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2000 - FDIC Rules and Regulations
Appendix A to Part 325—Statement of Policy on Risk-Based Capital
Capital adequacy is one of the critical factors that the FDIC is
required to analyze when taking action on various types of applications
and when conducting supervisory activities related to the safety and
soundness of individual banks and the banking system. In view of this,
the FDIC's Board of Directors has adopted Part 325 of its regulations,
which sets forth (1) minimum standards of capital adequacy for insured
state nonmember banks and (2) standards for determining when an insured
bank is in an unsafe or unsound condition by reason of the amount of
its capital.
This capital maintenance regulation was designed to establish, in
conjunction with other federal bank regulatory agencies, uniform
capital standards for all federally-regulated banking organizations,
regardless of size. The uniform capital standards were based on ratios
of capital to total assets. While those leverage ratios have served as
a useful tool for assessing capital adequacy, the FDIC believes there
is a need for a capital measure that is more explicitly and
systematically sensitive to the risk profiles of individual banks. As a
result, the FDIC's Board of Directors has adopted this Statement of
Policy on Risk-Based Capital to supplement the Part 325 regulation.
This statement of policy does not replace or eliminate the existing
Part 325 capital-to-total assets leverage ratios.
The framework set forth in this statement of policy consists of (1)
a definition of capital for risk-based capital purposes, and
(2) a system for calculating risk-weighted assets by assigning assets
and off-balance sheet items to broad risk categories. A bank's
risk-based capital ratio is calculated by dividing its qualifying total
capital base (the numerator of the ratio) by its risk-weighted assets
(the denominator). 1
Table I outlines the definition of capital and provides a general
explanation of how the risk-based capital ratio is calculated, Table II
summarizes the risk weights and risk categories, and Table III sets
forth the credit conversation factors for off-balance sheet items.
Additional explanations of the capital definitions, the risk-weighed
asset calculations, and the minimum risk-based capital ratio guidelines
are provided in Sections I, II and III of this statement of policy.
In addition, when certain banks that engage in trading activities
calculate their risk-based capital ratio under this appendix A, they
must also refer to
appendix C 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 banks are required to refer to
appendix C of this part for supplemental rules to determine qualifying
and excess capital, calculate risk-weighted assets, calculate market
risk equivalent assets and add them to risk-weighted assets, and
calculate risk-based capital ratios as adjusted for market risk.
This statement of policy applies to all FDIC-insured
state-chartered banks (excluding insured branches of foreign
banks) that are not members of the Federal Reserve System,
hereafter referred to as "state nonmember banks," regardless of
size, and to all circumstances in which the FDIC is required to
evaluate the capital of a banking organization. Therefore, the
risk-based capital framework set forth in this statement of policy will
be used in the examination and supervisory process as well as in the
analysis of applications that the FDIC is required to act upon.
The risk-based capital ratio focuses principally on broad categories
of credit risk, however, the ratio does not take account of many other
factors that can affect a bank's financial condition. These factors
include overall interest rate risk exposure, liquidity,
{{12-29-06 p.2257}}funding and market risks;
the quality and level of earnings; investment, loan portfolio, and
other concentrations of credit risk, certain risks arising from
nontraditional activities; the quality of loans and investments; the
effectiveness of loan and investment policies; and management's overall
ability to monitor and control financial and operating risks, including
the risk presented by concentrations of credit and nontraditional
activities. In addition to evaluating capital ratios, an overall
assessment of capital adequacy must take account of each of these other
factors, including, in particular, the level and severity of problem
and adversely classified assets as well as a bank's interest rate risk
as measured by the bank's exposure to declines in the economic value of
its capital due to changes in interest rates. For this reason, the
final supervisory judgment on a bank's capital adequacy may differ
significantly from the conclusions that might be drawn solely from the
absolute level of the bank's risk-based capital ratio.
In light of these other considerations, banks generally are expected
to operate above the minimum risk-based capital ratio. Banks
contemplating significant expansions plans, as well as those
institutions with high or inordinate levels of risk, should hold
capital commensurate with the level and nature of the risks to which
they are exposed.
I. Definition of Capital for the Risk-Based Capital Ratio
A bank's qualifying total capital base consists of two types
of capital elements: "core capital elements" (Tier 1) and
"supplementary capital elements" (Tier 2). To qualify as an
element of Tier 1 or Tier 2 capital, a capital instrument should not
contain or be subject to any conditions, convenants, terms,
restrictions, or provisions that are inconsistent with safe and sound
banking practices.
A. The Components of Qualifying Capital (see Table I)
1. Core capital elements (Tier 1) consists of:
i. Common stockholders' equity capital (includes common stock and
related surplus, undivided profits, disclosed capital reserves that
represent a segregation of undivided profits, and foreign currency
translation adjustments, less net unrealized holding losses on
availablefor-sale equity securities with readily determinable fair
values);
ii. Noncumulative perpetual preferred
stock, 2
including any related surplus; and
iii. Minority interests in the equity capital accounts of
consolidated subsidiaries.
(a) At least 50 percent of the qualifying total capital base should
consist of Tier 1 capital. Core (Tier 1) capital is defined as the sum
of core capital elements minus all intangible assets (other than
mortgage servicing assets, nonmortgage servicing assets and purchased
credit card relationships eligible for inclusion in core capital
pursuant to
§ 325.5(f)), 3
minus credit-enhancing interest-only strips that are not eligible for
inclusion in core capital pursuant to § 325.5(f)), minus any
disallowed deferred tax assets, and minus any amount of nonfinancial
equity investments required to be deducted pursuant to section II.B.(6)
of this Appendix.
(b) Although nonvoting common stock, noncumulative perpetual
preferred stock, and minority interests in the equity capital accounts
of consolidated subsidiaries are normally included in Tier 1 capital,
voting common stockholders' equity generally will be expected to be the
dominant form of Tier 1 capital. Thus, banks should avoid undue
reliance on nonvoting equity, preferred stock and minority interests.
(c) Although minority interests in consolidated subsidiaries are
generally included in regulatory capital, exceptions to this general
rule will be made if the minority interests fail to provide meaningful
capital support to the consolidated bank. Such a situation could arise
if the minority interests are entitled to a preferred claim on
essentially low risk assets of the subsidiary. Similarly, although
credit-enhancing interest-only strips and intangible assets in the form
of mortgage servicing assets, nonmortgage servicing assets and
purchased credit card relationships are generally recognized for
risk-based capital purposes, the deduction of
{{12-29-06 p.2258}}part or all of the
credit-enhancing interest-only strips, mortgage servicing assets,
nonmortgage servicing assets and purchased credit card relationships
may be required if the carrying amounts of these assets are excessive
in relation to their market value or the level of the bank's capital
accounts. Credit-enhancing interest-only strips, mortgage servicing
assets, nonmortgage servicing assets, purchased credit card
relationships and deferred tax assets that do not meet the conditions,
limitations and restrictions described in § 325.5(f) and (g) of this
part will not be recognized for risk-based capital purposes.
(d) Minority interests in small business investment companies,
investment funds that hold nonfinancial equity investments (as defined
in section II.B.(6)(ii) of this appendix A), and subsidiaries that are
engaged in nonfinancial activities are not included in a bank's Tier 1
or total capital base if the bank excludes the consolidated assets of
such programs from risk-weighted assets pursuant to section
II.B.(6)(ii) of this appendix.
2. Supplementary capital elements (Tier 2) consist of:
(i) Allowance for loan and lease losses, up to a maximum of 1.25
percent of risk-weighted assets;
(ii) Cumulative perpetual preferred stock, long-term preferred
stock (original maturity of at least 20 years) and any related surplus;
(iii) Perpetual preferred stock (and any related surplus) where the
dividend is reset periodically based, in whole or part, on the bank's
current credit standing, regardless of whether the dividends are
cumulative or noncumulative;
(iv) Hybrid capital instruments, including mandatory convertible
debt securities;
(v) Term subordinated debt and intermediate-term preferred stock
(original average maturity of five years or more) and any related
surplus; and
(vi) Net unrealized holding gains on equity securities (subject to
the limitations discussed in paragraph I.A.2.(f) of this
section).
The maximum amount of Tier 2 capital that may be recognized for
risk-based capital purposes is limited to 100 percent of Tier 1 capital
(after any deductions for disallowed intangibles and disallowed
deferred tax assets). In addition, the combined amount of term
subordinated debt and intermediate-term preferred stock that may be
treated as part of Tier 2 capital for riskbased capital purposes is
limited to 50 percent of Tier 1 capital. Amounts in excess of these
limits may be issued but are not included in the calculation of the
risk-based capital ratio.
(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." 4
and reserves created against identified losses.
This risk-based capital framework provides a phasedown during the
transition period of the extent to which the allowance for loan and
lease losses may be included in an institution's capital base. By
year-end 1990, the allowance for loan and lease losses, as an element
of supplementary capital, may constitute no more than 1.5 percent of
risk-weighted assets and, by year-end 1992, no more than 1.25 percent
of risk-weighted assets. 5
(b) Preferred stock. Perpetual preferred stock is
defined as preferred stock that does not have a maturity date, that
cannot be redeemed at the option of the holder, and that has no other
provisions that will require future redemption of the issue. Long-term
preferred stock includes limited-life preferred stock with an original
maturity of 20 years or more, provided
{{8-31-04 p.2258.01}}that the stock cannot be
redeemed at the option of the holder prior to maturity, except with the
prior approval of the FDIC.
Cumulative perpetual preferred stock and long-term preferred stock
qualify for inclusion in supplementary capital provided that the
instruments can absorb losses while the issuer operates as a going
concern (a fundamental characteristic of equity capital) and provided
the issuer has the option to defer payment of dividends on these
instruments. Given these conditions, and the perpetual or long-term
nature of the instruments, there is no limit on the amount of these
preferred stock instruments that may be included with Tier 2 capital.
Noncumulative perpetual preferred stock where the dividend is reset
periodically based, in whole or in part, on the bank's current credit
standing, including auction rate, moneymarket, or remarketable
preferred stock, are also assigned to Tier 2 capital without limit,
provided the above conditions are met.
{{12-31-01 p.2259}}
(c) Hybrid capital instruments. Hybrid capital
instruments include instruments that have certain characteristics of
both debt and equity. In order to be included as supplementary capital
elements, these instruments should meet the following criteria:
(1) The instrument should be unsecured, subordinated to the claims
of depositors and general creditors, and fully paid-up.
(2) The instrument should not be redeemable at the option of the
holder prior to maturity, except with the prior approval of the FDIC.
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 should 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 should convert to common or perpetual preferred stock in the
event that the sum of the undivided profits and capital surplus
accounts of the issuer results in a negative balance.
(4) The instrument should provide the option for the issuer to defer
principal and interest payments if: (a) the issuer does not report a
profit in the preceding annual period, defined as combined profits
(i.e., net income) for the most recent four quarters, and
(b) the issuer eliminates cash dividends on its common and
preferred stock.
Mandatory convertible debt securities, which are subordinated debt
instruments that require the issuer to convert such instruments into
common or perpetual preferred stock by a date at or before the maturity
of the debt instruments, will qualify as hybrid capital instruments
provided the maturity of these instruments is 12 years or less and the
instruments meet the criteria set forth below for "term subordinated
debt." There is no limit on the amount of hybrid capital instruments
that may be included within Tier 2 capital.
(d) Term subordinated debt and intermediate-term preferred
stock. The aggregate amount of term subordinated debt (excluding
mandatory convertible debt securities) and intermediate-term preferred
stock (including any related surplus) that may be treated as Tier 2
capital for risk-based capital purposes is limited to 50 percent of
Tier 1 capital. Term subordinated debt and intermediate-term preferred
stock should have an original average maturity of at least five years
to qualify as supplementary capital and should not be redeemable at the
option of the holder prior to maturity, except with the prior approval
of the FDIC. For state nonmember banks, a "term subordinated
debt" instrument is an obligation other than a deposit obligation
that:
(1) Bears on its face, in boldface type, the following: This
obligation is not a deposit and is not insured by the Federal Deposit
Insurance Corporation;
(2)(i) Has a maturity of at least five years; or
(ii) In the case of an obligation or issue that provides for
scheduled repayments of principal, has an average maturity of at least
five years; provided that the Director of the Division of Supervision
may permit the issuance of an obligation or issue with a shorter
maturity or average maturity if the Director has determined that
exigent circumstances require the issuance of such obligation or issue;
provided further that the provisions of this paragraph I.A.2.(d)(2)
shall not apply to mandatory convertible debt obligations or issues;
(3) States expressly that the obligation:
(i) Is subordinated and junior in right of payment to the issuing
bank's obligations to its depositors and to the bank's other
obligations to its general and secured creditors; and
(ii) Is ineligible as collateral for a loan by the issuing bank;
(4) Is unsecured;
(5) States expressly that the issuing bank may not retire any
part of its obligation without any prior written consent of the FDIC or
other primary federal regulator; and
(6) Includes, if the obligation is issued to a depository
institution, a specific waiver of the right of offset by the lending
depository institution.
{{12-31-01 p.2260}}Subordinated debt
obligations issued prior to December 2, 1987 that satisfied the
definition of the term "subordinated note and debenture" that was
in effect prior to that date also will be deemed to be term
subordinated debt for risk-based capital purposes. An optional
redemption ("call") provision in a subordinated debt instrument
that is exercisable by the issuing bank in less than five years will
not be deemed to constitute a maturity of less than five years,
provided that the obligation otherwise has a stated contractual
maturity of at least five years; the call is exercisable solely at the
discretion or option of the issuing bank, and not at the discretion or
option of the holder of the obligation; and the call is exercisable
only with the express prior written consent of the FDIC under
12 U.S.C. 1828(i)(1) at the
time early redemption or retirement is sought, and such consent has not
been given in advance at the time of issuance of the obligation.
Optional redemption provisions will be accorded similar treatment when
determining the perpetual nature and/or maturity of preferred stock and
other capital instruments.
(e) Discount of limited-life supplementary capital
instruments. As a limited-life capital instrument approaches
maturity, the instrument begins to take on characteristics of a
short-term obligation and becomes less like a component of capital.
Therefore, for risk-based capital purposes, the outstanding amount of
term subordinated debt and limited-life preferred stock eligible for
inclusion in capital will be adjusted downward, or discounted, as the
instruments approach maturity. Each limited-life capital instrument
will be discounted by reducing the outstanding amount of the capital
instrument eligible for inclusion as supplementary capital by a fifth
of the original amount (less redemptions) each year during the
instrument's last five years before maturity. Such instruments,
therefore, will have no capital value when they have a remaining
maturity of less than a year.
(f) Unrealized gains on equity securities and unrealized
gains (losses) on other assets. Up to 45 percent of pretax net
unrealized holding gains (that is, the excess, if any, of the fair
value over historical cost) on available-for-sale equity securities
with readily determinable fair values may be included in supplementary
capital. However, the FDIC may exclude all or a portion of these
unrealized gains from Tier 2 capital if the FDIC determines that the
equity securities are not prudently valued. Unrealized gains (losses)
on other types of assets, such as bank premises and available-for-sale
debt securities, are not included in supplementary capital, but the
FDIC may take these unrealized gains (losses) into account as
additional factors when assessing a bank's overall capital adequacy.
B. Deductions from Capital and Other Adjustments.
Certain assets are deducted from a bank's capital base for the
purpose of calculating the numerator of the risk-based capital
ratio. 6
These assets include:
(1) All intangible assets other than mortgage servicing
assets, nonmortgage servicing assets and purchased credit card
relationships. 7
These disallowed intangibles are deducted from the core capital (Tier
1) elements.
{{12-31-01 p.2261}}
(2) Investments in unconsolidated banking and finance
subsidiaries. 8
This includes any equity or debt capital investments in banking or
finance subsidiaries if the subsidiaries are not consolidated for
regulatory capital requirements. 9
Generally, these investments include equity and debt capital securities
and any other instruments or commitments that are deemed to be capital
of the subsidiary. These investments are deducted from the bank's total
(Tier 1 plus Tier 2) capital base.
(3) Investments in securities subsidiaries established
pursuant to 12 CFR 337.4. The FDIC may also consider deducting
investments in other subsidiaries, either on a case-by-case basis or,
as with securities subsidiaries, based on the general characteristics
or functional nature of the subsidiaries.
(4) Reciprocal holdings of capital instruments of banks
that represent intentional cross-holdings by the banks. These holdings
are deducted from the bank's total capital base.
(5) Deferred tax assets in excess of the limit set
forth in § 325.5(g).
These disallowed deferred tax assets are deducted from the core capital
(Tier 1) elements.
On a case-by-case basis, and in conjunction with supervisory
examinations, other deductions from capital may also be required,
including any adjustments deemed appropriate for assets classified as
loss.
II. Procedures For Computing Risk-Weighted Assets
A. General Procedures
1. Under the risk-based capital framework, a bank's balance sheet
assets and credit equivalent amounts of off-balance sheet items are
assigned to one of four broad risk categories according to the obligor
or, if relevant, the guarantor or the nature of the collateral. The
aggregate dollar amount in each category is then multiplied by the risk
weight assigned to that category. The resulting weighted values from
each of the four risk categories are added together and this sum is the
risk-weighted assets total that, as
adjusted, 10
comprises the denominator of the risk-based capital ratio.
2. The risk-weighted amounts for all off-balance sheet items are
determined by a two-step process. First, the notional principal, or
face value, amount of each off-balance sheet item generally is
multiplied by a credit conversion factor to arrive at a balance
sheet
{{12-31-01 p.2262}}"credit equivalent
amount." Second, the credit equivalent amount generally is assigned
to the appropriate risk category, like any balance sheet asset,
according to the obligor or, if relevant, the guarantor or the nature
of the collateral.
3. The Director of the Division of Supervision may, on a
case-by-case basis, determine the appropriate risk weight for any asset
or credit equivalent amount that does not fit wholly within one of the
risk categories set forth in this appendix A or that imposes risks on a
bank that are not commensurate with the risk weight otherwise specified
in this appendix A for the asset or credit equivalent amount. In
addition, the Director of the Division of Supervision may, on a
case-by-case basis, determine the appropriate credit conversion factor
for any off-balance sheet item that does not fit wholly within one of
the credit conversion factors set forth in this appendix A or that
imposes risks on a bank that are not commensurate with the credit
conversion factor otherwise specified in this appendix A for the
off-balance sheet item. In making such a determination, the Director of
the Division of Supervision will consider the similarity of the asset
or off-balance sheet item to assets or off-balance sheet items
explicitly treated in sections II.B and II.C of this appendix A, as
well as other relevant factors.
B. Other Considerations
1. Indirect Holdings of Assets--Some of the assets on
a bank's balance sheet may represent an indirect holding of a pool of
assets; for example, mutual funds. An investment in shares of a mutual
fund whose portfolio consists solely of various securities or money
market instruments that, if held separately, would be assigned to
different risk categories, generally is assigned to the risk category
appropriate to the highest risk-weighted asset that the fund is
permitted to hold in accordance with the stated investment objectives
set forth in its prospectus. The bank may, at its option, assign the
investment on a pro rata basis to different risk categories according
to the investment limits in the fund's prospectus, but in no case will
indirect holdings through shares in any mutual fund be assigned to a
risk weight less than 20 percent. If the bank chooses to assign its
investment on a pro rata basis, and the sum of the investment limits in
the fund's prospectus exceeds 100 percent, the bank must assign risk
weights in descending order. 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 be disregarded
in determining the risk category to which the bank's holdings in the
overall fund should be assigned. The prudent use of hedging instruments
by a mutual fund to reduce the risk of its assets will not increase the
risk weighting of the mutual fund investment. For example, the use of
hedging instruments by a mutual fund to reduce the interest rate risk
of its government bond portfolio will not increase the risk weight of
that fund above the 20 percent category. Nonetheless, if the fund
engages in any activities that appear speculative in nature or has any
other characteristics that are inconsistent with the preferential risk
weighting assigned to the fund's assets, holdings in the fund will be
assigned to the 100 percent risk category.
2. Collateral--In determining risk weights of various
assets, the only forms of collateral that are formally recognized by
the risk-based capital framework are cash on deposit in the lending
bank; securities issued or guaranteed by the central governments of the
OECD-based group of countries, 11
U.S. Government agencies, or U.S. Government-
{{6-30-08 p.2262.01}}sponsored agencies; and
securities issued or guaranteed by multilateral lending institutions or
regional development banks. Claims fully secured by such collateral are
assigned to the 20 percent risk category. The extent to which these
securities are recognized as collateral for risk-based capital purposes
is determined by their current market value. If a claim is partially
secured, the portion of the claim that is not covered by the collateral
is assigned to the risk category appropriate to the obligor or, if
relevant, the guarantor.
3. 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, foreign
banks, and qualifying OECD-based securities firms are also recognized.
If a claim is partially guaranteed, the portion of the claim that is
not fully covered by the guarantee is assigned to the risk category
appropriate to the obligor or, if relevant, the collateral.
4. Maturity--Maturity is generally not a factor in
assigning items to risk categories with the exceptions of claims on
non-OECD banks, commitments, and interest rate and foreign exchange
rate related 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. 12
5. Recourse, Direct Credit Substitutes, Residual Interests
and Mortgage- and Asset-Backed Securities. For purposes of this
section II.B.5 of this appendix A, the following definitions will
apply.
(a) Definitions. (1) 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."
(2) Credit-enhancing interest-only strip is defined in
§ 325.2(g).
(3) 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 a bank 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:
(i) 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;
(ii) 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
(iii) Warranties that permit the return of assets in instances of
misrepresentation, fraud or incomplete documentation.
(4) Direct credit substitute means an arrangement in
which a bank 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 (third-party asset) and the risk assumed
by the bank exceeds the pro rata share of the bank's interest in the
third-party asset. If the bank has no
{{6-30-08 p.2262.02}}claim on the third-party
asset, then the bank'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:
(i) Financial standby letters of credit, which includes any letter
of credit or similar arrangement, however named or described, that
support financial claims on a third party that exceeds a bank's
pro rata share of losses in the financial claim;
(ii) Guarantees, surety arrangements, credit derivatives, and
similar instruments backing financial claims;
(iii) Purchased subordinated interests or securities that absorb
more than their pro rata share of credit losses from the
underlying assets;
(iv) Credit derivative contracts under which the bank assumes more
than its pro rata share of credit risk on a third party
asset or exposure;
(v) Loans or lines of credit that provide credit enhancement for
the financial obligations of an account party;
(vi) Purchased loan servicing assets if the servicer;
(A) Is responsible for credit losses associated with the loans
being serviced;
(B) Is responsible for making mortgage servicer cash advances
(unless the advances are not direct credit substitutes because they
meet the conditions specified in II.B.5 (a)(9) of this Appendix A), or
(C) Makes or assumes credit-enhancing representations and
warranties with respect to the loans serviced;
(vii) Clean-up calls on third party assets. Clean-up calls that are
exercisable at the option of the bank (as servicer or as an affiliate
of the servicer) when the pool balance is 10 percent or less of the
original pool balance are not direct credit substitutes; and
(viii) Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
(5) 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.
(6) Externally rated means that an instrument or
obligation has received a credit rating from a nationally recognized
statistical rating organization.
(7) 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.
(8) 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.
(9) Financial standby letter of credit means a letter of
credit or similar arrangement that represents an irrevocable obligation
to a third-party beneficiary:
(i) To receive money borrowed by, or advanced to, or for the
account of, a second party (the account party), or
(ii) To make payment on behalf of the account party, in the event
that the account party fails to fulfill its obligation to the
beneficiary.
(10) 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.
{{8-31-04 p.2262.03}}
(11) Mortgage servicer cash advance means funds that a
residential mortgage 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:
(i) The mortgage 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
(ii) For any one loan, the servicer's obligation to make
nonreimbursable advances is contractually limited to an insignificant
amount of the outstanding principal of that loan.
(12) 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 (17 CFR 240.15c3--1).
(13) Recourse means an arrangement in which a bank
retains, in form or in substance, of any credit risk directly or
indirectly associated with an asset it has sold (in accordance with
generally accepted accounting principles) that exceeds a pro
rata share of the bank's claim on the asset. If a bank has no
claim on an asset it has sold, then the retention of any credit risk is
recourse. A recourse obligation typically arises when an institution
transfers assets in a sale and retains an obligation to repurchase the
assets or absorb losses due to a default of principal or interest or
any other deficiency in the performance of the underlying obligor or
some other party. Recourse may exist implicitly where a bank provides
credit enhancement beyond any contractual obligation to support assets
it has sold. The following are examples of recourse arrangements:
(i) Credit-enhancing representations and warranties made on the
transferred assets;
(ii) Loan servicing assets retained pursuant to an agreement under
which the bank:
(A) Is responsible for losses associated with the loans being
serviced, or
(B) Is responsible for making mortgage servicer cash advances
(unless the advances are not a recourse obligation because they meet
the conditions specified in section II.B.5(a)(11) of this Appendix A).
(iii) Retained subordinated interests that absorb more than their
pro rata share of losses from the underlying assets;
(iv) Assets sold under an agreement to repurchase, if the assets
are not already included on the balance sheet;
(v) Loan strips sold without contractural recourse where the
maturity of the transferred portion of the loan is shorter than the
maturity of the commitment under which the loan is drawn;
(vi) Credit derivative contracts under which the bank retains more
than its pro rata share of credit risk on transferred assets;
(vii) 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 are not recourse arrangements;
and
(viii) Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
(14) 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 (GAAP)) of financial assets, whether
through a securitization or otherwise, and that exposes a bank to
credit risk directly or indirectly associated with the transferred
assets that exceeds a pro rata share of the bank'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 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
{{8-31-04 p.2262.04}}not include interests
purchased from a third party, except that purchased credit-enhancing
I/Os are residual interests for purposes of the risk-based capital
treatment in this appendix.
(15) 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.
(16) 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.
(17) Sponsor means a bank 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 ABCP 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.
(18) 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.
(19) 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 weights of recourse
obligations and direct credit substitutes--(1) General rule
for determining the credit-equivalent amount. Except as otherwise
provided, 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 directly or indirectly retains or assumes
credit risk multiplied by a 100% conversion factor. Thus, a bank that
extends a partial direct credit substitute, e.g., a financial standby
letter of credit that absorbs the first 10 percent of loss on a
transaction, must maintain capital against the full amount of the
assets being supported.
(2) Risk-weight factor. To determine the bank's
risk-weighted assets for an off-balance sheet recourse obligation or a
direct credit substitute, 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 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 covered in this paragraph (b) is
subject to the low-level exposure rule provided in section II.B.5(h)(1)
of this appendix A.
(c) Credit equivalent amount and risk weight of
participations in, and syndications of, direct credit substitutes.
Subject to the low-level exposure rule provided in section
II.B.5(h)(1) of this appendix A, the credit equivalent amount for a
participation interest in, or syndication of, a direct credit
substitute (excluding purchased credit-enhancing interest-only strips)
is calculated and risk weighted as follows:
(1) Treatment for direct credit substitutes for which a bank
has conveyed a risk participation. In the case of a direct credit
substitute in which a bank has conveyed a risk participation, the full
amount of the assets that are supported by the direct credit substitute
is converted to a credit equivalent amount using a 100% conversion
factor. However, the pro rata share of the credit equivalent
amount that has been conveyed through a risk participation is then
assigned to whichever risk-weight category is lower: the risk-weight
category appropriate to the obligor in the underlying transaction,
after considering any associated guarantees or collateral, or the
risk-weight category appropriate to the party acquiring the
participation. The pro rata share of the credit equivalent
amount that has not
{{8-31-04 p.2262.04-A}}been participated out is
assigned to the risk-weight 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 substitute conveyed as a risk participation to a U.S.
domestic depository institution or an OECD bank is assigned to the 20
percent risk category. 13
(2) Treatment for direct credit substitutes in which the bank
has acquired a risk participation. In the case of a direct credit
substitute in which the bank has acquired a risk participation, the
acquiring bank's pro rata share of the direct credit
substitute is multiplied by the full amount of the assets that are
supported by the direct credit substitute and converted using a 100%
credit conversion factor. The resulting credit equivalent amount
is
{{12-31-01 p.2262.05}}then assigned to the
risk-weight category appropriate to the obligor in the underlying
transaction, after considering any associated guarantees or collateral.
(3) Treatment for direct credit substitutes related to
syndications. In the case of a direct credit substitute that takes
the form of a syndication where each party is obligated only for its
pro rata share of the risk and there is no recourse to the
originating entity, each bank's credit equivalent amount will be
calculated by multiplying only its pro rata share of the assets
supported by the direct credit substitute by a 100% conversion factor.
The resulting credit equivalent amount is then assigned to the
risk-weight category appropriate to the obligor in the underlying
transaction, after considering any associated guarantees or collateral.
(d) Externally rated positions: credit-equivalent amounts and
risk weights.--(1) Traded positions. With respect to a
recourse obligation, direct credit substitute, residual interest (other
than a credit-enhancing interest-only strip) or mortgage- or
asset-backed security 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 position that is
investment grade, the bank may multiply the face amount of the position
by the appropriate risk weight, determined in accordance with Table A
or B of this appendix A, as
appropriate. 14
If a traded position receives more than one external rating, the lowest
rating will apply.
Table
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
|
TABLE
B
| Short-term
rating category |
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
|
(2) Non-traded positions. A recourse obligation, direct
credit substitute, residual interest (but not a credit-enhancing
interest-only strip) or mortgage- or asset-backed security extended in
connection with a securitization that is not a "traded position"
may be assigned a risk weight in accordance with section II.B.5(d)(1)
of this appendix A if:
(i) It has been externally rated by more than one NRSRO;
(ii) It has received an external rating on a long-term position
that is one category below investment grade or better or a short-term
position that is investment grade by all NRSROs providing a rating;
(iii) The ratings are publicly available; and
(iv) 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, residual interest, or mortgage- or asset-backed
security will be assigned.
(e) Senior positions not externally rated. For a
recourse obligation, direct credit substitute, residual interest or
mortgage- or asset-backed security that is not externally rated but is
senior in all features to a traded position (including
collateralization and maturity), a bank may apply a risk weight to the
face amount of the senior position in accordance with section
II.B.5(d)(1) of this appendix A, based upon the risk weight of the
traded position, subject to any current or prospective supervisory
guidance and the bank satisfying the FDIC
{{12-31-01 p.2262.06}}that this treatment is
appropriate. This section will apply only if the traded position
provides substantial credit support for the entire life of the unrated
position.
(f) Residual interests--(1) Concentration limit
on credit-enhancing interest-only strips. In addition to the
capital requirement provided by section II.B.5(f)(2) of this appendix
A, a bank must deduct from Tier 1 capital the face amount of all
credit-enhancing interest-only strips in excess of 25 percent of Tier 1
capital in accordance with
§ 325.5(f)(3).
(2) Credit-enhancing interest-only strip capital requirement.
After applying the concentration limit to credit-enhancing
interest-only strips in accordance with § 325.5(f)(3), a bank must
maintain risk-based capital for a credit-enhancing interest-only strip,
equal to the remaining face amount of the credit-enhancing
interest-only strip (net of the remaining proportional amount of any
existing associated deferred tax liability recorded on the balance
sheet), even if the amount if 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
interest-only strip will be treated as if the credit-enhancing
interest-only strip was retained by the bank and not transferred.
(3) Other residual interests capital requirement. Except
as otherwise provided in section II.B.5(d) or (e) of this appendix A, a
bank must maintain risk-based capital for a residual interest
(excluding a credit-enhancing interest-only strip) equal to the face
amount of the residual interest (net of any existing associated
deferred tax liability recorded on the balance sheet), 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 and not transferred.
(4) Residual interests and other recourse obligations.
Where the aggregate capital requirement for residual interests
(including credit-enhancing interest-only strips) and recourse
obligations arising from the same transfer of assets exceed the full
risk-based capital requirement for assets transferred, a bank must
maintain risk-based capital equal to the greater of the risk-based
capital requirement for the residual interest as calculated under
sections II.B.5(f)(2) through (3) of this appendix A or the full
risk-based capital requirement for the assets transferred.
(g) Positions that are not rated by an NRSRO. A bank's
position (other than a residual interest) in a securitization or
structutred finance program that is not rated by an NRSRO may be
risk-weighted based on the bank's determination of the credit rating
of the position, as specified in Table C of this appendix A, multiplied
by the face amount of the position. In order to qualify for this
treatment, the bank's system for determining the credit rating of the
position must meet one of the three alternative standards set out in
section II.B.5(g)(1) through (3) of this appendix A.
TABLE
C
| Rating
category |
Examples |
Risk Weight(In percent) |
|---|
| Investment
grade |
BBB or other |
100 |
| One category below investment
grade |
BB |
200
|
(1) Internal risk rating used for asset-backed programs.
A bank extends a direct credit substitute (but not a purchased
credit-enhancing interest-only strip) to an asset-backed commercial
paper program sponsored by the bank and the bank is able to demonstrate
to the satisfaction of the FDIC, prior to relying upon its use, that
the bank's internal credit risk rating system is adequate. Adequate
internal credit risk rating systems usually contain the following
criteria: 15
{{2-28-02 p.2262.06-A}}(i) The internal credit
risk rating system is an integral part of the bank's risk management
system that explicitly incorporates the full range of risks arising
form a bank's participation in securitization activities;
(ii) 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;
(iii) The internal credit risk rating 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;
(iv) The internal credit risk rating system identifies gradations
of risk among "pass" assets and other risk positions;
(v) The internal credit risk rating system must have clear,
explicit criteria (including for subjective factors), that are used to
classify assets into each internal risk grade;
(vi) The bank must have independent credit risk management or loan
review personnel assigning or reviewing the credit risk ratings;
(vii) An internal audit procedure should periodically verify that
internal risk ratings are assigned in accordance with the bank's
established criteria;
(viii) The bank 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
(ix) The internal credit risk rating system must make credit risk
rating assumptions that are consistent with, or more conservative than,
the credit risk rating assumptions and methodologies of NRSROs.
(2) Program Ratings. A bank extends a direct credit
substitute or retains a recourse obligation (but not a residual
interest) in connection with a structured finance program and an 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 specified ranges of rating
categories to them, the bank may apply the rating category applicable
to the option that corresponds to the bank's position. In order to
rely on a program rating, the bank must demonstrate to the FDIC'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 must also demonstrate to the FDIC's satisfaction
that the criteria underlying the NRSRO's assignment of ratings for the
program are satisfied for the particular position issued by the bank.
If a bank participates in a securitization sponsored by another party,
the FDIC may authorize the bank to use this approach based on a program
rating obtained by the sponsor of the program.
(3) Computer Program. A bank is using an acceptable
credit assessment computer program that has been developed by an NRSRO
to determine the rating of a direct credit substitute or recourse
obligation (but not a residual interest) extended in connection with a
structured finance program. In order to rely on the rating determined
by the computer program, the bank must demonstrate to the FDIC's
satisfaction that ratings under the program correspond credibly and
reliably with the ratings of traded positions. The bank must also
demonstrate to the FDIC's satisfaction the credibility of the program
in financial markets, the reliability of the program in assessing
credit risk, the applicability of the program to the bank's position,
and the proper implementation of the program.
(h) Limitations on risk-based capital
requirements--(1) Low-level exposure rule. If the
maximum exposure to loss retained or assumed by a bank in connection
with a recourse obligation, a direct credit substitute, or a residual
interest is less than the effective risk-based capital requirement for
the credit-enhanced assets, the risk-based capital required under this
appendix A is limited to the bank's maximum contractual exposure, less
any recourse liability account established in accordance with generally
accepted accounting principles. This limitation does not apply when a
bank provides credit enhancement beyond any contractual obligation to
support assets it has sold.
{{2-28-02 p.2262.06-B}}
(2) Mortgage-related securities or participation certificates
retained in a mortgage loan swap. If a bank 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 bank continued to hold these loans as an on-balance sheet asset.
(3) Related on-balance sheet assets. If a recourse
obligation or direct credit substitute also appears as a balance sheet
asset, the asset is risk-weighted only under this section II.B.5 of
this appendix A, except in the case of loan servicing assets and
similar arrangements with embedded recourse obligations or direct
credit substitutes. In that case, the on-balance sheet servicing assets
and the related recourse obligations or direct credit substitutes must
both be separately risk weighted and incorporated into the risk-based
capital calculation.
(i) Alternative Capital Calculation for Small Business
Obligations.
(1) Definitions. For purposes of this section II.B.5(i);
(i) Qualified bank means a bank that:
(A) Is well capitalized as defined in
§ 325.103(b)(1) without
applying the capital treatment described in this section II.B.5(i), or
(B) Is adequately capitalized as defined in § 325.103(b)(2)
without applying the capital treatment described in this section
II.B.5(i) and has received written permission by order of the FDIC to
apply the capital treatment described in this section II.B.5(i).
(iii) Small business means a business that meets the
criteria for a small business concern established by the Small Business
Administration in 13 CFR part 121 pursuant to 15 U.S.C. 632.
(2) Capital and reserve requirements. Notwithstanding
the risk-based capital treatment outlined in any other paragraph (other
than paragraph (i) of this section II.B.5), with respect to a transfer
with recourse of a small business loan or a lease to a small business
of personal property that is a sale under generally accepted accounting
principles, and for which the bank establishes and maintains a
non-capital reserve under generally accepted accounting principles
sufficient to meet the reasonable estimated liability of the bank under
the recourse arrangement; a qualified bank may elect to include only
the face amount of its recourse in its risk-weighted assets for
purposes of calculating the bank's risk-based capital ratio.
(3) Limit on aggregate amount of recourse. The total
outstanding amount of recourse retained by a qualified bank with
respect to transfers of small business loans and leases to small
businesses of personal property and included in the risk-weighted
assets of the bank as described in section II.B.5(i)(2) of this
appendix A may not exceed 15 percent of the bank's total risk-based
capital, unless the FDIC specifies a greater amount by order.
(4) Bank that ceases to be qualified or that exceeds
aggregate limit. If a bank ceases to be a qualified bank or
exceeds the aggregate limit in section II.B.5(i)(3) of this appendix A,
the bank may continue to apply the capital treatment described in
section II.B.5(i)(2) of this appendix A to transfers of small business
loans and leases to small businesses of personal property that occurred
when the bank was qualified and did not exceed the limit.
(5) Prompt correction action not affected. (i) A bank
shall compute its capital without regard to this section II.B.5(i) for
purposes of prompt corrective action
(12 U.S.C. 1831o) unless the
bank is a well capitalized bank (without applying the capital treatment
described in this section II.B.5(i)) and, after applying the capital
treatment described in this section II.B.5(i), the bank would be well
capitalized.
(ii) A bank shall compute its capital without regard to this
section II.B.5(i) for purposes of 12
U.S.C. 1831o(g) regardless of the bank's capital level.
(6) Nonfinancial equity investments. (i)
General. A bank must deduct from its Tier 1 capital the sum
of the appropriate percentage (as determined below) of the adjusted
carrying value of all nonfinancial equity investments held by the bank
or by its direct or indirect
{{2-28-02 p.2262.06-B-1}}subsidiaries. For
purposes of this section II.B.(6), investments held by a bank include
all investments held directly or indirectly by the bank or any of its
subsidiaries.
(ii) Scope of nonfinancial equity investments. A
nonfinancial equity investment means any equity investment held by the
bank in a nonfinancial company: through a small business investment
company (SBIC) under section 302(b) of the Small Business Investment
Act of 1958 (15 U.S.C. 682(b)); 16
under the portfolio investment provisions of Regulation K issued by the
Board of Governors of the Federal Reserve System
(12 CFR 211.8(c)(3)); or under
section 24 of the Federal Deposit Insurance Act
(12 U.S.C. 1831a), other than
an investment held in accordance with section 24(f) of that
Act. 17
A nonfinancial company is an entity that engages in any activity that
has not been determined to be permissible for the bank to conduct
directly, or 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)).
(iii) Amount of deduction from core capital. (A) The
bank must deduct from its Tier 1 capital the sum of the appropriate
percentages, as set forth in the table following this paragraph, of the
adjusted carrying value of all nonfinancial equity investments held by
the bank. The amount of the percentage deduction increases as the
aggregate amount of nonfinancial equity investments held by the bank
increases as a percentage of the bank's Tier 1 capital.
DEDUCTION FOR NONFINANCIAL EQUITY
INVESTMENTS
| Aggregate
adjusted carrying value of all nonfinancial equity investments held
directly or indirectly by the bank (as a percentage of the Tier 1
capital of the bank)1 |
Deduction from Tier 1Capital (as a
percent-age of the adjustedcarrying value of 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, non-mortgage 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 interest-only strips (both purchased
and retained), any disallowed deferred tax assets, and any nonfinancial
equity investments.
(B) 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 bank's
Tier 1 capital. For example, if the adjusted carrying value of all
nonfinancial equity investments held by a bank equals 20 percent of the
Tier 1 capital of the bank, then the amount of the deduction would be 8
percent of the adjusted carrying value of all investments up to 15
percent of the bank's Tier capital, and 12 percent of the adjusted
carrying value of all investments in excess of 15 percent of the
bank's Tier 1 capital.
{{2-28-02 p.2262.06-B-2}}
(C) The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under this paragraph is
excluded from the bank's risk-weighted assets for purposes of
computing the denominator of the bank's risk-based capital ratio and
from total assets for purposes of calculating the denominator of the
leverage ratio. 18
(D) This Appendix establishes minimum risk-based capital ratios
and banks 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 bank from nonfinancial equity investments increases with its
concentration in such investments and strong capital levels above the
minimum requirements are particularly important when a bank has a high
degree of concentration in nonfinancial equity investments (e.g., in
excess of 50 percent of Tier 1 capital). The FDIC intends to monitor
banks and apply heightened supervision to equity investment activities
as appropriate, including where the bank has a high degree of
concentration in nonfinancial equity investments, to ensure that each
bank maintains capital levels that are appropriate in light of its
equity investment activities. The FDIC 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 bank, or other
information, indicate that a higher minimum capital requirement is
appropriate.
(iv) SBIC investments. (A) No deduction is required
for nonfinancial equity investments that are held by a bank through one
or more SBICs that are consolidated with the bank or in one or more
SBICs that are not consolidated with the bank to the extent that all
such investments, in the aggregate, do no exceed 15 percent of the
bank's Tier 1 capital. Any nonfinancial equity investment that is held
through an SBIC or in an SBIC and that is not required to be deducted
from Tier 1 capital under this section II.B.(6)(iv) will be assigned a
100 percent risk-weight and included in the bank's consolidated
risk-weighted assets. 19
(B) To the extent the adjusted carrying value of all nonfinancial
equity investments that a bank holds through one or more SBICs that are
consolidated with the bank or in one or more SBICs that are not
consolidated with the bank exceeds, in the aggregate, 15 percent of the
bank's Tier 1 capital, the appropriate percentage of such amounts (as
set forth in the table in section II.B.(6)(iii)(A)) must be deducted
from the bank's common stockholders' equity in determining the
bank's Tier 1 capital. In addition, the aggregate adjusted carrying
value of all nonfinancial equity investments held by a bank 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 the table in section II.B.(6)(iii)(A), the
total amount of nonfinancial equity investments held by the bank in
relation to its Tier 1 capital.
(v) Transition provisions. No deduction under this
section II.B.(6) is required to be made with respect to the adjusted
carrying value of any nonfinancial equity investment (or
{{12-29-06 p.2262.06-B-3}}portion of such an
investment) that was made by the bank prior to March 13, 2000, or that
was made by the bank after such date pursuant to a binding written
commitment 20
entered into prior to March 13, 2000, provided that in either case the
bank has continuously held the investment since the relevant investment
date. 21
For purposes of this section II.B.(6)(v) a nonfinancial equity
investment made prior to March 13, 2000, includes any shares or other
interests received by the bank through a stock split or stock dividend
on an investment made prior to March 13, 2000, provided the bank
provides no consideration for the shares or interests received and the
transaction does not materially increase the bank'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 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
from Tier 1 capital under this section II.B.(6)(v) must be included in
determining the total amount of nonfinancial equity investments held by
the bank in relation to its Tier 1 capital for purposes of the table in
section II.B.(6)(iii)(A). 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.(6)(v) will be assigned a
100-percent risk weight and included in the bank's consolidated
risk-weighted assets.
(vi) Adjusted carrying value. (A) For purposes of this
section II.B.(6), the "adjusted carrying value" of investments is
the aggregate value at which the investments are carried on the balance
sheet of the bank reduced by any unrealized gains on those investments
that are reflected in such carrying value but excluded from the bank's
Tier 1 capital and associated deferred tax liabilities. For example,
for equity investments held as available-for-sale (AFS), the adjusted
carrying value of the investments would be the aggregate carrying value
of those investments (as reflected on the consolidated balance sheet of
the bank) 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. 22
(B) 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 bank'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 bank's core capital in accordance with section I.A.(1) of
this appendix A). Even though the assets of the nonfinancial
company are consolidated for accounting purposes, these
assets
{{12-29-06 p.2262.06-B-4}}(as well as the credit
equivalent amounts of the company's off-balance sheet items) should be
excluded from the bank's risk-weighted assets for regulatory capital
purposes.
(vii) Equity investments. For purposes of this section
II.B.(6), 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.(6)(ii) of this appendix A. An
investment in any other instrument (including subordinated debt) may be
treated as an equity investment if, in the judgment of the FDIC, the
instrument is the functional equivalent of equity or exposes the bank
to essentially the same risks as an equity instrument.
{{12-29-06 p.2262.06-C}}
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
other exposures held in a bankruptcy-remote, special purpose entity.
b. A bank 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 is the sponsor of the ABCP
program. If a bank excludes such consolidated ABCP program assets, the
bank must assess the appropriate risk-based capital charge against any
exposures of the bank arising in connection with such ABCP programs,
including direct credit substitutes, recourse obligations, residual
interests, liquidity facilities, and loans, in accordance with sections
II.B.5., II.C. and II.D. of this appendix.
c. If a bank has multiple overlapping exposures (such as a
program-wide credit enhancement and multiple pool-specific liquidity
facilities) to an ABCP program that is not consolidated for risk-based
capital purposes, the bank is not required to hold capital under
duplicative risk-based capital requirements under this appendix against
the overlapping position. Instead, the bank should apply to the
overlapping position the applicable risk-based capital treatment that
results in the highest capital charge.
C. Risk Weights for Balance Sheet Assets (see Table II)
The risk-based capital framework contains four risk weight
categories--0 percent, 20 percent, 50 percent and 100 percent. In
general, if a particular item can be placed in more than one risk
category, it is assigned to the category that has the lowest risk
weight. An explanation of the components of each category follows:
a. Category 1--Zero Percent Risk Weight. This category
includes cash (domestic and foreign) owned and held in all offices of
the bank or in transit; balances due from Federal Reserve banks and
central banks in other OECD countries; the portions of local currency
claims on or unconditionally guaranteed by non-OECD central governments
to the extent that the bank has liabilities booked in that currency;
and gold bullion held in the bank's own vaults or in another bank's
vaults on an allocated basis, to the extent it is offset by gold
bullion liabilities. 23
b. The zero percent risk category also includes direct
claims 24
(including securities, loans, and leases) on, and the portions of
claims that are unconditionally guaranteed by, OECD central
governments 25
and U.S. Government agencies. 26
Federal Reserve bank stock also is included in this category.
c. This category also includes claims on, and claims guaranteed by,
qualifying securities firms incorporated in the United States or other
members of the OECD-based group of countries that are collateralized by
cash on deposit in the lending bank or by securities issued or
guaranteed by the United States or OECD central governments (including
U.S. government agencies), provided that a positive margin of
collateral is required to be
{{12-29-06 p.2262.06-D}}maintained on such a
claim on a daily basis, taking into account any change in a bank's
exposure to the obligor or counterparty under the claim in relation to
the market value of the collateral held in support of the claim.
Category 2--20 Percent Risk Weight.
a. This category includes short-term claims (including demand
deposits) on, and portions of short-term claims that are
guaranteed 27
by, U.S. depository institutions 28
and foreign banks, 29
portions of claims collateralized by cash heldin a segregated deposit
account of the lending bank; cash items in process of collection, both
foreign and domestic; and long-term claims on, and portions of
long-term claims guaranteed by, U.S. depository institutions and OECD
banks. 30
This category also includes a
claim 31
on, or guaranteed by, qualifying securities firms incorporated in the
United States or other member of the OECD-based group of
countries 32
provided that: the qualifying securities firm has a
{{4-30-02 p.2262.06-E}}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 that the claim arises
under a contract that:
(1) Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed using 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
standardized 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. 33
b. This category also includes claims on, or portions of claims
guaranteed by, U.S. Government-sponsored
agencies; 34
and portions of claims (including repurchase agreements) collateralized
by securities issued or guaranteed by OECD central governments, U.S.
Government agencies, or U.S. Government-sponsored agencies. Also
included in the 20 percent risk category are portions of claims that
are conditionally guaranteed by OECD central governments and U.S.
Government agencies, as well as portions of local currency claims that
are conditionally guaranteed by non-OECD central governments to the
extent that the bank has liabilities booked in that
currency. 35
c. General obligation claims on, or portions of claims guaranteed
by, the full faith and credit of states or other political subdivisions
of the United States or other countries of the OECD-based group are
also assigned to this 20 percent risk
category. 36
In addition, this category includes claims on the International Bank
for Reconstruction and Development (World Bank), International Finance
Corporation, the Inter-American 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 institutions in which the U.S. Government is a shareholder
or contributing member, as well as portions of claims guaranteed by
such organizations or collateralized by their securities.
{{4-30-02 p.2262.06-F}}
d. This category also includes recourse obligations, direct credit
substitutes, residual interests (other than a credit-enhancing
interest-only strip) and asset- or mortgage-backed securities rated in
the highest or second highest investment grade category, e.g., AAA, AA,
in the case of long-term ratings, or the highest rating category, e.g.,
A--1, P--1, in the case of short-term ratings.
Category 3--50 Percent Risk Weight. a. This category
includes loans fully secured by first
liens 37
on one-to-four family residential properties, provided that
such loans have been approved in accordance with prudent underwriting
standards, including standards relating to the loan amount as a percent
of the appraised value of the
property, 38
and provided that the loans are not past due 90 days or more or carried
in nonaccrual status. 39
The types of loans that qualify as loans secured by one-to-four family
residential properties are listed in the instructions for preparation
of the Consolidated Reports of Condition and Income. These properties
may be either owner-occupied or rented. 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. Such loans to builders will be
considered prudently underwritten only if the bank has obtained
sufficient documentation that the buyer of the home intends to purchase
the home (i.e., has a legally binding written sales contract) and has
the ability to obtain a mortgage loan sufficient to purchase the home
(i.e., has a firm written commitment for permanent financing of the
home upon completion), provided the following criteria are met:
(1) The purchaser is an individual(s) who intends to occupy the
residence and is not a partnership, joint venture, trust, corporation,
or any other entity (including an entity acting as a sole
proprietorship) that is purchasing one or more of the homes for
speculative purposes;
(2) The builder must incur at least the first ten percent of the
direct costs (i.e., actual costs of the land, labor, and material)
before any drawdown is made under the construction loan and the
construction loan may not exceed 80 percent of the sales price of the
presold home;
(3) The purchaser has made a substantial "earnest money
deposit" of no less than three percent of the sales price of the
home and the deposit must be subject to forfeiture if the purchaser
terminates the sales contract; and
(4) The earnest money deposit must be held in escrow by the bank
financing the builder or by an independent party in a fiduciary
capacity and the escrow agreement must provide that, in the event of
default arising from the cancellation of the sales contract by the
buyer, the escrow funds must first be used to defray any costs incurred
by the bank.
b. This category also includes loans fully secured by first liens
on multifamily residential
properties, 40
provided that:
{{6-30-05 p.2262.06-G}}
(1) The loan amount does not exceed 80 percent of the
value 41
of the property securing the loan as determined by the most current
appraisal or evaluation, whichever may be appropriate (75 percent if
the interest rate on the loan changes over the term of the loan);
(2) For the property's most recent fiscal year, the ratio of annual
net operating income generated by the property (before payment of any
debt service on the loan) to annual debt service on the loan is not
less than 120 percent (115 percent if the interest rate on the loan
changes over the term of the loan) or in the case of a property owned
by a cooperative housing corporation or nonprofit organization, the
property generates sufficient cash flow to provide comparable
protection to the bank;
(3) Amortization of principal and interest on the loan occurs over
a period of not more than 30 years;
(4) The minimum original maturity for repayment of principal on the
loan is not less than seven years;
(5) All principal and interest payments have been made on a timely
basis in accordance with the terms of the loan for at least one year
before the loan is placed in this
category; 42
(6) The loan is not 90 days or more past due or carried in
nonaccrual status; and
(7) The loan has been made in accordance with prudent underwriting
standards.
c. This category also includes revenue (non-general
obligation) bonds or similar obligations, including loans and leases,
that are obligations of states or political subdivisions of the United
States or other OECD countries, 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 (e.g., municipal revenue
bonds). In addition, the credit equivalent amount of derivative
contracts that do not qualify for a lower risk weight are assigned to
the 50 percent risk category.
d. This category also includes recourse obligations, direct credit
substitutes, residual interests (other than a credit-enhancing
interest-only strip) and asset- or mortgage-backed securities rated in
the third highest investment grade category, e.g., A, in the case of
long-term ratings, or the second highest rating category, e.g, A--2,
P--2, in the case of short-term ratings.
Category 4--100 Percent Risk Weight. All assets not
included in the categories above in section II.C of this appendix A,
except the assets specifically included in the 200 percent category
below in section II.C of this appendix A and assets that are otherwise
risk weighted in accordance with section II.B.5 of this appendix A, 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:
(1) 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; 43
(2) All claims on foreign and domestic private-sector obligors not
included in the categories above in section II.C of this appendix A
(including loans to nondepository financial institutions and bank
holding companies);
(3) Claims on commercial firms owned by the public
sector;
{{6-30-05 p.2262.06-H}}
(4) Customer liabilities to the bank on acceptances outstanding
involving standard risk claims; 44
(5) Investments in fixed assets, premises, and other real estate
owned;
(6) Common and preferred stock of corporations, including stock
acquired for debts previously contracted;
(7) 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);
(8) Recourse obligations, direct credit substitutes, residual
interests (other than a credit-enhancing interest-only strip) and
asset- or mortgage-backed securities rated in the lowest investment
grade category, e.g., BBB, as well as certain positions (but not
residual interests) which the bank rates pursuant to section II.B.5(g)
of this appendix A;
(9) 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;
(10) All obligations of states or political subdivisions of
countries that do not belong to the OECD-based group; and
(11) Stripped mortgage-backed securities and similar instruments,
such as interest-only strips that are not credit-enhancing and
principal-only strips.
(12) Claims representing capital of a qualifying securities firm.
(c) The following assets also are assigned a risk weight of 100
percent if they have not already been deducted from capital:
investments in unconsolidated companies, joint ventures, or associated
companies; instruments that qualify as capital issued by ohter banks;
deferred tax assets; and mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships.
Category 5--200 Percent Risk Weight. This category
includes:
(a) Externally reated recourse obligations, direct credit
substitutes, residual interests (other than a credit-enhancing
interest-only strip), and asset- and mortgage-backed securities that
are rated one caegory below the lowest investment grade category, e.g.,
BB, to the extent permitted in section II.B.5(d) of this appendix A;
and
(b) A position (but not a residual interest) in a securitization or
structured finance program that is not rated by an NRSRO for which the
bank determines that the credit risk is equivalent to one caegory below
investment grade, e.g., BB, to the extent permitted in section
II.B.5(g) of this appendix A.
D. Conversion Factors for Off-Balance Sheet Items (see Table
III)
The face amount of an off-balance sheet item is generally
incorporated into the risk-weighted assets in two steps. The face
amount is first multiplied by a credit conversion factor, except as
otherwise specified in section II.B.5. of this appendix A for direct
credit substitutes and recourse obligations. The resultant credit
equivalent amount is assigned to the appropriate risk category
according to the obligor or, if relevant, the guarantor, the nature of
any collateral, or external credit
ratings. 45
1. Items With a 100 Percent Conversion Factor.
(a) Except as otherwise provided in section II.B.5. of this
appendix A, the full amount of an asset or transaction supported,
in
{{6-30-05 p.2262.06-I}}whole or in part, by a
direct credit substitute or a recourse obligation. Direct credit
substitutes and recourse obligations are defined in section II.B.5. of
this appendix A.
(b) Sale and repurchase agreements, if not already included on the
balance sheet, and forward agreements. Forward agreements are legally
binding contractual obligations to purchase assets with drawdown which
is certain at a specified future date. Such obligations include forward
purchases, forward forward deposits
placed, 46
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 bank are treated in one of two ways,
depending upon whether the lender is exposed to risk of loss. If a
bank, as agent for a customer, lends thecustomer's securities and does
not indemnify the customer against loss, then the securities
transaction is excluded form the risk-based capital calculation. On the
other hand, if a bank lends its own securities or, acting as agent for
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 the collateral delivered to the lending bank or the
independent custodian acting on the lending bank's behalf.
2. Items With a 50 Percent Conversion Factor. a.
Transaction-related contingencies are to be converted at 50 percent.
Such contingencies include bid bonds, performance bonds, warranties,
and performance standby letters of credit related to
particular transactions, as well as acquisitions of risk participations
in performance standby letters of credits. Performance standby letters
of credit (performance bonds) are irrevocable obligations of the bank
to pay a third-party beneficiary when a customer (account party)
fails to perform on some contractual nonfinancial
obligation. Thus, 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 to
be 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 bank can at its option, unconditionally
(without cause) cancel the
commitment, 47
and (2) the bank is scheduled to (and as a normal practice actually
does) review the facility to determine whether or not it should be
extended and, on at least an annual basis, continues to regularly
review the facility. Facilities that are unconditionally cancelable
(without cause) at any time by the bank are not deemed to be
commitments, provided the bank makes a separate credit decision before
each drawing under the facility.
c.i. Commitments are defined as any legally binding arrangements
that obligate a bank to extend credit in the form of loans or lease
financing receivables; to purchase loans, securities, or other assets;
or to participate in loans and leases. Commitments also include
overdraft facilities, revolving credit, home equity and mortgage lines
of credit, eligible ABCP liquidity facilities, 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 bank is obligated solely for its
pro rata share, only the bank's proportional share of the
syndicated commitment is taken into account in calculating the
risk-based capital ratio.
{{6-30-05 p.2262.06-J}}
ii. Banks that are subject to the market risk rules in appendix C
to part 325 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
C 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 treatment in accordance
with section II.B.5. of this appendix.
d. In the case of commitments structured as syndications where the
bank is obligated only for its pro rata share, the
risk-based capital framework includes only the bank's proportional
share of such commitments. Thus, after a commitment has been converted
at 50 percent, portions of commitments that have been conveyed to other
U.S. depository institutions or OECD banks, but for which the
originating bank retains the full obligation to the borrower if the
participating bank fails to pay when the commitment is drawn upon, will
be assigned to the 20 percent risk category. The acquisition of such a
participation in a commitment would be converted at 50 percent and the
credit equivalent amount would be assigned to the risk category that is
appropriate for the account party obligor or, if relevant, to 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. These are facilities under which a borrower can issue on a
revolving basis short-term notes in its own name, but for which the
underwriting banks have a legally binding commitment either to purchase
any notes the borrower is unable to sell by the rollover 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
include commercial letters of credit and other documentary
letters of credit collateralized by the underlying
shipments.
{{2-28-05 p.2262.06-K}}
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 that provide liquidity support to ABCP
also are converted at 10 percent.
b. Banks that are subject to the market risk rules in appendix C to
part 325 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
through those facilities are structured or characterized as derivatives
or other trading book assets. Liquidity facilities that provide
liquidity support to 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 C 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 II.B.5. 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, with 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 retail credit card lines and
related plans are deemed to be short-term commitments if the bank, in
accordance with applicable law, has the unconditional option to cancel
the credit line at any time.
E. Derivative Contracts (Interest Rate, Exchange Rate,
Commodity (including precious metal) and Equity Derivative
Contracts)
1. Credit equivalent amounts are computed for each of the following
off-balance-sheet derivative contracts:
(a) Interest Rate Contracts
(i) Single currency interest rate swaps.
(ii) Basis swaps.
(iii) Forward rate agreements.
(iv) Interest rate options purchased (including caps, collars, and
floors purchased).
(v) Any other instrument linked to interest rates that gives rise
to similar credit risks (including when-issued securities and forward
deposits accepted).
(b) Exchange Rate Contracts
(i) Cross-currency interest rate swaps.
(ii) Forward foreign exchange contracts.
(iii) Currency options purchased.
(iv) Any other instrument linked to exchange rates that gives rise
to similar credit risks.
(c) Commodity (including precious metal) or Equity Derivative
Contracts
(i) Commodity- or equity-linked swaps.
(ii) Commodity- or equity-linked options purchased.
(iii) Forward commodity- or equity-linked contracts.
(iv) Any other instrument linked to commodities or equities that
gives rise to similar credit risks.
2. Exchange rate contracts with an original maturity of 14 calendar
days or less 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 gold contracts with an
original maturity of 14 calendar days or less are included in the
risk-based calculation. Over-the-counter options purchased are included
and treated in the same way as other derivative contracts.
3. Credit Equivalent Amounts for Derivative Contracts.
(a) The credit equivalent amount of a derivative contract that is
not subject to a qualifying bilateral netting contract in accordance
with section II.E.5. of this appendix A is equal to the sum
of:
{{2-28-05 p.2262.06-L}}
(i) The current exposure (which is equal to the mark-to-market
value, 48
if positive, and is sometimes referred to as the replacement cost) of
the contract; and
(ii) An estimate of the potential future credit exposure.
(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.
(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. Banks should, subject to examiner review, use the
effective rather than the apparent or stated notional amount in this
calculation. The credit conversion factors are:
CONVERSION FACTOR MATRIX
| Remaining maturity |
Interest rate |
Exchange rate
and gold |
Equity |
Precious metals, ex-cept
gold |
Other commodi-ties |
|---|
| One year or less
|
0.0% |
1.0% |
6.0% |
7.0% |
10.0% |
| More than one
year to five years |
0.5% |
5.0% |
8.0% |
7.0% |
12.0%
|
| More than five years
|
1.5% |
7.5% |
10.0% |
8.0% |
15.0%
|
(d) For contracts that are structured to settle outstanding
exposure on specified dates and where the terms are reset such that the
market value of the contract is zero on these specified dates, the
remaining maturity is equal to the time until the next reset date. For
interest rate contracts with remaining maturities of more than one year
and that meet these criteria, the conversion factor is subject to a
minimum value of 0.5 percent.
(e) For contracts with multiple exchanges of principal, the
conversion factors are to be multiplied by the number of remaining
payments in the contract. Derivative contracts not explicitly covered
by any of the columns of the conversion factor matrix are to be treated
as "other commodities."
(f) No potential future exposure is calculated for single currency
interest rate swaps in which payments are made based upon two floating
rate indices (so called floating/floating or basis swaps); the credit
exposure on these contracts is evaluated solely on the basis of their
mark-to-market values.
4. Risk Weights and Avoidance of Double Counting.
(a) Once the credit equivalent amount for a derivative contract,
or a group of derivative contracts subject to a qualifying bilateral
netting agreement, 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. However, the maximum weight
that will be applied to the credit equivalent amount of such contracts
is 50 percent.
(b) In certain cases, credit exposures arising from the derivative
contracts covered by these guidelines 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 types of instruments covered by these guidelines may need to be
excluded from balance sheet assets in calculating a bank's risk-based
capital ratio.
(c) The FDIC notes that the conversion factors set forth in section
II.E.3. of appendix A, 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.
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(d) Examples of the calculation of credit equivalent amounts for
these types of contracts are contained in Table IV of this appendix A.
5. 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:
(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 bank would have a claim
or obligation to receive or pay, respectively, 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 default, bankruptcy, liquidation, or similar
circumstances;
(ii) The bank obtains a written and reasoned legal opinion(s)
representing that in the event of a legal challenge, including one
resulting from default, insolvency, bankruptcy or similar
circumstances, the relevant court and administrative authorities would
find the bank's exposure to be such a 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 bank 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; and
(iv) The bank maintains in its file 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. 49
(c) By netting individual contracts for the purpose of calculating
its credit equivalent amount, a bank represents that it has met the
requirements of this appendix A and all the appropriate documents are
in the bank's files and available for inspection by the FDIC. Upon
determination by the FDIC that a bank's files are inadequate or that a
netting contract may not be legally enforceable under any one of the
bodies of law described in paragraphs (ii)(1) through (3) of section
II.E.5.(a) of this appendix A, underlying individual
contracts may be treated as though they were not subject to the netting
contract.
(d) The credit equivalent amount of derivative contracts that are
subject to a qualifying bilateral netting contract is calculated by
adding:
(i) The net current exposure of the netting contract; and
(ii) The sum of the estimates of potential future exposure for all
individual contractors subject to the netting contract, adjusted to
take into account the effects of the netting
contract. 50
(e) The net current exposure is the sum of all positive and
negative mark-to-market values of the individual contracts subject to
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.
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(f) The effects of the bilateral netting contract on the gross
potential future exposure are recognized through application of a
formula, resulting in an adjusted add-on amount (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)
The effect of this formula is that Anetis the weighted average
of Agross, and Agrossadjusted by the NGR.
(g) The NGR may be calculated in either one of two ways--referred
to as the counterparty-by-counterparty approach and the aggregate
approach.
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(i) Under the counterparty-by-counterparty approach, the NGR is the
ratio of the net current exposure of the 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 II.E. of
this appendix A.
(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 II.E.5(g)(i) of this appendix A).
Net negative mark-to-market values to individual counterparties cannot
be used to offset net positive current exposures to other
counterparties.
(iii) A bank 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.
III. Minimum Risk-Based Capital Ratio
Subject to section II.B.5. of this appendix A, banks generally will
be expected to meet a minimum ratio of qualifying total capital to
risk-weighted assets of 8 percent, of which at least 4 percentage
points should be in the form of core capital (Tier 1). Any bank that
does not meet the minimum risk-based capital ratio, or whose capital is
otherwise considered inadequate, generally will be expected to develop
and implement a capital plan for achieving an adequate level of
capital, consistent with the provisions of this risk-based capital
framework and
§ 325.104, the specific
circumstances affecting the individual bank, and the requirements of
any related agreements between the bank and the FDIC.
Table I.—Definition of Qualifying Capital
| Components |
Minimum requirements |
|---|
| (1) CORE CAPITAL
(Tier 1) |
Must equal or exceed 4% of risk-weighted assets.
|
| (a) Common stockholders' equity
|
No limit.1 |
| (b) Noncumulative perpetual
preferred stock and any related surplus |
No
limit.1 |
| (c) Minority interest in equity accounts of
consolidated |
No limit.1 |
| (d) Less: All intangible assets
other than certain mortgage servicing assets, nonmortgage servicing
assets and purchased credit card
relationships |
(2) |
| (e) Less: Certain
credit-enhancing interest only strips and nonfinancial equity
investments required to be deducted from
capital. |
(3) |
| (f) Less: Certain deferred tax
assets. |
(4).
|
| (2) SUPPLEMENTARY CAPITAL (Tier
2) |
Total of tier 2 is limited to 100% of tier 1.5
|
| (a) Allowance for loan and lease
losses |
Limited to 1.25% of weighted-risk
assets.5 |
| (b) Unrealized gains on certain equity
securities6 |
Limited to 45% of pretax net unrealized
gains.6. |
| (c) Cumulative
perpetual and long-term preferred stock (original maturity of 20 years
or more) and any related surplus. |
No limit within tier 2; long-term
preferred is amortized for capital purposes as it approaches
maturity. |
| (d) Auction rate and similar preferred stock (both
cumulative and non-cumulative). |
No limit within tier 2.
|
| (e) Hybrid capital instruments (including mandatory convertible
debt securities). |
No limit within tier
2.
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|
| (f) Term subordinated debt and intermediate-term
preferred stock (original weighted average maturity of five years or
more). |
Term subordinated debt and intermediate-term preferred stock
are limited to 50% of Tier 15 and amortized for capital purposes
as they approach maturity. |
| (3) DEDUCTIONS (from the sum of tier 1
and tier 2) |
| (a) Investments in banking and finance subsidiaries
that are not consolidated for regulatory capital
purposes. |
| (b) Intentional, reciprocal cross-holdings of capital
securities issued by banks. |
| (c) Other deductions (such as
investment in other subsidiaries or joint ventures) as determined by
supervisory authority. |
On a case-by-case basis or as a matter of
policy after formal consideration of relevant issues. |
| (4) TOTAL
CAPITAL |
Must equal or exceed 8% of
weighted-risk assets.
|
1 No express limits are placed on the amounts of
nonvoting common, noncumulative perpetual preferred stock, and minority
interests that may be recognized as part of Tier 1 capital. However,
voting common stockholders' equity capital generally will be expected
to be the dominant form of Tier 1 capital and banks should avoid undue
reliance on other Tier 1 capital elements.
2 The amounts of mortgage servicing assets, nonmortgage
servicing assets and purchased credit card relationships that can be
recognized for purposes of calculating Tier 1 capital are subject to
the limitations set forth in
§ 325.5(f). All
deductions are for capital purposes only; deductions would not affect
accounting treatment.
3The amounts of credit-enhancing interest-only strips that can
be recognized for purposes of calculating Tier 1 capital are subject to
the limitations set forth in § 325.5(f). The amounts of nonfinancial
equity investments that must be deducted for purposes of calculating
Tier 1 capital are set forth in section II.B.(6) of appendix A to part
325.
4 Deferred tax assets are subject to the capital limitations
set forth in § 325.5(g).
5 Amounts in excess of limitations are permitted but do not
qualify as capital.
6 Unrealized gains on equity securities are subject to the
capital limitations set forth in paragraph 1.A.2.(f) of appendix A to
part 325.
Calculation of the Risk-Based Capital Ratio
When calculating the risk-based capital ratio under the framework
set forth in this statement of policy, qualifying total capital (the
numerator) is divided by risk-weighted assets (the denominator). The
process of determining the numerator for the ratio is summarized in
Table I. The calculation of the denominator is based on the risk
weights and conversion factors that are summarized in Tables II and
III.
When determining the amount of risk-weighted assets, balance sheet
assets are assigned an appropriate risk weight (see Table II) and
off-balance sheet items are first converted to a credit equivalent
amount (see Table III) and then assigned to one of the risk weight
categories set forth in Table II.
The balance sheet assets and the credit equivalent amount of
off-balance sheet items are then multiplied by the appropriate risk
weight percentages and the sum of these risk-weighted amounts is the
gross risk-weighted asset figure used in determining the denominator of
the risk-based capital ratio. Any items deducted from capital when
computing the amount of qualifying capital may also be excluded from
risk-weighted assets when calculating the denominator for the
risk-based capital ratio.
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Table II.—Summary of Risk Weights and Risk Categories
Category 1—Zero Percent Risk Weight
(1) Cash (domestic and foreign).
(2) Balances due from Federal Reserve banks and central banks in
other OECD countries.
(3) Direct claims on, and portions of claims unconditionally
guaranteed by, the U.S. Treasury, U.S. Government
agencies, 1
or central governments in other OECD countries.
1 For the purpose of calculating the risk-based capital ratio,
a 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 repayment of principal and interest by the full faith and
credit of the U.S. Government.
(4) Portions of local currency claims on, or unconditionally
guaranteed by, non-OECD central governments (including non-OECD central
banks), to the extent the bank has liabilities booked in that currency.
(5) Gold bullion held in the bank's own vaults or in another bank's
vaults on an allocated basis, to the extent that it is offset by gold
bullion liabilities.
(6) Federal Reserve bank stock.
(7) Claims on, or guaranteed by, qualifying securities firms
incorporated in the United States or other members of the OECD-based
group of countries that are collateralized by cash on deposit in the
lending bank or by securities issued or guaranteed by the United States
or OECD central governments (including U.S. government agencies),
provided that a positive margin of collateral is required to be
maintained on such a claim on a daily basis, taking into account any
change in a bank's exposure to the obligor or counterparty under the
claim in relation to the market value of the collateral held in support
of the claim.
Category 2—20 Percent Risk Weight
(1) Cash items in the process of collection.
(2) All claims (long- and short-term) on, and portions of claims
(long- and short-term) guaranteed by, U.S. depository institutions and
OECD banks.
(3) Short-term (remaining maturity of one year or less) claims on,
and portions of short-term claims guaranteed by, non-OECD banks.
(4) Portions of loans and other claims conditionally guaranteed by
the U.S. Treasury, U.S. Government agencies,1 or central
governments in other OECD countries and portions of local currency
claims conditionally guaranteed by non-OECD central governments to the
extent that the bank has liabilities booked in that currency.
(5) Securities and other claims on, and portions of claims
guaranteed by, U.S. Government-sponsored
agencies. 2
2 For the purpose of calculating the risk-based capital ratio,
a U.S. Government-sponsored agency is defined as an agency
originally established or chartered 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.
(6) Portions of loans and other claims (including repurchase
agreements) collateralized 3
by securities issued or guaranteed by the U.S. Treasury, U.S.
Government agencies, U.S. Government-sponsored agencies or central
governments in other OECD countries.
3 Degree of collateralization is determined by current market
value.
(7) Portions of loans and other claims collateralized3 by cash
on deposit in the lending bank.
(8) General obligation claims on, and portions of claims guaranteed
by, the full faith and credit of states or other political subdivisions
of OECD countries, including U.S. state and local governments.
(9) Claims on, and portions of claims guaranteed by, official
multilateral lending institutions or regional development institutions
in which the U.S. Government is a shareholder or a contributing member.
(10) Portions of claims collateralized3 by securities issued by
official multilateral lending institutions or regional development
institutions in which the U.S. Government is a shareholder or
contributing member.
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(11) Investments in shares of mutual funds whose portfolios are
permitted to hold only assets that qualify for the zero or 20 percent
risk categories.
(12) Recourse obligations, direct credit substitutes, residual
interests (other than credit-enhancing interest-only strips) and asset-
or mortgage-backed securities rated in either of the two highest
investment grade categories, e.g., AAA or AA, in the case of long-term
ratings, or the highest rating category, e.g., A--1, P--1, in the case
of short-term ratings.
(13) Claims on, and claims guaranteed by, qualifying securities
firms incorporated in the United States or other member of the
OECD-based group of countries provided that:
a. The qualifying securities firm has a rating in one of the top
three investment grade rating categories from a nationally recognized
statistical rating organization; or
b. The claim is guaranteed by a qualifying securities firm's
parent company with such a rating.
(14) Certain collateralized claims on qualifying securities firms
in the United States or other member of the OECD-based group of
countries, without regard to satisfaction of the rating standard,
provided that the claim arises under a contract that:
a. Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed under standard industry
documentation;
b. Is collateralized by liquid and readily marketable debt or
equity securities;
c. Is marked to market daily;
d. Is subject to a daily margin maintenance requirement under the
standard documentation; and
e. 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 country.
Category 3—50 Percent Risk Weight
(1) Loans fully secured by first liens on one-to-four family
residential properties (including certain presold residential
construction loans), provided that the loans were approved in
accordance with prudent underwriting standards and are not past due 90
days or more or carried on a nonaccrual status.
(2) Loans fully secured by first liens on multifamily residential
properties that have been prudently underwritten and meet specified
requirements with respect to loan-to-value ration, level of annual net
operating income to required debt service, maximum amortization period,
minimum original maturity, and demonstrated timely repayment
performance.
(3) Recourse obligations, direct credit substitutes, residual
interests (other than credit-enhancing interest-only strips) and asset-
or mortgage-backed securities rated in the third-highest investment
grade category, e.g., A, in the case of long-term ratings, or the
second highest rating category, e.g., A--2, P--2, in the case of
short-term ratings.
(4) Revenue bonds or similar obligations, including loans and
leases, that are obligations of U.S. state or political subdivisions of
the United States or other OECD countries but for which the government
entity is committed to repay the debt only out of revenues from the
specific projects financed.
(5) Credit equivalent amounts of interest rate and foreign exchange
rate related contracts, except for those assigned to a lower risk
category.
Category 4—100 Percent Risk Weight
(1) All other claims on private obligors.
(2) Claims on, or guaranteed by, non-OECD banks with a remaining
maturity exceeding one year.
(3) Claims on non-OECD central governments that are not included in
item 4 of category 1 or item 3 of category 2, and all claims on
non-OECD state and local governments.
(4) Obligations issued by U.S. state or local governments or other
OECD local governments (including industrial development authorities
and similar entities) that are repayable solely by a private party or
enterprise.
{{8-31-04 p.2262.06-P-1}}
(5) Premises, plant, and equipment; other fixed assets; and other
real estate owned.
(6) Investments in any unconsolidated subsidiaries, joint ventures,
or associated companies--if not deducted from capital.
(7) Instruments issued by other banking organizations that qualify
as capital.
(8) Claims on commercial firms owned by the U.S. Government or
foreign governments.
(9) Recourse obligations, direct credit substitutes, residual
interests (other than credit-enhancing interest-only strips) and asset-
or mortgage-backed securities rated in the lowest investment grade
category, e.g., BBB, as well as certain positions (but not residual
interests) which the bank rates pursuant to section II.B.5(g) of this
appendix A.
(10) All other assets, including any intangible assets that are not
deducted from capital, and the credit equivalent
amounts 4
4 In general for each off-balance sheet item, a conversion
factor (see Table III) must be applied to determine the "credit
equivalent amount" prior to assigning the off-balance sheet item to
a risk weight category.
of off-balance sheet items not assigned to a different risk category.
Category 5—200 Percent Risk Weight.
(1) Externally rated recourse obligations, direct credit
substitutes, residual interests (other than credit-enhancing
interest-only strips), and asset- and mortgage-backed securities that
are rated one category below the lowest investment grade category,
e.g., BB, to the extent permitted in section II.B.5(d) of this appendix
A; and
(2) A position (but not a residual interest) extended in connection
with a securitization or structured financing program that is not rated
by an NRSRO for which the bank determines that the credit risk is
equivalent to one category below investment grade, e.g., BB, to the
extent permitted in section II.B.5.(g) of this appendix A.
[The page following this is 2262.06-S.]
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[Codified to 12 C.F.R. Part 325, Appendix A]
[Appendix A added at 54 Fed. Reg. 11509, March 21, 1989,
effective April 20, 1989; amended at 55 Fed. Reg. 53147, December 27,
1990, effective January 28, 1991; 56 Fed. Reg. 10165, March 11, 1991,
effective April 10, 1991; 58 Fed. Reg. 6369, January 28, 1993,
effective March 1, 1993; 58 Fed. Reg. 8219, February 12, 1993,
effective March 15, 1993; 58 Fed. Reg. 12149, March 3, 1993, effective
December 31, 1992; 58 Fed. Reg. 60103, November 15, 1993; 59 Fed. Reg.
3784, January 27, 1994; 59 Fed. Reg. 64564, December 15, 1994,
effective January 17, 1995; 59 Fed. Reg. 66660 and 66666, December 28,
1994, effective December 28, 1994 and January 27, 1995, respectively;
60 Fed. Reg. 8188, February 13, 1995, effective April 1, 1995; 59 Fed.
Reg. 15861, March 28, 1995, effective April 27, 1995; 60 Fed. Reg.
39232, August 1, 1995; 60 Fed. Reg. 39493, August 2, 1995, effective
September 1, 1995; 60 Fed. Reg. 45609, August 31, 1995; 60 Fed. Reg.
46182, September 5, 1995, effective October 1, 1995; 60 Fed. Reg.
66045, December 20, 1995, effective April 1, 1996; 61 Fed. Reg. 47375,
September 6, 1996, effective January 1, 1997; 62 Fed. Reg. 55493,
October 24, 1997, effective January 1, 1998; 63 Fed. Reg. 42677, August
10, 1998, effective October 1, 1998; 63 Fed. Reg. 46523, September 1,
1998, effective October 1, 1998; 64 Fed. Reg. 10200, March 2, 1999,
effective April 1, 1999; 66 Fed. Reg. 59653, November 29, 2001,
effective January 1, 2002; 67 Fed. Reg. 3804, January 25, 2002,
effective April 1, 2002; 67 Fed. Reg. 16978, April 9, 2002, effective
July 1, 2002; 67 Fed. Reg. 34991, May 17, 2002, effective July 1, 2002;
68 Fed. Reg. 56536, October 1, 2003, effective October 1, 2003; 69 Fed.
Reg. 22385, April 26, 2004; 69 Fed. Reg. 44921, July 28, 2004, however,
any banking organization may elect to adopt, as of July 28, 2004, the
capital treatment described in this final rule for assets in ABCP
programs that are consolidated onto the balance sheets of sponsoring
banking organizations as a result of FIN 46-R. All liquidity facilities
that provide support to ABCP will be treated as "eligible ABCP
liquidity facilities," regardless of their compliance with the
definition of "eligible ABCP liquidity facilities" in the final
rule, until September 30, 2005. On that date and thereafter liquidity
facilities that do not meet the final rule's definition of
"eligible ABCP liquidity facility" will be treated as recourse
obligations or direct credit substitutes.]
1Period-end amounts, rather than average balances, normally
will be used when calculating risk-based capital ratios. However, on a
casy-by-case basis, ratios based on average balances may also be
required if supervisory concerns render it appropriate. Go Back to Text
2 Preferred stock issues where the dividend is reset
periodically based, in whole or in part, upon the bank's current credit
standing, including but not limited to, auction rate, money market or
remarketable preferred stock, are assigned to Tier 2 capital,
regardless of whether the dividends are cumulative or noncumulative. Go Back to Text
3An exception is allowed for intangible assets that are
explicitly approved by the FDIC as part of the bank's regulatory
capital on a specific case basis. These intangibles will be included in
capital for risk-based capital purposes under the terms and conditions
that are specifically approved by the FDIC. Go Back to Text
4 Allocated transfer risk reserves are reserves that have been
established in accordance with section
905(a) of the International Lending Supervision Act of 1983
against certain assets whose value has been found by the U.S.
supervisory authorities to have been significantly impaired by
protracted transfer risk problems. Go Back to Text
5 The amount of the allowance for loan and lease losses that
may be included as a supplementary capital element is based on a
percentage of gross risk-weighted assets. A bank may deduct reserves
for loan and lease losses that are in excess of the amount permitted to
be included in capital, as well as allocated transfer risk reserves,
from gross risk-weighted assets when computing the denominator of the
risk-based capital ratio. Go Back to Text
6 Any assets deducted from capital when computing the numerator
of the risk-based capital ratio will also be excluded from
risk-weighted assets when computing the denominator of the ratio. Go Back to Text
7 In addition to mortgage servicing assets, nonmortgage
servicing assets and purchased credit card relationships, certain other
intangibles may be allowed if explicitly approved by the FDIC as part
of the bank's regulatory capital on a specific case basis. In
evaluating whether other types of intangibles should be recognized for
regulatory capital purposes on a specific case basis, the FDIC will
accord special attention to the general characteristics of the
intangibles, including: (1) the separability of the intangible asset
and the ability to sell it separate and apart from the bank or the bulk
of the bank's assets, (2) the certainty that a readily identifiable
stream of cash flows associated with the intangible asset can hold its
value notwithstanding the future prospects of the bank, and (3) the
existence of a market of sufficient depth to provide liquidity for the
intangible asset. Go Back to Text
8 For risk-based capital purposes, these subsidiaries are
generally defined as any company that is primarily engaged in banking
or finance and in which the bank, either directly or indirectly, owns
more than 50 percent of the outstanding voting stock but does not
consolidate the company for regulatory capital purposes. In addition to
investments in unconsolidated banking and finance subsidiaries, the
FDIC may, on a case-by-case basis, deduct investments in associated
companies or joint ventures, which are generally defined as any
companies in which the bank, either directly or indirectly, owns 20 to
50 percent of the outstanding voting stock. Alternatively, the FDIC
may, in certain cases, apply an appropriate risk-weighted capital
charge against a bank's proportionate interest in the assets of
associated companies and joint ventures. The definitions for
subsidiaries, associated companies and joint ventures are contained in
the instructions for the preparation of the Consolidated Reports of
Condition and Income. Go Back to Text
9 Consolidation requirements for regulatory capital purposes
generally follow the consolidation requirements set forth in the
instructions for preparation of the consolidated Reports of Condition
and Income. However, although investments in subsidiaries representing
majority ownership in another federally-insured depository institution
are not consolidated for purposes of the consolidated Reports of
Condition and Income that are filed by the parent bank, they are
generally consolidated for purposes of determining FDIC regulatory
capital requirements. Therefore, investments in these depository
institution subsidiaries generally will not be deducted for risk-based
capital purposes; rather, assets and liabilities of such subsidiaries
will be consolidated with those of the parent bank when calculating the
risk-based capital ratio. In addition, although securities subsidiaries
established pursuant to 12 CFR
337.4 are consolidated for Report of Condition and Income
purposes, they are not consolidated for regulatory capital purposes. Go Back to Text
10 Any asset deducted from a bank's capital accounts when
computing the numerator of the risk-based capital ratio will also be
excluded from risk-weighted assets when calculating the denominator for
the ratio. Go Back to Text
11 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 ofterms 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 renegotiation to allow the borrower to take
advantage of a decline in interest rates or other change in market
conditions. Go Back to Text
12 Through year-end 1992, remaining rather than original
maturity may be used for determining term to maturity for
commitments. Go Back to Text
13A risk participation with a remaining maturity of one year or
less that is conveyed to a non-OECD bank is also assigned to the 20
percent risk category. Go Back to Text
14Stripped mortgage-backed secruities and similar instruments,
such as interest-only strips that are not credit-enhancing and
principal-only strips, must be assigned to the 100% risk category. Go Back to Text
15The adequacy of a bank's use of its internal credit risk
rating system must be demonstrated to the FDIC considering the criteria
listed in this section and the size and complexity of the credit
exposures assumed by the bank. Go Back to Text
16An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in a SBIC that is not consolidated with
the bank is treated as a nonfinancial equity investment. Go Back to Text
17The Board of Directors of the FDIC, acting directly, may, in
exceptional cases and after a review of the proposed activity, permit a
lower capital deduction for investments approved by the Board of
Directors under section 24 of the FDI Act 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. The
FDIC reserves the authority to impose higher capital charges on any
investment where appropriate. Go Back to Text
18For 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
both risk-weighted assets and total assets in calculating the
respective denominators for the risk-based capital and leverage
ratios. Go Back to Text
19If a bank has an investment in a SBIC that is consolidated
for accounting purposes but that is not wholly owned by the bank, the
adjusted carrying value of the bank's nonfinancial equity investments
through the SBIC is equal to the bank's proportionate share of the
adjusted carrying value of the SBIC's 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. If a bank 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 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 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
20A "binding written commitment" means a legally binding
written agreement that requires the bank 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 bank the right to acquire
equity or make an investment, but do not require the bank to take such
actions, are not considered a binding written commitment for purposes
of this section II.B.(6)(v). Go Back to Text
21For example, if a bank made an equity investment in 100
shares of a nonfinancial company prior to March 13, 2000, the adjusted
carrying value of that investment would not be subject to a deduction
under this section II.B.(6). However, if the bank 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.(6). In addition, if the bank sold and repurchased, after
March 13, 2000, 40 shares of the company, the adjusted carrying value
of those 40 shares would be subject to a deduction under this section
II.B.(6). Go Back to Text
22Unrealized gains on available-for-sale equity investments may
be included in Tier 2 capital to the extent permitted under section
I.A.(2)(f) of this appendix A. In addition, the net unrealized losses
on available-for-sale equity investments are deducted from Tier 1
capital in accordance with section I.A.(1) of this appendix A. Go Back to Text
23 All other bullion holdings are to be assigned to the 100
percent risk weight category. Go Back to Text
24 For purposes of determining the appropriate risk weights for
this risk-based capital framework, the terms "claims" and
"securities" refer to loans or other debt obligations
of the entity on whom the claim is held. Investments in the form of
stock or equity holdings in commercial or financial firms are generally
assigned to the 100 percent risk category. Go Back to Text
25 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. 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. 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
26 For risk-based capital purposes U.S. Government agency is
defined as an instrumentality of the U.S. Government whose debt
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. These agencies include the Government National
Mortgage Association (GNMA), the Veterans Administration (VA), the
Federal Housing Administration (FHA), the Farmers Home 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). U.S. Government agencies
generally do not directly issue securities to the public; however, a
number of U.S. Government agencies, such as GNMA, guarantee securities
that are publicly held. Go Back to Text
27 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 other U.S. depository
institutions or foreign banks. Go Back to Text
28 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. terrritories
and possessions. The definition encompasses banks, mutual or stock
savings banks, savings or building and loan associations, cooperative
banks, credit unions, international banking facilities of domestic
depository institutions, and U.S.-chartered depository institutions
owned by foreigners. However, this definition excludes branches and
agencies of foreign banks located in the U.S. and bank holding
companies. Go Back to Text
29 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 risk-based capital purposes, 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
30 Long-term claims on, or guaranteed by, non-OECD banks and
all claims on bank holding companies are assigned to the 100 percent
risk weight category, as are holdings of bank-issued securities that
qualify as capital of the issuing banks for risk-based capital
purposes. Go Back to Text
31 Claims on a qualifying securities firm that are instruments
the firm, or its parent company, uses to satisfy its applicable capital
requirements are not eligible for this risk weight. Go Back to Text
32 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
(SEC) and are in compliance with the SEC's net capital rule, 17 CFR
240.15c3--1. With regard to securities firms incorporated in any other
country in the OECD-based group of countries, qualifying securities
firms are those securities firms that a bank 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). Claims on a qualifying securities firm that are
instruments the firm, or its parent company, uses to satisfy its
applicable capital requirements are not eligible for this risk weight
and are generally assigned to at least a 100 percent risk weight. In
addition, certain claims on qualifying securities firms are eligible
for a zero percent risk weight if the claims are collateralized by cash
on deposit in the lending bank or by securities issued or guaranteed by
the United States or OECD central governments (including U.S.
government agencies), provided that a positive margin of collateral is
required to be maintained on such a claim on a daily basis, taking into
account any change in a bank's exposure to the obligor or counterparty
under the claim in relation to the market value of the collateral held
in support of the claim. Go Back to Text
33 For example, a claim is exempt from the automatic stay in
bankruptcy in the United States if it arises under a securities
contract or a 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
34 For risk-based capital purposes, U.S. Government-sponsored
agencies are defined as agencies originally established or chartered by
the U.S. Government to serve public purposes specified by the U.S.
Congress but whose debt 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). For risk-based capital purposes, claims
on U.S. Government-sponsored agencies also include capital stock in a
Federal Home Loan Bank that is held as a condition of membership in
that bank. Go Back to Text
35 For risk-based capital purposes, a conditional guarantee is
deemed to exist if the validity of the guarantee by the OECD central
government or the U.S. Government agency is dependent upon some
affirmative action (e.g., servicing requirements on the part of the
beneficiary of the guarantee). Portions of claims that are
unconditionally guaranteed by OECD central governments or U.S.
Government agencies are assigned to the zero percent risk category. Go Back to Text
36 Claims on, or guaranteed by, states or other political
subdivisions of countries that do not belong to the OECD-based group of
countries are to be placed in the 100 percent risk weight category. Go Back to Text
37 If a bank holds the first and junior lien(s) on a
residential property and no other party holds an intervening lien, the
transactions are treated as a single loan secured by a first lien for
purposes of determining the loan-to-value ratio and assigning a risk
weight. Go Back to Text
38 For risk-based capital purposes, the loan-to-value ratio
generally is based upon the most current appraised value of the
property. The appraisal should be performed in a manner consistent with
the federal banking agencies' real estate appraisal guidelines and with
the bank's own appraisal guidelines. Go Back to Text
39 Real estate loans that do not meet all of the specified
criteria or that are made for the purpose of property development are
placed in the 100 percent risk category. Go Back to Text
40The types of loans that qualify as loans secured by
multifamily residential properties are listed in the instructions for
preparation of the Consolidated Reports of Condition and Income. In
addition, from the stand point of the selling bank, when a multifamily
residential property loan is sold subject to a pro rata loss
sharing arrangement which provides for the purchaser of the loan to
share in any loss incurred on the loan on a pro rata basis
with the selling bank when that portion of the loan is not subject to
the risk-based capital standards. In connection with sales of
multifamily residential property loans in which the purchaser of a loan
shares in any loss incurred on the loan with the selling bank on other
than a pro rata basis, the selling bank must treat these
other loss sharing arrangements in accordance with section II.B.5. of
this appendix A. Go Back to Text
41 At the origination of a loan to purchase an existing
property, the term "value" means the lesser of the actual
acquisition cost or the estimate of value set forth in an appraisal or
evaluation, whichever may be appropriate. Go Back to Text
42 In the case where the existing owner of a multifamily
residential property refinances a loan on that property, all principal
and interest payments on the loan being refinanced must have been made
on a timely basis in accordance with the terms of that loan for at
least the preceding year. The new loan must meet all of the other
eligiblity criteria in order to qualify for a 50 percent risk weight. Go Back to Text
43 Such assets include all non-local currency claims on, and
the portions of claims that are guaranteed by, non-OECD central
governments that exceed the local currency liabilities held by the
bank. Go Back to Text
44 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
45 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 II.B. of this appendix A. Go Back to Text
46 Forward forward deposits accepted are treated as interest
rate contracts. Go Back to Text
47 In the case of home equity or mortgage lines of credit
secured by liens on one-to-four family residential properties, a bank
is deemed able to unconditionally cancel the commitment 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
48 Mark-to-market values are measured in dollars, regardless
of the currency or currencies specified in the contract and should
reflect changes in both underlying rates, prices and indices, and
counterparty credit quality. Go Back to Text
49 For purposes of this section, a walkaway clause means a
provision in a neetting 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 a defaulter or the estate of a defaulter is a net
creditor under the contract. Go Back to Text
50 For purposes of calculating potential future credit
exposure 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 to each party falling due on
each value date in each currency. Go Back to Text
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