OCC 2005-8
OCC BULLETIN  

Subject:      Credit Risk
Description:  Proposed Classification of Commercial Credit 
              Exposures
Date:         March 28, 2005

TO:  Chief Executive Officers of All National Banks, Federal
     Branches and Agencies, Department and Division Heads, and
     All Examining Personnel

The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, and the Office of Thrift Supervision
(agencies) are seeking comment on proposed changes to the
supervisory framework for the classification of commercial credit
exposures.  The notice of proposed changes and request for
comment was published in the Federal Register on March 28, 2005
(attached).

The classifications of commercial credit exposures are used to
identify higher risk commercial loans and determine classified
loan ratios.  Examiners consider the aggregate levels of an
institution's classified assets in determining the "asset
quality" and "capital adequacy" components of an institution's
CAMELS ratings.1  These component ratings heavily influence an
institution's overall CAMELS rating.

The current classification system dates back to 1938 with only
minor revisions made over the last seven decades.  The proposal
would replace the current commercial credit classification
categories (special mention, substandard, and doubtful) with a
two-dimensional framework:  one dimension that measures the risk
of the borrower defaulting on his or her obligations (borrower
rating), and a second focused on the loss severity the bank would
likely incur in the event of the borrower's default (facility
rating).  As proposed, facility ratings would be required only
for those borrowers rated default (i.e., borrowers with a
facility placed on nonaccrual or fully or partially charged off).
For other borrowers, institutions would have the option of
assigning a facility rating.

The proposal also clarifies issues that have historically led to
rating differences between bankers and examiners and among the
regulatory agencies, e.g., split ratings (facilities that are
assigned multiple ratings) and ratings for asset-based lending
facilities.

Comments on the proposal will be accepted through June 30, 2005.
Feedback from this request will be used to develop a final
framework and to develop an implementation plan.

For further information, contact Daniel Bailey, National Bank
Examiner, Credit Risk Division at (202) 874-5170.



Barbara J. Grunkemeyer
Deputy Comptroller
Credit Risk Division

Attachment: 70 FR 15681
     [http://www.occ.treas.gov/fr/fedregister/70fr15681]
_______________________________
1 The FFIEC's Uniform Financial Institutions Rating System,
commonly referred to as CAMELS, assesses six components of a
financial institution's performance: Capital adequacy, Asset
quality, Management administration, Earnings, Liquidity, and
Sensitivity to market risk. Each component is rated on a scale of
1 to 5, with 1 being the most favorable rating. A composite or
overall rating is also assigned.