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6000 - Bank Holding Company Act
Appendix G to Part 225 Capital Adequacy Guidelines for Bank
Holding Companies: 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
{{2-29-08 p.6120.43}}
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 bank holding companies using
bank holding company-specific internal risk measurement and management
processes for calculating risk-based capital requirements;
(2) Methodologies for such bank holding companies to calculate
their risk-based capital requirements; and
(3) Public disclosure requirements for such bank holding
companies.
(b) Applicability. (1) (1) This appendix applies to a
bank holding company that:
(i) Is not a consolidated subsidiary of another bank holding
company that uses this appendix to calculate its risk-based capital
requirements; and
(ii) That:
(A) Is a U.S.-based bank holding company that has total
consolidated assets (excluding assets held by an insurance underwriting
subsidiary), as reported on the most recent year-end FR Y-9C Report,
equal to $250 billion or more;
(B) 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); or
(C) Has a subsidiary depository institution that is required, or
has elected, to use 12 CFR part 3, Appendix C, 12 CFR part 208,
Appendix F, 12 CFR part 325, Appendix F, or 12 CFR part 567, Appendix C
to calculate its risk-based capital requirements.
(2) Any bank holding company may elect to use this appendix to
calculate its risk-based capital requirements.
(3) A bank holding company that is subject to this appendix must
use this appendix unless the Federal Reserve determines in writing that
application of this appendix is not appropriate in light of the bank
holding company's asset size, level of complexity, risk profile, or
scope of operations. In making a determination under this paragraph,
the Federal Reserve will apply notice and response procedures in the
same manner and to the same extent as the notice and response
procedures in 12 CFR 263.202.
(c) Reservation of authority--(1) Additional
capital in the aggregate. The Federal Reserve may require a bank
holding company to hold an amount of capital greater than otherwise
required under this appendix if the Federal Reserve determines that the
bank holding company's risk-based capital requirement under this
appendix is not commensurate with the bank holding company's credit,
market, operational, or other risks. In making a determination under
this paragraph, the Federal Reserve will apply notice and response
procedures in the same manner and to the same extent as the notice and
response procedures in 12 CFR 263.202
(2) Specific risk-weighted asset amounts. (i) If the
Federal Reserve determines that the risk-weighted asset amount
calculated under this appendix by the bank holding company for one or
more exposures is not commensurate with the risks associated with those
exposures, the Federal Reserve may require the bank holding company 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 Federal
Reserve.
(ii) If the Federal Reserve determines that the risk-weighted
asset amount for operational risk produced by the bank holding company
under this appendix is not commensurate with the operational risks of
the bank holding company, the Federal Reserve may require the bank
holding company 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 holding company's operational risk
management processes, data and assessment systems, or quantification
systems, all as specified by the Federal Reserve.
{{2-29-08 p.6120.44}}
(3) Other supervisory authority. Nothing in this
appendix limits the authority of the Federal Reserve 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 holding company may choose not to
apply a provision of this appendix to one or more exposures, provided
that:
(1) The bank holding company can demonstrate on an ongoing basis
to the satisfaction of the Federal Reserve 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 holding company appropriately manages the risk of
each such exposure;
(3) The bank holding company notifies the Federal Reserve in
writing prior to applying this principle to each such exposure; and
(4) The exposures to which the bank holding company applies this
principle are not, in the aggregate, material to the bank holding
company.
Section 2. Definitions
Advanced internal ratings-based (IRB) systems means a
bank holding company'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 holding company's advanced
IRB systems, operational risk management processes, operational risk
data and assessment systems, operational risk quantification systems,
and, to the extent the bank holding company 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 holding company 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 holding
company'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).
{{12-31-07 p.6120.45}}
Benchmarking means the comparison of a bank holding
company'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 holding company's operational risk profile
that reflect a current and forward-looking assessment of the bank
holding company'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 holding company,
determined in accordance with GAAP.
Clean-up call means a contractual provision that permits
an originating bank holding company 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 holding company 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
holding company'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 holding company 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;
{{12-31-07 p.6120.46}}
(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 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 holding company 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 holding company 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 holding
company 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 holding company may elect to use the definition of default
that is used in that jurisdiction, provided that the bank holding
company has obtained prior approval from the Federal Reserve to use the
definition of default in that jurisdiction.
(iii) A retail exposure in default remains in default until the
bank holding company has reasonable assurance of repayment and
performance for all contractual principal and interest payments on the
exposure.
(2) Wholesale. (i) A bank holding company's wholesale
obligor is in default if:
(A) The bank holding company determines that the obligor is
unlikely to pay its credit obligations to the bank holding company in
full, without recourse by the bank holding company 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 holding
company. 1
(ii) An obligor in default remains in default until the bank
holding company has reasonable assurance of repayment and performance
for all contractual principal and interest payments on all exposures of
the bank holding company 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.
{{12-31-07 p.6120.47}}
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:
(1) Is triggered solely by events not directly related to the
performance of the underlying exposures or the originating bank holding
company (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 holding company, 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 holding company) in the exposure's national jurisdiction (or
subdivision of such jurisdiction selected by the bank holding company)
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 holding company 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 holding company 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 holding company 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
Federal Reserve, 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
{{12-31-07 p.6120.48}}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;
(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
holding company records net payments received on the swap as net
income, the bank holding company 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 holding company,
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 holding company 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 holding company 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 holding company 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 holding company 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 holding company 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.
{{12-31-07 p.6120.49}}
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;
(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 holding company,
unless the affiliate is an insured depository institution, bank,
securities broker or dealer, or insurance company that:
(i) Does not control the bank holding company; 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 holding company 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 holding company 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 holding company 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 holding company or securitization SPE with
a claim on all proceeds from the exposure or a pro rata interest in the
proceeds from the exposure;
{{12-31-07 p.6120.50}}
(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
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 holding company 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 holding
company under GAAP;
(ii) The bank holding company 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
{{12-31-07 p.6120.51}}100 percent risk weight under section
618(a)(2) of the Resolution Trust Corporation Refinancing,
Restructuring, and Improvement Act and under 12 CFR part 225, Appendix
A, section III.C.3.
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.
(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 holding company'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
holding company 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 holding company'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 holding company 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 holding company'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 holding company'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
holding company 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 holding
company's best estimate of net additions to the outstanding amount owed
the bank holding company, 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
{{12-31-07 p.6120.52}}margin loan for which the bank holding
company 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 holding company 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 holding company must reflect its
share of the exposures' undrawn balances in EAD. Undrawn balances of
revolving exposures for which the drawn balances have been 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 holding company, gross operational loss amounts, dates,
recoveries, and relevant causal information for operational loss events
occurring at organizations other than the bank holding company.
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 holding company (including cash
held for the bank holding company 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 holding company 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 HC of the FR Y-9C Report) of a bank holding
company that results from a securitization (other than an increase in
equity capital that results from the bank holding company'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
{{12-31-07 p.6120.53}}
(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 relevant
agency's real estate lending standards at 12 CFR part 34, Subpart D
(OCC), 12 CFR part 208, Appendix C (Federal Reserve); 12 CFR part 365,
Subpart D (FDIC); and 12 CFR 560.100-560.101 (OTS).
(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 holding company
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 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 holding company
that provided the ADC facility as long as the permanent financing is
subject to the bank holding company'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 holding company, gross operational loss amounts, dates,
recoveries, and relevant causal information for operational loss events
occurring at the bank holding company.
Investing bank holding company means, with respect to a
securitization, a bank holding company that assumes the credit risk of
a securitization exposure (other than an originating bank holding
company of the securitization). In the typical synthetic
securitization, the investing bank holding company sells credit
protection on a pool of underlying exposures to the originating bank
holding company.
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 holding company's empirically based best estimate
of the long-run default-weighted average economic loss, per dollar of
EAD, the bank holding company would expect to incur if the obligor (or
a typical obligor in the loss severity grade assigned by the bank
holding company 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 holding company's empirically based best estimate
of the economic loss, per dollar of EAD, the bank holding company would
expect to incur if the obligor (or a typical obligor in the loss
severity grade assigned by the bank holding company 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:
{{12-31-07 p.6120.54}}
(i) Zero;
(ii) The bank holding company's empirically based best estimate
of the long-run default-weighted average economic loss, per dollar of
EAD, the bank holding company 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 holding company's empirically based best estimate
of the economic loss, per dollar of EAD, the bank holding company 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 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 holding
company can demonstrate to the satisfaction of the Federal Reserve 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 Federal Reserve 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
holding company 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 holding company, 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
{{12-31-07 p.6120.55}}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 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 holding company's operational risk quantification
system over a one-year horizon (and not incorporating eligible
operational risk offsets or qualifying operational risk mitigants).
Originating bank holding company, with respect to a
securitization, means a bank holding company 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 holding company'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
holding company's empirically based best estimate of the long-run
average one-year default rate for the rating grade assigned by the bank
holding company to the obligor, capturing the average
default
{{12-31-07 p.6120.56}}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
holding company'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 holding company'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 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 holding company demonstrates to the satisfaction of
the Federal Reserve 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 holding company 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 holding company 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;
{{12-31-07 p.6120.57}}
(3) The bank holding company 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 holding company 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:
(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
holding company 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 holding company
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 holding company 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 holding company; and
(2) Executed under an agreement that provides the bank
holding company 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 holding company 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.
{{12-31-07 p.6120.58}}
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
holding company'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.
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 holding company 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);
{{12-31-07 p.6120.59}}
(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 225, Appendix A,
as modified in part II of this appendix.
Tier 2 capital is defined in 12 CFR part 225, 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
determined in section 35 of this appendix) minus the amounts deducted
from capital pursuant to 12 CFR part 225, 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 Federal Reserve 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 Federal Reserve 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.
{{12-31-07 p.6120.60}}
Unexpected operational loss (UOL) means the difference
between the bank holding company's operational risk exposure and the
bank holding company's expected operational loss.
Unit of measure means the level (for example,
organizational unit or operational loss event type) at which the bank
holding company'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 holding company on
behalf of a company;
(2) A repo-style transaction entered into by a bank holding
company with a company and any other transaction in which a bank
holding company posts collateral to a company and faces counterparty
credit risk;
(3) An exposure that a bank holding company treats as a covered
position under 12 CFR part 225, Appendix E for which there is a
counterparty credit risk capital requirement;
(4) A sale of corporate loans by a bank holding company to a
third party in which the bank holding company retains full recourse;
(5) An OTC derivative contract entered into by a bank holding
company with a company;
(6) An exposure to an individual that is not managed by a bank
holding company 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 holding company must meet a
minimum ratio of:
(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 holding company must hold capital commensurate with
the level and nature of all risks to which the bank holding company is
exposed.
(c) When a bank holding company subject to 12 CFR part 225,
Appendix E calculates its risk-based capital requirements under this
appendix, the bank holding company must also refer to 12 CFR part 225,
Appendix E 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 holding company that uses this
appendix must make the same deductions from its tier 1 capital and tier
2 capital required in 12 CFR part 225, Appendix A, except that:
(1) A bank holding company is not required to deduct certain
equity investments and CEIOs (as provided in section 12 of this
appendix); and
(2) A bank holding company also must make the deductions from
capital required by paragraphs (b) and (c) of this section.
(b) Deductions from tier 1 capital. A bank holding
company 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
holding company 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 holding company's actual tier 2 capital,
however, the bank holding company must deduct the excess from tier 1
capital.
{{12-31-07 p.6120.61}}
(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 holding company's exposure on certain failed capital markets
transactions.
(8) A bank holding company must also deduct an amount equal to
the minimum regulatory capital requirement established by the regulator
of any insurance underwriting subsidiary of the holding company. For
U.S.-based insurance underwriting subsidiaries, this amount generally
would be 200 percent of the subsidiary's Authorized Control Level as
established by the appropriate state regulator of the insurance
company.
Section 12. Deductions and Limitations Not Required
(a) Deduction of CEIOs. A bank holding company is not
required to make the deductions from capital for CEIOs in 12 CFR part
225, Appendix A, section II.B.1.e.
(b) Deduction for certain equity investments. A bank
holding company is not required to make the deductions from capital for
nonfinancial equity investments in 12 CFR part 225, Appendix A, section
II.B.5.
Section 13. Eligible Credit Reserves
(a) Comparison of eligible credit reserves to expected credit
losses--(1) Shortfall of eligible credit reserves. If
a bank holding company's eligible credit reserves are less than the
bank holding company's total expected credit losses, the bank holding
company must deduct the shortfall amount 50 percent from tier 1 capital
and 50 percent from tier 2 capital. If the amount deductible from tier
2 capital exceeds the bank holding company's actual tier 2 capital, the
bank holding company must deduct the excess amount from tier 1 capital.
(2) Excess eligible credit reserves. If a bank holding
company's eligible credit reserves exceed the bank holding company's
total expected credit losses, the bank holding company 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 holding company's
credit-risk-weighted assets.
(b) Treatment of allowance for loan and lease losses.
Regardless of any provision in 12 CFR part 225, 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 holding company 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 holding company meets a criterion in that
section. The implementation plan must incorporate an explicit first
floor period start date no
{{12-31-07 p.6120.62}}later than 36 months after the later of
April 1, 2008, or the date the bank holding company meets at least one
criterion under paragraph (b)(1) of section 1 of this appendix. The
Federal Reserve may extend the first floor period start date.
(2) A bank holding company 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 holding company's
implementation plan must address in detail how the bank holding company
complies, or plans to comply, with the qualification requirements in
section 22 of this appendix. The bank holding company 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 holding company and each
consolidated subsidiary (U.S. and foreign-based) of the bank holding
company with respect to all portfolios and exposures of the bank
holding company 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 holding company);
(iii) Include the bank holding company's self-assessment of:
(A) The bank holding company's current status in meeting the
qualification requirements in section 22 of this appendix; and
(B) The consistency of the bank holding company's current
practices with the Federal Reserve's supervisory guidance on the
qualification requirements;
(iv) Based on the bank holding company's self-assessment,
identify and describe the areas in which the bank holding company
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 holding company's current practices with the
Federal Reserve's supervisory guidance on the qualification
requirements (gap analysis);
(v) Describe what specific actions the bank holding company 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 holding company'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 holding company's board of
directors.
(2) The bank holding company must submit the implementation plan,
together with a copy of the minutes of the board of directors'
approval, to the Federal Reserve at least 60 days before the bank
holding company proposes to begin its parallel run, unless the Federal
Reserve 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 holding company 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
holding company complies with the qualification requirements in section
22 of this appendix to the satisfaction of the Federal Reserve. During
the parallel run, the bank holding company must report to the Federal
Reserve on a calendar quarterly basis its risk-based capital ratios
using 12 CFR part 225, Appendix A and the risk-based capital
requirements described in this appendix. During this period, the bank
holding company is subject to 12 CFR part 225, Appendix A.
(d) Approval to calculate risk-based capital requirements
under this appendix. The Federal Reserve will notify the bank
holding company of the date that the bank holding company may begin its
first floor period if the Federal Reserve determines that:
(1) The bank holding company fully complies with all the
qualification requirements in section 22 of this appendix;
(2) The bank holding company has conducted a satisfactory
parallel run under paragraph (c) of this section; and
(3) The bank holding company has an adequate process to ensure
ongoing compliance with the qualification requirements in section 22 of
this appendix.
{{12-31-07 p.6120.63}}
(e) Transitional floor periods. Following a satisfactory
parallel run, a bank holding company 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 holding company's transitional floor periods, the bank holding
company's tier 1 risk-based capital ratio is equal to the lower of:
(A) The bank holding company's floor-adjusted tier 1 risk-based
capital ratio; or
(B) The bank holding company's advanced approaches tier 1
risk-based capital ratio.
(ii) Total risk-based capital ratio. During a bank
holding company's transitional floor periods, the bank holding
company's total risk-based capital ratio is equal to the lower of:
(A) The bank holding company's floor-adjusted total risk-based
capital ratio; or
(B) The bank holding company's advanced approaches total
risk-based capital ratio.
(2) Floor-adjusted risk-based capital ratios. (i) A
bank holding company's floor-adjusted tier 1 risk-based capital ratio
during a transitional floor period is equal to the bank holding
company's tier 1 capital as calculated under 12 CFR part 225, Appendix
A, divided by the product of:
(A) The bank holding company's total risk-weighted assets as
calculated under 12 CFR part 225, Appendix A; and
(B) The appropriate transitional floor percentage in Table 1.
(ii) A bank holding company's floor-adjusted total risk-based
capital ratio during a transitional floor period is equal to the sum of
the bank holding company's tier 1 and tier 2 capital as calculated
under 12 CFR part 225, Appendix A, divided by the product of:
(A) The bank holding company's total risk-weighted assets as
calculated under 12 CFR part 225, Appendix A; and
(B) The appropriate transitional floor percentage in Table 1.
(iii) A bank holding company 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 225, 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 holding company's advanced approaches tier 1
risk-based capital ratio equals the bank holding company's tier 1
risk-based capital ratio as calculated under this appendix (other than
this section on transitional floor periods).
(ii) A bank holding company's advanced approaches total
risk-based capital ratio equals the bank holding company'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 holding company must report to the Federal Reserve on a calendar
quarterly basis both floor-adjusted risk-based capital ratios and both
advanced approaches risk-based capital ratios.
(5) Exiting a transitional floor period. A bank
holding company may not exit a transitional floor period until the bank
holding company has spent a minimum of four consecutive calendar
quarters in the period and the Federal Reserve has determined that the
bank holding company may exit the floor period. The Federal Reserve's
determination will be based on an assessment of the bank holding
company'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
{{12-31-07 p.6120.64}}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 holding
company 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 holding company for
risk-based capital purposes under this appendix must be consistent with
the bank holding company's internal risk management processes and
management information reporting systems.
(3) Each bank holding company 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 holding company's size and level of complexity.
Regardless of whether the systems and models that generate the risk
parameters necessary for calculating a bank holding company's
risk-based capital requirements are located at any affiliate of the
bank holding company, the bank holding company 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 holding company must have an internal risk rating and
segmentation system that accurately and reliably differentiates among
degrees of credit risk for the bank holding company's wholesale and
retail exposures.
(2) For wholesale exposures:
(i) A bank holding company 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
holding company may elect, however, not to assign to a rating grade an
obligor to whom the bank holding company extends credit based solely on
the financial strength of a guarantor, provided that all of the bank
holding company's exposures to the obligor are fully covered by
eligible guarantees, the bank holding company applies the PD
substitution approach in paragraph (c)(1) of section 33 of this
appendix to all exposures to that obligor, and the bank holding company
immediately assigns the obligor to a rating grade if a guarantee can no
longer be recognized under this appendix. The bank holding company'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 holding company has chosen to directly
assign LGD estimates to each wholesale exposure, the bank holding
company must have an internal risk rating system that accurately and
reliably assigns each wholesale exposure to a loss severity rating
grade (reflecting the bank holding company's estimate of the LGD of the
exposure). A bank holding company 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 holding company 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 holding company'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 holding company's internal risk rating policy for
wholesale exposures must describe the bank holding company's rating
philosophy (that is, must describe how wholesale obligor rating
assignments are affected by the bank holding company's choice of the
range of economic, business, and industry conditions that are
considered in the obligor rating process).
(5) The bank holding company's internal risk rating system for
wholesale exposures must provide for the review and update (as
appropriate) of each obligor rating and (if
{{12-31-07 p.6120.65}}applicable) each loss severity rating
whenever the bank holding company receives new material information,
but no less frequently than annually. The bank holding company's retail
exposure segmentation system must provide for the review and update (as
appropriate) of assignments of retail exposures to segments whenever
the bank holding company receives new material information, but
generally no less frequently than quarterly.
(c) Quantification of risk parameters for wholesale and
retail exposures. (1) The bank holding company must have a
comprehensive risk parameter quantification process that produces
accurate, timely, and reliable estimates of the risk parameters for the
bank holding company's wholesale and retail exposures.
(2) Data used to estimate the risk parameters must be relevant to
the bank holding company'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 holding company's risk parameter quantification
process must produce appropriately conservative risk parameter
estimates where the bank holding company 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 holding company'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 holding company'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 holding company 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 holding company
must adjust its estimates of risk parameters to compensate for the lack
of data from periods of economic downturn conditions.
(8) The bank holding company's PD, LGD, and EAD estimates must be
based on the definition of default in this appendix.
(9) The bank holding company must review and update (as
appropriate) its risk parameters and its risk parameter quantification
process at least annually.
(10) The bank holding company must at least annually conduct a
comprehensive review and analysis of reference data to determine
relevance of reference data to the bank holding company'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 holding
company must obtain the prior written approval of the Federal Reserve
under section 32 of this appendix to use the internal models
methodology for counterparty credit risk.
(e) Double default treatment. A bank holding company
must obtain the prior written approval of the Federal Reserve under
section 34 of this appendix to use the double default treatment.
(f) Securitization exposures. A bank holding company
must obtain the prior written approval of the Federal Reserve under
section 44 of this appendix to use the Internal Assessment Approach for
securitization exposures to ABCP programs.
(g) Equity exposures model. A bank holding company must
obtain the prior written approval of the Federal Reserve 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 holding company must: (i) Have an
operational risk management function that:
(A) Is independent of business line management; and
{{12-31-07 p.6120.66}}
(B) Is responsible for designing, implementing, and overseeing
the bank holding company'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 holding
company's operational risk profile) to identify, measure, monitor, and
control operational risk in bank holding company 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 holding company must have operational risk data and assessment
systems that capture operational risks to which the bank holding
company is exposed. The bank holding company's operational risk data
and assessment systems must:
(i) Be structured in a manner consistent with the bank holding
company'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
holding company 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 holding company'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 Federal Reserve to address transitional
situations, such as integrating a new business line).
(2) The bank holding company must be able to map its
internal operational loss event data into the seven operational loss
event type categories.
(3) The bank holding company may refrain from
collecting internal operational loss event data for individual
operational losses below established dollar threshold amounts if the
bank holding company can demonstrate to the satisfaction of the Federal
Reserve that the thresholds are reasonable, do not exclude important
internal operational loss event data, and permit the bank holding
company to capture substantially all the dollar value of the bank
holding company's operational losses.
(B) External operational loss event data. The bank
holding company 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 holding company 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 holding company must incorporate business environment and
internal control factors into its operational risk data and assessment
systems. The bank holding company 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 holding company's operational risk quantification systems:
(A) Must generate estimates of the bank holding company'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 holding company'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 holding company 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 holding company
can demonstrate to the satisfaction of the Federal Reserve that its
process for estimating dependence is sound,
{{12-31-07 p.6120.67}}robust to a variety of scenarios, and
implemented with integrity, and allows for the uncertainty surrounding
the estimates. If the bank holding company 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
(E) Must be reviewed and updated (as appropriate) whenever the
bank holding company becomes aware of information that may have a
material effect on the bank holding company's estimate of operational
risk exposure, but the review and update must occur no less frequently
than annually.
(ii) [Reserved]
(i) Data management and maintenance. (1) A bank holding
company 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 holding company must retain data using an electronic
format that allows timely retrieval of data for analysis, validation,
reporting, and disclosure purposes.
(3) A bank holding company 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 holding company's senior management must ensure that all
components of the bank holding company's advanced systems function
effectively and comply with the qualification requirements in this
section.
(2) The bank holding company's board of directors (or a
designated committee of the board) must at least annually review the
effectiveness of, and approve, the bank holding company's advanced
systems.
(3) A bank holding company 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 holding company's advanced systems; and
(iii) Includes adequate governance and project management
processes.
(4) The bank holding company must validate, on an ongoing basis,
its advanced systems. The bank holding company'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 holding company must have an internal audit function
independent of business-line management that at least annually assesses
the effectiveness of the controls supporting the bank holding company's
advanced systems and reports its findings to the bank holding company's
board of directors (or a committee thereof).
(6) The bank holding company 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 holding company must
adequately document all material aspects of its advanced
systems.
Section 23. Ongoing Qualification
(a) Changes to advanced systems. A bank holding company
must meet all the qualification requirements in section 22 of this
appendix on an ongoing basis. A bank holding company must notify the
Federal Reserve when the bank holding company makes any change to an
advanced system that would result in a material change in the bank
holding company's risk-weighted asset amount for an exposure type, or
when the bank holding company makes any significant change to its
modeling assumptions.
(b) Failure to comply with qualification requirements.
(1) If the Federal Reserve determines that a bank holding company that
uses this appendix and has conducted a
{{12-31-07 p.6120.68}}satisfactory parallel run fails to
comply with the qualification requirements in section 22 of this
appendix, the Federal Reserve will notify the bank holding company in
writing of the bank holding company's failure to comply.
(2) The bank holding company must establish and submit a plan
satisfactory to the Federal Reserve to return to compliance with the
qualification requirements.
(3) In addition, if the Federal Reserve determines that the bank
holding company's risk-based capital requirements are not commensurate
with the bank holding company's credit, market, operational, or other
risks, the Federal Reserve may require such a bank holding company to
calculate its risk-based capital requirements:
(i) Under 12 CFR part 225, Appendix A; or
(ii) Under this appendix with any modifications provided by the
Federal Reserve.
Section 24. Merger and Acquisition Transitional Arrangements
(a) Mergers and acquisitions of companies without advanced
systems. If a bank holding company merges with or acquires a
company that does not calculate its risk-based capital requirements
using advanced systems, the bank holding company may use 12 CFR part
225, 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 Federal Reserve
may extend this transition period for up to an additional 12 months.
Within 90 days of consummating the merger or acquisition, the bank
holding company must submit to the Federal Reserve an implementation
plan for using its advanced systems for the acquired company. During
the period when 12 CFR part 225, 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
holding company'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 holding company's
eligible credit reserves. In addition, the risk-weighted assets of the
merged or acquired company are not included in the bank holding
company's credit-risk-weighted assets but are included in total
risk-weighted assets. If a bank holding company relies on this
paragraph, the bank holding company must disclose publicly the amounts
of risk-weighted assets and qualifying capital calculated under this
appendix for the acquiring bank holding company and under 12 CFR part
225, Appendix A for the acquired company.
(b) Mergers and acquisitions of companies with advanced
systems--(1) If a bank holding company merges with or acquires a
company that calculates its risk-based capital requirements using
advanced systems, the bank holding company 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 Federal
Reserve may extend this transition period for up to an additional 12
months. Within 90 days of consummating the merger or acquisition, the
bank holding company must submit to the Federal Reserve an
implementation plan for using its advanced systems for the merged or
acquired company.
(2) If the acquiring bank holding company is not subject to the
advanced approaches in this appendix at the time of acquisition or
merger, during the period when 12 CFR part 225, Appendix A apply to the
acquiring bank holding company, 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
holding company'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 holding company must calculate its
total wholesale and retail risk-weighted asset amount in four distinct
phases:
(1) Phase 1--categorization of exposures;
{{12-31-07 p.6120.69}}
(2) Phase 2--assignment of wholesale obligors and exposures to
rating grades and segmentation of retail exposures;
(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 holding company
must determine which of its exposures are wholesale exposures, retail
exposures, securitization exposures, or equity exposures. The bank
holding company must categorize each retail exposure as a residential
mortgage exposure, a QRE, or an other retail exposure. The bank holding
company 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 holding company 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 holding company 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 holding company must identify which of its
wholesale obligors are in default.
(2) Segmentation of retail exposures. (i) The bank
holding company must group the retail exposures in each retail
subcategory into segments that have homogeneous risk characteristics.
(ii) The bank holding company must identify which of its retail
exposures are in default. The bank holding company must segment
defaulted retail exposures separately from non-defaulted retail
exposures.
(iii) If the bank holding company determines the EAD for eligible
margin loans using the approach in paragraph (b) of section 32 of this
appendix, the bank holding company must identify which of its retail
exposures are eligible margin loans for which the bank holding company
uses this EAD approach and must segment such eligible margin loans
separately from other retail exposures.
(3) Eligible purchased wholesale exposures. A bank
holding company may group its eligible purchased wholesale exposures
into segments that have homogeneous risk characteristics. A bank
holding company 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 holding company 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 holding company
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.
{{12-31-07 p.6120.70}}
(4) Eligible purchased wholesale exposures. A bank
holding company must assign a PD, LGD, EAD, and M to each segment of
eligible purchased wholesale exposures. If the bank holding company can
estimate ECL (but not PD or LGD) for a segment of eligible purchased
wholesale exposures, the bank holding company 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 holding company may take
into account the risk reducing effects of eligible guarantees and
eligible credit 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 holding company 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 holding company 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 holding company 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 holding
company must calculate its EAD for an OTC derivative contract as
provided in paragraphs (c) and (d) of section 32 of this appendix. A
bank holding company 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 holding company's VaR-based
measure under 12 CFR part 225, Appendix E through an adjustment to EAD
as provided in paragraphs (b) and (d) of section 32 of this appendix. A
bank holding company 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 holding company 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
holding company's ongoing financing of the obligor. An exposure is not
part of a bank holding company's ongoing financing of the obligor if
the bank holding company:
(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 holding company 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 holding company applies the double default treatment
in
{{12-31-07 p.6120.71}}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 holding company may apply a
300 percent risk weight to the EAD of an eligible margin loan if the
bank holding company is not able to meet the agencies' requirements for
estimation of PD and LGD for the margin loan.
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.
{{12-31-07 p.6120.72}}
(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.
(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 holding company may assign a risk-weighted
asset amount of zero to cash owned and held in all offices of
subsidiary depository institutions or in transit and for gold bullion
held in either a subsidiary depository institution's own vaults, or
held in another depository institution'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 holding company has demonstrated to the Federal Reserve's
satisfaction that the portfolio (when combined with all other
portfolios of exposures that the bank holding company seeks to treat
under this paragraph) is not material to the bank holding company 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 holding company 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
holding company's VaR-based measure under 12 CFR part 225, Appendix E.
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 holding
company also may use the internal models methodology to estimate EAD
for qualifying cross-product master netting agreements.
(3) A bank holding company 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 holding company's VaR-based measure
under 12 CFR part 225, Appendix E), eligible margin loans, and OTC
derivative contracts.
(4) A bank holding company 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 holding company 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 holding company may estimate an unsecured LGD for the exposure, as
well as for any repo-style transaction that is included in the bank
holding company's VaR-based measure under 12 CFR part 225, Appendix E,
and determine the EAD of the exposure using:
{{12-31-07 p.6120.73}}
(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 holding company may determine EAD for an eligible
margin loan, repo-style transaction, or netting set by setting EAD
equal to max {0, [(E C) + (Es × Hs) + (Efx ×
Hfx)]}, where:
(A) E equals the value of the exposure (the sum of the current
market values of all instruments, gold, and cash the bank holding
company has lent, sold subject to repurchase, or posted as collateral
to the counterparty under the transaction (or netting set));
(B) C equals the value of the collateral (the sum of the
current market values of all instruments, gold, and cash the bank
holding company 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 holding company 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 holding
company 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 holding company 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 holding company 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 holding company 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 |
0t;1 year, 5 years |
0.02 |
0.04
|
ratings/highest investment-grade rating category for
short-term ratings |
0t;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 |
0t;1 year, 5 years |
0.03 |
0.06 |
|
0t; 5 years
|
0.06 |
0.12
|
{{12-31-07 p.6120.74}}
Applicable external rating grade
category for debt securities |
Residual
maturity for debt securities |
Issuers exempt from the 3 basis point
floor |
Other issuers |
One rating category below investment
grade |
All |
0.15 |
0.25
Main index equities (including
convertible bonds) and gold | 0.15 |
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 holding
company 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 holding
company 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 holding company 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 Federal Reserve, a bank holding company
may calculate haircuts (Hs and Hfx) using its own internal estimates of
the volatilities of market prices and foreign exchange rates.
(A) To receive Federal Reserve approval to use its own internal
estimates, a bank holding company must satisfy the following minimum
quantitative standards:
(1) A bank holding company 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 holding company 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
holding company to derive HN; and
(iii) HN equals the haircut based on the holding
period TN.
(3) A bank holding company must adjust holding periods
upwards where and as appropriate to take into account the illiquidity
of an instrument.
{{12-31-07 p.6120.75}}
(4) The historical observation period must be at least
one year.
(5) A bank holding company 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 holding company may
calculate haircuts for categories of securities. For a category of
securities, the bank holding company 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 holding company has lent, sold subject to repurchase, posted as
collateral, borrowed, purchased subject to resale, or taken as
collateral. In determining relevant categories, the bank holding
company 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
holding company 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 holding company 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 holding company'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 Federal Reserve, a bank holding company 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 holding
company must set EAD equal to max {0, [(E -- C) + PFE]},
where:
(i) E equals the value of the exposure (the sum of the current
market values of all instruments, gold, and cash the bank holding
company has lent, sold subject to repurchase, or posted as collateral
to the counterparty under the netting set);
(ii) C equals the value of the collateral (the sum of the
current market values of all instruments, gold, and cash the bank
holding company 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 holding
company's empirically based best estimate of the 99th percentile,
one-tailed confidence interval for an increase in the value of (E --
C) 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 holding company
has lent, sold subject to repurchase, posted as collateral, borrowed,
purchased subject to resale, or taken as collateral. The bank holding
company 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 holding
company 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 holding company 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 holding company 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
{{12-31-07 p.6120.76}}a covered position under 12 CFR part
225, Appendix E need not compute a separate counterparty credit risk
capital requirement under this section so long as the bank holding
company 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 holding company 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 for risk-based capital purposes (unless the
bank holding company is treating the credit derivative as a covered
position under 12 CFR part 225, Appendix E, in which case the bank
holding company must compute a supplemental counterparty credit risk
capital requirement under this section).
(4) Counterparty credit risk for equity derivatives. A
bank holding company 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 holding company is
treating the contract as a covered position under 12 CFR part 225,
Appendix E). In addition, if the bank holding company is treating the
contract as a covered position under 12 CFR part 225, Appendix E and in
certain other cases described in section 55 of this appendix, the bank
holding company 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 holding company'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 holding company 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.
{{12-31-07 p.6120.77}}
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.
(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
holding company 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 holding company 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 holding company must substitute the EAD calculated under paragraph
(c)(5) or (c)(6) of this section
{{12-31-07 p.6120.78}}for E 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 Federal Reserve, a bank holding company 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
holding company 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
holding company 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 holding company 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 holding company effectively integrates the risk
mitigating effects of cross-product netting into its risk management
and other information technology systems; and
(ii) The bank holding company obtains the prior written approval
of the Federal Reserve.
A bank holding company that uses the internal models methodology
for a transaction type must receive approval from the Federal Reserve
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 holding company
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 holding company 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 Federal Reserve approval as provided in
paragraph (d)(7), a more conservative measure of
EAD.
(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(EffectiveEEtk1, 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
Federal Reserve has determined that the bank holding company must set a
higher based on the bank holding company's specific characteristics of
counterparty credit risk.
(iii) A bank holding company 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 holding company hedges some or all of the
counterparty credit risk associated with a netting set using an
eligible credit derivative, the bank holding company may take the
reduction in exposure to the counterparty into account when estimating
EE. If the bank holding company 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 holding
company's exposure to the protection provider of the credit derivative.
(3) To obtain Federal Reserve approval to calculate the
distributions of exposures upon which the EAD calculation is based, the
bank holding company must demonstrate to
{{12-31-07 p.6120.79}}the satisfaction of the Federal Reserve
that it has been using for at least one year an internal model that
broadly meets the following minimum standards, with which the bank
holding company 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 holding company 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 holding company must be able to measure and manage
current exposures gross and net of collateral held, where appropriate.
The bank holding company must estimate expected exposures for OTC
derivative contracts both with and without the effect of collateral
agreements.
(vi) The bank holding company 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 holding company
should consider using model parameters based on forward-looking
measures, where appropriate.
(viii) A bank holding company 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.
(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 holding company 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 tk1.
(ii) If the remaining maturity of the exposure or the
longest-dated contract in the netting set is one year or less, the bank
holding company 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 holding company 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 holding
company for a single financial contract or for all financial contracts
in a netting set and confers upon the bank holding company a perfected,
first priority security interest (notwithstanding the prior security
interest of any custodial agent), or the legal
equivalent
{{12-31-07 p.6120.80}}thereof, in the collateral posted by
the counterparty under the agreement. This security interest must
provide the bank holding company 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 holding company'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 Federal Reserve, a bank
holding company may include the effect of a collateral agreement within
its internal model used to calculate EAD. The bank holding company 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 holding company 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 ten business days for all other netting sets; or
(B) Effective EPE without a collateral agreement.
(6) Own estimate of alpha. With prior written approval
of the Federal Reserve, a bank holding company 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 holding company
must meet the following minimum standards to the satisfaction of the
Federal Reserve:
(i) The bank holding company'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 holding company must assess the potential model
uncertainty in its estimates of alpha.
(iii) The bank holding company must calculate the numerator and
denominator of alpha in a consistent fashion with respect to modeling
methodology, parameter specifications, and portfolio
composition.
{{12-31-07 p.6120.81}}
(iv) The bank holding company 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 Federal Reserve, a bank holding company
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 holding company
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 holding company 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 holding company 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 holding company 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 holding company 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 holding company'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 holding company may treat the hedged exposure as
multiple separate exposures each covered by a single eligible guarantee
or 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 holding company 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 holding company 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 holding company may
only recognize the credit risk mitigation benefits of eligible
guarantees and eligible credit derivatives.
(2) A bank holding company 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.
{{12-31-07 p.6120.82}}
(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 holding company may recognize the
guarantee or credit derivative in determining the bank holding
company'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 holding company
determines that full substitution of the protection provider's PD leads
to an inappropriate degree of risk mitigation, the bank holding company
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
holding company 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 holding company 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
holding company determines that full substitution leads to an
inappropriate degree of risk mitigation, the bank holding company may
use a higher PD than that of the protection provider.
(B) The bank holding company 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 guarantee or credit derivative
provides the bank holding company 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 holding
company 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 holding
company'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
holding company must treat the hedged exposure as two separate
exposures (protected and
{{12-31-07 p.6120.83}}unprotected) in order to recognize the
credit risk mitigation benefit of the guarantee or credit derivative.
(A) The bank holding company'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 holding company 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 holding company 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 holding company (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 holding
company (protection purchaser), but the terms of the arrangement at
origination of the credit risk mitigant contain a positive incentive
for the bank holding company 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.
(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 holding company
must apply the following adjustment to the effective notional amount of
the credit risk mitigant: Pm = E x (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 holding company 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 holding company must apply the following
adjustment to the effective notional amount of the credit derivative:
Pr = Pm x 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).
{{12-31-07 p.6120.84}}
(f) Currency mismatch. (1) If a bank holding company
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 holding company must apply the
following formula to the effective notional amount of the guarantee or
credit derivative: Pc = Pr x (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 holding company 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 holding
company 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 holding company must adjust HFX calculated in
paragraph (f)(2) of this section upward if the bank holding company
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 holding company 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
(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 holding company 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 holding company has implemented a process (which has
received the prior, written approval of the Federal Reserve) 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 holding company 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 holding company may determine its
risk-weighted asset amount for the hedged exposure under paragraph (e)
of this section.
{{12-31-07 p.6120.85}}
(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 holding company 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 holding company 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 holding company 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
holding company applies double default treatment, the bank holding
company 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 holding company 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 holding company with the option to receive
immediate payout on triggering the protection; or
(ii) The LGD of the guarantee or credit derivative, if the
guarantee or credit derivative does not provide the bank holding
company 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 holding company 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 holding company to the
counterparty.
{{12-31-07 p.6120.86}}
(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 Federal Reserve 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 holding company must hold risk-based
capital against any DvP or PvP transaction with a normal settlement
period if the bank holding company's counterparty has not made delivery
or payment within five business days after the settlement date. The
bank holding company must determine its risk-weighted asset amount for
such a transaction by multiplying the positive current exposure of the
transaction for the bank holding company by the appropriate risk weight
in Table 5.
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 holding company must hold risk-based
capital against any non-DvP/non-PvP transaction with a normal
settlement period if the bank holding company 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 holding company must continue to hold risk-based capital
against the transaction until the bank holding company has received its
corresponding deliverables.
(2) From the business day after the bank holding company has made
its delivery until five business days after the counterparty delivery
is due, the bank holding company must calculate its risk-based capital
requirement for the transaction by treating the current market value of
the deliverables owed to the bank holding company as a wholesale
exposure.
(i) A bank holding company 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 holding company may use a 45 percent LGD for the
transaction rather than estimating LGD for the transaction provided the
bank holding company uses the 45 percent LGD for all transactions
described in paragraphs (e)(1) and (e)(2) of this section.
(iii) A bank holding company may use a 100 percent risk weight
for the transaction provided the bank holding company uses this risk
weight for all transactions described in paragraphs (e)(1) and (e)(2)
of this section.
(3) If the bank holding company has not received its deliverables
by the fifth business day after the counterparty delivery was due, the
bank holding company must
{{12-31-07 p.6120.87}}deduct the current market value of the
deliverables owed to the bank holding company 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 holding company 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 holding
company that meets these conditions must hold risk-based capital
against any securitization exposures it retains in connection with the
securitization. A bank holding company 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:
(1) The transfer is considered a sale under GAAP;
(2) The bank holding company 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 holding company 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 holding company 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 holding company 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 holding company to alter or replace the
underlying exposures to improve the credit quality of the pool of
underlying exposures;
(iii) Increase the bank holding company'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
holding company 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 holding company after the
inception of the securitization;
(3) The bank holding company 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 holding company 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 holding company 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 holding company may either apply the
Internal Assessment Approach in section 44 of this appendix to the
exposure (if the bank holding company, the exposure, and the relevant
ABCP
{{12-31-07 p.6120.88}}program qualify for the Internal
Assessment Approach) or the Supervisory Formula Approach in section 45
of this appendix to the exposure (if the bank holding company 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 holding company 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 Federal Reserve, a bank
holding company 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.
(b) Total risk-weighted assets for securitization
exposures. A bank holding company'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 holding company must
deduct a securitization exposure from total capital, the bank holding
company 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 holding company's tier 2 capital, the bank
holding company must deduct the excess from tier 1 capital.
(2) A bank holding company 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
holding company 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 holding company's gain-on-sale or
CEIOs associated with the securitization) may not exceed the sum of:
(1) The bank holding company's total risk-based capital
requirement for the underlying exposures as if the bank holding company
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 holding company'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 holding company'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 holding company 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 holding company has
multiple securitization exposures that provide duplicative coverage of
the underlying exposures of a securitization (such as when a bank
holding company provides a program-wide credit enhancement
and
{{12-31-07 p.6120.89}}multiple pool-specific liquidity
facilities to an ABCP program), the bank holding company is not
required to hold duplicative risk-based capital against the overlapping
position. Instead, the bank holding company 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
holding company has a securitization exposure where any underlying
exposure is not a wholesale exposure, retail exposure, securitization
exposure, or equity exposure, the bank holding company must:
(1) If the bank holding company is an originating bank holding
company, deduct from tier 1 capital any after-tax gain-on-sale
resulting from the securitization and 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 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 holding
company, 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 holding company provides
support to a securitization in excess of the bank holding company's
contractual obligation to provide credit support to the securitization
(implicit support):
(1) The bank holding company 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 holding company must disclose publicly:
(i) That it has provided implicit support to the securitization;
and
(ii) The regulatory capital impact to the bank holding company of
providing such implicit support.
(i) Eligible servicer cash advance facilities.
Regardless of any other provisions of this part, a bank holding company
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 holding company 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 holding company establishes and maintains, pursuant
to GAAP, a non-capital reserve sufficient to meet the bank holding
company'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 holding company is well capitalized, as defined in
the Federal Reserve's prompt corrective action regulation at 12 CFR
part 208, Subpart D. For purposes of determining whether a bank holding
company is well capitalized for purposes of this paragraph, the bank
holding company'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
holding company on transfers of small-business obligations receiving
the capital treatment specified in paragraph
{{12-31-07 p.6120.90}}(k)(1) of this section cannot exceed 15
percent of the bank holding company's total qualifying capital.
(3) If a bank holding company 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 holding company was well
capitalized and did not exceed the capital limit.
(4) The risk-based capital ratios of the bank holding company
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 225,
Appendix A.
(l) Consolidated ABCP programs. (1) A bank holding
company 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
holding company is the sponsor of the ABCP program. If a bank holding
company excludes such consolidated ABCP program assets from
risk-weighted assets, the bank holding company must hold risk-based
capital against any securitization exposures of the bank holding
company to the ABCP program in accordance with this part.
(2) If a bank holding company either is not permitted, or elects
not, to exclude consolidated ABCP program assets from its risk-weighted
assets, the bank holding company 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 holding company to the ABCP
program.
(m) Nth-to-default credit
derivatives--(1) First-to-default credit
derivatives--(i) Protection purchaser. A bank holding
company 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 holding company 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 holding company 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
holding company 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 holding company 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 holding company satisfies the requirements of
paragraph (m)(2)(i)(A) of this section, the bank holding company must
determine its risk-based capital requirement for the underlying
exposures as if the bank holding company 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 holding company 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
{{2-29-08 p.6120.91}}
(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 holding company. An originating bank
holding company 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 holding company. An investing bank
holding company 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 holding company
must determine the risk-weighted asset amount for 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 provided in Table 6 and Table 7.
(2) A bank holding company 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 holding company 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 holding company may
assume that N is six or more unless the bank holding company 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 holding company 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 holding company must apply the risk
weights in column 2 of Table 6 or Table 7.
{{2-29-08 p.6120.92}}
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 |
| |
{{12-31-07 p.6120.93}}
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 holding company may
apply the IAA to calculate the risk-weighted asset amount for a
securitization exposure that the bank holding company has to an ABCP
program (such as a liquidity facility or credit enhancement) if the
bank holding company, the ABCP program, and the exposure qualify for
use of the IAA.
(1) bank holding company qualification criteria. A
bank holding company qualifies for use of the IAA if the bank holding
company has received the prior written approval of the Federal Reserve.
To receive such approval, the bank holding company must demonstrate to
the Federal Reserve's satisfaction that the bank holding company's
internal assessment process meets the following criteria:
(i) The bank holding company's internal credit assessments of
securitization exposures must be based on publicly available rating
criteria used by an NRSRO.
(ii) The bank holding company's internal credit assessments of
securitization exposures used for risk-based capital purposes must be
consistent with those used in the bank holding company's internal risk
management process, management information reporting systems, and
capital adequacy assessment process.
(iii) The bank holding company's internal credit assessment
process must have sufficient granularity to identify gradations of
risk. Each of the bank holding company's internal credit assessment
categories must correspond to an external rating of an NRSRO.
(iv) The bank holding company'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 holding
company 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 holding company must evaluate whether to revise its
internal assessment process.
(v) The bank holding company must have an effective system of
controls and oversight that ensures compliance with these operational
requirements and maintains the integrity and accuracy of the internal
credit assessments. The bank holding company must
{{12-31-07 p.6120.94}}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 holding company must review and update each
internal credit assessment whenever new material information is
available, but no less frequently than annually.
(vii) The bank holding company 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 holding company 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.
(b) Mechanics. A bank holding company 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 holding company must map its
internal assessment of such a securitization exposure to an equivalent
external rating from an NRSRO. Under the IAA, a bank holding company
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 holding company may
use the SFA to determine its risk-based capital requirement for a
securitization exposure only if the bank holding company 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].
{{12-31-07 p.6120.95}}
(3) If KIRB is greater than L and less than L+T, the bank
holding company 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:
(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 holding company's securitization exposure to the
amount of the tranche that contains the securitization
exposure.
{{12-31-07 p.6120.96}}
(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 holding company); 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 holding company's securitization
exposure; to
(B) UE.
(ii) A bank holding company 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 holding company'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 holding
company's securitization exposure; to
(ii) UE.
(6) Effective number of exposures (N). (i) Unless the
bank holding company 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 holding company must
treat each underlying exposure as a single underlying exposure and must
not look through to the originally securitized underlying
exposures.
{{12-31-07 p.6120.97}}
(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 holding company 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 holding company may employ a simplified method for
calculating N and EWALGD.
(3) If C1 is no more than 0.03, a bank holding company 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 holding
company.
(4) Alternatively, if only C1 is available and C1 is no
more than 0.03, the bank holding company 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.
Section 46. Recognition of Credit Risk Mitigants for
Securitization Exposures
(a) General. An originating bank holding company 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 holding company 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 holding company
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 holding company may recognize financial collateral in determining
the bank holding company'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
holding company has reflected collateral in its determination of
exposure amount under section 32 of this appendix) as follows. The bank
holding company's risk-based capital requirement for the collateralized
securitization exposure is equal to the risk-based capital requirement
for the securitization
{{12-31-07 p.6120.98}}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
holding company qualifies for use of and uses own-estimates haircuts in
paragraph (b)(4) of this section:
(i) A bank holding company must use the collateral type haircuts
(Hs) in Table 3;
(ii) A bank holding company must use a currency mismatch haircut
(Hfx) of 8 percent if the exposure and the collateral are denominated
in different currencies;
(iii) A bank holding company 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 holding company 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 Federal Reserve, a bank holding company 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
holding company may only recognize an eligible guarantee or eligible
credit derivative provided by an eligible securitization guarantor in
determining the bank holding company's risk-based capital requirement
for a securitization exposure.
(2) ECL for securitization exposures. When a bank
holding company recognizes an eligible guarantee or eligible credit
derivative provided by an eligible securitization guarantor in
determining the bank holding company's risk-based capital requirement
for a securitization exposure, the bank holding company must also:
(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 holding company's total
ECL.
(3) Rules of recognition. A bank holding company may
recognize an eligible guarantee or eligible credit derivative provided
by an eligible securitization guarantor in determining the bank holding
company'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 holding company 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
holding company's PD for the guarantor, the bank holding company'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).
{{12-31-07 p.6120.99}}
(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 holding company 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 holding company's PD for the
guarantor, the bank holding company'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 holding company 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 holding company 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 holding company
must hold risk-based capital against the sum of the originating bank
holding company'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 holding company must calculate the
risk-based capital requirement for the originating bank holding
company'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 holding company'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 holding company 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
securitization contains a mix of retail and nonretail exposures or a
mix of committed and uncommitted exposures, a bank holding company 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 holding company 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 holding company 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.
{{12-31-07 p.6120.100}}
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
|
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
|
{{12-31-07 p.6120.101}}
(2) For a securitization for which all or substantially all of
the underlying exposures are residential mortgage exposures, a bank
holding company 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 holding company 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 holding company 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 holding company 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 holding company'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 holding company'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
holding company's best estimate of the amount that would be funded
under economic downturn conditions.
Section 52. Simple Risk Weight Approach (SRWA)
(a) General. Under the SRWA, a bank holding company'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
holding company'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 holding company'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 holding company 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
{{12-31-07 p.6120.102}}the Federal Reserve'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 holding company's
tier 1 capital plus tier 2 capital.
(A) To compute the aggregate adjusted carrying value of a bank
holding company's equity exposures for purposes of this paragraph
(b)(3)(iii), the bank holding company 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 holding company does not
know the actual holdings of the investment fund, the bank holding
company 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 holding company
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 holding company's equity
exposures qualify for a 100 percent risk weight under this paragraph, a
bank holding company 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:
(i) would meet the definition of a traditional securitization
were it not for the Federal Reserve'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 holding company acquires at least one of the equity
exposures); the documentation specifies the measure of effectiveness
(E) the bank holding company 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 holding company 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 holding company 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.
{{12-31-07 p.6120.103}}
(ii) Under the variability-reduction method of measuring
effectiveness:
(A) χt = 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 holding company 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
holding company must receive prior written approval from the Federal
Reserve. To receive such approval, the bank holding company must
demonstrate to the Federal Reserve's satisfaction that the bank holding
company meets the following criteria:
(1) The bank holding company 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 holding company's modeled equity exposures; and
(iii) Adequately capture both general market risk and
idiosyncratic risk.
(2) The bank holding company'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 quarterly returns for a benchmark portfolio of equity
exposures comparable to the bank holding company'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 holding company's
model and benchmarking exercise must be sufficient to provide
confidence in the accuracy and robustness of the bank holding company's
estimates.
(4) The bank holding company's model and benchmarking process
must incorporate data that are relevant in representing the risk
profile of the bank holding company'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
holding company's modeled equity exposures. In addition, the bank
holding company's benchmarking exercise must be based on daily market
prices for the benchmark portfolio. If the bank holding company's model
uses a scenario methodology, the bank holding company must demonstrate
that the model produces a conservative estimate of potential losses on
the bank holding company's modeled equity exposures over a relevant
long-term market cycle. If the bank holding company employs risk factor
models, the bank holding company must demonstrate through empirical
analysis the appropriateness of the risk factors used.
{{12-31-07 p.6120.104}}
(5) The bank holding company must be able to demonstrate, using
theoretical arguments and empirical evidence, that any proxies used in
the modeling process are comparable to the bank holding company's
modeled equity exposures and that the bank holding company has made
appropriate adjustments for differences. The bank holding company must
derive any proxies for its modeled equity exposures and benchmark
portfolio using historical market data that are relevant to the bank
holding company'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 holding company's modeled
equity exposures.
(c) Risk-weighted assets calculation for a bank holding
company modeling publicly traded and non-publicly traded equity
exposures. If a bank holding company models publicly traded and
non-publicly traded equity exposures, the bank holding company'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 holding
company's equity exposures (other than equity exposures referenced in
paragraph (c)(1) of this section) generated by the bank holding
company'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 holding company'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 holding company'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 holding
company using the IMA only for publicly traded equity exposures.
If a bank holding company models only publicly traded equity exposures,
the bank holding company'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 holding
company's equity exposures (other than equity exposures referenced in
paragraph (d)(1) of this section) generated by the bank holding
company'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 holding company'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.
{{12-31-07 p.6120.105}}
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 holding
company 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 holding company does not use the Full
Look-Through Approach, the bank holding company 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 holding company
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 holding
company) may either:
(1) Set the risk-weighted asset amount of the bank holding
company'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 holding
company; and
(ii) The bank holding company's proportional ownership share of
the fund; or
(2) Include the bank holding company's proportional ownership
share of each exposure held by the fund in the bank holding company's
IMA.
(c) Simple Modified Look-Through Approach. Under this
approach, the risk-weighted asset amount for a bank holding company'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.6120.106}}
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 holding company 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 holding company'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 holding
company 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 holding
company must use the highest applicable risk weight. A bank holding
company 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 holding company'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.6120.107}}
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 holding company 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 holding company 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
holding company 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 holding company may adjust its estimate of operational risk
exposure to reflect qualifying operational risk mitigants if:
(1) The bank holding company's operational risk quantification
system is able to generate an estimate of the bank holding company's
operational risk exposure (which does not incorporate qualifying
operational risk mitigants) and an estimate of the bank holding
company's operational risk exposure adjusted to incorporate qualifying
operational risk mitigants; and
(2) The bank holding company's methodology for incorporating the
effects of insurance, if the bank holding company 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
Federal Reserve has given prior written approval. In evaluating an
operational risk mitigant other than insurance, the Federal Reserve
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 holding company does not qualify to use or does not
have qualifying operational risk mitigants, the bank holding company'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 holding company qualifies to use operational risk
mitigants and has qualifying operational risk mitigants, the bank
holding company's dollar risk-based capital requirement for operational
risk is the greater of:
(1) The bank holding company'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:
(i) The bank holding company's operational risk exposure; and
(ii) Eligible operational risk offsets (if any).
{{12-31-07 p.6120.108}}
(c) The bank holding company's risk-weighted asset amount for
operational risk equals the bank holding company'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 holding company 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) (1) Each consolidated bank holding company that is not a
subsidiary of a non-U.S. banking organization that is subject to
comparable public disclosure requirements in its home jurisdiction and
has successfully completed its parallel run must provide timely public
disclosures each calendar quarter of the information in tables 11.1 --
11.11 below. If a significant change occurs, such that the most recent
reported amounts are no longer reflective of the bank holding company's
capital adequacy and risk profile, then a brief discussion of this
change and its likely impact must be provided as soon as practicable
thereafter. Qualitative disclosures that typically do not change each
quarter (for example, a general summary of the bank holding company's
risk management objectives and policies, reporting system, and
definitions) may be disclosed annually, provided any significant
changes to these are disclosed in the interim. Management is encouraged
to provide all of the disclosures required by this appendix in one
place on the bank holding company's public
website. 5
The bank holding company must make these disclosures publicly available
for each of the last three years (that is, twelve quarters) or such
shorter period since it began its first floor period.
(2) Each bank holding company is required to have a formal
disclosure policy approved by the board of directors that addresses its
approach for determining the disclosures it makes. The policy must
address the associated internal controls and disclosure controls and
procedures. The board of directors and senior management are
responsible for establishing and maintaining an effective internal
control structure over financial reporting, including the disclosures
required by this appendix, and must ensure that appropriate review of
the disclosures takes place. One or more senior officers of the bank
holding company must attest that the disclosures meet the requirements
of this appendix.
(3) If a bank holding company believes that disclosure of
specific commercial or financial information would prejudice seriously
its position by making public information that is either proprietary or
confidential in nature, the bank holding company need not disclose
those specific items, but must disclose more general information about
the subject matter of the requirement, together with the fact that, and
the reason why, the specific items of information have not been
disclosed.
{{12-31-07 p.6120.109}}
Table 11.1 Scope of Application
Qualitative
Disclosures |
(a) |
The name of the top corporate entity in the
group to which the appendix applies. |
|
(b) |
An outline of
differences in the basis of consolidation for accounting and regulatory
purposes, with a brief description of the
entities 6
within the group (a) that are fully consolidated; (b) that are
deconsolidated and deducted; (c) for which the regulatory capital
requirement is deducted; and (d) that are neither consolidated nor
deducted (for example, where the investment is risk-weighted).
|
|
(c) |
Any restrictions, or other major impediments, on
transfer of funds or regulatory capital within the group.
|
Quantitative Disclosures |
(d) |
The
aggregate amount of surplus capital of insurance subsidiaries (whether
deducted or subjected to an alternative method) included in the
regulatory capital of the consolidated group. |
|
(e) |
The
aggregate amount by which actual regulatory capital is less than the
minimum regulatory capital requirement in all subsidiaries with
regulatory capital requirements and the name(s) of the subsidiaries
with such deficiencies. |
| |
Table 11.2 -- Capital Structure
Qualitative
Disclosures |
(a) |
Summary information on the terms and
conditions of the main features of all capital instruments, especially
in the case of innovative, complex or hybrid capital instruments.
|
Quantitative Disclosures |
(b) |
The amount
of tier 1 capital, with separate disclosure of: common
stock/surplus; retained earnings;
minority interests in the equity of subsidiaries;
restricted core capital elements as defined in 12 CFR part
225, Appendix A; regulatory calculation differences
deducted from tier 1 capital; 7
and other amounts deducted from tier 1 capital,
including goodwill and certain intangibles. |
|
(c)
|
The total amount of tier 2 capital. |
|
(d) |
Other
deductions from capital. 8
|
|
(e) |
Total eligible capital. |
| |
{{12-31-07 p.6120.110}}
Table 11.3 Capital Adequacy
Qualitative
disclosures |
(a) |
A summary discussion of the bank holding
company's approach to assessing the adequacy of its capital to support
current and future activities. |
Quantitative
disclosures |
(b) |
Risk-weighted assets for credit
risk from: Wholesale exposures;
Residential mortgage exposures;
Qualifying revolving exposures; Other
retail exposures; Securitization exposures;
Equity exposures Equity exposures
subject to the simple risk weight approach; and
Equity exposures subject to the internal models
approach. |
|
(c) |
Risk-weighted assets for market
risk as calculated under [the market risk
rule]: 9
Standardized approach for specific risk; and
Internal models approach for specific risk.
|
|
(d) |
Risk-weighted assets for operational risk.
|
|
(e) |
Total and tier 1 risk-based capital
ratios: 10
For the top consolidated group; and
For each DI subsidiary. |
|
|
|
| |
General qualitative disclosure requirement
For each separate risk area described in tables 11.4 through 11.11,
the bank holding company must describe its risk management objectives
and policies, including:
Strategies and processes;
The structure and organization of the relevant risk
management function;
The scope and nature of risk reporting and/or measurement
systems;
Policies for hedging and/or mitigating risk and
strategies and processes for monitoring the continuing effectiveness of
hedges/mitigants.
{{12-31-07 p.6120.111}}
Table 11.4 11
-- Credit Risk: General Disclosures
Qualitative
Disclosures |
(a) |
The general qualitative disclosure
requirement with respect to credit risk (excluding counterparty credit
risk disclosed in accordance with Table 11.6), including:
Definitions of past due and impaired (for accounting
purposes); Description of approaches followed for
allowances, including statistical methods used where applicable;
and Discussion of the bank holding company's credit
risk management policy. |
Quantitative
Disclosures |
(b) |
Total credit risk exposures and average
credit risk exposures, after accounting offsets in accordance with
GAAP, 12
and without taking into account the effects of credit risk
mitigation techniques (for example, collateral and netting), over
the period broken down by major types of credit
exposure. 13
|
|
(c) |
Geographic 14
distribution of exposures, broken down in significant areas by major
types of credit exposure. |
|
(d) |
Industry or
counterparty type distribution of exposures, broken down by major
types of credit exposure. |
|
(e) |
Remaining contractual
maturity breakdown (for example, one year or less) of the whole
portfolio, broken down by major types of credit exposure.
|
|
(f) |
By major industry or counterparty type:
Amount of impaired loans; Amount of past due
loans; 15
Allowances; and Charge-offs during
the period. |
|
(g) |
Amount of impaired loans
and, if available, the amount of past due loans broken down by
significant geographic areas including, if practical, the amounts of
allowances related to each geographical
area. 16
|
|
(h) |
Reconciliation of changes in the allowance for loan and
lease losses. 17
|
| |
{{12-31-07 p.6120.112}}
Table 11.5 Credit Risk: Disclosures for Portfolios Subject to
IRB Risk-Based Capital Formulas
Qualitative
disclosures |
(a) |
Explanation and review of the:
Structure of internal rating systems and relation between
internal and external ratings; Use of risk parameter
estimates other than for regulatory capital purposes;
Process for managing and recognizing credit risk mitigation
(see table 11.7); and Control mechanisms for the
rating system, including discussion of independence, accountability,
and rating systems review. |
|
(b) |
Description of
the internal ratings process, provided separately for the
following: Wholesale category; Retail
subcategories; Residential mortgage
exposures; Qualifying revolving exposures;
and Other retail exposures. For each category and
subcategory the description should include: The
types of exposure included in the category/subcategories;
and The definitions, methods and data for estimation
and validation of PD, LGD, and EAD, including assumptions employed
in the derivation of these
variables. 18
|
Quantitative disclosures: risk assessment
|
(c) |
For wholesale exposures, present the following information
across a sufficient number of PD grades (including default) to allow
for a meaningful differentiation of credit
risk: 19
Total EAD; 20
Exposure-weighted average LGD (percentage);
Exposure-weighted average risk weight; and
Amount of undrawn commitments and exposure-weighted average
EAD for wholesale exposures. For each retail subcategory,
present the disclosures outlined above across a sufficient number of
segments to allow for a meaningful differentiation of credit
risk. |
| |
{{12-31-07 p.6120.113}}
Quantitative
disclosures: historical results |
(d) |
Actual losses in the
preceding period for each category and subcategory and how this differs
from past experience. A discussion of the factors that impacted the
loss experience in the preceding period - for example, has the bank
holding company experienced higher than average default rates, loss
rates or EADs. |
|
(e) |
Bank holding company's estimates
compared against actual outcomes over a longer
period. 21
At a minimum, this should include information on estimates of losses
against actual losses in the wholesale category and each retail
subcategory over a period sufficient to allow for a meaningful
assessment of the performance of the internal rating processes for each
category/subcategory. 22
Where appropriate, the bank holding company should further decompose
this to provide analysis of PD, LGD, and EAD outcomes against estimates
provided in the quantitative risk assessment disclosures
above. 23
| |
Table 11.6 General Disclosure for Counterparty Credit Risk of
OTC Derivative Contracts, Repo-Style Transactions, and Eligible Margin
Loans
Qualitative
Disclosures |
(a) |
The general qualitative disclosure
requirement with respect to OTC derivatives, eligible margin loans, and
repo-style transactions, including: Discussion of
methodology used to assign economic capital and credit limits for
counterparty credit exposures; Discussion of policies
for securing collateral, valuing and managing collateral, and
establishing credit reserves; Discussion of the
primary types of collateral taken; Discussion of
policies with respect to wrong-way risk exposures; and
Discussion of the impact of the amount of collateral the
bank holding company would have to provide if the bank holding
company were to receive a credit rating
downgrade.
|
| |
{{12-31-07 p.6120.114}}
Quantitative
Disclosures |
(b) |
Gross positive fair value of contracts,
netting benefits, netted current credit exposure, collateral held
(including type, for example, cash, government securities), and net
unsecured credit exposure. 24
Also report measures for EAD used for regulatory capital for these
transactions, the notional value of credit derivative hedges purchased
for counterparty credit risk protection, and, for bank holding
companies not using the internal models methodology in section 32(d) of
this appendix, the distribution of current credit exposure by types of
credit exposure. 25
|
|
(c) |
Notional amount of purchased and sold credit
derivatives, segregated between use for the bank holding company's own
credit portfolio and for its intermediation activities, including the
distribution of the credit derivative products used, broken down
further by protection bought and sold within each product group.
|
|
(d) |
The estimate of alpha if the bank holding company has
received supervisory approval to estimate alpha.
| |
Table 11.7 Credit Risk
Mitigation 26,
27,
28
Qualitative
Disclosures |
(a) |
The general qualitative disclosure
requirement with respect to credit risk mitigation including:
Policies and processes for, and an indication of the extent
to which the bank holding company uses, on- and off-balance sheet
netting; Policies and processes for collateral
valuation and management; A description of the main
types of collateral taken by the bank holding company;
The main types of guarantors/credit derivative
counterparties and their creditworthiness; and
Information about (market or credit) risk concentrations
within the mitigation taken. |
Quantitative
Disclosures |
(b) |
For each separately disclosed portfolio,
the total exposure (after, where applicable, on- or
off-balance sheet netting) that is covered by guarantees/credit
derivatives. |
| |
{{12-31-07 p.6120.115}}
Table 11.8 Securitization
Qualitative
disclosures |
(a) |
The general qualitative disclosure
requirement with respect to securitization (including synthetics),
including a discussion of: The bank holding company's
objectives relating to securitization activity, including the extent to
which these activities transfer credit risk of the underlying exposures
away from the bank holding company to other entities;
The roles played by the bank holding company in the
securitization process 29
and an indication of the extent of the bank holding company's
involvement in each of them; and The regulatory
capital approaches (for example, RBA, IAA and SFA) that the bank
holding company follows for its securitization activities.
|
|
(b) |
Summary of the bank holding company's
accounting policies for securitization activities, including:
Whether the transactions are treated as sales or
financings; Recognition of gain-on-sale;
Key assumptions for valuing retained interests, including
any significant changes since the last reporting period and the impact
of such changes; and Treatment of synthetic
securitizations. |
|
(c) |
Names of NRSROs used for
securitizations and the types of securitization exposure for which each
agency is used. |
Quantitative disclosures |
(d)
|
The total outstanding exposures securitized by the bank holding
company in securitizations that meet the operational criteria in
section 41 of this appendix (broken down into
traditional/synthetic), by underlying exposure
type. 30,
31,
32
|
|
(e) |
For exposures securitized by the bank holding
company in securitizations that meet the operational criteria in
Section 41 of this appendix: Amount of securitized
assets that are impaired/past due; and Losses
recognized by the bank holding company during the current
period 33
broken down by exposure type. |
|
(f) |
Aggregate
amount of securitization exposures broken down by underlying exposure
type.
| |
{{12-31-07 p.6120.116}}
|
(g)
|
Aggregate amount of securitization exposures and the associated IRB
capital requirements for these exposures broken down into a meaningful
number of risk weight bands. Exposures that have been deducted from
capital should be disclosed separately by type of underlying
asset. |
|
(h) |
For securitizations subject to the
early amortization treatment, the following items by underlying asset
type for securitized facilities: the aggregate drawn
exposures attributed to the seller's and investors' interests;
and the aggregate IRB capital charges incurred by the
bank holding company against the investors' shares of drawn balances
and undrawn lines. |
|
(i) |
Summary of current year's
securitization activity, including the amount of exposures securitized
(by exposure type), and recognized gain or loss on sale by asset type.
| |
Table 11.9 Operational Risk
Qualitative
disclosures |
(a) |
The general qualitative disclosure
requirement for operational risk. |
|
(b)
|
Description of the AMA, including a discussion of relevant internal
and external factors considered in the bank holding company's
measurement approach. |
|
(c) |
A description of the use of
insurance for the purpose of mitigating operational
risk. |
| |
Table 11.10 Equities Not Subject to Market Risk Rule
Qualitative
Disclosures |
(a) |
The general qualitative disclosure
requirement with respect to equity risk, including:
differentiation between holdings on which capital gains are
expected and those held for other objectives, including for
relationship and strategic reasons; and discussion of
important policies covering the valuation of and accounting for equity
holdings in the banking book. This includes the accounting techniques
and valuation methodologies used, including key assumptions and
practices affecting valuation as well as significant changes in these
practices. |
Quantitative Disclosures |
(b)
|
Value disclosed in the balance sheet of investments, as well as the
fair value of those investments; for quoted securities, a comparison to
publicly-quoted share values where the share price is materially
different from fair value. |
|
(c) |
The types and nature
of investments, including the amount that is: Publicly
traded; and Non-publicly traded.
| |
{{12-31-07 p.6120.117}}
|
(d)
|
The cumulative realized gains (losses) arising from sales and
liquidations in the reporting period. |
|
(e)
|
Total unrealized gains
(losses) 34
Total latent revaluation gains
(losses) 35
Any amounts of the above included in tier 1 and/or
tier 2 capital. |
|
(f) |
Capital requirements broken down
by appropriate equity groupings, consistent with the bank holding
company's methodology, as well as the aggregate amounts
and the type of equity investments subject to any supervisory
transition regarding regulatory capital
requirements. 36
| |
Table 11.11 Interest Rate Risk for Non-trading Activities
Qualitative
disclosures |
(a) |
The general qualitative disclosure
requirement, including the nature of interest rate risk for non-trading
activities and key assumptions, including assumptions regarding loan
prepayments and behavior of non-maturity deposits, and frequency of
measurement of interest rate risk for non-trading activities.
|
Quantitative disclosures |
(b) |
The increase
(decline) in earnings or economic value (or relevant measure used by
management) for upward and downward rate shocks according to
management's method for measuring interest rate risk for non-trading
activities, broken down by currency (as appropriate).
|
| |
[The page following this is 6171.]
1 Overdrafts 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
2 This 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
3 Alternatively, a bank holding company 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
4 Other public disclosure requirements continue to apply - for
example, Federal securities law and regulatory reporting requirements.
Go Back to Text
5 Alternatively, a bank holding company may provide the
disclosures in more than one place, as some of them may be included in
public financial reports (for example, in Management's Discussion and
Analysis included in SEC filings) or other regulatory reports. The bank
holding company must provide a summary table on its public Web site
that specifically indicates where all the disclosures may be found (for
example, regulatory report schedules, page numbers in annual reports).
Go Back to Text
6 Entities include securities, insurance and other financial
subsidiaries, commercial subsidiaries (where permitted), and
significant minority equity investments in insurance, financial and
commercial entities. Go Back to Text
7 Representing 50 percent of the amount, if any, by which
total expected credit losses as calculated within the IRB approach
exceed eligible credit reserves, which must be deducted from tier 1
capital. Go Back to Text
8 Including 50 percent of the amount, if any, by which total
expected credit losses as calculated within the IRB approach exceed
eligible credit reserves, which must be deducted from tier 2 capital. Go Back to Text
9 Risk-weighted assets determined under [the market risk
rule] are to be disclosed only for the approaches used. Go Back to Text
10 Total risk-weighted assets should also be disclosed. Go Back to Text
11 Table 4 does not include equity exposures. Go Back to Text
12 For example, FASB Interpretations 39 and 41. Go Back to Text
13 For example, bank holding companies could apply a breakdown
similar to that used for accounting purposes. Such a breakdown might,
for instance, be (a) loans, off-balance sheet commitments, and other
non-derivative off-balance sheet exposures, (b) debt securities, and
(c) OTC derivatives. Go Back to Text
14 Geographical areas may comprise individual countries,
groups of countries, or regions within countries. A bank holding
company might choose to define the geographical areas based on the way
the company's portfolio is geographically managed. The criteria used to
allocate the loans to geographical areas must be specified. Go Back to Text
15 A bank holding company is encouraged also to provide an
analysis of the aging of past-due loans. Go Back to Text
16 The portion of general allowance that is not allocated to a
geographical area should be disclosed separately. Go Back to Text
17 transfers between allowances; and
the closing balance of the allowance. Charge-offs and recoveries that
have been recorded directly to the income statement should be disclosed
separately. Go Back to Text
18 This disclosure does not require a detailed description of
the model in full -- it should provide the reader with a broad overview
of the model approach, describing definitions of the variables and
methods for estimating and validating those variables set out in the
quantitative risk disclosures below. This should be done for each of
the four category/subcategories. The bank holding company should
disclose any significant differences in approach to estimating these
variables within each category/subcategories. Go Back to Text
19 The PD, LGD and EAD disclosures in Table 11.5(c) should
reflect the effects of collateral, qualifying master netting
agreements, eligible guarantees and eligible credit derivatives as
defined in part I. Disclosure of each PD grade should include the
exposure-weighted average PD for each grade. Where a bank holding
company aggregates PD grades for the purposes of disclosure, this
should be a representative breakdown of the distribution of PD grades
used for regulatory capital purposes. Go Back to Text
20 Outstanding loans and EAD on undrawn commitments can be
presented on a combined basis for these disclosures. Go Back to Text
21 These disclosures are a way of further informing the reader
about the reliability of the information provided in the
"quantitative disclosures: risk assessment" over the long run.
The disclosures are requirements from year-end 2010; in the meantime,
early adoption is encouraged. The phased implementation is to allow a
bank holding company sufficient time to build up a longer run of data
that will make these disclosures meaningful. Go Back to Text
22 This regulation is not prescriptive about the period used
for this assessment. Upon implementation, it might be expected that a
bank holding company would provide these disclosures for as long run of
data as possible -- for example, if a bank holding company has 10 years
of data, it might choose to disclose the average default rates for each
PD grade over that 10-year period. Annual amounts need not be
disclosed. Go Back to Text
23 A bank holding company should provide this further
decomposition where it will allow users greater insight into the
reliability of the estimates provided in the "quantitative
disclosures: risk assessment." In particular, it should provide this
information where there are material differences between its estimates
of PD, LGD or EAD compared to actual outcomes over the long run. The
bank holding company should also provide explanations for such
differences. Go Back to Text
24 Net unsecured credit exposure is the credit exposure after
considering the benefits from legally enforceable netting agreements
and collateral arrangements, without taking into account haircuts for
price volatility, liquidity, etc. Go Back to Text
25 This may include interest rate derivative contracts,
foreign exchange derivative contracts, equity derivative contracts,
credit derivatives, commodity or other derivative contracts, repo-style
transactions, and eligible margin loans. Go Back to Text
26 At a minimum, a bank holding company must provide the
disclosures in Table 11.7 in relation to credit risk mitigation that
has been recognized for the purposes of reducing capital requirements
under this appendix. Where relevant, bank holding companies are
encouraged to give further information about mitigants that have not
been recognized for that purpose. Go Back to Text
27 Credit derivatives that are treated, for the purposes of
this appendix, as synthetic securitization exposures should be excluded
from the credit risk mitigation disclosures and included within those
relating to securitization. Go Back to Text
28 Counterparty credit risk-related exposures disclosed
pursuant to Table 11.6 should be excluded from the credit risk
mitigation disclosures in Table 11.7. Go Back to Text
29 For example: originator, investor, servicer, provider of
credit enhancement, sponsor of asset backed commercial paper facility,
liquidity provider, or swap provider. Go Back to Text
30 Underlying exposure types may include, for example, one- to
four-family residential loans, home equity lines, credit card
receivables, and auto loans. Go Back to Text
31 Securitization transactions in which the originating bank
holding company does not retain any securitization exposure should be
shown separately but need only be reported for the year of inception.
Go Back to Text
32 Where relevant, a bank holding company is encouraged to
differentiate between exposures resulting from activities in which they
act only as sponsors, and exposures that result from all other bank
holding company securitization activities. Go Back to Text
33 For example, charge-offs/allowances (if the assets remain
on the bank holding company's balance sheet) or write-downs of I/O
strips and other residual interests. Go Back to Text
34 Unrealized gains (losses) recognized in the balance sheet
but not through earnings. Go Back to Text
35 Unrealized gains (losses) not recognized either in the
balance sheet or through earnings. Go Back to Text
36 This disclosure should include a breakdown of equities that
are subject to the 0 percent, 20 percent, 100 percent, 300 percent, 400
percent, and 600 percent risk weights, as applicable. Go Back to Text
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