(a) General. Under the SRWA, a Board-regulated institution’s total
risk-weighted assets for equity exposures equals the sum of the risk-weighted
asset amounts for each of the Board-regulated institution’s individual
equity exposures (other than equity exposures to an investment fund)
as determined under this section and the risk-weighted asset amounts
for each of the Board-regulated institution’s individual equity exposures
to an investment fund as determined under section 217.53.
(b) SRWA computation for individual
equity exposures. A Board-regulated institution 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) Zero percent
risk weight equity exposures. An equity exposure to a sovereign,
the Bank for International Settlements, the European Central Bank,
the European Commission, the International Monetary Fund, the European
Stability Mechanism, the European Financial Stability Facility, an
MDB, and any other entity whose credit exposures receive a zero percent
risk weight under section 217.32 may be assigned a zero percent risk
weight.
(2) 20 percent risk weight equity exposures. An equity exposure to a PSE, Federal Home Loan Bank or the Federal
Agricultural Mortgage Corporation (Farmer Mac) must be assigned a
20 percent risk weight.
(3) 100 percent risk weight equity exposures. The equity exposures set forth in this paragraph (b)(3) must be
assigned a 100 percent risk weight.
(i) Community development equity exposures.
(A) For state
member banks and bank holding companies, 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).
(B) For savings and loan holding companies,
an equity exposure that is designed primarily to promote community
welfare, including the welfare of low- and moderate-income communities
or families, such as by providing services or employment, and excluding
equity exposures to an unconsolidated small business investment company
and equity exposures held through a 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 significant investments in the capital of an
unconsolidated financial institution in the form of common stock and
exposures to an investment firm that would meet the definition of
a traditional securitization were it not for the application of paragraph
(8) of that definition in section 217.2 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 Board-regulated
institution’s total capital.
(A) To compute the aggregate
adjusted carrying value of a Board-regulated institution’s equity
exposures for purposes of this section, the Board-regulated institution
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 Board-regulated institution does not know the actual holdings
of the investment fund, the Board-regulated institution 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 Board-regulated institution must assume for
purposes of this section that the investment fund invests to the maximum
extent possible in equity exposures.
(B) When determining which of a Board-regulated
institution’s equity exposures qualify for a 100 percent risk weight
under this paragraph (b), a Board-regulated institution 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, 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) 250 percent risk weight equity exposures. Significant investments in the capital of unconsolidated financial
institutions in the form of common stock that are not deducted from
capital pursuant to section 217.22(d)(2) are assigned a 250 percent
risk weight.
(5) 300 percent
risk weight equity exposures. A publicly traded equity exposure
(other than an equity exposure described in paragraph (b)(7) of this
section and including the ineffective portion of a hedge pair) must
be assigned a 300 percent risk weight.
(6) 400 percent
risk weight equity exposures. An equity exposure (other than
an equity exposure described in paragraph (b)(7)) of this section
that is not publicly traded must be assigned a 400 percent risk weight.
(7) 600 percent risk weight equity exposures. An equity exposure
to an investment firm must be assigned a 600 percent risk weight,
provided that the investment firm:
(i) Would meet the definition
of a traditional securitization were it not for the application of
paragraph (8) of that definition; and
(ii) Has greater than immaterial leverage.
(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
Board-regulated institution acquires at least one of the equity exposures);
the documentation specifies the measure of effectiveness (E) the Board-regulated
institution 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 Board-regulated institution must measure E at least
quarterly and must use one of three alternative measures of E as set
forth in this paragraph (c).
(i) Under the dollar-offset method of
measuring effectiveness, the Board-regulated institution must determine
the ratio of value change (RVC). The RVC is the ratio of the cumulative
sum of the changes in value of one equity exposure to the cumulative
sum of the changes in the value of the other equity exposure. If RVC
is positive, the hedge is not effective and E equals 0. If RVC is
negative and greater than or equal to −1 (that is, between zero and
−1), then E equals the absolute value of RVC. If RVC is negative and
less than −1, then E equals 2 plus RVC.
(ii) Under the variability-reduction
method of measuring effectiveness:
Figure 1. DISPLAY EQUATION
$$
E = 1 - \frac{\displaystyle\sum_{t=1}^{T}\big(X_t - X_{t-1}\big)^2}
{\displaystyle\sum_{t=1}^{T}\big(A_t - A_{t-1}\big)^2}
$$
where
(A) X i = A i − B t ;
(B) A t = the value at time t of one exposure in
a hedge pair; and
(C) B t = 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 E equals
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.
