commonly controlled with the bank and for which
the bank is subject to liability under section 5(e) of the Federal
Deposit Insurance Act. A correspondent is considered to be commonly
controlled with the bank if:
(1) 25 percent or more of any class of voting securities of the
bank and the correspondent are owned, directly or indirectly, by the
same depository institution or company; or
(2) Either the bank or the correspondent owns 25 percent or more
of any class of voting securities of the other.
(c) Correspondent means a U.S. depository institution or
a foreign bank, as defined in this part, to which a bank has exposure,
but does not include a commonly controlled correspondent.
(d) Exposure means the potential that an obligation will
not be paid in a timely manner or in full. "Exposure" includes
credit and liquidity risks, including operational risks, related to
intraday and interday transactions.
(e) Foreign bank means an institution that: (1) Is
organized under the laws of a country other than the United States;
(2) Engaged in the business of banking;
(3) Is recognized as a bank by the bank supervisory or monetary
authorities of the country of the bank's organization;
(4) Receives deposits to a substantial extent in the regular
course of business; and
(5) Has the power to accept demand deposits.
(f) Primary federal supervisor has the same meaning as
the term "appropriate Federal banking agency" in section 3 of the
Federal Deposit Insurance Act (12
U.S.C. 1813).
(g) Total capital means the total of a bank's Tier
1 and Tier 2 capital under the riskbased capital guidelines
provided by the bank's primary federal supervisor. For an
insured
{{10-31-03 p.7586.32}}branch of a foreign bank organized
under the laws of a country that subscribes to the principles of the
Basel Capital Accord, "total capital" means total Tier 1 and Tier
2 capital as calculated under the standards of that country. For an
insured branch of a foreign bank organized under the laws of a country
that does not subscribe to the principles of the Basel Capital Accord,
"total capital" means total Tier 1 and Tier 2 capital as
calculated under the provisions of the Accord.
(h) U.S. depository institution means a bank, as defined
in § 206.2(a) of this part, other than an insured branch of a foreign
bank.
[Codified to 12 C.F.R. § 206.2]
[Section 206.2 amended at 68 Fed. Reg. 53283, September 10,
2003]
§ 206.3 Prudential standards.
(a) General. A bank shall establish and maintain written
policies and procedures to prevent excessive exposure to any individual
correspondent in relation to the condition of the correspondent.
(b) Standards for selecting correspondents. (1) A bank
shall establish policies and procedures that take into account credit
and liquidity risks, including operational risks, in selecting
correspondents and terminating those relationships.
(2) Where exposure to a correspondent is significant, the
policies and procedures shall require periodic reviews of the financial
condition of the correspondent and shall take into account any
deterioration in the correspondent's financial condition. Factors
bearing on the financial condition of the correspondent include the
capital level of the correspondent, level of nonaccrual and past due
loans and leases, level of earnings, and other factors affecting the
financial condition of the correspondent. Where public information on
the financial condition of the correspondent is available, a bank may
base its review of the financial condition of a correspondent on such
information, and is not required to obtain non-public information for
its review. However, for those foreign banks for which there is no
public source of financial information, a bank will be required to
obtain information for its review.
(3) A bank may rely on another party, such as a bank rating
agency or the bank's holding company, to assess the financial condition
of or select a correspondent, provided that the bank's board of
directors has reviewed and approved the general assessment or selection
criteria used by that party.
(c) Internal limits on exposure. (1) Where the
financial condition of the correspondent and the form or maturity of
the exposure create a significant risk that payments will not be made
in full or in a timely manner, a bank's policies and procedures shall
limit the bank's exposure to the correspondent, either by the
establishment of internal limits or by other means. Limits shall be
consistent with the risk undertaken, considering the financial
condition and the form and maturity of exposure to the correspondent.
Limits may be fixed as to amount or flexible, based on such factors as
the monitoring of exposure and the financial condition of the
correspondent. Different limits may be set for different forms of
exposure, different products, and different maturities.
(2) A bank shall structure transactions with a correspondent or
monitor exposure to a correspondent, directly or through another party,
to ensure that its exposure ordinarily does not exceed the bank's
internal limits, including limits established for credit exposure,
except for occasional excesses resulting from unusual market
disturbances, market movements favorable to the bank, increases in
activity, operational problems, or other unusual circumstances.
Generally, monitoring may be done on a retrospective basis. The level
of monitoring required depends on:
(i) The extent to which exposure approaches the bank's internal
limits;
(ii) The volatility of the exposure; and
(iii) The financial condition of the correspondent.
(3) A bank shall establish appropriate procedures to address
excesses over its internal limits.
(d) Review by board of directors. The policies and
procedures established under this section shall be reviewed and
approved by the bank's board of directors at least annually.
{{10-31-03 p.7586.33}}
[Codified to 12 C.F.R. § 206.3]
[Section 206.3 amended at 68 Fed. Reg. 53283, September 10,
2003]
§ 206.4 Credit exposure.
(a) Limits on credit exposure. (1) The policies and
procedures on exposure established by a bank under § 206.3(c) of this
part shall limit a bank's interday credit exposure to an individual
correspondent to not more than 25 percent of the bank's total capital,
unless the bank can demonstrate that its correspondent is at least
adequately capitalized, as defined in § 206.5(a) of this part.
(2) Where a bank is no longer able to demonstrate that a
correspondent is at least adequately capitalized for the purposes of
§ 206.4(a) of this part, including where the bank cannot obtain
adequate information concerning the capital ratios of the
correspondent, the bank shall reduce its credit exposure to comply with
the requirements of § 206.4(a)(1) of this part within 120 days after
the date when the current Report of Condition and Income or other
relevant report normally would be available.
(b) Calculation of credit exposure. Except as provided
in §§ 206.4(c) and (d) of this part, the credit exposure of a bank
to a correspondent shall consist of the bank's assets and off-balance
sheet items that are subject to capital requirements under the capital
adequacy guidelines of the bank's primary federal supervisor, and that
involve claims on the correspondent or capital instruments issued by
the correspondent. For this purpose, off-balance sheet items shall be
valued on the basis of current exposure. The term "credit
exposure" does not include exposure related to the settlement of
transactions, intraday exposure, transactions in an agency or similar
capacity where losses will be passed back to the principal or other
party, or other sources of exposure that are not covered by the capital
adequacy guidelines.
(c) Netting. Transactions covered by netting agreements
that are valid and enforceable under all applicable laws may be netted
in calculating credit exposure.
(d) Exclusions. A bank may exclude the following from
the calculation of credit exposure to a correspondent:
(1) Transactions, including reverse repurchase agreements, to the
extent that the transactions are secured by government securities or
readily marketable collateral, as defined in paragraph (f) of this
section, based on the current market value of the collateral;
(2) The proceeds of checks and other cash items deposited in an
account at a correspondent that are not yet available for withdrawal;
(3) Quality assets, as defined in paragraph (f) of this section,
on which the correspondent is secondarily liable, or obligations of the
correspondent on which a creditworthy obligor in addition to the
correspondent is available, including but not limited to:
(i) Loans to third parties secured by stock or debt obligations
of the correspondent;
(ii) Loans to third parties purchased from the correspondent with
recourse;
(iii) Loans or obligations of third parties backed by stand-by
letters of credit issued by the correspondent; or
(iv) Obligations of the correspondent backed by stand-by letters
of credit issued by a creditworthy third party;
(4) Exposure that results from the merger with or acquisition of
another bank for one year after that merger or acquisition is
consummated; and
(5) The portion of the bank's exposure to the correspondent that
is covered by federal deposit insurance.
(e) Credit exposure of subsidiaries. In calculating
credit exposure to a correspondent under this part, a bank shall
include credit exposure to the correspondent of any entity that the
bank is required to consolidate on its Report of Condition and Income
or Thrift Financial Report.
(f) Definitions. As used in this section:
(1) Government securities means obligations of, or
obligations fully guaranteed as to principal and interest by, the
United States government or any department, agency,
{{10-31-03 p.7586.34}}bureau, board, commission, or
establishment of the United States, or any corporation wholly owned,
directly or indirectly, by the United States.
(2) Readily marketable collateral means financial
instruments or bullion that may be sold in ordinary circumstances with
reasonable promptness at a fair market value determined by quotations
based on actual transactions on an auction or a similarly available
daily bid- ask-price market.
(3)(i) Quality asset means an asset:
(A) That is not in a nonaccrual status;
(B) On which principal or interest is not more than thirty days
past due; and
(C) Whose terms have not been renegotiated or compromised due to
the deteriorating financial conditions of the additional obligor.
(ii) An asset is not considered a "quality asset" if any
other loans to the primary obligor on the asset have been classified as
"substandard," "doubtful," or "loss," or treated as
"other loans specially mentioned" in the most recent report of
examination or inspection of the bank or an affiliate prepared by
either a federal or a state supervisory agency.
[Codified to 12 C.F.R. § 206.4]
[Section 206.4 amended at 68 Fed. Reg. 53283, September 10,
2003]
§ 206.5 Capital levels of correspondents.
(a) Adequately capitalized
correspondents. 1
For the purpose of this part, a correspondent is considered adequately
capitalized if the correspondent has:
(1) A total risk-based capital ratio, as defined in paragraph
(e)(1) of this section, of 8.0 percent or greater;
(2) A Tier 1 risk-based capital ratio, as defined in paragraph
(e)(2) of this section, of 4.0 percent or greater; and
(3) A leverage ratio, as defined in paragraph (e)(3) of this
section, of 4.0 percent or greater.
(b) Frequency of monitoring capital levels. A bank shall
obtain information to demonstrate that a correspondent is at least
adequately capitalized on a quarterly basis, either from the most
recently available Report of Condition and Income, Thrift Financial
Report, financial statement, or bank rating report for the
correspondent. For a foreign bank correspondent for which quarterly
financial statements or reports are not available, a bank shall obtain
such information on as frequent a basis as such information is
available. Information obtained directly from a correspondent for the
purpose of this section should be based on the most recently available
Report of Condition and Income, Thrift Financial Report, or financial
statement of the correspondent.
(c) Foreign banks. A correspondent that is a foreign
bank may be considered adequately capitalized under this section
without regard to the minimum leverage ratio required under paragraph
(a)(3) of this section.
(d) Reliance on information. A bank may rely on
information as to the capital levels of a correspondent obtained from
the correspondent, a bank rating agency, or other party that it
reasonably believes to be accurate.
(e) Definitions. For the purposes of this section:
(1) Total risk-based capital ratio means the ratio of
qualifying total capital to weighted risk assets.
(2) Tier 1 risk-based capital ratio means the ratio of
Tier 1 capital to weighted risk assets.
(3) Leverage ratio means the ratio of Tier 1 capital
to average total consolidated assets, as calculated in accordance with
the capital adequacy guidelines of the correspondent's primary federal
supervisor.
{{10-31-03 p.7586.35}}
(f) Calculation of capital ratios. (1) For a
correspondent that is a U.S. depository institution, the ratios shall
be calculated in accordance with the capital adequacy guidelines of the
correspondent's primary federal supervisor.
(2) For a correspondent that is a foreign bank organized in a
country that has adopted the risk-based framework of the Basel Capital
Accord, the ratios shall be calculated in accordance with the capital
adequacy guidelines of the appropriate supervisory authority of the
country in which the correspondent is chartered.
(3) For a correspondent that is a foreign bank organized in a
country that has not adopted the risk-based framework of the Basel
Capital Accord, the ratios shall be calculated in accordance with the
provisions of the Basel Capital Accord.
[Codified to 12 C.F.R. § 206.5]
[Section 206.5 amended at 68 Fed. Reg. 53283, September 10,
2003]
§ 206.6 Waiver.
The Board may waive the application of § 206.4(a) of this part to
a bank if the primary federal supervisor of the bank advises the Board
that the bank is not reasonably able to obtain necessary services,
including payment-related services and placement of funds, without
incurring exposure to a correspondent in excess of the otherwise
applicable limit.
[Codified to 12 C.F.R.
§ 206.6]
[The page following this is 7611.]
1As used in this part, the term "adequately capitalized"
is similar but not identical to the definition of that term as used for
the purposes of the prompt corrective action standards. See, e.g.
12 CFR Part 208, subpart D. Go Back to Text
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