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2000 - FDIC Rules and Regulations
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Appendix D to Part 325 — Capital Adequacy Guidelines for Banks:
Internal-Ratings-Based and Advanced Measurement Approaches
Part I General Provisions
Section
1 Purpose, Applicability, Reservation of Authority, and Principle of
Conservatism
Section
2 Definitions
Section
3 Minimum Risk-Based Capital Requirements
Part II Qualifying Capital
Section
11 Additional Deductions
Section
12 Deductions and Limitations Not Required
Section
13 Eligible Credit Reserves
Part III Qualification
Section
21 Qualification Process
Section
22 Qualification Requirements
Section
23 Ongoing Qualification
Section
24 Merger and Acquisition Transitional Arrangements
Part IV Risk-Weighted Assets for General Credit Risk
Section
31 Mechanics for Calculating Total Wholesale and Retail Risk-Weighted
Assets
Section
32 Counterparty Credit Risk of Repo-Style Transactions, Eligible
Margin Loans, and OTC Derivative Contracts
Section
33 Guarantees and Credit Derivatives: PD Substitution and LGD
Adjustment Approaches
Section
34 Guarantees and Credit Derivatives: Double Default Treatment
Section
35 Risk-Based Capital Requirement for Unsettled Transactions
Part V Risk-Weighted Assets for Securitization Exposures
Section
41 Operational Criteria for Recognizing the Transfer of Risk
Section
42 Risk-Based Capital Requirement for Securitization Exposures
Section
43 Ratings-Based Approach (RBA)
Section
44 Internal Assessment Approach (IAA)
Section
45 Supervisory Formula Approach (SFA)
Section
46 Recognition of Credit Risk Mitigants for Securitization Exposures
Section
47 Risk-Based Capital Requirement for Early Amortization Provisions
Part VI Risk-Weighted Assets for Equity Exposures
Section
51 Introduction and Exposure Measurement
Section
52 Simple Risk Weight Approach (SRWA)
Section
53 Internal Models Approach (IMA)
Section
54 Equity Exposures to Investment Funds
Section
55 Equity Derivative Contracts
Part VII Risk-Weighted Assets for Operational Risk
Section
61 Qualification Requirements for Incorporation of Operational Risk
Mitigants
Section
62 Mechanics of Risk-Weighted Asset Calculation
Part VIII Disclosure
Section
71 Disclosure Requirements
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Part I. General
Provisions
Section 1. Purpose, Applicability, Reservation of Authority, and
Principle of Conservatism
(a) Purpose. This appendix establishes:
(1) Minimum qualifying criteria for banks using bank-specific
internal risk measurement and management processes for calculating
risk-based capital requirements;
(2) Methodologies for such banks to calculate their risk-based
capital requirements; and
(3) Public disclosure requirements for such banks.
(b) Applicability. (1) This appendix applies to a bank
that: (i) Has consolidated assets, as reported on the most recent
year-end Consolidated Report of Condition and Income (Call Report)
equal to $250 billion or more;
(ii) Has consolidated total on-balance sheet foreign exposure at
the most recent year-end equal to $10 billion or more (where total
on-balance sheet foreign exposure equals total cross-border claims less
claims with head office or guarantor located in another country plus
redistributed guaranteed amounts to the country of head office or
guarantor plus local country claims on local residents plus revaluation
gains on foreign exchange and derivative products, calculated in
accordance with the Federal Financial Institutions Examination Council
(FFIEC) 009 Country Exposure Report);
(iii) Is a subsidiary of a depository institution that uses 12
CFR part 3, Appendix C, 12 CFR part 208, Appendix F, 12 CFR part 325,
Appendix D, or 12 CFR part 567, Appendix C, to calculate its risk-based
capital requirements; or
(iv) Is a subsidiary of a bank holding company that uses 12 CFR
part 225, Appendix G, to calculate its risk-based capital requirements.
(2) Any bank may elect to use this appendix to calculate its
risk-based capital requirements.
(3) A bank that is subject to this appendix must use this
appendix unless the FDIC determines in writing that application of this
appendix is not appropriate in light of the bank's asset size, level of
complexity, risk profile, or scope of operations. In making a
determination under this paragraph, the FDIC will apply notice and
response procedures in the same manner and to the same extent as the
notice and response procedures in 12 CFR 325.6(c).
(c) Reservation of authority--(1) Additional
capital in the aggregate. The FDIC may require a bank to hold an
amount of capital greater than otherwise required under this appendix
if the FDIC determines that the bank's risk-based capital requirement
under this appendix is not commensurate with the bank's credit, market,
operational, or other risks. In making a determination under this
paragraph, the FDIC will apply notice and response procedures in the
same manner and to the same extent as the notice and response
procedures in 12 CFR 325.6(c).
(2) Specific risk-weighted asset amounts. (i) If the
FDIC determines that the risk-weighted asset amount calculated under
this appendix by the bank for one or more exposures is not commensurate
with the risks associated with those exposures, the FDIC may require
the bank to assign a different risk-weighted asset amount to the
exposures, to assign different risk parameters to the exposures (if the
exposures are wholesale or retail exposures), or to use different model
assumptions for the exposures (if relevant), all as specified by the
FDIC.
(ii) If the FDIC determines that the risk-weighted asset amount
for operational risk produced by the bank under this appendix is not
commensurate with the operational risks of the bank, the FDIC may
require the bank to assign a different risk-weighted asset amount for
operational risk, to change elements of its operational risk analytical
framework, including distributional and dependence assumptions, or to
make other changes to the bank's operational risk management processes,
data and assessment systems, or quantification systems, all as
specified by the FDIC.
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(3) Other supervisory authority. Nothing in this
appendix limits the authority of the FDIC under any other provision of
law or regulation to take supervisory or enforcement action, including
action to address unsafe or unsound practices or conditions, deficient
capital levels, or violations of law.
(d) Principle of conservatism. Notwithstanding the
requirements of this appendix, a bank may choose not to apply a
provision of this appendix to one or more exposures, provided that:
(1) The bank can demonstrate on an ongoing basis to the
satisfaction of the FDIC that not applying the provision would, in all
circumstances, unambiguously generate a risk-based capital requirement
for each such exposure greater than that which would otherwise be
required under this appendix;
(2) The bank appropriately manages the risk of each such
exposure;
(3) The bank notifies the FDIC in writing prior to applying this
principle to each such exposure; and
(4) The exposures to which the bank applies this principle are
not, in the aggregate, material to the
bank.
Section 2. Definitions
Advanced internal ratings-based (IRB) systems means a
bank's internal risk rating and segmentation system; risk parameter
quantification system; data management and maintenance system; and
control, oversight, and validation system for credit risk of wholesale
and retail exposures.
Advanced systems means a bank's advanced IRB systems,
operational risk management processes, operational risk data and
assessment systems, operational risk quantification systems, and, to
the extent the bank uses the following systems, the internal models
methodology, double default excessive correlation detection process,
IMA for equity exposures, and IAA for securitization exposures to ABCP
programs.
Affiliate with respect to a company means any company
that controls, is controlled by, or is under common control with, the
company.
Applicable external rating means:
(1) With respect to an exposure that has multiple external
ratings assigned by NRSROs, the lowest solicited external rating
assigned to the exposure by any NRSRO; and
(2) With respect to an exposure that has a single external rating
assigned by an NRSRO, the external rating assigned to the exposure by
the NRSRO.
Applicable inferred rating means:
(1) With respect to an exposure that has multiple inferred
ratings, the lowest inferred rating based on a solicited external
rating; and
(2) With respect to an exposure that has a single inferred
rating, the inferred rating.
Asset-backed commercial paper (ABCP) program means a
program that primarily issues commercial paper that:
(1) Has an external rating; and
(2) Is backed by underlying exposures held in a bankruptcy-remote
SPE.
Asset-backed commercial paper (ABCP) program sponsor
means a bank that:
(1) Establishes an ABCP program;
(2) Approves the sellers permitted to participate in an ABCP
program;
(3) Approves the exposures to be purchased by an ABCP program; or
(4) Administers the ABCP program by monitoring the underlying
exposures, underwriting or otherwise arranging for the placement of
debt or other obligations issued by the program, compiling monthly
reports, or ensuring compliance with the program documents and with the
program's credit and investment policy.
Backtesting means the comparison of a bank's internal
estimates with actual outcomes during a sample period not used in model
development. In this context, backtesting is one form of out-of-sample
testing.
Bank holding company is defined in section 2 of the Bank
Holding Company Act (12 U.S.C. 1841).
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Benchmarking means the comparison of a bank's internal
estimates with relevant internal and external data or with estimates
based on other estimation techniques.
Business environment and internal control factors means
the indicators of a bank's operational risk profile that reflect a
current and forward-looking assessment of the bank's underlying
business risk factors and internal control environment.
Carrying value means, with respect to an asset, the value
of the asset on the balance sheet of the bank, determined in accordance
with GAAP.
Clean-up call means a contractual provision that permits
an originating bank or servicer to call securitization exposures before
their stated maturity or call date. See also eligible clean-up
call.
Commodity derivative contract means a commodity-linked
swap, purchased commodity-linked option, forward commodity-linked
contract, or any other instrument linked to commodities that gives rise
to similar counterparty credit risks.
Company means a corporation, partnership, limited
liability company, depository institution, business trust, special
purpose entity, association, or similar organization.
Control. A person or company controls a
company if it:
(1) Owns, controls, or holds with power to vote 25 percent or
more of a class of voting securities of the company; or
(2) Consolidates the company for financial reporting purposes.
Controlled early amortization provision means an early
amortization provision that meets all the following conditions:
(1) The originating bank has appropriate policies and procedures
to ensure that it has sufficient capital and liquidity available in the
event of an early amortization;
(2) Throughout the duration of the securitization (including the
early amortization period), there is the same pro rata sharing of
interest, principal, expenses, losses, fees, recoveries, and other cash
flows from the underlying exposures based on the originating bank's and
the investors' relative shares of the underlying exposures outstanding
measured on a consistent monthly basis;
(3) The amortization period is sufficient for at least 90 percent
of the total underlying exposures outstanding at the beginning of the
early amortization period to be repaid or recognized as in default; and
(4) The schedule for repayment of investor principal is not more
rapid than would be allowed by straight-line amortization over an
18-month period.
Credit derivative means a financial contract executed
under standard industry credit derivative documentation that allows one
party (the protection purchaser) to transfer the credit risk of one or
more exposures (reference exposure) to another party (the protection
provider). See also eligible credit derivative.
Credit-enhancing interest-only strip (CEIO) means an
on-balance sheet asset that, in form or in substance:
(1) Represents a contractual right to receive some or all of the
interest and no more than a minimal amount of principal due on the
underlying exposures of a securitization; and
(2) Exposes the holder to credit risk directly or indirectly
associated with the underlying exposures that exceeds a pro rata share
of the holder's claim on the underlying exposures, whether through
subordination provisions or other credit-enhancement techniques.
Credit-enhancing representations and warranties means
representations and warranties that are made or assumed in connection
with a transfer of underlying exposures (including loan servicing
assets) and that obligate a bank to protect another party from losses
arising from the credit risk of the underlying exposures.
Credit-enhancing representations and warranties include provisions to
protect a party from losses resulting from the default or
nonperformance of the obligors of the underlying exposures or from an
insufficiency in the value of the collateral backing the underlying
exposures. Credit-enhancing representations and warranties do not
include:
(1) Early default clauses and similar warranties that permit the
return of, or premium refund clauses that cover, first-lien residential
mortgage exposures for a period not to exceed 120 days from the date of
transfer, provided that the date of transfer is within one year of
origination of the residential mortgage exposure;
(2) Premium refund clauses that cover underlying exposures
guaranteed, in whole or in part, by the U.S. government, a U.S.
government agency, or a U.S. government
{{12-31-07 p.2262.24}}sponsored enterprise,
provided that the clauses are for a period not to exceed 120 days from
the date of transfer; or
(3) Warranties that permit the return of underlying exposures in
instances of misrepresentation, fraud, or incomplete documentation.
Credit risk mitigant means collateral, a credit
derivative, or a guarantee.
Credit-risk-weighted assets means 1.06 multiplied by the
sum of:
(1) Total wholesale and retail risk-weighted assets;
(2) Risk-weighted assets for securitization exposures; and
(3) Risk-weighted assets for equity exposures.
Current exposure means, with respect to a netting set,
the larger of zero or the market value of a transaction or portfolio of
transactions within the netting set that would be lost upon default of
the counterparty, assuming no recovery on the value of the
transactions. Current exposure is also called replacement cost.
Default--(1) Retail. (i) A retail exposure of
a bank is in default if:
(A) The exposure is 180 days past due, in the case of a
residential mortgage exposure or revolving exposure;
(B) The exposure is 120 days past due, in the case of all other
retail exposures; or
(C) The bank has taken a full or partial charge-off, write-down
of principal, or material negative fair value adjustment of principal
on the exposure for credit-related reasons.
(ii) Notwithstanding paragraph (1)(i) of this definition, for a
retail exposure held by a non-U.S. subsidiary of the bank that is
subject to an internal ratings-based approach to capital adequacy
consistent with the Basel Committee on Banking Supervision's
"International Convergence of Capital Measurement and Capital
Standards: A Revised Framework" in a non-U.S. jurisdiction, the bank
may elect to use the definition of default that is used in that
jurisdiction, provided that the bank has obtained prior approval from
the FDIC to use the definition of default in that jurisdiction.
(iii) A retail exposure in default remains in default until the
bank has reasonable assurance of repayment and performance for all
contractual principal and interest payments on the exposure.
(2) Wholesale. (i) A bank's wholesale obligor is in
default if:
(A) The bank determines that the obligor is unlikely to pay its
credit obligations to the bank in full, without recourse by the bank to
actions such as realizing collateral (if held); or
(B) The obligor is past due more than 90 days on any material
credit obligation(s) to the
bank. 1
(ii) An obligor in default remains in default until the bank has
reasonable assurance of repayment and performance for all contractual
principal and interest payments on all exposures of the bank to the
obligor (other than exposures that have been fully written-down or
charged-off).
Dependence means a measure of the association among
operational losses across and within units of measure.
Depository institution is defined in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813).
Derivative contract means a financial contract whose
value is derived from the values of one or more underlying assets,
reference rates, or indices of asset values or reference rates.
Derivative contracts include interest rate derivative contracts,
exchange rate derivative contracts, equity derivative contracts,
commodity derivative contracts, credit derivatives, and any other
instrument that poses similar counterparty credit risks. Derivative
contracts also include unsettled securities, commodities, and foreign
exchange transactions with a contractual settlement or delivery lag
that is longer than the lesser of the market standard for the
particular instrument or five business days.
Early amortization provision means a provision in the
documentation governing a securitization that, when triggered, causes
investors in the securitization exposures to be repaid before the
original stated maturity of the securitization exposures, unless the
provision:
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(1) Is triggered solely by events not directly related to the
performance of the underlying exposures or the originating bank (such
as material changes in tax laws or regulations); or
(2) Leaves investors fully exposed to future draws by obligors on
the underlying exposures even after the provision is triggered.
Economic downturn conditions means, with respect to an
exposure held by the bank, those conditions in which the aggregate
default rates for that exposure's wholesale or retail exposure
subcategory (or subdivision of such subcategory selected by the bank)
in the exposure's national jurisdiction (or subdivision of such
jurisdiction selected by the bank) are significantly higher than
average.
Effective maturity (M) of a wholesale exposure means:
(1) For wholesale exposures other than repo-style transactions,
eligible margin loans, and OTC derivative contracts described in
paragraph (2) or (3) of this definition:
(i) The weighted-average remaining maturity (measured in years,
whole or fractional) of the expected contractual cash flows from the
exposure, using the undiscounted amounts of the cash flows as weights;
or
(ii) The nominal remaining maturity (measured in years, whole or
fractional) of the exposure.
(2) For repo-style transactions, eligible margin loans, and OTC
derivative contracts subject to a qualifying master netting agreement
for which the bank does not apply the internal models approach in
paragraph (d) of section 32 of this appendix, the weighted-average
remaining maturity (measured in years, whole or fractional) of the
individual transactions subject to the qualifying master netting
agreement, with the weight of each individual transaction set equal to
the notional amount of the transaction.
(3) For repo-style transactions, eligible margin loans, and OTC
derivative contracts for which the bank applies the internal models
approach in paragraph (d) of section 32 of this appendix, the value
determined in paragraph (d)(4) of section 32 of this appendix.
Effective notional amount means, for an eligible
guarantee or eligible credit derivative, the lesser of the contractual
notional amount of the credit risk mitigant and the EAD of the hedged
exposure, multiplied by the percentage coverage of the credit risk
mitigant. For example, the effective notional amount of an eligible
guarantee that covers, on a pro rata basis, 40 percent of any losses on
a $100 bond would be $40.
Eligible clean-up call means a clean-up call that:
(1) Is exercisable solely at the discretion of the originating
bank or servicer;
(2) Is not structured to avoid allocating losses to
securitization exposures held by investors or otherwise structured to
provide credit enhancement to the securitization; and
(3) (i) For a traditional securitization, is only exercisable
when 10 percent or less of the principal amount of the underlying
exposures or securitization exposures (determined as of the inception
of the securitization) is outstanding; or
(ii) For a synthetic securitization, is only exercisable when 10
percent or less of the principal amount of the reference portfolio of
underlying exposures (determined as of the inception of the
securitization) is outstanding.
Eligible credit derivative means a credit derivative in
the form of a credit default swap, nth-to-default swap, total
return swap, or any other form of credit derivative approved by the
FDIC, provided that:
(1) The contract meets the requirements of an eligible guarantee
and has been confirmed by the protection purchaser and the protection
provider;
(2) Any assignment of the contract has been confirmed by all
relevant parties;
(3) If the credit derivative is a credit default swap or
nth-to-default swap, the contract includes the following credit
events:
(i) Failure to pay any amount due under the terms of the
reference exposure, subject to any applicable minimal payment threshold
that is consistent with standard market practice and with a grace
period that is closely in line with the grace period of the reference
exposure; and
(ii) Bankruptcy, insolvency, or inability of the obligor on the
reference exposure to pay its debts, or its failure or admission in
writing of its inability generally to pay its debts as they become due,
and similar events;
(4) The terms and conditions dictating the manner in which the
contract is to be settled are incorporated into the
contract;
{{12-31-07 p.2262.26}}
(5) If the contract allows for cash settlement, the contract
incorporates a robust valuation process to estimate loss reliably and
specifies a reasonable period for obtaining post-credit event
valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer
an exposure to the protection provider at settlement, the terms of at
least one of the exposures that is permitted to be transferred under
the contract provides that any required consent to transfer may not be
unreasonably withheld;
(7) If the credit derivative is a credit default swap or
nth-to-default swap, the contract clearly identifies the parties
responsible for determining whether a credit event has occurred,
specifies that this determination is not the sole responsibility of the
protection provider, and gives the protection purchaser the right to
notify the protection provider of the occurrence of a credit event; and
(8) If the credit derivative is a total return swap and the bank
records net payments received on the swap as net income, the bank
records offsetting deterioration in the value of the hedged exposure
(either through reductions in fair value or by an addition to
reserves).
Eligible credit reserves means all general allowances
that have been established through a charge against earnings to absorb
credit losses associated with on- or off-balance sheet wholesale and
retail exposures, including the allowance for loan and lease losses
(ALLL) associated with such exposures but excluding allocated transfer
risk reserves established pursuant to 12 U.S.C. 3904 and other specific
reserves created against recognized losses.
Eligible double default guarantor, with respect to a
guarantee or credit derivative obtained by a bank, means:
(1) U.S.-based entities. A depository institution, a
bank holding company, a savings and loan holding company (as defined in
12 U.S.C. 1467a) provided all or substantially all of the holding
company's activities are permissible for a financial holding company
under 12 U.S.C. 1843(k), a securities broker or dealer registered with
the SEC under the Securities Exchange Act of 1934 (15 U.S.C. 78o
et seq.), or an insurance company in the business of
providing credit protection (such as a monoline bond insurer or
re-insurer) that is subject to supervision by a State insurance
regulator, if:
(i) At the time the guarantor issued the guarantee or credit
derivative or at any time thereafter, the bank assigned a PD to the
guarantor's rating grade that was equal to or lower than the PD
associated with a long-term external rating in the third-highest
investment-grade rating category; and
(ii) The bank currently assigns a PD to the guarantor's rating
grade that is equal to or lower than the PD associated with a long-term
external rating in the lowest investment-grade rating category; or
(2) Non-U.S.-based entities. A foreign bank (as
defined in § 211.2 of the Federal Reserve Board's Regulation K (12
CFR 211.2)), a non-U.S.-based securities firm, or a non-U.S.-based
insurance company in the business of providing credit protection, if:
(i) The bank demonstrates that the guarantor is subject to
consolidated supervision and regulation comparable to that imposed on
U.S. depository institutions, securities broker-dealers, or insurance
companies (as the case may be), or has issued and outstanding an
unsecured long-term debt security without credit enhancement that has a
long-term applicable external rating of at least investment grade;
(ii) At the time the guarantor issued the guarantee or credit
derivative or at any time thereafter, the bank assigned a PD to the
guarantor's rating grade that was equal to or lower than the PD
associated with a long-term external rating in the third-highest
investment-grade rating category; and
(iii) The bank currently assigns a PD to the guarantor's rating
grade that is equal to or lower than the PD associated with a long-term
external rating in the lowest investment-grade rating category.
Eligible guarantee means a guarantee that:
(1) Is written and unconditional;
(2) Covers all or a pro rata portion of all contractual payments
of the obligor on the reference exposure;
(3) Gives the beneficiary a direct claim against the protection
provider;
(4) Is not unilaterally cancelable by the protection provider for
reasons other than the breach of the contract by the
beneficiary;
{{12-31-07 p.2262.27}}
(5) Is legally enforceable against the protection provider in a
jurisdiction where the protection provider has sufficient assets
against which a judgment may be attached and enforced;
(6) Requires the protection provider to make payment to the
beneficiary on the occurrence of a default (as defined in the
guarantee) of the obligor on the reference exposure in a timely manner
without the beneficiary first having to take legal actions to pursue
the obligor for payment;
(7) Does not increase the beneficiary's cost of credit protection
on the guarantee in response to deterioration in the credit quality of
the reference exposure; and
(8) Is not provided by an affiliate of the bank, unless the
affiliate is an insured depository institution, bank, securities broker
or dealer, or insurance company that:
(i) Does not control the bank; and
(ii) Is subject to consolidated supervision and regulation
comparable to that imposed on U.S. depository institutions, securities
broker-dealers, or insurance companies (as the case may be).
Eligible margin loan means an extension of credit where:
(1) The extension of credit is collateralized exclusively by
liquid and readily marketable debt or equity securities, gold, or
conforming residential mortgages;
(2) The collateral is marked to market daily, and the transaction
is subject to daily margin maintenance requirements;
(3) The extension of credit is conducted under an agreement that
provides the bank the right to accelerate and terminate the extension
of credit and to liquidate or set off collateral promptly upon an event
of default (including upon an event of bankruptcy, insolvency, or
similar proceeding) of the counterparty, provided that, in any such
case, any exercise of rights under the agreement will not be stayed or
avoided under applicable law in the relevant
jurisdictions; 2
and
(4) The bank has conducted sufficient legal review to conclude
with a well-founded basis (and maintains sufficient written
documentation of that legal review) that the agreement meets the
requirements of paragraph (3) of this definition and is legal, valid,
binding, and enforceable under applicable law in the relevant
jurisdictions.
Eligible operational risk offsets means amounts, not to
exceed expected operational loss, that:
(1) Are generated by internal business practices to absorb highly
predictable and reasonably stable operational losses, including
reserves calculated consistent with GAAP; and
(2) Are available to cover expected operational losses with a
high degree of certainty over a one-year horizon.
Eligible purchased wholesale exposure means a purchased
wholesale exposure that:
(1) The bank or securitization SPE purchased from an unaffiliated
seller and did not directly or indirectly originate;
(2) Was generated on an arm's-length basis between the seller and
the obligor (intercompany accounts receivable and receivables subject
to contra-accounts between firms that buy and sell to each other do not
satisfy this criterion);
(3) Provides the bank or securitization SPE with a claim on all
proceeds from the exposure or a pro rata interest in the proceeds from
the exposure;
(4) Has an M of less than one year; and
(5) When consolidated by obligor, does not represent a
concentrated exposure relative to the portfolio of purchased wholesale
exposures.
Eligible securitization guarantor means:
(1) A sovereign entity, the Bank for International Settlements,
the International Monetary Fund, the European Central Bank, the
European Commission, a Federal Home Loan Bank, Federal Agricultural
Mortgage Corporation (Farmer Mac), a multilateral development bank, a
depository institution, a bank holding company, a savings and
loan
{{12-31-07 p.2262.28}}holding company (as
defined in 12 U.S.C. 1467a) provided all or substantially all of the
holding company's activities are permissible for a financial holding
company under 12 U.S.C. 1843(k), a foreign bank (as defined in
§ 211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)),
or a securities firm;
(2) Any other entity (other than a securitization SPE) that has
issued and outstanding an unsecured long-term debt security without
credit enhancement that has a long-term applicable external rating in
one of the three highest investment-grade rating categories; or
(3) Any other entity (other than a securitization SPE) that has a
PD assigned by the bank that is lower than or equal to the PD
associated with a long-term external rating in the third highest
investment-grade rating category.
Eligible servicer cash advance facility means a servicer
cash advance facility in which:
(1) The servicer is entitled to full reimbursement of advances,
except that a servicer may be obligated to make non-reimbursable
advances for a particular underlying exposure if any such advance is
contractually limited to an insignificant amount of the outstanding
principal balance of that exposure;
(2) The servicer's right to reimbursement is senior in right of
payment to all other claims on the cash flows from the underlying
exposures of the securitization; and
(3) The servicer has no legal obligation to, and does not, make
advances to the securitization if the servicer concludes the advances
are unlikely to be repaid.
Equity derivative contract means an equity-linked swap,
purchased equity-linked option, forward equity-linked contract, or any
other instrument linked to equities that gives rise to similar
counterparty credit risks.
Equity exposure means:
(1) A security or instrument (whether voting or non-voting) that
represents a direct or indirect ownership interest in, and is a
residual claim on, the assets and income of a company, unless:
(i) The issuing company is consolidated with the bank under GAAP;
(ii) The bank is required to deduct the ownership interest from
tier 1 or tier 2 capital under this appendix;
(iii) The ownership interest incorporates a payment or other
similar obligation on the part of the issuing company (such as an
obligation to make periodic payments); or
(iv) The ownership interest is a securitization exposure;
(2) A security or instrument that is mandatorily convertible into
a security or instrument described in paragraph (1) of this definition;
(3) An option or warrant that is exercisable for a security or
instrument described in paragraph (1) of this definition; or
(4) Any other security or instrument (other than a securitization
exposure) to the extent the return on the security or instrument is
based on the performance of a security or instrument described in
paragraph (1) of this definition.
Excess spread for a period means:
(1) Gross finance charge collections and other income received by
a securitization SPE (including market interchange fees) over a period
minus interest paid to the holders of the securitization exposures,
servicing fees, charge-offs, and other senior trust or similar expenses
of the SPE over the period; divided by
(2) The principal balance of the underlying exposures at the end
of the period.
Exchange rate derivative contract means a cross-currency
interest rate swap, forward foreign-exchange contract, currency option
purchased, or any other instrument linked to exchange rates that gives
rise to similar counterparty credit risks.
Excluded mortgage exposure means any one- to four-family
residential pre-sold construction loan for a residence for which the
purchase contract is cancelled that would receive a 100 percent risk
weight under section 618(a)(2) of the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement Act and under and 12 CFR
part 325, Appendix A, section II.C
Expected credit loss (ECL) means:
(1) For a wholesale exposure to a non-defaulted obligor or
segment of non-defaulted retail exposures that is carried at fair value
with gains and losses flowing through earnings or that is classified as
held-for-sale and is carried at the lower of cost or fair value with
losses flowing through earnings, zero.
{{12-31-07 p.2262.29}}
(2) For all other wholesale exposures to non-defaulted obligors
or segments of non-defaulted retail exposures, the product of PD times
LGD times EAD for the exposure or segment.
(3) For a wholesale exposure to a defaulted obligor or segment of
defaulted retail exposures, the bank's impairment estimate for
allowance purposes for the exposure or segment.
(4) Total ECL is the sum of expected credit losses for all
wholesale and retail exposures other than exposures for which the bank
has applied the double default treatment in section 34 of this
appendix.
Expected exposure (EE) means the expected value of the
probability distribution of non-negative credit risk exposures to a
counterparty at any specified future date before the maturity date of
the longest term transaction in the netting set. Any negative market
values in the probability distribution of market values to a
counterparty at a specified future date are set to zero to convert the
probability distribution of market values to the probability
distribution of credit risk exposures.
Expected operational loss (EOL) means the expected value
of the distribution of potential aggregate operational losses, as
generated by the bank's operational risk quantification system using a
one-year horizon.
Expected positive exposure (EPE) means the weighted
average over time of expected (non-negative) exposures to a
counterparty where the weights are the proportion of the time interval
that an individual expected exposure represents. When calculating
risk-based capital requirements, the average is taken over a one-year
horizon.
Exposure at default (EAD). (1) For the on-balance sheet
component of a wholesale exposure or segment of retail exposures (other
than an OTC derivative contract, or a repo-style transaction or
eligible margin loan for which the bank determines EAD under section 32
of this appendix), EAD means:
(i) If the exposure or segment is a security classified as
available-for-sale, the bank's carrying value (including net accrued
but unpaid interest and fees) for the exposure or segment less any
allocated transfer risk reserve for the exposure or segment, less any
unrealized gains on the exposure or segment, and plus any unrealized
losses on the exposure or segment; or
(ii) If the exposure or segment is not a security classified as
available-for-sale, the bank's carrying value (including net accrued
but unpaid interest and fees) for the exposure or segment less any
allocated transfer risk reserve for the exposure or segment.
(2) For the off-balance sheet component of a wholesale exposure
or segment of retail exposures (other than an OTC derivative contract,
or a repo-style transaction or eligible margin loan for which the bank
determines EAD under section 32 of this appendix) in the form of a loan
commitment, line of credit, trade-related letter of credit, or
transaction-related contingency, EAD means the bank's best estimate of
net additions to the outstanding amount owed the bank, including
estimated future additional draws of principal and accrued but unpaid
interest and fees, that are likely to occur over a one-year horizon
assuming the wholesale exposure or the retail exposures in the segment
were to go into default. This estimate of net additions must reflect
what would be expected during economic downturn conditions.
Trade-related letters of credit are short-term, self-liquidating
instruments that are used to finance the movement of goods and are
collateralized by the underlying goods. Transaction-related
contingencies relate to a particular transaction and include, among
other things, performance bonds and performance-based letters of
credit.
(3) For the off-balance sheet component of a wholesale exposure
or segment of retail exposures (other than an OTC derivative contract,
or a repo-style transaction or eligible margin loan for which the bank
determines EAD under section 32 of this appendix) in the form of
anything other than a loan commitment, line of credit, trade-related
letter of credit, or transaction-related contingency, EAD means the
notional amount of the exposure or segment.
(4) EAD for OTC derivative contracts is calculated as described
in section 32 of this appendix. A bank also may determine EAD for
repo-style transactions and eligible margin loans as described in
section 32 of this appendix.
(5) For wholesale or retail exposures in which only the drawn
balance has been securitized, the bank must reflect its share of the
exposures' undrawn balances in EAD. Undrawn balances of revolving
exposures for which the drawn balances have been
{{12-31-07 p.2262.30}}securitized must be
allocated between the seller's and investors' interests on a pro rata
basis, based on the proportions of the seller's and investors' shares
of the securitized drawn balances.
Exposure category means any of the wholesale, retail,
securitization, or equity exposure categories.
External operational loss event data means, with respect
to a bank, gross operational loss amounts, dates, recoveries, and
relevant causal information for operational loss events occurring at
organizations other than the bank.
External rating means a credit rating that is assigned by
an NRSRO to an exposure, provided:
(1) The credit rating fully reflects the entire amount of credit
risk with regard to all payments owed to the holder of the exposure. If
a holder is owed principal and interest on an exposure, the credit
rating must fully reflect the credit risk associated with timely
repayment of principal and interest. If a holder is owed only principal
on an exposure, the credit rating must fully reflect only the credit
risk associated with timely repayment of principal; and
(2) The credit rating is published in an accessible form and is
or will be included in the transition matrices made publicly available
by the NRSRO that summarize the historical performance of positions
rated by the NRSRO.
Financial collateral means collateral:
(1) In the form of:
(i) Cash on deposit with the bank (including cash held for the
bank by a third-party custodian or trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that have an applicable external
rating of one category below investment grade or higher;
(iv) Short-term debt instruments that have an applicable external
rating of at least investment grade;
(v) Equity securities that are publicly traded;
(vi) Convertible bonds that are publicly traded;
(vii) Money market mutual fund shares and other mutual fund
shares if a price for the shares is publicly quoted daily; or
(viii) Conforming residential mortgages; and
(2) In which the bank has a perfected, first priority security
interest or, outside of the United States, the legal equivalent thereof
(with the exception of cash on deposit and notwithstanding the prior
security interest of any custodial agent).
GAAP means generally accepted accounting principles as
used in the United States.
Gain-on-sale means an increase in the equity capital (as
reported on Schedule RC of the Call Report) of a bank that results from
a securitization (other than an increase in equity capital that results
from the bank's receipt of cash in connection with the securitization).
Guarantee means a financial guarantee, letter of credit,
insurance, or other similar financial instrument (other than a credit
derivative) that allows one party (beneficiary) to transfer the credit
risk of one or more specific exposures (reference exposure) to another
party (protection provider). See also eligible guarantee.
High volatility commercial real estate (HVCRE) exposure
means a credit facility that finances or has financed the acquisition,
development, or construction (ADC) of real property, unless the
facility finances:
(1) One- to four-family residential properties; or
(2) Commercial real estate projects in which:
(i) The loan-to-value ratio is less than or equal to the
applicable maximum supervisory loan-to-value ratio in the FDIC's real
estate lending standards at 12 CFR part 365, Appendix A.
(ii) The borrower has contributed capital to the project in the
form of cash or unencumbered readily marketable assets (or has paid
development expenses out-of-pocket) of at least 15 percent of the real
estate's appraised "as completed" value; and
(iii) The borrower contributed the amount of capital required by
paragraph (2)(ii) of this definition before the bank advances funds
under the credit facility, and the capital contributed by the borrower,
or internally generated by the project, is contractually required to
remain in the project throughout the life of the project. The life of a
project concludes
{{12-31-07 p.2262.31}}only when the credit
facility is converted to permanent financing or is sold or paid in
full. Permanent financing may be provided by the bank that provided the
ADC facility as long as the permanent financing is subject to the
bank's underwriting criteria for long-term mortgage loans.
Inferred rating. A securitization exposure has an
inferred rating equal to the external rating referenced in
paragraph (2)(i) of this definition if:
(1) The securitization exposure does not have an external rating;
and
(2) Another securitization exposure issued by the same issuer and
secured by the same underlying exposures:
(i) Has an external rating;
(ii) Is subordinated in all respects to the unrated
securitization exposure;
(iii) Does not benefit from any credit enhancement that is not
available to the unrated securitization exposure; and
(iv) Has an effective remaining maturity that is equal to or
longer than that of the unrated securitization exposure.
Interest rate derivative contract means a single-currency
interest rate swap, basis swap, forward rate agreement, purchased
interest rate option, when-issued securities, or any other instrument
linked to interest rates that gives rise to similar counterparty credit
risks.
Internal operational loss event data means, with respect
to a bank, gross operational loss amounts, dates, recoveries, and
relevant causal information for operational loss events occurring at
the bank.
Investing bank means, with respect to a securitization, a
bank that assumes the credit risk of a securitization exposure (other
than an originating bank of the securitization). In the typical
synthetic securitization, the investing bank sells credit protection on
a pool of underlying exposures to the originating bank.
Investment fund means a company:
(1) All or substantially all of the assets of which are financial
assets; and
(2) That has no material liabilities.
Investors' interest EAD means, with respect to a
securitization, the EAD of the underlying exposures multiplied by the
ratio of:
(1) The total amount of securitization exposures issued by the
securitization SPE to investors; divided by
(2) The outstanding principal amount of underlying exposures.
Loss given default (LGD) means:
(1) For a wholesale exposure, the greatest of:
(i) Zero;
(ii) The bank's empirically based best estimate of the long-run
default-weighted average economic loss, per dollar of EAD, the bank
would expect to incur if the obligor (or a typical obligor in the loss
severity grade assigned by the bank to the exposure) were to default
within a one-year horizon over a mix of economic conditions, including
economic downturn conditions; or
(iii) The bank's empirically based best estimate of the economic
loss, per dollar of EAD, the bank would expect to incur if the obligor
(or a typical obligor in the loss severity grade assigned by the bank
to the exposure) were to default within a one-year horizon during
economic downturn conditions.
(2) For a segment of retail exposures, the greatest of:
(i) Zero;
(ii) The bank's empirically based best estimate of the long-run
default-weighted average economic loss, per dollar of EAD, the bank
would expect to incur if the exposures in the segment were to default
within a one-year horizon over a mix of economic conditions, including
economic downturn conditions; or
(iii) The bank's empirically based best estimate of the economic
loss, per dollar of EAD, the bank would expect to incur if the
exposures in the segment were to default within a one-year horizon
during economic downturn conditions.
(3) The economic loss on an exposure in the event of default is
all material credit-related losses on the exposure (including accrued
but unpaid interest or fees, losses on the sale of collateral, direct
workout costs, and an appropriate allocation of indirect workout
costs). Where positive or negative cash flows on a wholesale exposure
to a defaulted obligor or a defaulted retail exposure (including
proceeds from the sale of
{{12-31-07 p.2262.32}}collateral, workout
costs, additional extensions of credit to facilitate repayment of the
exposure, and draw-downs of unused credit lines) occur after the date
of default, the economic loss must reflect the net present value of
cash flows as of the default date using a discount rate appropriate to
the risk of the defaulted exposure.
Main index means the Standard & Poor's 500 Index, the
FTSE All-World Index, and any other index for which the bank can
demonstrate to the satisfaction of the FDIC that the equities
represented in the index have comparable liquidity, depth of market,
and size of bid-ask spreads as equities in the Standard & Poor's 500
Index and FTSE All-World Index.
Multilateral development bank means the International
Bank for Reconstruction and Development, the International Finance
Corporation, the Inter-American Development Bank, the Asian Development
Bank, the African Development Bank, the European Bank for
Reconstruction and Development, the European Investment Bank, the
European Investment Fund, the Nordic Investment Bank, the Caribbean
Development Bank, the Islamic Development Bank, the Council of Europe
Development Bank, and any other multilateral lending institution or
regional development bank in which the U.S. government is a shareholder
or contributing member or which the FDIC determines poses comparable
credit risk.
Nationally recognized statistical rating organization
(NRSRO) means an entity registered with the SEC as a nationally
recognized statistical rating organization under section 15E of the
Securities Exchange Act of 1934 (15 U.S.C. 78o-7).
Netting set means a group of transactions with a single
counterparty that are subject to a qualifying master netting agreement
or qualifying cross-product master netting agreement. For purposes of
the internal models methodology in paragraph (d) of section 32 of this
appendix, each transaction that is not subject to such a master netting
agreement is its own netting set.
Nth-to-default credit derivative means a credit
derivative that provides credit protection only for the
nth-defaulting reference exposure in a group of reference
exposures.
Obligor means the legal entity or natural person
contractually obligated on a wholesale exposure, except that a bank may
treat the following exposures as having separate obligors:
(1) Exposures to the same legal entity or natural person
denominated in different currencies;
(2) (i) An income-producing real estate exposure for which all or
substantially all of the repayment of the exposure is reliant on the
cash flows of the real estate serving as collateral for the exposure;
the bank, in economic substance, does not have recourse to the borrower
beyond the real estate collateral; and no cross-default or
cross-acceleration clauses are in place other than clauses obtained
solely out of an abundance of caution; and
(ii) Other credit exposures to the same legal entity or natural
person; and
(3) (i) A wholesale exposure authorized under section 364 of the
U.S. Bankruptcy Code (11 U.S.C. 364) to a legal entity or natural
person who is a debtor-in-possession for purposes of Chapter 11 of the
Bankruptcy Code; and
(ii) Other credit exposures to the same legal entity or natural
person.
Operational loss means a loss (excluding insurance or tax
effects) resulting from an operational loss event. Operational loss
includes all expenses associated with an operational loss event except
for opportunity costs, forgone revenue, and costs related to risk
management and control enhancements implemented to prevent future
operational losses.
Operational loss event means an event that results in
loss and is associated with any of the following seven operational loss
event type categories:
(1) Internal fraud, which means the operational loss event type
category that comprises operational losses resulting from an act
involving at least one internal party of a type intended to defraud,
misappropriate property, or circumvent regulations, the law, or company
policy, excluding diversity- and discrimination-type events.
(2) External fraud, which means the operational loss event type
category that comprises operational losses resulting from an act by a
third party of a type intended to defraud, misappropriate property, or
circumvent the law. Retail credit card losses arising from
non-contractual, third-party initiated fraud (for example, identity
theft) are external fraud operational losses. All other third-party
initiated credit losses are to be treated as credit risk losses.
(3) Employment practices and workplace safety, which means the
operational loss event type category that comprises operational losses
resulting from an act inconsistent with
{{12-31-07 p.2262.33}}employment, health, or
safety laws or agreements, payment of personal injury claims, or
payment arising from diversity- and discrimination-type events.
(4) Clients, products, and business practices, which means the
operational loss event type category that comprises operational losses
resulting from the nature or design of a product or from an
unintentional or negligent failure to meet a professional obligation to
specific clients (including fiduciary and suitability requirements).
(5) Damage to physical assets, which means the operational loss
event type category that comprises operational losses resulting from
the loss of or damage to physical assets from natural disaster or other
events.
(6) Business disruption and system failures, which means the
operational loss event type category that comprises operational losses
resulting from disruption of business or system failures.
(7) Execution, delivery, and process management, which means the
operational loss event type category that comprises operational losses
resulting from failed transaction processing or process management or
losses arising from relations with trade counterparties and vendors.
Operational risk means the risk of loss resulting from
inadequate or failed internal processes, people, and systems or from
external events (including legal risk but excluding strategic and
reputational risk).
Operational risk exposure means the 99.9th percentile
of the distribution of potential aggregate operational losses, as
generated by the bank's operational risk quantification system over a
one-year horizon (and not incorporating eligible operational risk
offsets or qualifying operational risk mitigants).
Originating bank, with respect to a securitization,
means a bank that:
(1) Directly or indirectly originated or securitized the
underlying exposures included in the securitization; or
(2) Serves as an ABCP program sponsor to the securitization.
Other retail exposure means an exposure (other than a
securitization exposure, an equity exposure, a residential mortgage
exposure, an excluded mortgage exposure, a qualifying revolving
exposure, or the residual value portion of a lease exposure) that is
managed as part of a segment of exposures with homogeneous risk
characteristics, not on an individual-exposure basis, and is either:
(1) An exposure to an individual for non-business purposes; or
(2) An exposure to an individual or company for business purposes
if the bank's consolidated business credit exposure to the individual
or company is $1 million or less.
Over-the-counter (OTC) derivative contract means a
derivative contract that is not traded on an exchange that requires the
daily receipt and payment of cash-variation margin.
Probability of default (PD) means:
(1) For a wholesale exposure to a non-defaulted obligor, the
bank's empirically based best estimate of the long-run average one-year
default rate for the rating grade assigned by the bank to the obligor,
capturing the average default experience for obligors in the rating
grade over a mix of economic conditions (including economic downturn
conditions) sufficient to provide a reasonable estimate of the average
one-year default rate over the economic cycle for the rating grade.
(2) For a segment of non-defaulted retail exposures, the bank's
empirically based best estimate of the long-run average one-year
default rate for the exposures in the segment, capturing the average
default experience for exposures in the segment over a mix of economic
conditions (including economic downturn conditions) sufficient to
provide a reasonable estimate of the average one-year default rate over
the economic cycle for the segment and adjusted upward as appropriate
for segments for which seasoning effects are material. For purposes of
this definition, a segment for which seasoning effects are material is
a segment where there is a material relationship between the time since
origination of exposures within the segment and the bank's best
estimate of the long-run average one-year default rate for the
exposures in the segment.
(3) For a wholesale exposure to a defaulted obligor or segment of
defaulted retail exposures, 100 percent.
Protection amount (P) means, with respect to an exposure
hedged by an eligible guarantee or eligible credit derivative, the
effective notional amount of the guarantee or
{{12-31-07 p.2262.34}}credit derivative,
reduced to reflect any currency mismatch, maturity mismatch, or lack of
restructuring coverage (as provided in section 33 of this appendix).
Publicly traded means traded on:
(1) Any exchange registered with the SEC as a national securities
exchange under section 6 of the Securities Exchange Act of 1934 (15
U.S.C. 78f); or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a national securities
regulatory authority; and
(ii) Provides a liquid, two-way market for the instrument in
question, meaning that there are enough independent bona fide offers to
buy and sell so that a sales price reasonably related to the last sales
price or current bona fide competitive bid and offer quotations can be
determined promptly and a trade can be settled at such a price within
five business days.
Qualifying central counterparty means a counterparty (for
example, a clearing house) that:
(1) Facilitates trades between counterparties in one or more
financial markets by either guaranteeing trades or novating contracts;
(2) Requires all participants in its arrangements to be fully
collateralized on a daily basis; and
(3) The bank demonstrates to the satisfaction of the FDIC is in
sound financial condition and is subject to effective oversight by a
national supervisory authority.
Qualifying cross-product master netting agreement means a
qualifying master netting agreement that provides for termination and
close-out netting across multiple types of financial transactions or
qualifying master netting agreements in the event of a counterparty's
default, provided that:
(1) The underlying financial transactions are OTC derivative
contracts, eligible margin loans, or repo-style transactions; and
(2) The bank obtains a written legal opinion verifying the
validity and enforceability of the agreement under applicable law of
the relevant jurisdictions if the counterparty fails to perform upon an
event of default, including upon an event of bankruptcy, insolvency, or
similar proceeding.
Qualifying master netting agreement means any written,
legally enforceable bilateral agreement, provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default, including bankruptcy, insolvency, or similar proceeding, of
the counterparty;
(2) The agreement provides the bank the right to accelerate,
terminate, and close-out on a net basis all transactions under the
agreement and to liquidate or set off collateral promptly upon an event
of default, including upon an event of bankruptcy, insolvency, or
similar proceeding, of the counterparty, provided that, in any such
case, any exercise of rights under the agreement will not be stayed or
avoided under applicable law in the relevant jurisdictions;
(3) The bank has conducted sufficient legal review to conclude
with a well-founded basis (and maintains sufficient written
documentation of that legal review) that:
(i) The agreement meets the requirements of paragraph (2) of this
definition; and
(ii) In the event of a legal challenge (including one resulting
from default or from bankruptcy, insolvency, or similar proceeding) the
relevant court and administrative authorities would find the agreement
to be legal, valid, binding, and enforceable under the law of the
relevant jurisdictions;
(4) The bank establishes and maintains procedures to monitor
possible changes in relevant law and to ensure that the agreement
continues to satisfy the requirements of this definition; and
(5) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it would make otherwise under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement).
Qualifying revolving exposure (QRE) means an exposure
(other than a securitization exposure or equity exposure) to an
individual that is managed as part of a segment of exposures with
homogeneous risk characteristics, not on an individual-exposure basis,
and:
{{12-31-07 p.2262.35}}
(1) Is revolving (that is, the amount outstanding fluctuates,
determined largely by the borrower's decision to borrow and repay, up
to a pre-established maximum amount);
(2) Is unsecured and unconditionally cancelable by the bank to
the fullest extent permitted by Federal law; and
(3) Has a maximum exposure amount (drawn plus undrawn) of up to
$100,000.
Repo-style transaction means a repurchase or reverse
repurchase transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the bank acts as agent
for a customer and indemnifies the customer against loss, provided
that:
(1) The transaction is based solely on liquid and readily
marketable securities, cash, gold, or conforming residential mortgages;
(2) The transaction is marked-to-market daily and subject to
daily margin maintenance requirements;
(3) (i) The transaction is a "securities contract" or
"repurchase agreement" under section 555 or 559, respectively, of
the Bankruptcy Code (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 or among
financial institutions under sections 401-407 of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407) or
the Federal Reserve Board's Regulation EE (12 CFR part 231); or
(ii) If the transaction does not meet the criteria set
forth in paragraph (3)(i) of this definition, then either:
(A) The transaction is executed under an agreement that provides
the bank the right to accelerate, terminate, and close-out the
transaction on a net basis and to liquidate or set off collateral
promptly upon an event of default (including upon an event of
bankruptcy, insolvency, or similar proceeding) of the counterparty,
provided that, in any such case, any exercise of rights under the
agreement will not be stayed or avoided under applicable law in the
relevant jurisdictions; or
(B) The transaction is:
(1) Either overnight or unconditionally cancelable at
any time by the bank; and
(2) Executed under an agreement that
provides the bank the right to accelerate, terminate, and close-out the
transaction on a net basis and to liquidate or set off collateral
promptly upon an event of counterparty default; and
(4) The bank has conducted sufficient legal review to conclude
with a well-founded basis (and maintains sufficient written
documentation of that legal review) that the agreement meets the
requirements of paragraph (3) of this definition and is legal, valid,
binding, and enforceable under applicable law in the relevant
jurisdictions.
Residential mortgage exposure means an exposure (other
than a securitization exposure, equity exposure, or excluded mortgage
exposure) that is managed as part of a segment of exposures with
homogeneous risk characteristics, not on an individual-exposure basis,
and is:
(1) An exposure that is primarily secured by a first or
subsequent lien on one- to four-family residential property; or
(2) An exposure with an original and outstanding amount of $1
million or less that is primarily secured by a first or subsequent lien
on residential property that is not one to four family.
Retail exposure means a residential mortgage exposure, a
qualifying revolving exposure, or an other retail exposure.
Retail exposure subcategory means the residential
mortgage exposure, qualifying revolving exposure, or other retail
exposure subcategory.
Risk parameter means a variable used in determining
risk-based capital requirements for wholesale and retail exposures,
specifically probability of default (PD), loss given default (LGD),
exposure at default (EAD), or effective maturity (M).
Scenario analysis means a systematic process of obtaining
expert opinions from business managers and risk management experts to
derive reasoned assessments of the likelihood and loss impact of
plausible high-severity operational losses. Scenario analysis may
include the well-reasoned evaluation and use of external operational
loss event data, adjusted as appropriate to ensure relevance to a
bank's operational risk profile and control structure.
SEC means the U.S. Securities and Exchange Commission.
Securitization means a traditional securitization or a
synthetic securitization.
{{12-31-07 p.2262.36}}
Securitization exposure means an on-balance sheet or
off-balance sheet credit exposure that arises from a traditional or
synthetic securitization (including credit-enhancing representations
and warranties).
Securitization special purpose entity (securitization
SPE) means a corporation, trust, or other entity organized for the
specific purpose of holding underlying exposures of a securitization,
the activities of which are limited to those appropriate to accomplish
this purpose, and the structure of which is intended to isolate the
underlying exposures held by the entity from the credit risk of the
seller of the underlying exposures to the entity.
Senior securitization exposure means a securitization
exposure that has a first priority claim on the cash flows from the
underlying exposures. When determining whether a securitization
exposure has a first priority claim on the cash flows from the
underlying exposures, a bank is not required to consider amounts due
under interest rate or currency derivative contracts, fees due, or
other similar payments. Both the most senior commercial paper issued by
an ABCP program and a liquidity facility that supports the ABCP program
may be senior securitization exposures if the liquidity facility
provider's right to reimbursement of the drawn amounts is senior to all
claims on the cash flows from the underlying exposures except amounts
due under interest rate or currency derivative contracts, fees due, or
other similar payments.
Servicer cash advance facility means a facility under
which the servicer of the underlying exposures of a securitization may
advance cash to ensure an uninterrupted flow of payments to investors
in the securitization, including advances made to cover foreclosure
costs or other expenses to facilitate the timely collection of the
underlying exposures. See also eligible servicer cash advance
facility.
Sovereign entity means a central government (including
the U.S. government) or an agency, department, ministry, or central
bank of a central government.
Sovereign exposure means:
(1) A direct exposure to a sovereign entity; or
(2) An exposure directly and unconditionally backed by the full
faith and credit of a sovereign entity.
Subsidiary means, with respect to a company, a company
controlled by that company.
Synthetic securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying
exposures is transferred to one or more third parties through the use
of one or more credit derivatives or guarantees (other than a guarantee
that transfers only the credit risk of an individual retail exposure);
(2) The credit risk associated with the underlying exposures has
been separated into at least two tranches reflecting different levels
of seniority;
(3) Performance of the securitization exposures depends upon the
performance of the underlying exposures; and
(4) All or substantially all of the underlying exposures are
financial exposures (such as loans, commitments, credit derivatives,
guarantees, receivables, asset-backed securities, mortgage-backed
securities, other debt securities, or equity securities).
Tier 1 capital is defined in 12 CFR part 325, Appendix A,
as modified in part II of this appendix.
Tier 2 capital is defined in 12 CFR part 325, Appendix A,
as modified in part II of this appendix.
Total qualifying capital means the sum of tier 1 capital
and tier 2 capital, after all deductions required in this appendix.
Total risk-weighted assets means:
(1) The sum of:
(i) Credit risk-weighted assets; and
(ii) Risk-weighted assets for operational risk; minus
(2) Excess eligible credit reserves not included in tier 2
capital.
Total wholesale and retail risk-weighted assets means the
sum of risk-weighted assets for wholesale exposures to non-defaulted
obligors and segments of non-defaulted retail exposures; risk-weighted
assets for wholesale exposures to defaulted obligors and segments of
defaulted retail exposures; risk-weighted assets for assets not defined
by an exposure category; and risk-weighted assets for non-material
portfolios of exposures (all as determined in section 31 of this
appendix) and risk-weighted assets for unsettled transactions
(as
{{12-31-07 p.2262.37}}determined in section 35
of this appendix) minus the amounts deducted from capital pursuant to
12 CFR part 325, Appendix A (excluding those deductions reversed in
section 12 of this appendix).
Traditional securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying
exposures is transferred to one or more third parties other than
through the use of credit derivatives or guarantees;
(2) The credit risk associated with the underlying exposures has
been separated into at least two tranches reflecting different levels
of seniority;
(3) Performance of the securitization exposures depends upon the
performance of the underlying exposures;
(4) All or substantially all of the underlying exposures are
financial exposures (such as loans, commitments, credit derivatives,
guarantees, receivables, asset-backed securities, mortgage-backed
securities, other debt securities, or equity securities);
(5) The underlying exposures are not owned by an operating
company;
(6) The underlying exposures are not owned by a small business
investment company described in section 302 of the Small Business
Investment Act of 1958 (15 U.S.C. 682); and
(7) The underlying exposures are not owned by a firm an
investment in which qualifies as a community development investment
under 12 U.S.C. 24(Eleventh).
(8) The FDIC may determine that a transaction in which the
underlying exposures are owned by an investment firm that exercises
substantially unfettered control over the size and composition of its
assets, liabilities, and off-balance sheet exposures is not a
traditional securitization based on the transaction's leverage, risk
profile, or economic substance.
(9) The FDIC may deem a transaction that meets the definition of
a traditional securitization, notwithstanding paragraph (5), (6), or
(7) of this definition, to be a traditional securitization based on the
transaction's leverage, risk profile, or economic substance.
Tranche means all securitization exposures associated
with a securitization that have the same seniority level.
Underlying exposures means one or more exposures that
have been securitized in a securitization transaction.
Unexpected operational loss (UOL) means the difference
between the bank's operational risk exposure and the bank's expected
operational loss.
Unit of measure means the level (for example,
organizational unit or operational loss event type) at which the bank's
operational risk quantification system generates a separate
distribution of potential operational losses.
Value-at-Risk (VaR) means the estimate of the maximum
amount that the value of one or more exposures could decline due to
market price or rate movements during a fixed holding period within a
stated confidence interval.
Wholesale exposure means a credit exposure to a company,
natural person, sovereign entity, or governmental entity (other than a
securitization exposure, retail exposure, excluded mortgage exposure,
or equity exposure). Examples of a wholesale exposure include:
(1) A non-tranched guarantee issued by a bank on behalf of a
company;
(2) A repo-style transaction entered into by a bank with a
company and any other transaction in which a bank posts collateral to a
company and faces counterparty credit risk;
(3) An exposure that a bank treats as a covered position under 12
CFR part 325, Appendix C for which there is a counterparty credit risk
capital requirement;
(4) A sale of corporate loans by a bank to a third party in which
the bank retains full recourse;
(5) An OTC derivative contract entered into by a bank with a
company;
(6) An exposure to an individual that is not managed by a bank as
part of a segment of exposures with homogeneous risk characteristics;
and
(7) A commercial lease.
Wholesale exposure subcategory means the HVCRE or
non-HVCRE wholesale exposure
subcategory.
Section 3. Minimum Risk-Based Capital Requirements
(a) Except as modified by paragraph (c) of this section or by
section 23 of this appendix, each bank must meet a minimum ratio
of:
{{12-31-07 p.2262.38}}
(1) Total qualifying capital to total risk-weighted assets of 8.0
percent; and
(2) Tier 1 capital to total risk-weighted assets of 4.0 percent.
(b) Each bank must hold capital commensurate with the level and
nature of all risks to which the bank is exposed.
(c) When a bank subject to 12 CFR part 325, Appendix C calculates
its risk-based capital requirements under this appendix, the bank must
also refer to 12 CFR part 325, Appendix C for supplemental rules to
calculate risk-based capital requirements adjusted for market risk.
Part II. Qualifying Capital
Section 11. Additional Deductions
(a) General. A bank that uses this appendix must make
the same deductions from its tier 1 capital and tier 2 capital required
in 12 CFR part 325, Appendix A, except that:
(1) A bank is not required to deduct certain equity investments
and CEIOs (as provided in section 12 of this appendix); and
(2) A bank also must make the deductions from capital required by
paragraphs (b) and (c) of this section.
(b) Deductions from tier 1 capital. A bank must deduct
from tier 1 capital any gain-on-sale associated with a securitization
exposure as provided in paragraph (a) of section 41 and paragraphs
(a)(1), (c), (g)(1), and (h)(1) of section 42 of this appendix.
(c) Deductions from tier 1 and tier 2 capital. A bank
must deduct the exposures specified in paragraphs (c)(1) through (c)(7)
in this section 50 percent from tier 1 capital and 50 percent from tier
2 capital. If the amount deductible from tier 2 capital exceeds the
bank's actual tier 2 capital, however, the bank must deduct the excess
from tier 1 capital.
(1) Credit-enhancing interest-only strips (CEIOs). In
accordance with paragraphs (a)(1) and (c) of section 42 of this
appendix, any CEIO that does not constitute gain-on-sale.
(2) Non-qualifying securitization exposures. In
accordance with paragraphs (a)(4) and (c) of section 42 of this
appendix, any securitization exposure that does not qualify for the
Ratings-Based Approach, the Internal Assessment Approach, or the
Supervisory Formula Approach under sections 43, 44, and 45 of this
appendix, respectively.
(3) Securitizations of non-IRB exposures. In
accordance with paragraphs (c) and (g)(4) of section 42 of this
appendix, certain exposures to a securitization any underlying exposure
of which is not a wholesale exposure, retail exposure, securitization
exposure, or equity exposure.
(4) Low-rated securitization exposures. In accordance
with section 43 and paragraph (c) of section 42 of this appendix, any
securitization exposure that qualifies for and must be deducted under
the Ratings-Based Approach.
(5) High-risk securitization exposures subject to the
Supervisory Formula Approach. In accordance with paragraphs (b)
and (c) of section 45 of this appendix and paragraph (c) of section 42
of this appendix, certain high-risk securitization exposures (or
portions thereof) that qualify for the Supervisory Formula Approach.
(6) Eligible credit reserves shortfall. In accordance
with paragraph (a)(1) of section 13 of this appendix, any eligible
credit reserves shortfall.
(7) Certain failed capital markets transactions. In
accordance with paragraph (e)(3) of section 35 of this appendix, the
bank's exposure on certain failed capital markets
transactions.
Section 12. Deductions and Limitations Not Required
(a) Deduction of CEIOs. A bank is not required to make
the deductions from capital for CEIOs in 12 CFR part 325, Appendix A,
section II.B.5.
(b) Deduction for certain equity investments. A bank is
not required to make the deductions from capital for nonfinancial
equity investments in 12 CFR part 325, Appendix A, section
II.B.
Section 13. Eligible Credit Reserves
(a) Comparison of eligible credit reserves to expected credit
losses--(1) Shortfall of eligible credit reserves. If
a bank's eligible credit reserves are less than the bank's total
expected credit losses, the bank must deduct the shortfall amount 50
percent from tier 1
{{12-31-07 p.2262.39}}capital and 50 percent
from tier 2 capital. If the amount deductible from tier 2 capital
exceeds the bank's actual tier 2 capital, the bank must deduct the
excess amount from tier 1 capital.
(2) Excess eligible credit reserves. If a bank's
eligible credit reserves exceed the bank's total expected credit
losses, the bank may include the excess amount in tier 2 capital to the
extent that the excess amount does not exceed 0.6 percent of the bank's
credit-risk-weighted assets.
(b) Treatment of allowance for loan and lease losses.
Regardless of any provision in 12 CFR part 325, Appendix A, the ALLL is
included in tier 2 capital only to the extent provided in paragraph
(a)(2) of this section and in section 24 of this appendix.
Part III. Qualification
Section 21. Qualification Process
(a) Timing. (1) A bank that is described in paragraph
(b)(1) of section 1 of this appendix must adopt a written
implementation plan no later than six months after the later of April
1, 2008, or the date the bank meets a criterion in that section. The
implementation plan must incorporate an explicit first floor period
start date no later than 36 months after the later of April 1, 2008, or
the date the bank meets at least one criterion under paragraph (b)(1)
of section 1 of this appendix. The FDIC may extend the first floor
period start date.
(2) A bank that elects to be subject to this appendix under
paragraph (b)(2) of section 1 of this appendix must adopt a written
implementation plan.
(b) Implementation plan. (1) The bank's implementation
plan must address in detail how the bank complies, or plans to comply,
with the qualification requirements in section 22 of this appendix. The
bank also must maintain a comprehensive and sound planning and
governance process to oversee the implementation efforts described in
the plan. At a minimum, the plan must:
(i) Comprehensively address the qualification requirements in
section 22 of this appendix for the bank and each consolidated
subsidiary (U.S. and foreign-based) of the bank with respect to all
portfolios and exposures of the bank and each of its consolidated
subsidiaries;
(ii) Justify and support any proposed temporary or permanent
exclusion of business lines, portfolios, or exposures from application
of the advanced approaches in this appendix (which business lines,
portfolios, and exposures must be, in the aggregate, immaterial to the
bank);
(iii) Include the bank's self-assessment of:
(A) The bank's current status in meeting the qualification
requirements in section 22 of this appendix; and
(B) The consistency of the bank's current practices with the
FDIC's supervisory guidance on the qualification requirements;
(iv) Based on the bank's self-assessment, identify and describe
the areas in which the bank proposes to undertake additional work to
comply with the qualification requirements in section 22 of this
appendix or to improve the consistency of the bank's current practices
with the FDIC's supervisory guidance on the qualification requirements
(gap analysis);
(v) Describe what specific actions the bank will take to address
the areas identified in the gap analysis required by paragraph
(b)(1)(iv) of this section;
(vi) Identify objective, measurable milestones, including
delivery dates and a date when the bank's implementation of the
methodologies described in this appendix will be fully operational;
(vii) Describe resources that have been budgeted and are
available to implement the plan; and
(viii) Receive approval of the bank's board of directors.
(2) The bank must submit the implementation plan, together with a
copy of the minutes of the board of directors' approval, to the FDIC at
least 60 days before the bank proposes to begin its parallel run,
unless the FDIC waives prior notice.
(c) Parallel run. Before determining its risk-based
capital requirements under this appendix and following adoption of the
implementation plan, the bank must conduct a satisfactory parallel run.
A satisfactory parallel run is a period of no less than four
consecutive calendar quarters during which the bank complies with the
qualification
{{12-31-07 p.2262.40}}requirements in section
22 of this appendix to the satisfaction of the FDIC. During the
parallel run, the bank must report to the FDIC on a calendar quarterly
basis its risk-based capital ratios using 12 CFR part 325, Appendix A
and the risk-based capital requirements described in this appendix.
During this period, the bank is subject to 12 CFR part 325, Appendix A.
(d) Approval to calculate risk-based capital requirements
under this appendix. The FDIC will notify the bank of the date
that the bank may begin its first floor period if the FDIC determines
that:
(1) The bank fully complies with all the qualification
requirements in section 22 of this appendix;
(2) The bank has conducted a satisfactory parallel run under
paragraph (c) of this section; and
(3) The bank has an adequate process to ensure ongoing compliance
with the qualification requirements in section 22 of this appendix.
(e) Transitional floor periods. Following a satisfactory
parallel run, a bank is subject to three transitional floor periods.
(1) Risk-based capital ratios during the transitional floor
periods--(i) Tier 1 risk-based capital ratio. During a
bank's transitional floor periods, the bank's tier 1 risk-based capital
ratio is equal to the lower of:
(A) The bank's floor-adjusted tier 1 risk-based capital ratio; or
(B) The bank's advanced approaches tier 1 risk-based capital
ratio.
(ii) Total risk-based capital ratio. During a bank's
transitional floor periods, the bank's total risk-based capital ratio
is equal to the lower of:
(A) The bank's floor-adjusted total risk-based capital ratio; or
(B) The bank's advanced approaches total risk-based capital
ratio.
(2) Floor-adjusted risk-based capital ratios. (i) A
bank's floor-adjusted tier 1 risk-based capital ratio during a
transitional floor period is equal to the bank's tier 1 capital as
calculated under 12 CFR part 325, Appendix A, divided by the product
of:
(A) The bank's total risk-weighted assets as calculated under 12
CFR part 325, Appendix A; and
(B) The appropriate transitional floor percentage in Table 1.
(ii) A bank's floor-adjusted total risk-based capital ratio
during a transitional floor period is equal to the sum of the bank's
tier 1 and tier 2 capital as calculated under 12 CFR part 325, Appendix
A, divided by the product of:
(A) The bank's total risk-weighted assets as calculated under 12
CFR part 325, Appendix A; and
(B) The appropriate transitional floor percentage in Table 1.
(iii) A bank that meets the criteria in paragraph (b)(1) or
(b)(2) of section 1 of this appendix as of April 1, 2008, must use 12
CFR part 325, Appendix A during the parallel run and as the basis for
its transitional floors.
Table 1 — Transitional
Floors
| Transitional floor period |
Transitional floor
percentage |
|---|
| First floor period |
95 percent |
| Second floor
period |
90 percent |
| Third floor period |
85 percent
|
(3) Advanced approaches risk-based capital
ratios. (i) A bank's advanced approaches tier 1 risk-based capital
ratio equals the bank's tier 1 risk-based capital ratio as calculated
under this appendix (other than this section on transitional floor
periods).
(ii) A bank's advanced approaches total risk-based capital ratio
equals the bank's total risk-based capital ratio as calculated under
this appendix (other than this section on transitional floor periods).
(4) Reporting. During the transitional floor periods,
a bank must report to the FDIC on a calendar quarterly basis both
floor-adjusted risk-based capital ratios and both advanced approaches
risk-based capital ratios.
{{12-31-07 p.2262.41}}
(5) Exiting a transitional floor period. A bank may
not exit a transitional floor period until the bank has spent a minimum
of four consecutive calendar quarters in the period and the FDIC has
determined that the bank may exit the floor period. The FDIC's
determination will be based on an assessment of the bank's ongoing
compliance with the qualification requirements in section 22 of this
appendix.
(6) Interagency study. After the end of the second
transition year (2010), the Federal banking agencies will publish a
study that evaluates the advanced approaches to determine if there are
any material deficiencies. For any primary Federal supervisor to
authorize any institution to exit the third transitional floor period,
the study must determine that there are no such material deficiencies
that cannot be addressed by then-existing tools, or, if such
deficiencies are found, they are first remedied by changes to this
appendix. Notwithstanding the preceding sentence, a primary Federal
supervisor that disagrees with the finding of material deficiency may
not authorize any institution under its jurisdiction to exit the third
transitional floor period unless it provides a public report explaining
its reasoning.
Section 22. Qualification Requirements
(a) Process and systems requirements. (1) A bank must
have a rigorous process for assessing its overall capital adequacy in
relation to its risk profile and a comprehensive strategy for
maintaining an appropriate level of capital.
(2) The systems and processes used by a bank for risk-based
capital purposes under this appendix must be consistent with the bank's
internal risk management processes and management information reporting
systems.
(3) Each bank must have an appropriate infrastructure with risk
measurement and management processes that meet the qualification
requirements of this section and are appropriate given the bank's size
and level of complexity. Regardless of whether the systems and models
that generate the risk parameters necessary for calculating a bank's
risk-based capital requirements are located at any affiliate of the
bank, the bank itself must ensure that the risk parameters and
reference data used to determine its risk-based capital requirements
are representative of its own credit risk and operational risk
exposures.
(b) Risk rating and segmentation systems for wholesale and
retail exposures. (1) A bank must have an internal risk rating and
segmentation system that accurately and reliably differentiates among
degrees of credit risk for the bank's wholesale and retail exposures.
(2) For wholesale exposures:
(i) A bank must have an internal risk rating system that
accurately and reliably assigns each obligor to a single rating grade
(reflecting the obligor's likelihood of default). A bank may elect,
however, not to assign to a rating grade an obligor to whom the bank
extends credit based solely on the financial strength of a guarantor,
provided that all of the bank's exposures to the obligor are fully
covered by eligible guarantees, the bank applies the PD substitution
approach in paragraph (c)(1) of section 33 of this appendix to all
exposures to that obligor, and the bank immediately assigns the obligor
to a rating grade if a guarantee can no longer be recognized under this
appendix. The bank's wholesale obligor rating system must have at least
seven discrete rating grades for non-defaulted obligors and at least
one rating grade for defaulted obligors.
(ii) Unless the bank has chosen to directly assign LGD estimates
to each wholesale exposure, the bank must have an internal risk rating
system that accurately and reliably assigns each wholesale exposure to
a loss severity rating grade (reflecting the bank's estimate of the LGD
of the exposure). A bank employing loss severity rating grades must
have a sufficiently granular loss severity grading system to avoid
grouping together exposures with widely ranging LGDs.
(3) For retail exposures, a bank must have an internal system
that groups retail exposures into the appropriate retail exposure
subcategory, groups the retail exposures in each retail exposure
subcategory into separate segments with homogeneous risk
characteristics, and assigns accurate and reliable PD and LGD estimates
for each segment on a consistent basis. The bank's system must identify
and group in separate segments by subcategories exposures identified in
paragraphs (c)(2)(ii) and (iii) of section 31 of this appendix.
(4) The bank's internal risk rating policy for wholesale
exposures must describe the bank's rating philosophy (that is, must
describe how wholesale obligor rating assignments
{{12-31-07 p.2262.42}}are affected by the
bank's choice of the range of economic, business, and industry
conditions that are considered in the obligor rating process).
(5) The bank's internal risk rating system for wholesale
exposures must provide for the review and update (as appropriate) of
each obligor rating and (if applicable) each loss severity rating
whenever the bank receives new material information, but no less
frequently than annually. The bank's retail exposure segmentation
system must provide for the review and update (as appropriate) of
assignments of retail exposures to segments whenever the bank receives
new material information, but generally no less frequently than
quarterly.
(c) Quantification of risk parameters for wholesale and
retail exposures. (1) The bank must have a comprehensive risk
parameter quantification process that produces accurate, timely, and
reliable estimates of the risk parameters for the bank's wholesale and
retail exposures.
(2) Data used to estimate the risk parameters must be relevant to
the bank's actual wholesale and retail exposures, and of sufficient
quality to support the determination of risk-based capital requirements
for the exposures.
(3) The bank's risk parameter quantification process must produce
appropriately conservative risk parameter estimates where the bank has
limited relevant data, and any adjustments that are part of the
quantification process must not result in a pattern of bias toward
lower risk parameter estimates.
(4) The bank's risk parameter estimation process should not rely
on the possibility of U.S. government financial assistance, except for
the financial assistance that the U.S. government has a legally binding
commitment to provide.
(5) Where the bank's quantifications of LGD directly or
indirectly incorporate estimates of the effectiveness of its credit
risk management practices in reducing its exposure to troubled obligors
prior to default, the bank must support such estimates with empirical
analysis showing that the estimates are consistent with its historical
experience in dealing with such exposures during economic downturn
conditions.
(6) PD estimates for wholesale obligors and retail segments must
be based on at least five years of default data. LGD estimates for
wholesale exposures must be based on at least seven years of loss
severity data, and LGD estimates for retail segments must be based on
at least five years of loss severity data. EAD estimates for wholesale
exposures must be based on at least seven years of exposure amount
data, and EAD estimates for retail segments must be based on at least
five years of exposure amount data.
(7) Default, loss severity, and exposure amount data must include
periods of economic downturn conditions, or the bank must adjust its
estimates of risk parameters to compensate for the lack of data from
periods of economic downturn conditions.
(8) The bank's PD, LGD, and EAD estimates must be based on the
definition of default in this appendix.
(9) The bank must review and update (as appropriate) its risk
parameters and its risk parameter quantification process at least
annually.
(10) The bank must at least annually conduct a comprehensive
review and analysis of reference data to determine relevance of
reference data to the bank's exposures, quality of reference data to
support PD, LGD, and EAD estimates, and consistency of reference data
to the definition of default contained in this appendix.
(d) Counterparty credit risk model. A bank must obtain
the prior written approval of the FDIC under section 32 of this
appendix to use the internal models methodology for counterparty credit
risk.
(e) Double default treatment. A bank must obtain the
prior written approval of the FDIC under section 34 of this appendix to
use the double default treatment.
(f) Securitization exposures. A bank must obtain the
prior written approval of the FDIC under section 44 of this appendix to
use the Internal Assessment Approach for securitization exposures to
ABCP programs.
(g) Equity exposures model. A bank must obtain the prior
written approval of the FDIC under section 53 of this appendix to use
the Internal Models Approach for equity exposures.
(h) Operational risk--(1) Operational risk
management processes. A bank must:
(i) Have an operational risk management function that:
(A) Is independent of business line management; and
{{12-31-07 p.2262.43}}
(B) Is responsible for designing, implementing, and overseeing
the bank's operational risk data and assessment systems, operational
risk quantification systems, and related processes;
(ii) Have and document a process (which must capture business
environment and internal control factors affecting the bank's
operational risk profile) to identify, measure, monitor, and control
operational risk in bank products, activities, processes, and systems;
and
(iii) Report operational risk exposures, operational loss events,
and other relevant operational risk information to business unit
management, senior management, and the board of directors (or a
designated committee of the board).
(2) Operational risk data and assessment systems. A
bank must have operational risk data and assessment systems that
capture operational risks to which the bank is exposed. The bank's
operational risk data and assessment systems must:
(i) Be structured in a manner consistent with the bank's current
business activities, risk profile, technological processes, and risk
management processes; and
(ii) Include credible, transparent, systematic, and verifiable
processes that incorporate the following elements on an ongoing basis:
(A) Internal operational loss event data. The bank
must have a systematic process for capturing and using internal
operational loss event data in its operational risk data and assessment
systems.
(1) The bank's operational risk data and assessment
systems must include a historical observation period of at least five
years for internal operational loss event data (or such shorter period
approved by the FDIC to address transitional situations, such as
integrating a new business line).
(2) The bank must be able to map its internal
operational loss event data into the seven operational loss event type
categories.
(3) The bank may refrain from collecting internal
operational loss event data for individual operational losses below
established dollar threshold amounts if the bank can demonstrate to the
satisfaction of the FDIC that the thresholds are reasonable, do not
exclude important internal operational loss event data, and permit the
bank to capture substantially all the dollar value of the bank's
operational losses.
(B) External operational loss event data. The bank
must have a systematic process for determining its methodologies for
incorporating external operational loss event data into its operational
risk data and assessment systems.
(C) Scenario analysis. The bank must have a systematic
process for determining its methodologies for incorporating scenario
analysis into its operational risk data and assessment systems.
(D) Business environment and internal control factors.
The bank must incorporate business environment and internal control
factors into its operational risk data and assessment systems. The bank
must also periodically compare the results of its prior business
environment and internal control factor assessments against its actual
operational losses incurred in the intervening period.
(3) Operational risk quantification systems. (i) The
bank's operational risk quantification systems:
(A) Must generate estimates of the bank's operational risk
exposure using its operational risk data and assessment systems;
(B) Must employ a unit of measure that is appropriate for the
bank's range of business activities and the variety of operational loss
events to which it is exposed, and that does not combine business
activities or operational loss events with demonstrably different risk
profiles within the same loss distribution;
(C) Must include a credible, transparent, systematic, and
verifiable approach for weighting each of the four elements, described
in paragraph (h)(2)(ii) of this section, that a bank is required to
incorporate into its operational risk data and assessment systems;
(D) May use internal estimates of dependence among operational
losses across and within units of measure if the bank can demonstrate
to the satisfaction of the FDIC that its process for estimating
dependence is sound, robust to a variety of scenarios, and implemented
with integrity, and allows for the uncertainty surrounding the
estimates. If the bank has not made such a demonstration, it must sum
operational risk exposure estimates across units of measure to
calculate its total operational risk exposure; and
{{12-31-07 p.2262.44}}
(E) Must be reviewed and updated (as appropriate) whenever the
bank becomes aware of information that may have a material effect on
the bank's estimate of operational risk exposure, but the review and
update must occur no less frequently than annually.
(ii) With the prior written approval of the FDIC, a bank may
generate an estimate of its operational risk exposure using an
alternative approach to that specified in paragraph (h)(3)(i) of this
section. A bank proposing to use such an alternative operational risk
quantification system must submit a proposal to the FDIC. In
determining whether to approve a bank's proposal to use an alternative
operational risk quantification system, the FDIC will consider the
following principles:
(A) Use of the alternative operational risk quantification system
will be allowed only on an exception basis, considering the size,
complexity, and risk profile of the bank;
(B) The bank must demonstrate that its estimate of its
operational risk exposure generated under the alternative operational
risk quantification system is appropriate and can be supported
empirically; and
(C) A bank must not use an allocation of operational risk capital
requirements that includes entities other than depository institutions
or the benefits of diversification across entities.
(i) Data management and maintenance. (1) A bank must
have data management and maintenance systems that adequately support
all aspects of its advanced systems and the timely and accurate
reporting of risk-based capital requirements.
(2) A bank must retain data using an electronic format that
allows timely retrieval of data for analysis, validation, reporting,
and disclosure purposes.
(3) A bank must retain sufficient data elements related to key
risk drivers to permit adequate monitoring, validation, and refinement
of its advanced systems.
(j) Control, oversight, and validation mechanisms. (1)
The bank's senior management must ensure that all components of the
bank's advanced systems function effectively and comply with the
qualification requirements in this section.
(2) The bank's board of directors (or a designated committee of
the board) must at least annually review the effectiveness of, and
approve, the bank's advanced systems.
(3) A bank must have an effective system of controls and
oversight that:
(i) Ensures ongoing compliance with the qualification
requirements in this section;
(ii) Maintains the integrity, reliability, and accuracy of the
bank's advanced systems; and
(iii) Includes adequate governance and project management
processes.
(4) The bank must validate, on an ongoing basis, its advanced
systems. The bank's validation process must be independent of the
advanced systems' development, implementation, and operation, or the
validation process must be subjected to an independent review of its
adequacy and effectiveness. Validation must include:
(i) An evaluation of the conceptual soundness of (including
developmental evidence supporting) the advanced systems;
(ii) An ongoing monitoring process that includes verification of
processes and benchmarking; and
(iii) An outcomes analysis process that includes back-testing.
(5) The bank must have an internal audit function independent of
business-line management that at least annually assesses the
effectiveness of the controls supporting the bank's advanced systems
and reports its findings to the bank's board of directors (or a
committee thereof).
(6) The bank must periodically stress test its advanced systems.
The stress testing must include a consideration of how economic cycles,
especially downturns, affect risk-based capital requirements (including
migration across rating grades and segments and the credit risk
mitigation benefits of double default treatment).
(k) Documentation. The bank must adequately document all
material aspects of its advanced
systems.
Section 23. Ongoing Qualification
(a) Changes to advanced systems. A bank must meet all
the qualification requirements in section 22 of this appendix on an
ongoing basis. A bank must notify the FDIC when the bank makes any
change to an advanced system that would result in a material change
in
{{12-31-07 p.2262.45}}the bank's risk-weighted
asset amount for an exposure type, or when the bank makes any
significant change to its modeling assumptions.
(b) Failure to comply with qualification requirements.
(1) If the FDIC determines that a bank that uses this appendix and has
conducted a satisfactory parallel run fails to comply with the
qualification requirements in section 22 of this appendix, the FDIC
will notify the bank in writing of the bank's failure to comply.
(2) The bank must establish and submit a plan satisfactory to the
FDIC to return to compliance with the qualification requirements.
(3) In addition, if the FDIC determines that the bank's
risk-based capital requirements are not commensurate with the bank's
credit, market, operational, or other risks, the FDIC may require such
a bank to calculate its risk-based capital requirements:
(i) Under 12 CFR part 325, Appendix A; or
(ii) Under this appendix with any modifications provided by the
FDIC.
Section 24. Merger and Acquisition Transitional Arrangements
(a) Mergers and acquisitions of companies without advanced
systems. If a bank merges with or acquires a company that does not
calculate its risk-based capital requirements using advanced systems,
the bank may use 12 CFR part 325, Appendix A to determine the
risk-weighted asset amounts for, and deductions from capital associated
with, the merged or acquired company's exposures for up to 24 months
after the calendar quarter during which the merger or acquisition
consummates. The FDIC may extend this transition period for up to an
additional 12 months. Within 90 days of consummating the merger or
acquisition, the bank must submit to the FDIC an implementation plan
for using its advanced systems for the acquired company. During the
period when 12 CFR part 325, Appendix A apply to the merged or acquired
company, any ALLL, net of allocated transfer risk reserves established
pursuant to 12 U.S.C. 3904, associated with the merged or acquired
company's exposures may be included in the acquiring bank's tier 2
capital up to 1.25 percent of the acquired company's risk-weighted
assets. All general allowances of the merged or acquired company must
be excluded from the bank's eligible credit reserves. In addition, the
risk-weighted assets of the merged or acquired company are not included
in the bank's credit-risk-weighted assets but are included in total
risk-weighted assets. If a bank relies on this paragraph, the bank must
disclose publicly the amounts of risk-weighted assets and qualifying
capital calculated under this appendix for the acquiring bank and under
12 CFR part 325, Appendix A for the acquired company.
(b) Mergers and acquisitions of companies with advanced
systems--(1) If a bank merges with or acquires a company that
calculates its risk-based capital requirements using advanced systems,
the bank may use the acquired company's advanced systems to determine
the risk-weighted asset amounts for, and deductions from capital
associated with, the merged or acquired company's exposures for up to
24 months after the calendar quarter during which the acquisition or
merger consummates. The FDIC may extend this transition period for up
to an additional 12 months. Within 90 days of consummating the merger
or acquisition, the bank must submit to the FDIC an implementation plan
for using its advanced systems for the merged or acquired company.
(2) If the acquiring bank is not subject to the advanced
approaches in this appendix at the time of acquisition or merger,
during the period when 12 CFR part 325, Appendix A apply to the
acquiring bank, the ALLL associated with the exposures of the merged or
acquired company may not be directly included in tier 2 capital.
Rather, any excess eligible credit reserves associated with the merged
or acquired company's exposures may be included in the bank's tier 2
capital up to 0.6 percent of the credit-risk-weighted assets associated
with those exposures.
Part IV. Risk-Weighted Assets for General Credit
Risk
Section 31. Mechanics for Calculating Total Wholesale and Retail
Risk-Weighted Assets
(a) Overview. A bank must calculate its total wholesale
and retail risk-weighted asset amount in four distinct phases:
(1) Phase 1--categorization of exposures;
(2) Phase 2--assignment of wholesale obligors and exposures to
rating grades and segmentation of retail exposures;
{{12-31-07 p.2262.46}}
(3) Phase 3--assignment of risk parameters to wholesale exposures
and segments of retail exposures; and
(4) Phase 4--calculation of risk-weighted asset amounts.
(b) Phase 1--Categorization. The bank must determine
which of its exposures are wholesale exposures, retail exposures,
securitization exposures, or equity exposures. The bank must categorize
each retail exposure as a residential mortgage exposure, a QRE, or an
other retail exposure. The bank must identify which wholesale exposures
are HVCRE exposures, sovereign exposures, OTC derivative contracts,
repo-style transactions, eligible margin loans, eligible purchased
wholesale exposures, unsettled transactions to which section 35 of this
appendix applies, and eligible guarantees or eligible credit
derivatives that are used as credit risk mitigants. The bank must
identify any on-balance sheet asset that does not meet the definition
of a wholesale, retail, equity, or securitization exposure, as well as
any non-material portfolio of exposures described in paragraph (e)(4)
of this section.
(c) Phase 2--Assignment of wholesale obligors and exposures
to rating grades and retail exposures to
segments--(1) Assignment of wholesale obligors and
exposures to rating grades.
(i) The bank must assign each obligor of a wholesale exposure to
a single obligor rating grade and must assign each wholesale exposure
to which it does not directly assign an LGD estimate to a loss severity
rating grade.
(ii) The bank must identify which of its wholesale obligors are
in default.
(2) Segmentation of retail exposures. (i) The bank
must group the retail exposures in each retail subcategory into
segments that have homogeneous risk characteristics.
(ii) The bank must identify which of its retail exposures are in
default. The bank must segment defaulted retail exposures separately
from non-defaulted retail exposures.
(iii) If the bank determines the EAD for eligible margin loans
using the approach in paragraph (b) of section 32 of this appendix, the
bank must identify which of its retail exposures are eligible margin
loans for which the bank uses this EAD approach and must segment such
eligible margin loans separately from other retail exposures.
(3) Eligible purchased wholesale exposures. A bank may
group its eligible purchased wholesale exposures into segments that
have homogeneous risk characteristics. A bank must use the wholesale
exposure formula in Table 2 in this section to determine the risk-based
capital requirement for each segment of eligible purchased wholesale
exposures.
(d) Phase 3--Assignment of risk parameters to wholesale
exposures and segments of retail exposures--(1)
Quantification process. Subject to the limitations in this
paragraph (d), the bank must:
(i) Associate a PD with each wholesale obligor rating grade;
(ii) Associate an LGD with each wholesale loss severity rating
grade or assign an LGD to each wholesale exposure;
(iii) Assign an EAD and M to each wholesale exposure; and
(iv) Assign a PD, LGD, and EAD to each segment of retail
exposures.
(2) Floor on PD assignment. The PD for each wholesale
obligor or retail segment may not be less than 0.03 percent, except for
exposures to or directly and unconditionally guaranteed by a sovereign
entity, the Bank for International Settlements, the International
Monetary Fund, the European Commission, the European Central Bank, or a
multilateral development bank, to which the bank assigns a rating grade
associated with a PD of less than 0.03 percent.
(3) Floor on LGD estimation. The LGD for each segment
of residential mortgage exposures (other than segments of residential
mortgage exposures for which all or substantially all of the principal
of each exposure is directly and unconditionally guaranteed by the full
faith and credit of a sovereign entity) may not be less than 10
percent.
(4) Eligible purchased wholesale exposures. A bank
must assign a PD, LGD, EAD, and M to each segment of eligible purchased
wholesale exposures. If the bank can estimate ECL (but not PD or LGD)
for a segment of eligible purchased wholesale exposures, the bank must
assume that the LGD of the segment equals 100 percent and that the PD
of the segment equals ECL divided by EAD. The estimated ECL must be
calculated for the exposures without regard to any assumption of
recourse or guarantees from the seller or other parties.
(5) Credit risk mitigation--credit derivatives, guarantees,
and collateral. (i) A bank may take into account the risk reducing
effects of eligible guarantees and eligible credit
{{12-31-07 p.2262.47}}derivatives in support
of a wholesale exposure by applying the PD substitution or LGD
adjustment treatment to the exposure as provided in section 33 of this
appendix or, if applicable, applying double default treatment to the
exposure as provided in section 34 of this appendix. A bank may decide
separately for each wholesale exposure that qualifies for the double
default treatment under section 34 of this appendix whether to apply
the double default treatment or to use the PD substitution or LGD
adjustment treatment without recognizing double default effects.
(ii) A bank may take into account the risk reducing effects of
guarantees and credit derivatives in support of retail exposures in a
segment when quantifying the PD and LGD of the segment.
(iii) Except as provided in paragraph (d)(6) of this section, a
bank may take into account the risk reducing effects of collateral in
support of a wholesale exposure when quantifying the LGD of the
exposure and may take into account the risk reducing effects of
collateral in support of retail exposures when quantifying the PD and
LGD of the segment.
(6) EAD for OTC derivative contracts, repo-style
transactions, and eligible margin loans. (i) A bank must calculate
its EAD for an OTC derivative contract as provided in paragraphs (c)
and (d) of section 32 of this appendix. A bank may take into account
the risk-reducing effects of financial collateral in support of a
repo-style transaction or eligible margin loan and of any collateral in
support of a repo-style transaction that is included in the bank's
VaR-based measure under 12 CFR part 325, Appendix C through an
adjustment to EAD as provided in paragraphs (b) and (d) of section 32
of this appendix. A bank that takes collateral into account through
such an adjustment to EAD under section 32 of this appendix may not
reflect such collateral in LGD.
(ii) A bank may attribute an EAD of zero to:
(A) Derivative contracts that are publicly traded on an exchange
that requires the daily receipt and payment of cash-variation margin;
(B) Derivative contracts and repo-style transactions that are
outstanding with a qualifying central counterparty (but not for those
transactions that a qualifying central counterparty has rejected); and
(C) Credit risk exposures to a qualifying central counterparty in
the form of clearing deposits and posted collateral that arise from
transactions described in paragraph (d)(6)(ii)(B) of this section.
(7) Effective maturity. An exposure's M must be no
greater than five years and no less than one year, except that an
exposure's M must be no less than one day if the exposure has an
original maturity of less than one year and is not part of a bank's
ongoing financing of the obligor. An exposure is not part of a bank's
ongoing financing of the obligor if the bank:
(i) Has a legal and practical ability not to renew or roll over
the exposure in the event of credit deterioration of the obligor;
(ii) Makes an independent credit decision at the inception of the
exposure and at every renewal or roll over; and
(iii) Has no substantial commercial incentive to continue its
credit relationship with the obligor in the event of credit
deterioration of the obligor.
(e) Phase 4--Calculation of risk-weighted
assets--(1) Non-defaulted exposures. (i) A bank must
calculate the dollar risk-based capital requirement for each of its
wholesale exposures to a non-defaulted obligor (except eligible
guarantees and eligible credit derivatives that hedge another wholesale
exposure and exposures to which the bank applies the double default
treatment in section 34 of this appendix) and segments of non-defaulted
retail exposures by inserting the assigned risk parameters for the
wholesale obligor and exposure or retail segment into the appropriate
risk-based capital formula specified in Table 2 and multiplying the
output of the formula (K) by the EAD of the exposure or segment.
Alternatively, a bank may apply a 300 percent risk weight to the EAD of
an eligible margin loan if the bank is not able to meet the agencies'
requirements for estimation of PD and LGD for the margin
loan.
{{12-31-07 p.2262.48}}
Table 2 — IRB Risk-Based Capital Formulas for Wholesale
Exposures to Non-Defaulted Obligors and Segments of Non-Defaulted
Retail
Exposures
1
1N(.) means the cumulative distribution function for a
standard normal random variable. N–1(.) means the inverse
cumulative distribution function for a standard normal random variable.
The symbol e refers to the base of the natural logarithms, and the
function ln(.) refers to the natural logarithm of the expression within
parentheses. The formulas apply when PD is greater than zero. If PD
equals zero, the capital requirement K is set equal to zero.
(ii) The sum of all the dollar risk-based capital
requirements for each wholesale exposure to a non-defaulted obligor and
segment of non-defaulted retail exposures calculated in paragraph
(e)(1)(i) of this section and in paragraph (e) of section 34 of this
appendix equals the total dollar risk-based capital requirement for
those exposures and segments.
(iii) The aggregate risk-weighted asset amount for wholesale
exposures to non-defaulted obligors and segments of non-defaulted
retail exposures equals the total dollar risk-based capital requirement
calculated in paragraph (e)(1)(ii) of this section multiplied by 12.5.
(2) Wholesale exposures to defaulted obligors and segments
of defaulted retail exposures. (i) The dollar risk-based capital
requirement for each wholesale exposure to a defaulted obligor equals
0.08 multiplied by the EAD of the exposure.
(ii) The dollar risk-based capital requirement for a segment of
defaulted retail exposures equals 0.08 multiplied by the EAD of the
segment.
(iii) The sum of all the dollar risk-based capital requirements
for each wholesale exposure to a defaulted obligor calculated in
paragraph (e)(2)(i) of this section plus the dollar risk-based capital
requirements for each segment of defaulted retail exposures calculated
in paragraph (e)(2)(ii) of this section equals the total dollar
risk-based capital requirement for those exposures and
segments.
{{12-31-07 p.2262.49}}
(iv) The aggregate risk-weighted asset amount for wholesale
exposures to defaulted obligors and segments of defaulted retail
exposures equals the total dollar risk-based capital requirement
calculated in paragraph (e)(2)(iii) of this section multiplied by 12.5.
(3) Assets not included in a defined exposure
category. (i) A bank may assign a risk-weighted asset amount of
zero to cash owned and held in all offices of the bank or in transit
and for gold bullion held in the bank's own vaults, or held in another
bank's vaults on an allocated basis, to the extent the gold bullion
assets are offset by gold bullion liabilities.
(ii) The risk-weighted asset amount for the residual value of a
retail lease exposure equals such residual value.
(iii) The risk-weighted asset amount for any other
on-balance-sheet asset that does not meet the definition of a
wholesale, retail, securitization, or equity exposure equals the
carrying value of the asset.
(4) Non-material portfolios of exposures. The
risk-weighted asset amount of a portfolio of exposures for which the
bank has demonstrated to the FDIC's satisfaction that the portfolio
(when combined with all other portfolios of exposures that the bank
seeks to treat under this paragraph) is not material to the bank is the
sum of the carrying values of on-balance sheet exposures plus the
notional amounts of off-balance sheet exposures in the portfolio. For
purposes of this paragraph (e)(4), the notional amount of an OTC
derivative contract that is not a credit derivative is the EAD of the
derivative as calculated in section 32 of this
appendix.
Section 32. Counterparty Credit Risk of Repo-Style Transactions,
Eligible Margin Loans, and OTC Derivative Contracts
(a) In General. (1) This section describes two
methodologies--a collateral haircut approach and an internal models
methodology--that a bank may use instead of an LGD estimation
methodology to recognize the benefits of financial collateral in
mitigating the counterparty credit risk of repo-style transactions,
eligible margin loans, collateralized OTC derivative contracts, and
single product netting sets of such transactions and to recognize the
benefits of any collateral in mitigating the counterparty credit risk
of repo-style transactions that are included in a bank's VaR-based
measure under 12 CFR part 325, Appendix C. A third methodology, the
simple VaR methodology, is available for single product netting sets of
repo-style transactions and eligible margin loans.
(2) This section also describes the methodology for calculating
EAD for an OTC derivative contract or a set of OTC derivative contracts
subject to a qualifying master netting agreement. A bank also may use
the internal models methodology to estimate EAD for qualifying
cross-product master netting agreements.
(3) A bank may only use the standard supervisory haircut approach
with a minimum 10-business-day holding period to recognize in EAD the
benefits of conforming residential mortgage collateral that secures
repo-style transactions (other than repo-style transactions included in
the bank's VaR-based measure under 12 CFR part 325, Appendix C),
eligible margin loans, and OTC derivative contracts.
(4) A bank may use any combination of the three methodologies for
collateral recognition; however, it must use the same methodology for
similar exposures.
(b) EAD for eligible margin loans and repo-style
transactions--(1) General. A bank may recognize the
credit risk mitigation benefits of financial collateral that secures an
eligible margin loan, repo-style transaction, or single-product netting
set of such transactions by factoring the collateral into its LGD
estimates for the exposure. Alternatively, a bank may estimate an
unsecured LGD for the exposure, as well as for any repo-style
transaction that is included in the bank's VaR-based measure under 12
CFR part 325, Appendix C, and determine the EAD of the exposure using:
(i) The collateral haircut approach described in paragraph (b)(2)
of this section;
(ii) For netting sets only, the simple VaR methodology described
in paragraph (b)(3) of this section; or
(iii) The internal models methodology described in paragraph (d)
of this section.
(2) Collateral haircut approach--(i) EAD
equation. A bank may determine EAD for an eligible margin loan,
repo-style transaction, or netting set by setting EAD equal to max
{0, [(ΣE – ΣC) + Σ((Es × Hs) + Σ(Efx × Hfx)]},
where:
{{12-31-07 p.2262.50}}
(A) ΣE equals the value of the exposure (the sum of the current
market values of all instruments, gold, and cash the bank has lent,
sold subject to repurchase, or posted as collateral to the counterparty
under the transaction (or netting set));
(B) ΣC equals the value of the collateral (the sum of the
current market values of all instruments, gold, and cash the bank has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty under the transaction (or netting set));
(C) Es equals the absolute value of the net position in a given
instrument or in gold (where the net position in a given instrument or
in gold equals the sum of the current market values of the instrument
or gold the bank has lent, sold subject to repurchase, or posted as
collateral to the counterparty minus the sum of the current market
values of that same instrument or gold the bank has borrowed, purchased
subject to resale, or taken as collateral from the counterparty);
(D) Hs equals the market price volatility haircut appropriate to
the instrument or gold referenced in Es;
(E) Efx equals the absolute value of the net position of
instruments and cash in a currency that is different from the
settlement currency (where the net position in a given currency equals
the sum of the current market values of any instruments or cash in the
currency the bank has lent, sold subject to repurchase, or posted as
collateral to the counterparty minus the sum of the current market
values of any instruments or cash in the currency the bank has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty); and
(F) Hfx equals the haircut appropriate to the mismatch between
the currency referenced in Efx and the settlement currency.
(ii) Standard supervisory haircuts. (A) Under the
standard supervisory haircuts approach:
(1) A bank must use the haircuts for market price
volatility (Hs) in Table 3, as adjusted in certain circumstances as
provided in paragraph (b)(2)(ii)(A)(3) and (4) of
this section;
Table 3 — Standard Supervisory Market Price Volatility
Haircuts
1
| Applicable external rating grade
category for debt securities |
Residual
maturity for debt securities |
Issuers exempt from the 3 basis point
floor |
Other issuers |
|---|
| Two highest investment-grade
|
≤ 1 year |
0.005 |
0.01 |
| rating categories
for long-term |
>1 year, ≤ 5 years |
0.02 |
0.04
|
| ratings/highest investment-grade rating category for
short-term ratings |
>5 years |
0.04 |
0.08 |
| Two
lowest investment-grade |
≤1 year |
0.01 |
0.02
|
| rating categories for both short- and long-term
ratings |
>1 year, ≤5 years |
0.03 |
0.06 |
|
> 5 years
|
0.06 |
0.12 |
| One rating category below investment grade
|
All |
0.15 |
0.25
| Main index equities (including
convertible bonds) and gold | 0.15
| |
{{12-31-07 p.2262.51}}
| Applicable external rating grade
category for debt securities |
Residual
maturity for debt securities |
Issuers exempt from the 3 basis point
floor |
Other issuers
| Other publicly traded equities
(including convertible bonds), conforming residential mortgages, and
nonfinancial collateral | 0.25 |
| Mutual funds | Highest
haircut applicable to any security in which the fund can invest
|
| Cash on deposit with the bank holding company (including a
certificate of deposit issued by the bank holding company)
| 0
| |
|---|
1 The market price volatility haircuts in Table
3 are based on a ten-business-day holding period.
(2) For currency mismatches, a bank must use
a haircut for foreign exchange rate volatility (Hfx) of 8 percent, as
adjusted in certain circumstances as provided in paragraph
(b)(2)(ii)(A)(3) and (4) of this section.
(3) For repo-style transactions, a bank may multiply
the supervisory haircuts provided in paragraphs
(b)(2)(ii)(A)(1) and (2) of this section by the
square root of 1/2 (which equals 0.707107).
(4) A bank must adjust the supervisory haircuts upward
on the basis of a holding period longer than ten business days (for
eligible margin loans) or five business days (for repo-style
transactions) where and as appropriate to take into account the
illiquidity of an instrument.
(iii) Own internal estimates for haircuts. With the
prior written approval of the FDIC, a bank may calculate haircuts (Hs
and Hfx) using its own internal estimates of the volatilities of market
prices and foreign exchange rates.
(A) To receive FDIC approval to use its own internal estimates, a
bank must satisfy the following minimum quantitative standards:
(1) A bank must use a 99th percentile one-tailed
confidence interval.
(2) The minimum holding period for a repo-style
transaction is five business days and for an eligible margin loan is
ten business days. When a bank calculates an own-estimates haircut on a
TN-day holding period, which is different from the minimum holding
period for the transaction type, the applicable haircut (HM) is
calculated using the following square root of time
formula:
(i) TM equals 5 for repo-style transactions and 10
for eligible margin loans;
(ii) TN equals the holding period used by the bank
to derive HN; and
(iii) HN equals the haircut based on the holding
period TN.
(3) A bank must adjust holding periods upwards where
and as appropriate to take into account the illiquidity of an
instrument.
(4) The historical observation period must be at least
one year.
(5) A bank must update its data sets and recompute
haircuts no less frequently than quarterly and must also reassess data
sets and haircuts whenever market prices change materially.
(B) With respect to debt securities that have an applicable
external rating of investment grade, a bank may calculate haircuts for
categories of securities. For a category of securities, the bank must
calculate the haircut on the basis of internal volatility estimates for
securities in that category that are representative of the securities
in that category that the bank has lent, sold subject to repurchase,
posted as collateral, borrowed, purchased
{{12-31-07 p.2262.52}}subject to resale, or
taken as collateral. In determining relevant categories, the bank must
at a minimum take into account:
(1) The type of issuer of the security;
(2) The applicable external rating of the security;
(3) The maturity of the security; and
(4) The interest rate sensitivity of the security.
(C) With respect to debt securities that have an applicable
external rating of below investment grade and equity securities, a bank
must calculate a separate haircut for each individual security.
(D) Where an exposure or collateral (whether in the form of cash
or securities) is denominated in a currency that differs from the
settlement currency, the bank must calculate a separate currency
mismatch haircut for its net position in each mismatched currency based
on estimated volatilities of foreign exchange rates between the
mismatched currency and the settlement currency.
(E) A bank's own estimates of market price and foreign exchange
rate volatilities may not take into account the correlations among
securities and foreign exchange rates on either the exposure or
collateral side of a transaction (or netting set) or the correlations
among securities and foreign exchange rates between the exposure and
collateral sides of the transaction (or netting set).
(3) Simple VaR methodology. With the prior written
approval of the FDIC, a bank may estimate EAD for a netting set using a
VaR model that meets the requirements in paragraph (b)(3)(iii) of this
section. In such event, the bank must set EAD equal to max {0,
[(ΣE – ΣC) + PFE]}, where:
(i) ΣE equals the value of the exposure (the sum of the current
market values of all instruments, gold, and cash the bank has lent,
sold subject to repurchase, or posted as collateral to the counterparty
under the netting set);
(ii) ΣC equals the value of the collateral (the sum of the
current market values of all instruments, gold, and cash the bank has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty under the netting set); and
(iii) PFE (potential future exposure) equals the bank's
empirically based best estimate of the 99th percentile, one-tailed
confidence interval for an increase in the value of (ΣE – ΣC)
over a five-business-day holding period for repo-style transactions or
over a ten-business-day holding period for eligible margin loans using
a minimum one-year historical observation period of price data
representing the instruments that the bank has lent, sold subject to
repurchase, posted as collateral, borrowed, purchased subject to
resale, or taken as collateral. The bank must validate its VaR model,
including by establishing and maintaining a rigorous and regular
back-testing regime.
(c) EAD for OTC derivative contracts. (1) A bank must
determine the EAD for an OTC derivative contract that is not subject to
a qualifying master netting agreement using the current exposure
methodology in paragraph (c)(5) of this section or using the internal
models methodology described in paragraph (d) of this section.
(2) A bank must determine the EAD for multiple OTC derivative
contracts that are subject to a qualifying master netting agreement
using the current exposure methodology in paragraph (c)(6) of this
section or using the internal models methodology described in paragraph
(d) of this section.
(3) Counterparty credit risk for credit derivatives.
Notwithstanding the above,
(i) A bank that purchases a credit derivative that is recognized
under section 33 or 34 of this appendix as a credit risk mitigant for
an exposure that is not a covered position under 12 CFR part 325,
Appendix C need not compute a separate counterparty credit risk capital
requirement under this section so long as the bank does so consistently
for all such credit derivatives and either includes all or excludes all
such credit derivatives that are subject to a master netting agreement
from any measure used to determine counterparty credit risk exposure to
all relevant counterparties for risk-based capital purposes.
(ii) A bank that is the protection provider in a credit
derivative must treat the credit derivative as a wholesale exposure to
the reference obligor and need not compute a counterparty credit risk
capital requirement for the credit derivative under this section, so
long as it does so consistently for all such credit derivatives and
either includes all or excludes all such credit derivatives that are
subject to a master netting agreement from any measure used to
determine counterparty credit risk exposure to all relevant
counterparties
{{12-31-07 p.2262.53}}for risk-based capital
purposes (unless the bank is treating the credit derivative as a
covered position under 12 CFR part 325, Appendix C, in which case the
bank must compute a supplemental counterparty credit risk capital
requirement under this section).
(4) Counterparty credit risk for equity derivatives. A
bank must treat an equity derivative contract as an equity exposure and
compute a risk-weighted asset amount for the equity derivative contract
under part VI (unless the bank is treating the contract as a covered
position under 12 CFR part 325, Appendix C). In addition, if the bank
is treating the contract as a covered position under 12 CFR part 325,
Appendix C and in certain other cases described in section 55 of this
appendix, the bank must also calculate a risk-based capital requirement
for the counterparty credit risk of an equity derivative contract under
this part.
(5) Single OTC derivative contract. Except as modified
by paragraph (c)(7) of this section, the EAD for a single OTC
derivative contract that is not subject to a qualifying master netting
agreement is equal to the sum of the bank's current credit exposure and
potential future credit exposure (PFE) on the derivative contract.
(i) Current credit exposure. The current credit
exposure for a single OTC derivative contract is the greater of the
mark-to-market value of the derivative contract or zero.
(ii) PFE. The PFE for a single OTC derivative
contract, including an OTC derivative contract with a negative
mark-to-market value, is calculated by multiplying the notional
principal amount of the derivative contract by the appropriate
conversion factor in Table 4. For purposes of calculating either the
PFE under this paragraph or the gross PFE under paragraph (c)(6) of
this section for exchange rate contracts and other similar contracts in
which the notional principal amount is equivalent to the cash flows,
notional principal amount is the net receipts to each party falling due
on each value date in each currency. For any OTC derivative contract
that does not fall within one of the specified categories in Table 4,
the PFE must be calculated using the "other" conversion factors.
A bank must use an OTC derivative contract's effective notional
principal amount (that is, its apparent or stated notional principal
amount multiplied by any multiplier in the OTC derivative contract)
rather than its apparent or stated notional principal amount in
calculating PFE. PFE of the protection provider of a credit derivative
is capped at the net present value of the amount of unpaid premiums.
Table 4 — Conversion Factor Matrix for OTC Derivative
Contracts
1
| Remaining maturity2 |
Interest
rate |
Foreign exchange rate and gold |
Credit (invest- ment-grade
reference obligor)3 |
Credit (non- invest- ment-grade reference
obligor) |
Equity |
Precious metals (except gold) |
Other |
|---|
| One
year or less |
0.00 |
0.01 |
0.05 |
0.10 |
0.06 |
0.07
|
0.10 |
| Over one to five years |
0.005 |
0.05 |
0.05
|
0.10 |
0.08 |
0.07 |
0.12 |
| Over five years |
0.015
|
0.075 |
0.05 |
0.10 |
0.10 |
0.08 |
0.15
|
1 For an OTC derivative contract with multiple exchanges
of principal, the conversion factor is multiplied by the number of
remaining payments in the derivative contract.
2 For an OTC derivative contract that is structured such
that on specified dates any outstanding exposure is settled and the
terms are reset so that the market value of the contract is zero, the
remaining maturity equals the time until the next reset date. For an
interest rate derivative contract with a remaining maturity of greater
than one year that meets these criteria, the minimum conversion factor
is 0.005.
3 A bank holding company must use the column labeled
"Credit (investment-grade reference obligor)" for a credit
derivative whose reference obligor has an outstanding unsecured
long-term debt security without credit enhancement that has a long-term
applicable external rating of at least investment grade. A bank holding
company must use the column labeled "Credit (non-investment-grade
reference obligor)" for all other credit derivatives.
{{12-31-07 p.2262.54}}
(6) Multiple OTC derivative contracts subject to a
qualifying master netting agreement. Except as modified by
paragraph (c)(7) of this section, the EAD for multiple OTC derivative
contracts subject to a qualifying master netting agreement is equal to
the sum of the net current credit exposure and the adjusted sum of the
PFE exposure for all OTC derivative contracts subject to the qualifying
master netting agreement.
(i) Net current credit exposure. The net current
credit exposure is the greater of:
(A) The net sum of all positive and negative mark-to-market
values of the individual OTC derivative contracts subject to the
qualifying master netting agreement; or
(B) zero.
(ii) Adjusted sum of the PFE. The adjusted sum of the
PFE, Anet, is calculated as Anet = (0.4×Agross)+(0.6×NGR×Agross),
where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts
(as determined under paragraph (c)(5)(ii) of this section) for each
individual OTC derivative contract subject to the qualifying master
netting agreement); and
(B) NGR = the net to gross ratio (that is, the ratio of the net
current credit exposure to the gross current credit exposure). In
calculating the NGR, the gross current credit exposure equals the sum
of the positive current credit exposures (as determined under paragraph
(c)(5)(i) of this section) of all individual OTC derivative contracts
subject to the qualifying master netting agreement.
(7) Collateralized OTC derivative contracts. A bank
may recognize the credit risk mitigation benefits of financial
collateral that secures an OTC derivative contract or single-product
netting set of OTC derivatives by factoring the collateral into its LGD
estimates for the contract or netting set. Alternatively, a bank may
recognize the credit risk mitigation benefits of financial collateral
that secures such a contract or netting set that is marked to market on
a daily basis and subject to a daily margin maintenance requirement by
estimating an unsecured LGD for the contract or netting set and
adjusting the EAD calculated under paragraph (c)(5) or (c)(6) of this
section using the collateral haircut approach in paragraph (b)(2) of
this section. The bank must substitute the EAD calculated under
paragraph (c)(5) or (c)(6) of this section for ΣE in the equation in
paragraph (b)(2)(i) of this section and must use a ten-business-day
minimum holding period (TM = 10).
(d) Internal models methodology. (1) With prior written
approval from the FDIC, a bank may use the internal models methodology
in this paragraph (d) to determine EAD for counterparty credit risk for
OTC derivative contracts (collateralized or uncollateralized) and
single-product netting sets thereof, for eligible margin loans and
single-product netting sets thereof, and for repo-style transactions
and single-product netting sets thereof. A bank that uses the internal
models methodology for a particular transaction type (OTC derivative
contracts, eligible margin loans, or repo-style transactions) must use
the internal models methodology for all transactions of that
transaction type. A bank may choose to use the internal models
methodology for one or two of these three types of exposures and not
the other types. A bank may also use the internal models methodology
for OTC derivative contracts, eligible margin loans, and repo-style
transactions subject to a qualifying cross-product netting agreement
if:
(i) The bank effectively integrates the risk mitigating effects
of cross-product netting into its risk management and other information
technology systems; and
(ii) The bank obtains the prior written approval of the FDIC. A
bank that uses the internal models methodology for a transaction type
must receive approval from the FDIC to cease using the methodology for
that transaction type or to make a material change to its internal
model.
(2) Under the internal models methodology, a bank uses an
internal model to estimate the expected exposure (EE) for a netting set
and then calculates EAD based on that EE.
(i) The bank must use its internal model's probability
distribution for changes in the market value of a netting set that are
attributable to changes in market variables to determine EE.
(ii) Under the internal models methodology, EAD = α ×
effective EPE, or, subject to FDIC approval as provided in paragraph
(d)(7), a more conservative measure of
EAD.
{{12-31-07 p.2262.55}}
(that is, effective EPE is the time-weighted average of effective
EE where the weights are the proportion that an individual effective EE
represents in a one-year time interval) where:
(1) EffectiveEEtk = max
(EffectiveEEtk-1,
EEtk) (that is, for a specific date tk,
effective EE is the greater of EE at that date or the effective EE at
the previous date); and
(2) tk represents the kth future time period in
the model and there are n time periods represented in the model over
the first year; and
(B) α = 1.4 except as provided in paragraph (d)(6), or when the
FDIC has determined that the bank must set a higher based on the bank's
specific characteristics of counterparty credit risk.
(iii) A bank may include financial collateral currently posted by
the counterparty as collateral (but may not include other forms of
collateral) when calculating EE.
(iv) If a bank hedges some or all of the counterparty credit risk
associated with a netting set using an eligible credit derivative, the
bank may take the reduction in exposure to the counterparty into
account when estimating EE. If the bank recognizes this reduction in
exposure to the counterparty in its estimate of EE, it must also use
its internal model to estimate a separate EAD for the bank's exposure
to the protection provider of the credit derivative.
(3) To obtain FDIC approval to calculate the distributions of
exposures upon which the EAD calculation is based, the bank must
demonstrate to the satisfaction of the FDIC that it has been using for
at least one year an internal model that broadly meets the following
minimum standards, with which the bank must maintain compliance:
(i) The model must have the systems capability to estimate the
expected exposure to the counterparty on a daily basis (but is not
expected to estimate or report expected exposure on a daily basis).
(ii) The model must estimate expected exposure at enough future
dates to reflect accurately all the future cash flows of contracts in
the netting set.
(iii) The model must account for the possible non-normality of
the exposure distribution, where appropriate.
(iv) The bank must measure, monitor, and control current
counterparty exposure and the exposure to the counterparty over the
whole life of all contracts in the netting set.
(v) The bank must be able to measure and manage current exposures
gross and net of collateral held, where appropriate. The bank must
estimate expected exposures for OTC derivative contracts both with and
without the effect of collateral agreements.
(vi) The bank must have procedures to identify, monitor, and
control specific wrong-way risk throughout the life of an exposure.
Wrong-way risk in this context is the risk that future exposure to a
counterparty will be high when the counterparty's probability of
default is also high.
(vii) The model must use current market data to compute current
exposures. When estimating model parameters based on historical data,
at least three years of historical data that cover a wide range of
economic conditions must be used and must be updated quarterly or more
frequently if market conditions warrant. The bank should consider using
model parameters based on forward-looking measures, where appropriate.
(viii) A bank must subject its internal model to an initial
validation and annual model review process. The model review should
consider whether the inputs and risk factors, as well as the model
outputs, are appropriate.
{{12-31-07 p.2262.56}}
(4) Maturity. (i) If the remaining maturity of the
exposure or the longest-dated contract in the netting set is greater
than one year, the bank must set M for the exposure or netting set
equal to the lower of five years or
M(EPE), 3
where:
(B) dfk is the risk-free discount factor for future time
period tk; and
(C) Δtk = tk -- tk–1.
(ii) If the remaining maturity of the exposure or the
longest-dated contract in the netting set is one year or less, the bank
must set M for the exposure or netting set equal to one year, except as
provided in paragraph (d)(7) of section 31 of this appendix.
(5) Collateral agreements. A bank may capture the
effect on EAD of a collateral agreement that requires receipt of
collateral when exposure to the counterparty increases but may not
capture the effect on EAD of a collateral agreement that requires
receipt of collateral when counterparty credit quality deteriorates.
For this purpose, a collateral agreement means a legal contract that
specifies the time when, and circumstances under which, the
counterparty is required to pledge collateral to the bank for a single
financial contract or for all financial contracts in a netting set and
confers upon the bank a perfected, first priority security interest
(notwithstanding the prior security interest of any custodial agent),
or the legal equivalent thereof, in the collateral posted by the
counterparty under the agreement. This security interest must provide
the bank with a right to close out the financial positions and
liquidate the collateral upon an event of default of, or failure to
perform by, the counterparty under the collateral agreement. A contract
would not satisfy this requirement if the bank's exercise of rights
under the agreement may be stayed or avoided under applicable law in
the relevant jurisdictions. Two methods are available to capture the
effect of a collateral agreement:
(i) With prior written approval from the FDIC, a bank may include
the effect of a collateral agreement within its internal model used to
calculate EAD. The bank may set EAD equal to the expected exposure at
the end of the margin period of risk. The margin period of risk means,
with respect to a netting set subject to a collateral agreement, the
time period from the most recent exchange of collateral with a
counterparty until the next required exchange of collateral plus the
period of time required to sell and realize the proceeds of the least
liquid collateral that can be delivered under the terms of the
collateral agreement and, where applicable, the period of time required
to re-hedge the resulting market risk, upon the default of the
counterparty. The minimum margin period of risk is five business days
for repo-style transactions and ten business days for other
transactions when liquid financial collateral is posted under a daily
margin maintenance requirement. This period should be extended to cover
any additional time between margin calls; any potential closeout
difficulties; any delays in selling collateral, particularly if the
collateral is illiquid; and any impediments to prompt re-hedging of any
market risk.
(ii) A bank that can model EPE without collateral agreements but
cannot achieve the higher level of modeling sophistication to model EPE
with collateral agreements can set effective EPE for a collateralized
netting set equal to the lesser of:
(A) The threshold, defined as the exposure amount at which the
counterparty is required to post collateral under the collateral
agreement, if the threshold is positive, plus an add-on that reflects
the potential increase in exposure of the netting set over the margin
period of risk. The add-on is computed as the expected increase in the
netting set's exposure beginning from current exposure of zero over the
margin period of risk. The margin period of risk must be at least five
business days for netting sets consisting only of repo-style
transactions subject to daily re-margining and daily marking-to-market,
and tenbusiness days for all other netting sets; or
{{12-31-07 p.2262.57}}
(B) Effective EPE without a collateral agreement.
(6) Own estimate of alpha. With prior written approval
of the FDIC, a bank may calculate alpha as the ratio of economic
capital from a full simulation of counterparty exposure across
counterparties that incorporates a joint simulation of market and
credit risk factors (numerator) and economic capital based on EPE
(denominator), subject to a floor of 1.2. For purposes of this
calculation, economic capital is the unexpected losses for all
counterparty credit risks measured at a 99.9 percent confidence level
over a one-year horizon. To receive approval, the bank must meet the
following minimum standards to the satisfaction of the FDIC:
(i) The bank's own estimate of alpha must capture in the
numerator the effects of:
(A) The material sources of stochastic dependency of
distributions of market values of transactions or portfolios of
transactions across counterparties;
(B) Volatilities and correlations of market risk factors used in
the joint simulation, which must be related to the credit risk factor
used in the simulation to reflect potential increases in volatility or
correlation in an economic downturn, where appropriate; and
(C) The granularity of exposures (that is, the effect of a
concentration in the proportion of each counterparty's exposure that is
driven by a particular risk factor).
(ii) The bank must assess the potential model uncertainty in its
estimates of alpha.
(iii) The bank must calculate the numerator and denominator of
alpha in a consistent fashion with respect to modeling methodology,
parameter specifications, and portfolio composition.
(iv) The bank must review and adjust as appropriate its estimates
of the numerator and denominator of alpha on at least a quarterly basis
and more frequently when the composition of the portfolio varies over
time.
(7) Other measures of counterparty exposure. With
prior written approval of the FDIC, a bank may set EAD equal to a
measure of counterparty credit risk exposure, such as peak EAD, that is
more conservative than an alpha of 1.4 (or higher under the terms of
paragraph (d)(2)(ii)(B)) of this section times EPE for every
counterparty whose EAD will be measured under the alternative measure
of counterparty exposure. The bank must demonstrate the conservatism of
the measure of counterparty credit risk exposure used for EAD. For
material portfolios of new OTC derivative products, the bank may assume
that the current exposure methodology in paragraphs (c)(5) and (c)(6)
of this section meets the conservatism requirement of this paragraph
for a period not to exceed 180 days. For immaterial portfolios of OTC
derivative contracts, the bank generally may assume that the current
exposure methodology in paragraphs (c)(5) and (c)(6) of this section
meets the conservatism requirement of this
paragraph.
Section 33. Guarantees and Credit Derivatives: PD Substitution
and LGD Adjustment Approaches
(a) Scope. (1) This section applies to wholesale
exposures for which:
(i) Credit risk is fully covered by an eligible guarantee or
eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis (that is, on a
basis in which the bank and the protection provider share losses
proportionately) by an eligible guarantee or eligible credit
derivative.
(2) Wholesale exposures on which there is a tranching of credit
risk (reflecting at least two different levels of seniority) are
securitization exposures subject to the securitization framework in
part V.
(3) A bank may elect to recognize the credit risk mitigation
benefits of an eligible guarantee or eligible credit derivative
covering an exposure described in paragraph (a)(1) of this section by
using the PD substitution approach or the LGD adjustment approach in
paragraph (c) of this section or, if the transaction qualifies, using
the double default treatment in section 34 of this appendix. A bank's
PD and LGD for the hedged exposure may not be lower than the PD and LGD
floors described in paragraphs (d)(2) and (d)(3) of section 31 of this
appendix.
(4) If multiple eligible guarantees or eligible credit
derivatives cover a single exposure described in paragraph (a)(1) of
this section, a bank may treat the hedged exposure as multiple separate
exposures each covered by a single eligible guarantee or
{{12-31-07 p.2262.58}}eligible credit
derivative and may calculate a separate risk-based capital requirement
for each separate exposure as described in paragraph (a)(3) of this
section.
(5) If a single eligible guarantee or eligible credit derivative
covers multiple hedged wholesale exposures described in paragraph
(a)(1) of this section, a bank must treat each hedged exposure as
covered by a separate eligible guarantee or eligible credit derivative
and must calculate a separate risk-based capital requirement for each
exposure as described in paragraph (a)(3) of this section.
(6) A bank must use the same risk parameters for calculating ECL
as it uses for calculating the risk-based capital requirement for the
exposure.
(b) Rules of recognition. (1) A bank may only recognize
the credit risk mitigation benefits of eligible guarantees and eligible
credit derivatives.
(2) A bank may only recognize the credit risk mitigation benefits
of an eligible credit derivative to hedge an exposure that is different
from the credit derivative's reference exposure used for determining
the derivative's cash settlement value, deliverable obligation, or
occurrence of a credit event if:
(i) The reference exposure ranks pari passu (that is, equally)
with or is junior to the hedged exposure; and
(ii) The reference exposure and the hedged exposure are exposures
to the same legal entity, and legally enforceable cross-default or
cross-acceleration clauses are in place to assure payments under the
credit derivative are triggered when the obligor fails to pay under the
terms of the hedged exposure.
(c) Risk parameters for hedged exposures--(1) PD
substitution approach--(i) Full coverage. If an
eligible guarantee or eligible credit derivative meets the conditions
in paragraphs (a) and (b) of this section and the protection amount (P)
of the guarantee or credit derivative is greater than or equal to the
EAD of the hedged exposure, a bank may recognize the guarantee or
credit derivative in determining the bank's risk-based capital
requirement for the hedged exposure by substituting the PD associated
with the rating grade of the protection provider for the PD associated
with the rating grade of the obligor in the risk-based capital formula
applicable to the guarantee or credit derivative in Table 2 and using
the appropriate LGD as described in paragraph (c)(1)(iii) of this
section. If the bank determines that full substitution of the
protection provider's PD leads to an inappropriate degree of risk
mitigation, the bank may substitute a higher PD than that of the
protection provider.
(ii) Partial coverage. If an eligible guarantee or
eligible credit derivative meets the conditions in paragraphs (a) and
(b) of this section and the protection amount (P) of the guarantee or
credit derivative is less than the EAD of the hedged exposure, the bank
must treat the hedged exposure as two separate exposures (protected and
unprotected) in order to recognize the credit risk mitigation benefit
of the guarantee or credit derivative.
(A) The bank must calculate its risk-based capital requirement
for the protected exposure under section 31 of this appendix, where PD
is the protection provider's PD, LGD is determined under paragraph
(c)(1)(iii) of this section, and EAD is P. If the bank determines that
full substitution leads to an inappropriate degree of risk mitigation,
the bank may use a higher PD than that of the protection provider.
(B) The bank must calculate its risk-based capital requirement
for the unprotected exposure under section 31 of this appendix, where
PD is the obligor's PD, LGD is the hedged exposure's LGD (not adjusted
to reflect the guarantee or credit derivative), and EAD is the EAD of
the original hedged exposure minus P.
(C) The treatment in this paragraph (c)(1)(ii) is applicable when
the credit risk of a wholesale exposure is covered on a partial pro
rata basis or when an adjustment is made to the effective notional
amount of the guarantee or credit derivative under paragraph (d), (e),
or (f) of this section.
(iii) LGD of hedged exposures. The LGD of a hedged
exposure under the PD substitution approach is equal to:
(A) The lower of the LGD of the hedged exposure (not adjusted to
reflect the guarantee or credit derivative) and the LGD of the
guarantee or credit derivative, if the
{{12-31-07 p.2262.59}}guarantee or credit
derivative provides the bank with the option to receive immediate
payout upon triggering the protection; or
(B) The LGD of the guarantee or credit derivative, if the
guarantee or credit derivative does not provide the bank with the
option to receive immediate payout upon triggering the protection.
(2) LGD adjustment approach--(i) Full
coverage. If an eligible guarantee or eligible credit derivative
meets the conditions in paragraphs (a) and (b) of this section and the
protection amount (P) of the guarantee or credit derivative is greater
than or equal to the EAD of the hedged exposure, the bank's risk-based
capital requirement for the hedged exposure is the greater of:
(A) The risk-based capital requirement for the exposure as
calculated under section 31 of this appendix, with the LGD of the
exposure adjusted to reflect the guarantee or credit derivative; or
(B) The risk-based capital requirement for a direct exposure to
the protection provider as calculated under section 31 of this
appendix, using the PD for the protection provider, the LGD for the
guarantee or credit derivative, and an EAD equal to the EAD of the
hedged exposure.
(ii) Partial coverage. If an eligible guarantee or
eligible credit derivative meets the conditions in paragraphs (a) and
(b) of this section and the protection amount (P) of the guarantee or
credit derivative is less than the EAD of the hedged exposure, the bank
must treat the hedged exposure as two separate exposures (protected and
unprotected) in order to recognize the credit risk mitigation benefit
of the guarantee or credit derivative.
(A) The bank's risk-based capital requirement for the protected
exposure would be the greater of:
(1) The risk-based capital requirement for the
protected exposure as calculated under section 31 of this appendix,
with the LGD of the exposure adjusted to reflect the guarantee or
credit derivative and EAD set equal to P; or
(2) The risk-based capital requirement for a direct
exposure to the guarantor as calculated under section 31 of this
appendix, using the PD for the protection provider, the LGD for the
guarantee or credit derivative, and an EAD set equal to P.
(B) The bank must calculate its risk-based capital requirement
for the unprotected exposure under section 31 of this appendix, where
PD is the obligor's PD, LGD is the hedged exposure's LGD (not adjusted
to reflect the guarantee or credit derivative), and EAD is the EAD of
the original hedged exposure minus P.
(3) M of hedged exposures. The M of the hedged
exposure is the same as the M of the exposure if it were unhedged.
(d) Maturity mismatch. (1) A bank that recognizes an
eligible guarantee or eligible credit derivative in determining its
risk-based capital requirement for a hedged exposure must adjust the
effective notional amount of the credit risk mitigant to reflect any
maturity mismatch between the hedged exposure and the credit risk
mitigant.
(2) A maturity mismatch occurs when the residual maturity of a
credit risk mitigant is less than that of the hedged exposure(s).
(3) The residual maturity of a hedged exposure is the longest
possible remaining time before the obligor is scheduled to fulfill its
obligation on the exposure. If a credit risk mitigant has embedded
options that may reduce its term, the bank (protection purchaser) must
use the shortest possible residual maturity for the credit risk
mitigant. If a call is at the discretion of the protection provider,
the residual maturity of the credit risk mitigant is at the first call
date. If the call is at the discretion of the bank (protection
purchaser), but the terms of the arrangement at origination of the
credit risk mitigant contain a positive incentive for the bank to call
the transaction before contractual maturity, the remaining time to the
first call date is the residual maturity of the credit risk mitigant.
For example, where there is a step-up in cost in conjunction with a
call feature or where the effective cost of protection increases over
time even if credit quality remains the same or improves, the residual
maturity of the credit risk mitigant will be the remaining time to the
first call.
{{12-31-07 p.2262.60}}
(4) A credit risk mitigant with a maturity mismatch may be
recognized only if its original maturity is greater than or equal to
one year and its residual maturity is greater than three months.
(5) When a maturity mismatch exists, the bank must apply the
following adjustment to the effective notional amount of the credit
risk mitigant: Pm = E × (t-0.25)/(T-0.25), where:
(i) Pm = effective notional amount of the credit risk mitigant,
adjusted for maturity mismatch;
(ii) E = effective notional amount of the credit risk mitigant;
(iii) t = the lesser of T or the residual maturity of the credit
risk mitigant, expressed in years; and
(iv) T = the lesser of five or the residual maturity of the
hedged exposure, expressed in years.
(e) Credit derivatives without restructuring as a credit
event. If a bank recognizes an eligible credit derivative that
does not include as a credit event a restructuring of the hedged
exposure involving forgiveness or postponement of principal, interest,
or fees that results in a credit loss event (that is, a charge-off,
specific provision, or other similar debit to the profit and loss
account), the bank must apply the following adjustment to the effective
notional amount of the credit derivative: Pr = Pm × 0.60, where:
(1) Pr = effective notional amount of the credit risk mitigant,
adjusted for lack of restructuring event (and maturity mismatch, if
applicable); and
(2) Pm = effective notional amount of the credit risk mitigant
adjusted for maturity mismatch (if applicable).
(f) Currency mismatch. (1) If a bank recognizes an
eligible guarantee or eligible credit derivative that is denominated in
a currency different from that in which the hedged exposure is
denominated, the bank must apply the following formula to the effective
notional amount of the guarantee or credit derivative: Pc = Pr ×
(1-HFX), where:
(i) Pc = effective notional amount of the credit risk mitigant,
adjusted for currency mismatch (and maturity mismatch and lack of
restructuring event, if applicable);
(ii) Pr = effective notional amount of the credit risk mitigant
(adjusted for maturity mismatch and lack of restructuring event, if
applicable); and
(iii) HFX = haircut appropriate for the currency mismatch
between the credit risk mitigant and the hedged exposure.
(2) A bank must set HFX equal to 8 percent unless it
qualifies for the use of and uses its own internal estimates of foreign
exchange volatility based on a ten-business-day holding period and
daily marking-to-market and remargining. A bank qualifies for the use
of its own internal estimates of foreign exchange volatility if it
qualifies for:
(i) The own-estimates haircuts in paragraph (b)(2)(iii) of
section 32 of this appendix;
(ii) The simple VaR methodology in paragraph (b)(3) of section 32
of this appendix; or
(iii) The internal models methodology in paragraph (d) of section
32 of this appendix.
(3) A bank must adjust HFX calculated in paragraph (f)(2) of
this section upward if the bank revalues the guarantee or credit
derivative less frequently than once every ten business days using the
square root of time formula provided in paragraph
(b)(2)(iii)(A)(2) of section 32 of this
appendix.
Section 34. Guarantees and Credit Derivatives: Double Default
Treatment
(a) Eligibility and operational criteria for double default
treatment. A bank may recognize the credit risk mitigation
benefits of a guarantee or credit derivative covering an exposure
described in paragraph (a)(1) of section 33 of this appendix by
applying the double default treatment in this section if all the
following criteria are satisfied.
(1) The hedged exposure is fully covered or covered on a pro rata
basis by:
(i) An eligible guarantee issued by an eligible double default
guarantor; or
{{12-31-07 p.2262.61}}
(ii) An eligible credit derivative that meets the requirements of
paragraph (b)(2) of section 33 of this appendix and is issued by an
eligible double default guarantor.
(2) The guarantee or credit derivative is:
(i) An uncollateralized guarantee or uncollateralized credit
derivative (for example, a credit default swap) that provides
protection with respect to a single reference obligor; or
(ii) An nth-to-default credit derivative (subject to the
requirements of paragraph (m) of section 42 of this appendix).
(3) The hedged exposure is a wholesale exposure (other than a
sovereign exposure).
(4) The obligor of the hedged exposure is not:
(i) An eligible double default guarantor or an affiliate of an
eligible double default guarantor; or
(ii) An affiliate of the guarantor.
(5) The bank does not recognize any credit risk mitigation
benefits of the guarantee or credit derivative for the hedged exposure
other than through application of the double default treatment as
provided in this section.
(6) The bank has implemented a process (which has received the
prior, written approval of the FDIC) to detect excessive correlation
between the creditworthiness of the obligor of the hedged exposure and
the protection provider. If excessive correlation is present, the bank
may not use the double default treatment for the hedged exposure.
(b) Full coverage. If the transaction meets the criteria
in paragraph (a) of this section and the protection amount (P) of the
guarantee or credit derivative is at least equal to the EAD of the
hedged exposure, the bank may determine its risk-weighted asset amount
for the hedged exposure under paragraph (e) of this section.
(c) Partial coverage. If the transaction meets the
criteria in paragraph (a) of this section and the protection amount (P)
of the guarantee or credit derivative is less than the EAD of the
hedged exposure, the bank must treat the hedged exposure as two
separate exposures (protected and unprotected) in order to recognize
double default treatment on the protected portion of the exposure.
(1) For the protected exposure, the bank must set EAD equal to P
and calculate its risk-weighted asset amount as provided in paragraph
(e) of this section.
(2) For the unprotected exposure, the bank must set EAD equal to
the EAD of the original exposure minus P and then calculate its
risk-weighted asset amount as provided in section 31 of this appendix.
(d) Mismatches. For any hedged exposure to which a bank
applies double default treatment, the bank must make applicable
adjustments to the protection amount as required in paragraphs (d),
(e), and (f) of section 33 of this appendix.
(e) The double default dollar risk-based capital
requirement. The dollar risk-based capital requirement for a
hedged exposure to which a bank has applied double default treatment is
KDD multiplied by the EAD of the exposure. KDD is calculated
according to the following formula: KDD = Ko × (0.15 + 160 ×
PDg), where:
(1)
(2) PDg = PD of the protection provider.
(3) PDo = PD of the obligor of the hedged exposure.
(4) LGDg = (i) The lower of the LGD of the hedged exposure
(not adjusted to reflect the guarantee or credit derivative) and the
LGD of the guarantee or credit derivative, if the guarantee or credit
derivative provides the bank with the option to receive immediate
payout on triggering the protection; or
{{12-31-07 p.2262.62}}
(ii) The LGD of the guarantee or credit derivative, if the
guarantee or credit derivative does not provide the bank with the
option to receive immediate payout on triggering the protection.
(5) ρos (asset value correlation of the obligor) is
calculated according to the appropriate formula for (R) provided in
Table 2 in section 31 of this appendix, with PD equal to PDo.
(6) b (maturity adjustment coefficient) is calculated according
to the formula for b provided in Table 2 in section 31 of this
appendix, with PD equal to the lesser of PDo and PDg.
(7) M (maturity) is the effective maturity of the guarantee or
credit derivative, which may not be less than one year or greater than
five years.
Section 35. Risk-Based Capital Requirement for Unsettled
Transactions
(a) Definitions. For purposes of this section:
(1) Delivery-versus-payment (DvP) transaction means a
securities or commodities transaction in which the buyer is obligated
to make payment only if the seller has made delivery of the securities
or commodities and the seller is obligated to deliver the securities or
commodities only if the buyer has made payment.
(2) Payment-versus-payment (PvP) transaction means a
foreign exchange transaction in which each counterparty is obligated to
make a final transfer of one or more currencies only if the other
counterparty has made a final transfer of one or more currencies.
(3) Normal settlement period. A transaction has a
normal settlement period if the contractual settlement
period for the transaction is equal to or less than the market standard
for the instrument underlying the transaction and equal to or less than
five business days.
(4) Positive current exposure. The positive current
exposure of a bank for a transaction is the difference between the
transaction value at the agreed settlement price and the current market
price of the transaction, if the difference results in a credit
exposure of the bank to the counterparty.
(b) Scope. This section applies to all transactions
involving securities, foreign exchange instruments, and commodities
that have a risk of delayed settlement or delivery. This section does
not apply to:
(1) Transactions accepted by a qualifying central counterparty
that are subject to daily marking-to-market and daily receipt and
payment of variation margin;
(2) Repo-style transactions, including unsettled repo-style
transactions (which are addressed in sections 31 and 32 of this
appendix);
(3) One-way cash payments on OTC derivative contracts (which are
addressed in sections 31 and 32 of this appendix); or
(4) Transactions with a contractual settlement period that is
longer than the normal settlement period (which are treated as OTC
derivative contracts and addressed in sections 31 and 32 of this
appendix).
(c) System-wide failures. In the case of a system-wide
failure of a settlement or clearing system, the FDIC may waive
risk-based capital requirements for unsettled and failed transactions
until the situation is rectified.
(d) Delivery-versus-payment (DvP) and payment-versus-payment
(PvP) transactions. A bank must hold risk-based capital against
any DvP or PvP transaction with a normal settlement period if the
bank's counterparty has not made delivery or payment within five
business days after the settlement date. The bank must determine its
risk-weighted asset amount for such a transaction by multiplying the
positive current exposure of the transaction for the bank by the
appropriate risk weight in Table 5.
{{12-31-07 p.2262.63}}
Table 5 — Risk Weights for Unsettled DvP and PvP
Transactions
| Number
of business days after contractual settlement date |
Risk
weight to be applied to positive current exposure |
|---|
| From 5 to
15 |
100% |
| From 16 to 30 |
625% |
| From 31 to 45 |
937.5%
|
| 46 or more |
1,250%
|
(e) Non-DvP/non-PvP
(non-delivery-versus-payment/non-payment-versus-payment)
transactions. (1) A bank must hold risk-based capital against any
non-DvP/non-PvP transaction with a normal settlement period if the bank
has delivered cash, securities, commodities, or currencies to its
counterparty but has not received its corresponding deliverables by the
end of the same business day. The bank must continue to hold risk-based
capital against the transaction until the bank has received its
corresponding deliverables.
(2) From the business day after the bank has made its delivery
until five business days after the counterparty delivery is due, the
bank must calculate its risk-based capital requirement for the
transaction by treating the current market value of the deliverables
owed to the bank as a wholesale exposure.
(i) A bank may assign an obligor rating to a counterparty for
which it is not otherwise required under this appendix to assign an
obligor rating on the basis of the applicable external rating of any
outstanding unsecured long-term debt security without credit
enhancement issued by the counterparty.
(ii) A bank may use a 45 percent LGD for the transaction rather
than estimating LGD for the transaction provided the bank uses the 45
percent LGD for all transactions described in paragraphs (e)(1) and
(e)(2) of this section.
(iii) A bank may use a 100 percent risk weight for the
transaction provided the bank uses this risk weight for all
transactions described in paragraphs (e)(1) and (e)(2) of this section.
(3) If the bank has not received its deliverables by the fifth
business day after the counterparty delivery was due, the bank must
deduct the current market value of the deliverables owed to the bank 50
percent from tier 1 capital and 50 percent from tier 2 capital.
(f) Total risk-weighted assets for unsettled
transactions. Total risk-weighted assets for unsettled
transactions is the sum of the risk-weighted asset amounts of all DvP,
PvP, and non-DvP/non-PvP transactions.
Part V. Risk-Weighted Assets for Securitization
Exposures
Section 41. Operational Criteria for Recognizing the Transfer of
Risk
(a) Operational criteria for traditional
securitizations. A bank that transfers exposures it has originated
or purchased to a securitization SPE or other third party in connection
with a traditional securitization may exclude the exposures from the
calculation of its risk-weighted assets only if each of the conditions
in this paragraph (a) is satisfied. A bank that meets these conditions
must hold risk-based capital against any securitization exposures it
retains in connection with the securitization. A bank that fails to
meet these conditions must hold risk-based capital against the
transferred exposures as if they had not been securitized and must
deduct from tier 1 capital any after-tax gain-on-sale resulting from
the transaction. The conditions are:
{{12-31-07 p.2262.64}}
(1) The transfer is considered a sale under GAAP;
(2) The bank has transferred to third parties credit risk
associated with the underlying exposures; and
(3) Any clean-up calls relating to the securitization are
eligible clean-up calls.
(b) Operational criteria for synthetic securitizations.
For synthetic securitizations, a bank may recognize for risk-based
capital purposes the use of a credit risk mitigant to hedge underlying
exposures only if each of the conditions in this paragraph (b) is
satisfied. A bank that fails to meet these conditions must hold
risk-based capital against the underlying exposures as if they had not
been synthetically securitized. The conditions are:
(1) The credit risk mitigant is financial collateral, an eligible
credit derivative from an eligible securitization guarantor or an
eligible guarantee from an eligible securitization guarantor;
(2) The bank transfers credit risk associated with the underlying
exposures to third parties, and the terms and conditions in the credit
risk mitigants employed do not include provisions that:
(i) Allow for the termination of the credit protection due to
deterioration in the credit quality of the underlying exposures;
(ii) Require the bank to alter or replace the underlying
exposures to improve the credit quality of the pool of underlying
exposures;
(iii) Increase the bank's cost of credit protection in response
to deterioration in the credit quality of the underlying exposures;
(iv) Increase the yield payable to parties other than the bank in
response to a deterioration in the credit quality of the underlying
exposures; or
(v) Provide for increases in a retained first loss position or
credit enhancement provided by the bank after the inception of the
securitization;
(3) The bank obtains a well-reasoned opinion from legal counsel
that confirms the enforceability of the credit risk mitigant in all
relevant jurisdictions; and
(4) Any clean-up calls relating to the securitization are
eligible clean-up calls.
Section 42. Risk-Based Capital Requirement for Securitization
Exposures
(a) Hierarchy of approaches. Except as provided
elsewhere in this section:
(1) A bank must deduct from tier 1 capital any after-tax
gain-on-sale resulting from a securitization and must deduct from total
capital in accordance with paragraph (c) of this section the portion of
any CEIO that does not constitute gain-on-sale.
(2) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section and qualifies for the Ratings-Based
Approach in section 43 of this appendix, a bank must apply the
Ratings-Based Approach to the exposure.
(3) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section and does not qualify for the
Ratings-Based Approach, the bank may either apply the Internal
Assessment Approach in section 44 of this appendix to the exposure (if
the bank, the exposure, and the relevant ABCP program qualify for the
Internal Assessment Approach) or the Supervisory Formula Approach in
section 45 of this appendix to the exposure (if the bank and the
exposure qualify for the Supervisory Formula Approach).
(4) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section and does not qualify for the
Ratings-Based Approach, the Internal Assessment Approach, or the
Supervisory Formula Approach, the bank must deduct the exposure from
total capital in accordance with paragraph (c) of this section.
(5) If a securitization exposure is an OTC derivative contract
(other than a credit derivative) that has a first priority claim on the
cash flows from the underlying exposures (notwithstanding amounts due
under interest rate or currency derivative contracts, fees due, or
other similar payments), with approval of the FDIC, a bank may choose
to set the risk-weighted asset amount of the exposure equal to the
amount of the exposure as determined in paragraph (e) of this section
rather than apply the hierarchy of approaches described in paragraphs
(a)(1) through (4) of this section.
{{12-31-07 p.2262.65}}
(b) Total risk-weighted assets for securitization
exposures. A bank's total risk-weighted assets for securitization
exposures is equal to the sum of its risk-weighted assets calculated
using the Ratings-Based Approach in section 43 of this appendix, the
Internal Assessment Approach in section 44 of this appendix, and the
Supervisory Formula Approach in section 45 of this appendix, and its
risk-weighted assets amount for early amortization provisions
calculated in section 47 of this appendix.
(c) Deductions. (1) If a bank must deduct a
securitization exposure from total capital, the bank must take the
deduction 50 percent from tier 1 capital and 50 percent from tier 2
capital. If the amount deductible from tier 2 capital exceeds the
bank's tier 2 capital, the bank must deduct the excess from tier 1
capital.
(2) A bank may calculate any deduction from tier 1 capital and
tier 2 capital for a securitization exposure net of any deferred tax
liabilities associated with the securitization exposure.
(d) Maximum risk-based capital requirement. Regardless
of any other provisions of this part, unless one or more underlying
exposures does not meet the definition of a wholesale, retail,
securitization, or equity exposure, the total risk-based capital
requirement for all securitization exposures held by a single bank
associated with a single securitization (including any risk-based
capital requirements that relate to an early amortization provision of
the securitization but excluding any risk-based capital requirements
that relate to the bank's gain-on-sale or CEIOs associated with the
securitization) may not exceed the sum of:
(1) The bank's total risk-based capital requirement for the
underlying exposures as if the bank directly held the underlying
exposures; and
(2) The total ECL of the underlying exposures.
(e) Amount of a securitization exposure. (1) The amount
of an on-balance sheet securitization exposure that is not a repo-style
transaction, eligible margin loan, or OTC derivative contract (other
than a credit derivative) is:
(i) The bank's carrying value minus any unrealized gains and plus
any unrealized losses on the exposure, if the exposure is a security
classified as available-for-sale; or
(ii) The bank's carrying value, if the exposure is not a security
classified as available-for-sale.
(2) The amount of an off-balance sheet securitization exposure
that is not an OTC derivative contract (other than a credit derivative)
is the notional amount of the exposure. For an off-balance-sheet
securitization exposure to an ABCP program, such as a liquidity
facility, the notional amount may be reduced to the maximum potential
amount that the bank could be required to fund given the ABCP program's
current underlying assets (calculated without regard to the current
credit quality of those assets).
(3) The amount of a securitization exposure that is a repo-style
transaction, eligible margin loan, or OTC derivative contract (other
than a credit derivative) is the EAD of the exposure as calculated in
section 32 of this appendix.
(f) Overlapping exposures. If a bank has multiple
securitization exposures that provide duplicative coverage of the
underlying exposures of a securitization (such as when a bank provides
a program-wide credit enhancement and multiple pool-specific liquidity
facilities to an ABCP program), the bank is not required to hold
duplicative risk-based capital against the overlapping position.
Instead, the bank may apply to the overlapping position the applicable
risk-based capital treatment that results in the highest risk-based
capital requirement.
(g) Securitizations of non-IRB exposures. If a bank has
a securitization exposure where any underlying exposure is not a
wholesale exposure, retail exposure, securitization exposure, or equity
exposure, the bank must:
(1) If the bank is an originating bank, deduct from tier 1
capital any after-tax gain-on-sale resulting from the securitization
and deduct from total capital in accordance
{{12-31-07 p.2262.66}}with paragraph (c) of
this section the portion of any CEIO that does not constitute
gain-on-sale;
(2) If the securitization exposure does not require deduction
under paragraph (g)(1), apply the RBA in section 43 of this appendix to
the securitization exposure if the exposure qualifies for the RBA;
(3) If the securitization exposure does not require deduction
under paragraph (g)(1) and does not qualify for the RBA, apply the IAA
in section 44 of this appendix to the exposure (if the bank, the
exposure, and the relevant ABCP program qualify for the IAA); and
(4) If the securitization exposure does not require deduction
under paragraph (g)(1) and does not qualify for the RBA or the IAA,
deduct the exposure from total capital in accordance with paragraph (c)
of this section.
(h) Implicit support. If a bank provides support to a
securitization in excess of the bank's contractual obligation to
provide credit support to the securitization (implicit support):
(1) The bank must hold regulatory capital against all of the
underlying exposures associated with the securitization as if the
exposures had not been securitized and must deduct from tier 1 capital
any after-tax gain-on-sale resulting from the securitization; and
(2) The bank must disclose publicly:
(i) That it has provided implicit support to the securitization;
and
(ii) The regulatory capital impact to the bank of providing such
implicit support.
(i) Eligible servicer cash advance facilities.
Regardless of any other provisions of this part, a bank is not required
to hold risk-based capital against the undrawn portion of an eligible
servicer cash advance facility.
(j) Interest-only mortgage-backed securities. Regardless
of any other provisions of this part, the risk weight for a
non-credit-enhancing interest-only mortgage-backed security may not be
less than 100 percent.
(k) Small-business loans and leases on personal property
transferred with recourse. (1) Regardless of any other provisions
of this appendix, a bank that has transferred small-business loans and
leases on personal property (small-business obligations) with recourse
must include in risk-weighted assets only the contractual amount of
retained recourse if all the following conditions are met:
(i) The transaction is a sale under GAAP.
(ii) The bank establishes and maintains, pursuant to GAAP, a
non-capital reserve sufficient to meet the bank's reasonably estimated
liability under the recourse arrangement.
(iii) The loans and leases are to businesses that meet the
criteria for a small-business concern established by the Small Business
Administration under section 3(a) of the Small Business Act (15 U.S.C.
632).
(iv) The bank is well capitalized, as defined in the FDIC 's
prompt corrective action regulation at 12 CFR part 325, Subpart B. For
purposes of determining whether a bank is well capitalized for purposes
of this paragraph, the bank's capital ratios must be calculated without
regard to the capital treatment for transfers of small-business
obligations with recourse specified in paragraph (k)(1) of this
section. For purposes of determining whether a bank is well capitalized
for purposes of this paragraph, the bank's capital ratios must be
calculated without regard to the capital treatment for transfers of
small-business obligations with recourse specified in paragraph (k)(1)
of this section.
(2) The total outstanding amount of recourse retained by a bank
on transfers of small-business obligations receiving the capital
treatment specified in paragraph (k)(1) of this section cannot exceed
15 percent of the bank's total qualifying capital.
(3) If a bank ceases to be well capitalized or exceeds the 15
percent capital limitation, the preferential capital treatment
specified in paragraph (k)(1) of this section will continue to apply to
any transfers of small-business obligations with recourse that occurred
during the time that the bank was well capitalized and did not exceed
the capital limit.
(4) The risk-based capital ratios of the bank must be calculated
without regard to the capital treatment for transfers of small-business
obligations with recourse specified in paragraph (k)(1) of this section
as provided in 12 CFR part 325, Appendix A.
(l) Consolidated ABCP programs. (1) A bank that
qualifies as a primary beneficiary and must consolidate an ABCP program
as a variable interest entity under GAAP may exclude the consolidated
ABCP program assets from risk-weighted assets if the bank is the
sponsor
{{2-29-08 p.2262.67}}of the ABCP program. If
a bank excludes such consolidated ABCP program assets from
risk-weighted assets, the bank must hold risk-based capital against any
securitization exposures of the bank to the ABCP program in accordance
with this part.
(2) If a bank either is not permitted, or elects not, to exclude
consolidated ABCP program assets from its risk-weighted assets, the
bank must hold risk-based capital against the consolidated ABCP program
assets in accordance with this appendix but is not required to hold
risk-based capital against any securitization exposures of the bank to
the ABCP program.
(m) Nth-to-default credit
derivatives--(1) First-to-default credit
derivatives--(i) Protection purchaser. A bank that
obtains credit protection on a group of underlying exposures through a
first-to-default credit derivative must determine its risk-based
capital requirement for the underlying exposures as if the bank
synthetically securitized the underlying exposure with the lowest
risk-based capital requirement and had obtained no credit risk mitigant
on the other underlying exposures.
(ii) Protection provider. A bank that provides credit
protection on a group of underlying exposures through a
first-to-default credit derivative must determine its risk-weighted
asset amount for the derivative by applying the RBA in section 43 of
this appendix (if the derivative qualifies for the RBA) or, if the
derivative does not qualify for the RBA, by setting its risk-weighted
asset amount for the derivative equal to the product of:
(A) The protection amount of the derivative;
(B) 12.5; and
(C) The sum of the risk-based capital requirements of the
individual underlying exposures, up to a maximum of 100 percent.
(2) Second-or-subsequent-to-default credit
derivatives--(i) Protection purchaser.
(A) A bank that obtains credit protection on a group of
underlying exposures through a nth-to-default credit derivative
(other than a first-to-default credit derivative) may recognize the
credit risk mitigation benefits of the derivative only if:
(1) The bank also has obtained credit protection on
the same underlying exposures in the form of
first-through-(n-1)-to-default credit derivatives; or
(2) If n-1 of the underlying exposures have already
defaulted.
(B) If a bank satisfies the requirements of paragraph
(m)(2)(i)(A) of this section, the bank must determine its risk-based
capital requirement for the underlying exposures as if the bank had
only synthetically securitized the underlying exposure with the nth
lowest risk-based capital requirement and had obtained no credit risk
mitigant on the other underlying exposures.
(ii) Protection provider. A bank that provides credit
protection on a group of underlying exposures through a
nth-to-default credit derivative (other than a first-to-default
credit derivative) must determine its risk-weighted asset amount for
the derivative by applying the RBA in section 43 of this appendix (if
the derivative qualifies for the RBA) or, if the derivative does not
qualify for the RBA, by setting its risk-weighted asset amount for the
derivative equal to the product of:
(A) The protection amount of the derivative;
(B) 12.5; and
(C) The sum of the risk-based capital requirements of the
individual underlying exposures (excluding the n-1 underlying exposures
with the lowest risk-based capital requirements), up to a maximum of
100 percent.
Section 43. Ratings-Based Approach (RBA)
(a) Eligibility requirements for use of the
RBA--(1) Originating bank. An originating bank must
use the RBA to calculate its risk-based capital requirement for a
securitization exposure if the exposure has two or more external
ratings or inferred ratings (and may not use the RBA if the exposure
has fewer than two external ratings or inferred ratings).
(2) Investing bank. An investing bank must use the RBA
to calculate its risk-based capital requirement for a securitization
exposure if the exposure has one or more external or inferred ratings
(and may not use the RBA if the exposure has no external or inferred
rating).
(b) Ratings-based approach. (1) A bank must determine
the risk-weighted asset amount for a securitization exposure by
multiplying the amount of the exposure (as defined in
{{2-29-08 p.2262.68}}paragraph (e) of section
42 of this appendix) by the appropriate risk weight provided in Table 6
and Table 7.
(2) A bank must apply the risk weights in Table 6 when the
securitization exposure's applicable external or applicable inferred
rating represents a long-term credit rating, and must apply the risk
weights in Table 7 when the securitization exposure's applicable
external or applicable inferred rating represents a short-term credit
rating.
(i) A bank must apply the risk weights in column 1 of Table 6 or
Table 7 to the securitization exposure if:
(A) N (as calculated under paragraph (e)(6) of section 45 of this
appendix) is six or more (for purposes of this section only, if the
notional number of underlying exposures is 25 or more or if all of the
underlying exposures are retail exposures, a bank may assume that N is
six or more unless the bank knows or has reason to know that N is less
than six); and
(B) The securitization exposure is a senior securitization
exposure.
(ii) A bank must apply the risk weights in column 3 of Table 6 or
Table 7 to the securitization exposure if N is less than six,
regardless of the seniority of the securitization exposure.
(iii) Otherwise, a bank must apply the risk weights in column 2
of Table 6 or Table 7.
Table 6 — Long-Term Credit Rating Risk Weights
under RBA and IAA
|
Column
1 |
Column
2 |
Column
3
|
|---|
| Applicable external
or inferred rating (Illustrative rating example)
|
Risk weights for senior securitization
exposures backed by granular pools |
Risk weights for
non-senior securitization exposures backed by granular
pools |
Risk weights for securitization exposures backed
by non-granular pools |
| Highest investment grade (for
example, AAA) |
7% |
12% |
20%
|
| Second highest investment grade (for example, AA)
|
8% |
15% |
25% |
| Third-highest
investment grade--positive designation (for example, A+)
|
10% |
18% |
35% |
| Third-highest
investment grade (for example, A) |
12% |
20%
|
| Third-highest investment grade--negative designation (for example,
A--) |
20% |
35% |
|
| Lowest investment
grade--positive designation (for example, BBB+) |
35%
| 50% |
| Lowest investment grade (for example,
BBB) |
60% |
75% |
| Lowest investment grade--negative
designation (for example, BBB--) |
100% |
| One
category below investment grade--positive designation (for example,
BB+) | 250% |
| One category below investment
grade (for example, BB) |
425% |
| One category
below investment grade--negative designation (for example, BB--)
| 650% |
| More than one category below investment
grade | Deduction from tier 1 and tier 2
capital |
|
| |
{{2-29-08 p.2262.69}}
Table 7 — Short-Term Credit Rating Risk Weights under RBA
and IAA
|
Column
1 |
Column 2 |
Column 3
|
|---|
| Applicable external or inferred rating
(Illustrative rating example) |
Risk weights for senior
securitization exposures backed by granular pools |
Risk weights for
non-senior securitization exposures backed by granular pools |
Risk
weights for securitization exposures backed by non-granular pools
|
| Highest investment grade (for example, A1) |
7% |
12%
|
20% |
| Second highest investment grade (for example, A2) |
12%
|
20% |
35% |
| Third highest investment grade (for example, A3)
|
60% |
75% |
75% |
| All other ratings |
Deduction from
tier 1 and tier 2 capital
|
Section 44. Internal Assessment Approach (IAA)
(a) Eligibility requirements. A bank may apply the IAA
to calculate the risk-weighted asset amount for a securitization
exposure that the bank has to an ABCP program (such as a liquidity
facility or credit enhancement) if the bank, the ABCP program, and the
exposure qualify for use of the IAA.
(1) bank qualification criteria. A bank qualifies for
use of the IAA if the bank has received the prior written approval of
the FDIC. To receive such approval, the bank must demonstrate to the
FDIC's satisfaction that the bank's internal assessment process meets
the following criteria:
(i) The bank's internal credit assessments of securitization
exposures must be based on publicly available rating criteria used by
an NRSRO.
(ii) The bank's internal credit assessments of securitization
exposures used for risk-based capital purposes must be consistent with
those used in the bank's internal risk management process, management
information reporting systems, and capital adequacy assessment process.
(iii) The bank's internal credit assessment process must have
sufficient granularity to identify gradations of risk. Each of the
bank's internal credit assessment categories must correspond to an
external rating of an NRSRO.
(iv) The bank's internal credit assessment process, particularly
the stress test factors for determining credit enhancement
requirements, must be at least as conservative as the most conservative
of the publicly available rating criteria of the NRSROs that have
provided external ratings to the commercial paper issued by the ABCP
program.
(A) Where the commercial paper issued by an ABCP program has an
external rating from two or more NRSROs and the different NRSROs'
benchmark stress factors require different levels of credit enhancement
to achieve the same external rating equivalent, the bank must apply the
NRSRO stress factor that requires the highest level of credit
enhancement.
(B) If any NRSRO that provides an external rating to the ABCP
program's commercial paper changes its methodology (including stress
factors), the bank must evaluate whether to revise its internal
assessment process.
(v) The bank must have an effective system of controls and
oversight that ensures compliance with these operational requirements
and maintains the integrity and accuracy of
{{2-29-08 p.2262.70}}the internal credit
assessments. The bank must have an internal audit function independent
from the ABCP program business line and internal credit assessment
process that assesses at least annually whether the controls over the
internal credit assessment process function as intended.
(vi) The bank must review and update each internal credit
assessment whenever new material information is available, but no less
frequently than annually. (vii) The bank must validate its internal
credit assessment process on an ongoing basis and at least annually.
(vii) The bank must validate its internal credit assessment
process on an ongoing basis and at least annually.
(2) ABCP-program qualification criteria. An ABCP
program qualifies for use of the IAA if all commercial paper issued by
the ABCP program has an external rating.
(3) Exposure qualification criteria. A securitization
exposure qualifies for use of the IAA if the exposure meets the
following criteria:
(i) The bank initially rated the exposure at least the equivalent
of investment grade.
(ii) The ABCP program has robust credit and investment guidelines
(that is, underwriting standards) for the exposures underlying the
securitization exposure.
(iii) The ABCP program performs a detailed credit analysis of the
sellers of the exposures underlying the securitization exposure.
(iv) The ABCP program's underwriting policy for the exposures
underlying the securitization exposure establishes minimum asset
eligibility criteria that include the prohibition of the purchase of
assets that are significantly past due or of assets that are defaulted
(that is, assets that have been charged off or written down by the
seller prior to being placed into the ABCP program or assets that would
be charged off or written down under the program's governing
contracts), as well as limitations on concentration to individual
obligors or geographic areas and the tenor of the assets to be
purchased.
(v) The aggregate estimate of loss on the exposures underlying
the securitization exposure considers all sources of potential risk,
such as credit and dilution risk.
(vi) Where relevant, the ABCP program incorporates structural
features into each purchase of exposures underlying the securitization
exposure to mitigate potential credit deterioration of the underlying
exposures. Such features may include wind-down triggers specific to a
pool of underlying exposures.
{{12-31-07 p.2262.71}}
(b) Mechanics. A bank that elects to use the IAA to
calculate the risk-based capital requirement for any securitization
exposure must use the IAA to calculate the risk-based capital
requirements for all securitization exposures that qualify for the IAA
approach. Under the IAA, a bank must map its internal assessment of
such a securitization exposure to an equivalent external rating from an
NRSRO. Under the IAA, a bank must determine the risk-weighted asset
amount for such a securitization exposure by multiplying the amount of
the exposure (as defined in paragraph (e) of section 42 of this
appendix) by the appropriate risk weight in Table 6 and Table 7 in
paragraph (b) of section 43 of this
appendix.
Section 45. Supervisory Formula Approach (SFA)
(a) Eligibility requirements. A bank may use the SFA to
determine its risk-based capital requirement for a securitization
exposure only if the bank can calculate on an ongoing basis each of the
SFA parameters in paragraph (e) of this section.
(b) Mechanics. Under the SFA, a securitization exposure
incurs a deduction from total capital (as described in paragraph (c) of
section 42 of this appendix) and/or an SFA risk-based capital
requirement, as determined in paragraph (c) of this section. The
risk-weighted asset amount for the securitization exposure equals the
SFA risk-based capital requirement for the exposure multiplied by 12.5.
(c) The SFA risk-based capital requirement. (1) If
KIRB is greater than or equal to L+T, the entire exposure must be
deducted from total capital.
(2) If KIRB is less than or equal to L, the exposure's SFA
risk-based capital requirement is UE multiplied by TP multiplied by the
greater of:
(i) 0.0056 * T; or
(ii) S[L+T] -- S[L].
(3) If KIRB is greater than L and less than L+T, the bank
must deduct from total capital an amount equal to UE*TP*(KIRB --L),
and the exposure's SFA risk-based capital requirement is UE multiplied
by TP multiplied by the greater of:
(i) 0.0056 * (T -- (KIRB -- L)); or
(ii) S[L+T] -- S[KIRB].
(d) The supervisory
formula:
{{12-31-07 p.2262.72}}
(11) In these expressions, β [Y; a, b] refers to the
cumulative beta distribution with parameters a and b evaluated at Y. In
the case where N = 1 and EWALGD = 100 percent, S[Y] in formula (1)
must be calculated with K[Y] set equal to the product of KIRB and
Y, and d set equal to 1- KIRB.
(e) SFA parameters--(1) Amount of the underlying
exposures (UE). UE is the EAD of any underlying exposures that are
wholesale and retail exposures (including the amount of any funded
spread accounts, cash collateral accounts, and other similar funded
credit enhancements) plus the amount of any underlying exposures that
are securitization exposures (as defined in paragraph (e) of section 42
of this appendix) plus the adjusted carrying value of any underlying
exposures that are equity exposures (as defined in paragraph (b) of
section 51 of this appendix).
(2) Tranche percentage (TP). TP is the ratio of the
amount of the bank's securitization exposure to the amount of the
tranche that contains the securitization exposure.
(3) Capital requirement on underlying exposures
(KIRB). (i) KIRB is the ratio of:
(A) The sum of the risk-based capital requirements for the
underlying exposures plus the expected credit losses of the underlying
exposures (as determined under this appendix as if the underlying
exposures were directly held by the bank); to
(B) UE.
(ii) The calculation of KIRB must reflect the effects of any
credit risk mitigant applied to the underlying exposures (either to an
individual underlying exposure, to a group of underlying exposures, or
to the entire pool of underlying exposures).
(iii) All assets related to the securitization are treated as
underlying exposures, including assets in a reserve account (such as a
cash collateral account).
(4) Credit enhancement level (L). (i) L is the ratio
of:
(A) The amount of all securitization exposures subordinated to
the tranche that contains the bank's securitization exposure; to
(B) UE.
(ii) A bank must determine L before considering the effects of
any tranche-specific credit enhancements.
(iii) Any gain-on-sale or CEIO associated with the securitization
may not be included in L.
(iv) Any reserve account funded by accumulated cash flows from
the underlying exposures that is subordinated to the tranche that
contains the bank's securitization exposure may be included in the
numerator and denominator of L to the extent cash has accumulated in
the account. Unfunded reserve accounts (that is, reserve accounts that
are to be funded from future cash flows from the underlying exposures)
may not be included in the calculation of L.
(v) In some cases, the purchase price of receivables will reflect
a discount that provides credit enhancement (for example, first loss
protection) for all or certain tranches of the securitization. When
this arises, L should be calculated inclusive of this discount if the
discount provides credit enhancement for the securitization exposure.
(5) Thickness of tranche (T). T is the ratio of:
(i) The amount of the tranche that contains the bank's
securitization exposure; to
(ii) UE.
{{12-31-07 p.2262.73}}
(6) Effective number of exposures (N). (i) Unless the
bank elects to use the formula provided in paragraph (f) of this
section,
where EADi represents the EAD associated with the ith
instrument in the pool of underlying exposures.
(ii) Multiple exposures to one obligor must be treated as a
single underlying exposure.
(iii) In the case of a re-securitization (that is, a
securitization in which some or all of the underlying exposures are
themselves securitization exposures), the bank must treat each
underlying exposure as a single underlying exposure and must not look
through to the originally securitized underlying exposures.
(7) Exposure-weighted average loss given default
(EWALGD). EWALGD is calculated
as:
where LGDi represents the average LGD associated with all
exposures to the ith obligor. In the case of a re-securitization,
an LGD of 100 percent must be assumed for the underlying exposures that
are themselves securitization exposures.
(f) Simplified method for computing N and EWALGD. (1) If
all underlying exposures of a securitization are retail exposures, a
bank may apply the SFA using the following simplifications:
(i) h = 0; and
(ii) v = 0.
(2) Under the conditions in paragraphs (f)(3) and (f)(4) of this
section, a bank may employ a simplified method for calculating N and
EWALGD.
(3) If C1 is no more than 0.03, a bank may set EWALGD = 0.50
if none of the underlying exposures is a securitization exposure or
EWALGD = 1 if one or more of the underlying exposures is a
securitization exposure, and may set N equal to the following
amount:
where:
(i) Cm is the ratio of the sum of the amounts of the m'
largest underlying exposures to UE; and
(ii) The level of m is to be selected by the bank.
(4) Alternatively, if only C1 is available and C1 is no
more than 0.03, the bank may set EWALGD = 0.50 if none of the
underlying exposures is a securitization exposure or EWALGD = 1 if one
or more of the underlying exposures is a securitization exposure and
may set N = 1/C1.
{{12-31-07 p.2262.74}}
Section 46. Recognition of Credit Risk Mitigants for
Securitization Exposures
(a) General. An originating bank that has obtained a
credit risk mitigant to hedge its securitization exposure to a
synthetic or traditional securitization that satisfies the operational
criteria in section 41 of this appendix may recognize the credit risk
mitigant, but only as provided in this section. An investing bank that
has obtained a credit risk mitigant to hedge a securitization exposure
may recognize the credit risk mitigant, but only as provided in this
section. A bank that has used the RBA in section 43 of this appendix or
the IAA in section 44 of this appendix to calculate its risk-based
capital requirement for a securitization exposure whose external or
inferred rating (or equivalent internal rating under the IAA) reflects
the benefits of a credit risk mitigant provided to the associated
securitization or that supports some or all of the underlying exposures
may not use the credit risk mitigation rules in this section to further
reduce its risk-based capital requirement for the exposure to reflect
that credit risk mitigant.
(b) Collateral--(1) Rules of recognition. A
bank may recognize financial collateral in determining the bank's
risk-based capital requirement for a securitization exposure (other
than a repo-style transaction, an eligible margin loan, or an OTC
derivative contract for which the bank has reflected collateral in its
determination of exposure amount under section 32 of this appendix) as
follows. The bank's risk-based capital requirement for the
collateralized securitization exposure is equal to the risk-based
capital requirement for the securitization exposure as calculated under
the RBA in section 43 of this appendix or under the SFA in section 45
of this appendix multiplied by the ratio of adjusted exposure amount
(SE*) to original exposure amount (SE), where:
(i) SE* = max {0, [SE -- C × (1 -- Hs -- Hfx)]};
(ii) SE = the amount of the securitization exposure calculated
under paragraph (e) of section 42 of this appendix;
(iii) C = the current market value of the collateral;
(iv) Hs = the haircut appropriate to the collateral type; and
(v) Hfx = the haircut appropriate for any currency mismatch
between the collateral and the exposure.
(2) Mixed collateral. Where the collateral is a basket
of different asset types or a basket of assets denominated in different
currencies, the haircut on the basket will be
where ai is the current market value of the asset in the basket
divided by the current market value of all assets in the basket and
Hi is the haircut applicable to that asset.
(3) Standard supervisory haircuts. Unless a bank
qualifies for use of and uses own-estimates haircuts in paragraph
(b)(4) of this section:
(i) A bank must use the collateral type haircuts (Hs) in Table 3;
(ii) A bank must use a currency mismatch haircut (Hfx) of 8
percent if the exposure and the collateral are denominated in different
currencies;
(iii) A bank must multiply the supervisory haircuts obtained in
paragraphs (b)(3)(i) and (ii) by the square root of 6.5 (which equals
2.549510); and
(iv) A bank must adjust the supervisory haircuts upward on the
basis of a holding period longer than 65 business days where and as
appropriate to take into account the illiquidity of the collateral.
(4) Own estimates for haircuts. With the prior written
approval of the FDIC, a bank may calculate haircuts using its own
internal estimates of market price volatility and foreign exchange
volatility, subject to paragraph (b)(2)(iii) of section 32 of this
appendix. The minimum holding period (TM) for securitization
exposures is 65 business days.
(c) Guarantees and credit
derivatives--(1) Limitations on recognition. A bank
may only recognize an eligible guarantee or eligible credit derivative
provided by an eligible securitization guarantor in determining the
bank's risk-based capital requirement for a securitization exposure.
(2) ECL for securitization exposures. When a bank
recognizes an eligible guarantee or eligible credit derivative provided
by an eligible securitization guarantor in determining the bank's
risk-based capital requirement for a securitization exposure, the bank
must also:
{{12-31-07 p.2262.75}}
(i) Calculate ECL for the protected portion of the exposure using
the same risk parameters that it uses for calculating the risk-weighted
asset amount of the exposure as described in paragraph (c)(3) of this
section; and
(ii) Add the exposure's ECL to the bank's total ECL.
(3) Rules of recognition. A bank may recognize an
eligible guarantee or eligible credit derivative provided by an
eligible securitization guarantor in determining the bank's risk-based
capital requirement for the securitization exposure as follows:
(i) Full coverage. If the protection amount of the
eligible guarantee or eligible credit derivative equals or exceeds the
amount of the securitization exposure, the bank may set the
risk-weighted asset amount for the securitization exposure equal to the
risk-weighted asset amount for a direct exposure to the eligible
securitization guarantor (as determined in the wholesale risk weight
function described in section 31 of this appendix), using the bank's PD
for the guarantor, the bank's LGD for the guarantee or credit
derivative, and an EAD equal to the amount of the securitization
exposure (as determined in paragraph (e) of section 42 of this
appendix).
(ii) Partial coverage. If the protection amount of the
eligible guarantee or eligible credit derivative is less than the
amount of the securitization exposure, the bank may set the
risk-weighted asset amount for the securitization exposure equal to the
sum of:
(A) Covered portion. The risk-weighted asset amount
for a direct exposure to the eligible securitization guarantor (as
determined in the wholesale risk weight function described in section
31 of this appendix), using the bank's PD for the guarantor, the bank's
LGD for the guarantee or credit derivative, and an EAD equal to the
protection amount of the credit risk mitigant; and
(B) Uncovered portion. (1) 1.0 minus the
ratio of the protection amount of the eligible guarantee or eligible
credit derivative to the amount of the securitization exposure);
multiplied by
(2) The risk-weighted asset amount for the
securitization exposure without the credit risk mitigant (as determined
in sections 42-45 of this appendix).
(4) Mismatches. The bank must make applicable
adjustments to the protection amount as required in paragraphs (d),
(e), and (f) of section 33 of this appendix for any hedged
securitization exposure and any more senior securitization exposure
that benefits from the hedge. In the context of a synthetic
securitization, when an eligible guarantee or eligible credit
derivative covers multiple hedged exposures that have different
residual maturities, the bank must use the longest residual maturity of
any of the hedged exposures as the residual maturity of all the hedged
exposures.
Section 47. Risk-Based Capital Requirement for Early Amortization
Provisions
(a) General. (1) An originating bank must hold
risk-based capital against the sum of the originating bank's interest
and the investors' interest in a securitization that:
(i) Includes one or more underlying exposures in which the
borrower is permitted to vary the drawn amount within an agreed limit
under a line of credit; and
(ii) Contains an early amortization provision.
(2) For securitizations described in paragraph (a)(1) of this
section, an originating bank must calculate the risk-based capital
requirement for the originating bank's interest under sections 42-45 of
this appendix, and the risk-based capital requirement for the
investors' interest under paragraph (b) of this section.
(b) Risk-weighted asset amount for investors' interest.
The originating bank's risk-weighted asset amount for the investors'
interest in the securitization is equal to the product of the following
5 quantities:
(1) The investors' interest EAD;
(2) The appropriate conversion factor in paragraph (c) of this
section;
(3) KIRB (as defined in paragraph (e)(3) of section 45 of
this appendix);
(4) 12.5; and
(5) The proportion of the underlying exposures in which the
borrower is permitted to vary the drawn amount within an agreed limit
under a line of credit.
(c) Conversion factor. (1) (i) Except as provided in
paragraph (c)(2) of this section, to calculate the appropriate
conversion factor, a bank must use Table 8 for a securitization that
contains a controlled early amortization provision and must use Table 9
for a securitization that contains a non-controlled early amortization
provision. In circumstances where a
{{12-31-07 p.2262.76}}securitization contains
a mix of retail and nonretail exposures or a mix of committed and
uncommitted exposures, a bank may take a pro rata approach to
determining the conversion factor for the securitization's early
amortization provision. If a pro rata approach is not feasible, a bank
must treat the mixed securitization as a securitization of nonretail
exposures if a single underlying exposure is a nonretail exposure and
must treat the mixed securitization as a securitization of committed
exposures if a single underlying exposure is a committed exposure.
(ii) To find the appropriate conversion factor in the tables, a
bank must divide the three-month average annualized excess spread of
the securitization by the excess spread trapping point in the
securitization structure. In securitizations that do not require excess
spread to be trapped, or that specify trapping points based primarily
on performance measures other than the three-month average annualized
excess spread, the excess spread trapping point is 4.5 percent.
Table 8 — Controlled Early Amortization
Provisions
|
Uncommitted |
Committed |
|---|
| Retail Credit
Lines |
Three-month average annualized excess spread
Conversion Factor (CF) |
90% CF
|
|
133.33% of trapping point or more0% CF
|
|
less than 133.33% to 100% of trapping point 1%
CF |
|
|
less than 100% to 75% of trapping
point 2% CF |
|
|
less than 75% to 50% of
trapping point 10% CF |
|
|
less than 50% to
25% of trapping point 20% CF |
|
|
less than 25% of
trapping point 40% CF |
|
| Non-retail Credit Lines
|
90% CF |
90% CF
|
{{12-31-07 p.2262.77}}
Table 9 — Non-Controlled Early Amortization
Provisions
|
Uncommitted |
Committed |
|---|
| Retail Credit
Lines |
Three-month average annualized excess spread
Conversion Factor (CF) |
100% CF
|
|
133.33% of trapping point or more 0% CF
|
|
|
less than 133.33% to 100% of trapping
point 5% CF |
|
|
less than 100% to 75% of
trapping point 15% CF |
|
|
less than 75% to
50% of trapping point 50% CF |
|
|
less than 50% of
trapping point 100% CF |
|
| Non-retail Credit Lines
|
100% CF |
100% CF
|
(2) For a securitization for which all or substantially
all of the underlying exposures are residential mortgage exposures, a
bank may calculate the appropriate conversion factor using paragraph
(c)(1) of this section or may use a conversion factor of 10 percent. If
the bank chooses to use a conversion factor of 10 percent, it must use
that conversion factor for all securitizations for which all or
substantially all of the underlying exposures are residential mortgage
exposures.
Part VI. Risk-Weighted Assets for Equity
Exposures
Section 51. Introduction and Exposure Measurement
(a) General. To calculate its risk-weighted asset
amounts for equity exposures that are not equity exposures to
investment funds, a bank may apply either the Simple Risk Weight
Approach (SRWA) in section 52 of this appendix or, if it qualifies to
do so, the Internal Models Approach (IMA) in section 53 of this
appendix. A bank must use the look-through approaches in section 54 of
this appendix to calculate its risk-weighted asset amounts for equity
exposures to investment funds.
(b) Adjusted carrying value. For purposes of this part,
the adjusted carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure, the
bank's carrying value of the exposure reduced by any unrealized gains
on the exposure that are reflected in such carrying value but excluded
from the bank's tier 1 and tier 2 capital; and
(2) For the off-balance sheet component of an equity exposure,
the effective notional principal amount of the exposure, the size of
which is equivalent to a hypothetical on-balance sheet position in the
underlying equity instrument that would evidence the same change in
fair value (measured in dollars) for a given small change in the price
of the underlying equity instrument, minus the adjusted carrying value
of the on-balance sheet component of the exposure as calculated in
paragraph (b)(1) of this section. For unfunded equity commitments that
are unconditional, the effective notional principal amount is the
notional amount of the commitment. For unfunded equity commitments that
are conditional, the effective notional principal amount is the bank's
best estimate of the amount that would be funded under economic
downturn conditions.
{{12-31-07 p.2262.78}}
Section 52. Simple Risk Weight Approach (SRWA)
(a) General. Under the SRWA, a bank's aggregate
risk-weighted asset amount for its equity exposures is equal to the sum
of the risk-weighted asset amounts for each of the bank's individual
equity exposures (other than equity exposures to an investment fund) as
determined in this section and the risk-weighted asset amounts for each
of the bank's individual equity exposures to an investment fund as
determined in section 54 of this appendix.
(b) SRWA computation for individual equity exposures. A
bank must determine the risk-weighted asset amount for an individual
equity exposure (other than an equity exposure to an investment fund)
by multiplying the adjusted carrying value of the equity exposure or
the effective portion and ineffective portion of a hedge pair (as
defined in paragraph (c) of this section) by the lowest applicable risk
weight in this paragraph (b).
(1) 0 percent risk weight equity exposures. An equity
exposure to an entity whose credit exposures are exempt from the 0.03
percent PD floor in paragraph (d)(2) of section 31 of this appendix is
assigned a 0 percent risk weight.
(2) 20 percent risk weight equity exposures. An equity
exposure to a Federal Home Loan Bank or Farmer Mac is assigned a 20
percent risk weight.
(3) 100 percent risk weight equity exposures. The
following equity exposures are assigned a 100 percent risk weight:
(i) Community development equity exposures. An equity
exposure that qualifies as a community development investment under 12
U.S.C. 24(Eleventh), excluding equity exposures to an unconsolidated
small business investment company and equity exposures held through a
consolidated small business investment company described in section 302
of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(ii) Effective portion of hedge pairs. The effective
portion of a hedge pair.
(iii) Non-significant equity exposures. Equity
exposures, excluding exposures to an investment firm that would meet
the definition of a traditional securitization were it not for the
FDIC's application of paragraph (8) of that definition and has greater
than immaterial leverage, to the extent that the aggregate adjusted
carrying value of the exposures does not exceed 10 percent of the
bank's tier 1 capital plus tier 2 capital.
(A) To compute the aggregate adjusted carrying value of a bank's
equity exposures for purposes of this paragraph (b)(3)(iii), the bank
may exclude equity exposures described in paragraphs (b)(1), (b)(2),
(b)(3)(i), and (b)(3)(ii) of this section, the equity exposure in a
hedge pair with the smaller adjusted carrying value, and a proportion
of each equity exposure to an investment fund equal to the proportion
of the assets of the investment fund that are not equity exposures or
that meet the criterion of paragraph (b)(3)(i) of this section. If a
bank does not know the actual holdings of the investment fund, the bank
may calculate the proportion of the assets of the fund that are not
equity exposures based on the terms of the prospectus, partnership
agreement, or similar contract that defines the fund's permissible
investments. If the sum of the investment limits for all exposure
classes within the fund exceeds 100 percent, the bank must assume for
purposes of this paragraph (b)(3)(iii) that the investment fund invests
to the maximum extent possible in equity exposures.
(B) When determining which of a bank's equity exposures qualify
for a 100 percent risk weight under this paragraph, a bank first must
include equity exposures to unconsolidated small business investment
companies or held through consolidated small business investment
companies described in section 302 of the Small Business Investment Act
of 1958 (15 U.S.C. 682), then must include publicly traded equity
exposures (including those held indirectly through investment funds),
and then must include non-publicly traded equity exposures (including
those held indirectly through investment funds).
(4) 300 percent risk weight equity exposures. A
publicly traded equity exposure (other than an equity exposure
described in paragraph (b)(6) of this section and including the
ineffective portion of a hedge pair) is assigned a 300 percent risk
weight.
(5) 400 percent risk weight equity exposures. An
equity exposure (other than an equity exposure described in paragraph
(b)(6) of this section) that is not publicly traded is assigned a 400
percent risk weight.
(6) 600 percent risk weight equity exposures. An
equity exposure to an investment firm that:
{{12-31-07 p.2262.79}}
(i) would meet the definition of a traditional securitization
were it not for the FDIC's application of paragraph (8) of that
definition; and
(ii) has greater than immaterial leverage is assigned a 600
percent risk weight.
(c) Hedge transactions--(1) Hedge pair. A
hedge pair is two equity exposures that form an effective hedge so long
as each equity exposure is publicly traded or has a return that is
primarily based on a publicly traded equity exposure.
(2) Effective hedge. Two equity exposures form an
effective hedge if the exposures either have the same remaining
maturity or each has a remaining maturity of at least three months; the
hedge relationship is formally documented in a prospective manner (that
is, before the bank acquires at least one of the equity exposures); the
documentation specifies the measure of effectiveness (E) the bank will
use for the hedge relationship throughout the life of the transaction;
and the hedge relationship has an E greater than or equal to 0.8. A
bank must measure E at least quarterly and must use one of three
alternative measures of E:
(i) Under the dollar-offset method of measuring effectiveness,
the bank must determine the ratio of value change (RVC). The RVC is the
ratio of the cumulative sum of the periodic changes in value of one
equity exposure to the cumulative sum of the periodic changes in the
value of the other equity exposure. If RVC is positive, the hedge is
not effective and E equals 0. If RVC is negative and greater than or
equal to --1 (that is, between zero and --1), then E equals the
absolute value of RVC. If RVC is negative and less than --1, then E
equals 2 plus RVC.
(ii) Under the variability-reduction method of measuring
effectiveness:
(A) Xt = At -- Bt;
(B) At = the value at time t of one exposure in a
hedge pair; and
(C) Bt = the value at time t of the other exposure
in a hedge pair.
(iii) Under the regression method of measuring effectiveness, E
equals the coefficient of determination of a regression in which the
change in value of one exposure in a hedge pair is the dependent
variable and the change in value of the other exposure in a hedge pair
is the independent variable. However, if the estimated regression
coefficient is positive, then the value of E is zero.
(3) The effective portion of a hedge pair is E multiplied by the
greater of the adjusted carrying values of the equity exposures forming
a hedge pair.
(4) The ineffective portion of a hedge pair is (1-E) multiplied
by the greater of the adjusted carrying values of the equity exposures
forming a hedge pair.
Section 53. Internal Models Approach (IMA)
(a) General. A bank may calculate its risk-weighted
asset amount for equity exposures using the IMA by modeling publicly
traded and non-publicly traded equity exposures (in accordance with
paragraph (c) of this section) or by modeling only publicly traded
equity exposures (in accordance with paragraph (d) of this section).
(b) Qualifying criteria. To qualify to use the IMA to
calculate risk-based capital requirements for equity exposures, a bank
must receive prior written approval from the FDIC. To receive such
approval, the bank must demonstrate to the FDIC's satisfaction that the
bank meets the following criteria:
(1) The bank must have one or more models that:
(i) Assess the potential decline in value of its modeled equity
exposures;
(ii) Are commensurate with the size, complexity, and composition
of the bank's modeled equity exposures; and
(iii) Adequately capture both general market risk and
idiosyncratic risk.
(2) The bank's model must produce an estimate of potential losses
for its modeled equity exposures that is no less than the estimate of
potential losses produced by a VaR methodology employing a 99.0
percent, one-tailed confidence interval of the distribution
of
{{12-31-07 p.2262.80}}quarterly returns for a
benchmark portfolio of equity exposures comparable to the bank's
modeled equity exposures using a long-term sample period.
(3) The number of risk factors and exposures in the sample and
the data period used for quantification in the bank's model and
benchmarking exercise must be sufficient to provide confidence in the
accuracy and robustness of the bank's estimates.
(4) The bank's model and benchmarking process must incorporate
data that are relevant in representing the risk profile of the bank's
modeled equity exposures, and must include data from at least one
equity market cycle containing adverse market movements relevant to the
risk profile of the bank's modeled equity exposures. In addition, the
bank's benchmarking exercise must be based on daily market prices for
the benchmark portfolio. If the bank's model uses a scenario
methodology, the bank must demonstrate that the model produces a
conservative estimate of potential losses on the bank's modeled equity
exposures over a relevant long-term market cycle. If the bank employs
risk factor models, the bank must demonstrate through empirical
analysis the appropriateness of the risk factors used.
(5) The bank must be able to demonstrate, using theoretical
arguments and empirical evidence, that any proxies used in the modeling
process are comparable to the bank's modeled equity exposures and that
the bank has made appropriate adjustments for differences. The bank
must derive any proxies for its modeled equity exposures and benchmark
portfolio using historical market data that are relevant to the bank's
modeled equity exposures and benchmark portfolio (or, where not, must
use appropriately adjusted data), and such proxies must be robust
estimates of the risk of the bank's modeled equity exposures.
(c) Risk-weighted assets calculation for a bank modeling
publicly traded and non-publicly traded equity exposures. If a
bank models publicly traded and non-publicly traded equity exposures,
the bank's aggregate risk-weighted asset amount for its equity
exposures is equal to the sum of:
(1) The risk-weighted asset amount of each equity exposure that
qualifies for a 0 percent, 20 percent, or 100 percent risk weight under
paragraphs (b)(1) through (b)(3)(i) of section 52 (as determined under
section 52 of this appendix) and each equity exposure to an investment
fund (as determined under section 54 of this appendix); and
(2) The greater of:
(i) The estimate of potential losses on the bank's equity
exposures (other than equity exposures referenced in paragraph (c)(1)
of this section) generated by the bank's internal equity exposure model
multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the aggregate adjusted carrying
value of the bank's publicly traded equity exposures that do not belong
to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100
percent risk weight under paragraphs (b)(1) through (b)(3)(i) of
section 52 of this appendix, and are not equity exposures to an
investment fund;
(B) 200 percent multiplied by the aggregate ineffective portion
of all hedge pairs; and
(C) 300 percent multiplied by the aggregate adjusted carrying
value of the bank's equity exposures that are not publicly traded, do
not qualify for a 0 percent, 20 percent, or 100 percent risk weight
under paragraphs (b)(1) through (b)(3)(i) of section 52 of this
appendix, and are not equity exposures to an investment fund.
(d) Risk-weighted assets calculation for a bank using the IMA
only for publicly traded equity exposures. If a bank models only
publicly traded equity exposures, the bank's aggregate risk-weighted
asset amount for its equity exposures is equal to the sum of:
(1) The risk-weighted asset amount of each equity exposure that
qualifies for a 0 percent, 20 percent, or 100 percent risk weight under
paragraphs (b)(1) through (b)(3)(i) of section 52 (as determined under
section 52 of this appendix), each equity exposure that qualifies for a
400 percent risk weight under paragraph (b)(5) of section 52 or a 600
percent risk weight under paragraph (b)(6) of section 52 (as determined
under section 52 of this appendix), and each equity exposure to an
investment fund (as determined under section 54 of this appendix); and
(2) The greater of:
(i) The estimate of potential losses on the bank's equity
exposures (other than equity exposures referenced in paragraph (d)(1)
of this section) generated by the bank's internal equity exposure model
multiplied by 12.5; or
{{12-31-07 p.2262.81}}
(ii) The sum of:
(A) 200 percent multiplied by the aggregate adjusted carrying
value of the bank's publicly traded equity exposures that do not belong
to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100
percent risk weight under paragraphs (b)(1) through (b)(3)(i) of
section 52 of this appendix, and are not equity exposures to an
investment fund; and
(B) 200 percent multiplied by the aggregate ineffective portion
of all hedge pairs.
Section 54. Equity Exposures to Investment Funds
(a) Available approaches. (1) Unless the exposure meets
the requirements for a community development equity exposure in
paragraph (b)(3)(i) of section 52 of this appendix, a bank must
determine the risk-weighted asset amount of an equity exposure to an
investment fund under the Full Look-Through Approach in paragraph (b)
of this section, the Simple Modified Look-Through Approach in paragraph
(c) of this section, the Alternative Modified Look-Through Approach in
paragraph (d) of this section, or, if the investment fund qualifies for
the Money Market Fund Approach, the Money Market Fund Approach in
paragraph (e) of this section.
(2) The risk-weighted asset amount of an equity exposure to an
investment fund that meets the requirements for a community development
equity exposure in paragraph (b)(3)(i) of section 52 of this appendix
is its adjusted carrying value.
(3) If an equity exposure to an investment fund is part of a
hedge pair and the bank does not use the Full Look-Through Approach,
the bank may use the ineffective portion of the hedge pair as
determined under paragraph (c) of section 52 of this appendix as the
adjusted carrying value for the equity exposure to the investment fund.
The risk-weighted asset amount of the effective portion of the hedge
pair is equal to its adjusted carrying value.
(b) Full Look-Through Approach. A bank that is able to
calculate a risk-weighted asset amount for its proportional ownership
share of each exposure held by the investment fund (as calculated under
this appendix as if the proportional ownership share of each exposure
were held directly by the bank) may either:
(1) Set the risk-weighted asset amount of the bank's exposure to
the fund equal to the product of:
(i) The aggregate risk-weighted asset amounts of the exposures
held by the fund as if they were held directly by the bank; and
(ii) The bank's proportional ownership share of the fund; or
(2) Include the bank's proportional ownership share of each
exposure held by the fund in the bank's IMA.
(c) Simple Modified Look-Through Approach. Under this
approach, the risk-weighted asset amount for a bank's equity exposure
to an investment fund equals the adjusted carrying value of the equity
exposure multiplied by the highest risk weight in Table 10 that applies
to any exposure the fund is permitted to hold under its prospectus,
partnership agreement, or similar contract that defines the fund's
permissible investments (excluding derivative contracts that are used
for hedging rather than speculative purposes and that do not constitute
a material portion of the fund's exposures).
{{12-31-07 p.2262.82}}
Table 10 — Modified Look-Through Approaches for Equity
Exposures to Investment Funds
| Risk
Weight |
Exposure Class |
|---|
| 0 percent
|
Sovereign exposures with a long-term applicable external rating in
the highest investment-grade rating category and sovereign exposures of
the United States |
| 20 percent |
Non-sovereign exposures with a
long-term applicable external rating in the highest or second-highest
investment-grade rating category; exposures with a short-term
applicable external rating in the highest investment-grade rating
category; and exposures to, or guaranteed by, depository institutions,
foreign banks (as defined in 12 CFR 211.2), or securities firms subject
to consolidated supervision and regulation comparable to that imposed
on U.S. securities broker-dealers that are repo-style transactions or
bankers' acceptances |
| 50 percent |
Exposures with a long-term
applicable external rating in the third-highest investment-grade rating
category or a short-term applicable external rating in the
second-highest investment-grade rating category |
| 100 percent
|
Exposures with a long-term or short-term applicable external rating
in the lowest investment-grade rating category |
| 200 percent
|
Exposures with a long-term applicable external rating one rating
category below investment grade |
| 300 percent |
Publicly traded
equity exposures |
| 400 percent |
Non-publicly traded equity
exposures; exposures with a long-term applicable external rating two
rating categories or more below investment grade; and exposures without
an external rating (excluding publicly traded equity exposures)
|
| 1,250 percent |
OTC derivative contracts and exposures that must
be deducted from regulatory capital or receive a risk weight greater
than 400 percent under this appendix
|
(d) Alternative Modified Look-Through Approach.
Under this approach, a bank may assign the adjusted carrying value of
an equity exposure to an investment fund on a pro rata basis to
different risk weight categories in Table 10 based on the investment
limits in the fund's prospectus, partnership agreement, or similar
contract that defines the fund's permissible investments. The
risk-weighted asset amount for the bank's equity exposure to the
investment fund equals the sum of each portion of the adjusted carrying
value assigned to an exposure class multiplied by the applicable risk
weight. If the sum of the investment limits for exposure classes within
the fund exceeds 100 percent, the bank must assume that the fund
invests to the maximum extent permitted under its investment limits in
the exposure class with the highest risk weight under Table 10, and
continues to make investments in order of the exposure class with the
next highest risk weight under Table 10 until the maximum total
investment level is reached. If more than one exposure class applies to
an exposure, the bank must use the highest applicable risk weight. A
bank may exclude derivative contracts held by the fund that are used
for hedging rather than for speculative purposes and do not constitute
a material portion of the fund's exposures.
(e) Money Market Fund Approach. The risk-weighted asset
amount for a bank's equity exposure to an investment fund that is a
money market fund subject to 17 CFR 270.2a-7 and that has an applicable
external rating in the highest investment-grade rating category equals
the adjusted carrying value of the equity exposure multiplied by 7
percent.
{{12-31-07 p.2262.83}}
Section 55. Equity Derivative Contracts
Under the IMA, in addition to holding risk-based capital against an
equity derivative contract under this part, a bank must hold risk-based
capital against the counterparty credit risk in the equity derivative
contract by also treating the equity derivative contract as a wholesale
exposure and computing a supplemental risk-weighted asset amount for
the contract under part IV. Under the SRWA, a bank may choose not to
hold risk-based capital against the counterparty credit risk of equity
derivative contracts, as long as it does so for all such contracts.
Where the equity derivative contracts are subject to a qualified master
netting agreement, a bank using the SRWA must either include all or
exclude all of the contracts from any measure used to determine
counterparty credit risk exposure.
Part VII. Risk-Weighted Assets for Operational
Risk
Section 61. Qualification Requirements for Incorporation of
Operational Risk Mitigants
(a) Qualification to use operational risk mitigants. A
bank may adjust its estimate of operational risk exposure to reflect
qualifying operational risk mitigants if:
(1) The bank's operational risk quantification system is able to
generate an estimate of the bank's operational risk exposure (which
does not incorporate qualifying operational risk mitigants) and an
estimate of the bank's operational risk exposure adjusted to
incorporate qualifying operational risk mitigants; and
(2) The bank's methodology for incorporating the effects of
insurance, if the bank uses insurance as an operational risk mitigant,
captures through appropriate discounts to the amount of risk
mitigation:
(i) The residual term of the policy, where less than one year;
(ii) The cancellation terms of the policy, where less than one
year;
(iii) The policy's timeliness of payment;
(iv) The uncertainty of payment by the provider of the policy;
and
(v) Mismatches in coverage between the policy and the hedged
operational loss event.
(b) Qualifying operational risk mitigants. Qualifying
operational risk mitigants are:
(1) Insurance that:
(i) Is provided by an unaffiliated company that has a claims
payment ability that is rated in one of the three highest rating
categories by a NRSRO;
(ii) Has an initial term of at least one year and a residual term
of more than 90 days;
(iii) Has a minimum notice period for cancellation by the
provider of 90 days;
(iv) Has no exclusions or limitations based upon regulatory
action or for the receiver or liquidator of a failed depository
institution; and
(v) Is explicitly mapped to a potential operational loss event;
and
(2) Operational risk mitigants other than insurance for which the
FDIC has given prior written approval. In evaluating an operational
risk mitigant other than insurance, the FDIC will consider whether the
operational risk mitigant covers potential operational losses in a
manner equivalent to holding regulatory
capital.
Section 62. Mechanics of Risk-Weighted Asset Calculation
(a) If a bank does not qualify to use or does not have qualifying
operational risk mitigants, the bank's dollar risk-based capital
requirement for operational risk is its operational risk exposure minus
eligible operational risk offsets (if any).
(b) If a bank qualifies to use operational risk mitigants and has
qualifying operational risk mitigants, the bank's dollar risk-based
capital requirement for operational risk is the greater of:
(1) The bank's operational risk exposure adjusted for qualifying
operational risk mitigants minus eligible operational risk offsets (if
any); or
(2) 0.8 multiplied by the difference between:
{{12-31-07 p.2262.84}}
(i) The bank's operational risk exposure; and
(ii) Eligible operational risk offsets (if any).
(c) The bank's risk-weighted asset amount for operational risk
equals the bank's dollar risk-based capital requirement for operational
risk determined under paragraph (a) or (b) of this section multiplied
by 12.5.
Part VIII. Disclosure
Section 71. Disclosure Requirements
(a) Each bank must publicly disclose each quarter its total and
tier 1 risk-based capital ratios and their components (that is, tier 1
capital, tier 2 capital, total qualifying capital, and total
risk-weighted assets). 4
(b) A bank must comply with paragraph (b) of section 71 of appendix
G to the Federal Reserve Board's Regulation Y (12 CFR part 225,
appendix G) unless it is a consolidated subsidiary of a bank holding
company or depository institution that is subject to these
requirements.
[The page following this is 2263.]
1Overdrafts are past due once the obligor has breached an
advised limit or been advised of a limit smaller than the current
outstanding balance. Go Back to Text
2This requirement is met where all transactions under the
agreement are (i) executed under U.S. law and (ii) constitute
"securities contracts" under section 555 of the Bankruptcy Code
(11 U.S.C. 555), qualified financial contracts under section 11(e)(8)
of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or netting
contracts between or among financial institutions under sections
401-407 of the Federal Deposit Insurance Corporation Improvement Act of
1991 (12 U.S.C. 4401-4407) or the Federal Reserve Board's Regulation EE
(12 CFR part 231). Go Back to Text
3Alternatively, a bank that uses an internal model to calculate
a one-sided credit valuation adjustment may use the effective credit
duration estimated by the model as M(EPE) in place of the formula in
paragraph (d)(4). Go Back to Text
4Other public disclosure requirements continue to apply - for
example, Federal securities law and regulatory reporting requirements.
Go Back to Text
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