(a) Terms that are
set forth in section 217.2 and used in this subpart have the definitions
assigned thereto in section 217.2.
(b) For the
purposes of this subpart, the following terms are defined as follows:
Advanced internal ratings-based (IRB) systems means an advanced approaches Board-regulated institution’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 an advanced approaches
Board-regulated institution’s advanced IRB systems, operational risk
management processes, operational risk data and assessment systems,
operational risk quantification systems, and, to the extent used by
the Board-regulated institution, the internal models methodology,
advanced CVA approach, double default excessive correlation detection
process, and internal models approach (IMA) for equity exposures.
Backtesting means the comparison of a Board-regulated
institution’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.
Benchmarking means the comparison of a Board-regulated institution’s internal
estimates with relevant internal and external data or with estimates based
on other estimation techniques.
Bond option
contract means a bond option, bond future, or any other instrument
linked to a bond that gives rise to similar counterparty credit risk.
Business environment and internal control factors means the indicators of a Board-regulated institution’s operational
risk profile that reflect a current and forward-looking assessment
of the Board-regulated institution’s underlying business risk factors
and internal control environment.
Credit default
swap (CDS) means a financial contract executed under standard
industry documentation that allows one party (the protection purchaser)
to transfer the credit risk of one or more exposures (reference exposure(s))
to another party (the protection provider) for a certain period of
time.
Credit valuation adjustment (CVA) means
the fair value adjustment to reflect counterparty credit risk in valuation
of OTC derivative contracts.
Default—For
the purposes of calculating capital requirements under this subpart:
(1) Retail.
(i) A retail exposure of a Board-regulated
institution 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 retail exposures that are not
residential mortgage exposures or revolving exposures; or
(C) The Board-regulated institution
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 Board-regulated institution 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 Board-regulated institution may elect to use the
definition of default that is used in that jurisdiction, provided
that the Board-regulated institution has obtained prior approval from
the Board to use the definition of default in that jurisdiction.
(iii) A retail exposure
in default remains in default until the Board-regulated institution
has reasonable assurance of repayment and performance for all contractual
principal and interest payments on the exposure.
(2) Wholesale.
(i) A Board-regulated institution’s
wholesale obligor is in default if:
(A) The Board-regulated institution
determines that the obligor is unlikely to pay its credit obligations
to the Board-regulated institution in full, without recourse by the
Board-regulated institution 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 Board-regulated institution.
28(ii) An obligor in default remains in default until the Board-regulated
institution has reasonable assurance of repayment and performance
for all contractual principal and interest payments on all exposures
of the Board-regulated institution 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.
Economic downturn conditions means, with respect
to an exposure held by the Board regulated institution, 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 Board-regulated institution) in the exposure’s national
jurisdiction (or subdivision of such jurisdiction selected by the
Board-regulated institution) 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 Board-regulated institution does not apply the internal models
approach in section 132(d), 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 Board-regulated institution applies the internal
models approach in section 217.132(d), the value determined in section
217.132(d)(4).
Eligible double default
guarantor, with respect to a guarantee or credit derivative obtained
by a Board-regulated institution, means:
(1) U.S.-based
entities. A depository institution, a bank holding company, a
savings and loan holding company, or a securities broker or dealer
registered with the SEC under the Securities Exchange Act, if at the
time the guarantee is issued or anytime thereafter, has issued and
outstanding an unsecured debt security without credit enhancement
that is investment grade.
(2) Non-U.S.-based entities. A foreign
bank, or a non-U.S.-based securities firm if the Board-regulated institution
demonstrates that the guarantor is subject to consolidated supervision
and regulation comparable to that imposed on U.S. depository institutions,
or securities broker-dealers) if at the time the guarantee is issued
or anytime thereafter, has issued and outstanding an unsecured debt
security without credit enhancement that is investment grade.
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 Board-regulated
institution 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 Board-regulated
institution or securitization SPE with a claim on all proceeds from
the exposure or a pro rata interest in the proceeds from the exposure;
(4) Has an M of less
than one year; and
(5)
When consolidated by obligor, does not represent a concentrated exposure
relative to the portfolio of purchased wholesale exposures.
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
fair values in the probability distribution of fair values to a counterparty
at a specified future date are set to zero to convert the probability
distribution of fair 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 Board-regulated institution’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) means:
(1) For the on-balance sheet
component of a wholesale exposure or segment of retail exposures (other
than an OTC derivative contract, a repo-style transaction or eligible
margin loan for which the Board-regulated institution determines EAD
under section 217.132, a cleared transaction, or default fund contribution),
EAD means the Board-regulated institution’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, a repo-style transaction or
eligible margin loan for which the Board-regulated institution determines
EAD under section 217.132, cleared transaction, or default fund contribution)
in the form of a loan commitment, line of credit, trade-related letter
of credit, or transaction-related contingency, EAD means the Board-regulated
institution’s best estimate of net additions to the outstanding amount
owed the Board-regulated institution, 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. For the purposes of this definition:
(i) 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.
(ii) 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, a repo-style transaction,
or eligible margin loan for which the Board-regulated institution
determines EAD under section 217.132, cleared transaction, or default
fund contribution) 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 217.132. A Board-regulated
institution also may determine EAD for repo-style transactions and
eligible margin loans as described in section 217.132.
Exposure category means any of the wholesale,
retail, securitization, or equity exposure categories.
External operational loss event data means, with
respect to a Board-regulated institution, gross operational loss amounts,
dates, recoveries, and relevant causal information for operational
loss events occurring at organizations other than the Board-regulated
institution.
IMM exposure means a repo-style
transaction, eligible margin loan, or OTC derivative for which a Board-regulated
institution calculates its EAD using the internal models methodology
of section 217.132(d).
Internal operational
loss event data means, with respect to a Board-regulated institution,
gross operational loss amounts, dates, recoveries, and relevant causal
information for operational loss events occurring at the Board-regulated
institution.
Loss given default (LGD) means:
(1) For a wholesale exposure, the greatest
of:
(i) Zero;
(ii) The Board-regulated institution’s
empirically based best estimate of the long-run default-weighted average
economic loss, per dollar of EAD, the Board-regulated institution
would expect to incur if the obligor (or a typical obligor in the
loss severity grade assigned by the Board-regulated institution to
the exposure) were to default within a one-year horizon over a mix
of economic conditions, including economic downturn conditions; or
(iii) The Board-regulated
institution’s empirically based best estimate of the economic loss,
per dollar of EAD, the Board-regulated institution would expect to
incur if the obligor (or a typical obligor in the loss severity grade
assigned by the Board-regulated institution to the exposure) were
to default within a one-year horizon during economic downturn conditions.
(2) For
a segment of retail exposures, the greatest of:
(i) Zero;
(ii) The Board-regulated
institution’s empirically based best estimate of the long-run default-weighted
average economic loss, per dollar of EAD, the Board-regulated institution
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 Board-regulated institution’s
empirically based best estimate of the economic loss, per dollar of
EAD, the Board-regulated institution 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.
Obligor means the legal entity or natural person contractually
obligated on a wholesale exposure, except that a Board-regulated institution
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 Board-regulated institution, in
economic substance, does not have recourse to the borrower beyond
the real estate collateral; and no cross-default or cross-acceleration
clauses are in place other than clauses obtained solely out of an
abundance of caution; and
(ii) Other credit exposures to the same
legal entity or natural person; and
(3) (i)
A wholesale exposure authorized under section 364 of the U.S. Bankruptcy
Code (11 U.S.C. 364) to a legal entity or natural person who is a debtor-in-possession
for purposes of Chapter 11 of the Bankruptcy Code; and
(ii) Other credit exposures
to the same legal entity or natural person.
Operational loss means a loss (excluding insurance
or tax effects) resulting from an operational loss event. Operational
loss includes all expenses associated with an operational loss event
except for opportunity costs, forgone revenue, and costs related to
risk management and control enhancements implemented to prevent future
operational losses.
Operational loss event means an event that results in loss and is associated with any of
the following seven operational loss event type categories:
(1) Internal fraud, which means the operational
loss event type category that comprises operational losses resulting
from an act involving at least one internal party of a type intended
to defraud, misappropriate property, or circumvent regulations, the
law, or company policy excluding diversity- and discrimination-type
events.
(2) External
fraud, which means the operational loss event type category that comprises
operational losses resulting from an act by a third party of a type
intended to defraud, misappropriate property, or circumvent the law.
Retail credit card losses arising from non-contractual, third-party-initiated
fraud (for example, identity theft) are external fraud operational
losses. All other third-party-initiated credit losses are to be treated
as credit risk losses.
(3) Employment practices and workplace safety, which means the operational
loss event type category that comprises operational losses resulting
from an act inconsistent with 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 Board-regulated institution’s operational
risk quantification system over a one-year horizon (and not incorporating
eligible operational risk offsets or qualifying operational risk mitigants).
Other retail exposure means an exposure (other
than a securitization exposure, an equity exposure, a residential
mortgage exposure, a pre-sold construction loan, 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 Board-regulated institution’s consolidated
business credit exposure to the individual or company is $1 million
or less.
Probability of default (PD) means:
(1) For a wholesale exposure
to a non-defaulted obligor, the Board-regulated institution’s empirically
based best estimate of the long-run average one-year default rate
for the rating grade assigned by the Board-regulated institution to
the obligor, capturing the average default experience for obligors
in the rating grade over a mix of economic conditions (including economic
downturn conditions) sufficient to provide a reasonable estimate of
the average one-year default rate over the economic cycle for the
rating grade.
(2) For
a segment of non-defaulted retail exposures, the Board-regulated institution’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.
(3)
For a wholesale exposure to a defaulted obligor or segment of defaulted
retail exposures, 100 percent.
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 the underlying financial transactions are OTC derivative contracts,
eligible margin loans, or repo-style transactions. In order to treat
an agreement as a qualifying cross-product master netting agreement
for purposes of this subpart, a Board-regulated institution must comply
with the requirements of section 217.3(c) of this part with respect
to that 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 a borrower’s decision to borrow
and repay up to a pre-established maximum amount, except for an outstanding
amount that the borrower is required to pay in full every month);
(2) Is unsecured and
unconditionally cancelable by the Board-regulated institution to the
fullest extent permitted by Federal law; and
(3) (i)
Has a maximum contractual exposure amount (drawn plus undrawn) of
up to $100,000; or
(ii) With respect to a product with an outstanding amount that the
borrower is required to pay in full every month, the total outstanding
amount does not in practice exceed $100,000.
(4) A segment of exposures
that contains one or more exposures that fails to meet paragraph (3)(ii)
of this definition must be treated as a segment of other retail exposures
for the 24 month period following the month in which the total outstanding
amount of one or more exposures individually exceeds $100,000.
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 Board regulated institution’s operational risk profile
and control structure.
Total wholesale and
retail risk-weighted assets means the sum of:
(1) Risk-weighted assets for wholesale
exposures that are not IMM exposures, cleared transactions, or default
fund contributions to non-defaulted obligors and segments of non-defaulted
retail exposures;
(2)
Risk-weighted assets for wholesale exposures to defaulted obligors
and segments of defaulted retail exposures;
(3) Risk-weighted assets for assets not
defined by an exposure category;
(4) Risk-weighted assets for non-material
portfolios of exposures;
(5) Risk-weighted assets for IMM exposures (as determined in section
217.132(d));
(6) Risk-weighted
assets for cleared transactions and risk-weighted assets for default
fund contributions (as determined in section 217.133); and
(7) Risk-weighted assets for
unsettled transactions (as determined in section 217.136).
Unexpected operational loss (UOL) means the
difference between the Board-regulated institution’s operational risk
exposure and the Board-regulated institution’s expected operational
loss.
Unit of measure means the level (for
example, organizational unit or operational loss event type) at which
the Board-regulated institution’s operational risk quantification
system generates a separate distribution of potential operational
losses.
Wholesale exposure means a credit
exposure to a company, natural person, sovereign, or governmental
entity (other than a securitization exposure, retail exposure, pre-sold
construction loan, or equity exposure).
Wholesale
exposure subcategory means the HVCRE or non-HVCRE wholesale exposure
subcategory.
