SECTION 217.131—Mechanics
for Calculating Total Wholesale and Retail Risk-Weighted Assets
(a) Overview. A Board-regulated
institution must calculate its total wholesale and retail risk-weighted
asset amount in four distinct phases:
(1) Phase 1—categorization of exposures;
(2) Phase 2—assignment
of wholesale obligors and exposures to rating grades and segmentation
of retail exposures;
(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 Board-regulated
institution must determine which of its exposures are wholesale exposures,
retail exposures, securitization exposures, or equity exposures.
The Board-regulated institution must categorize each retail exposure
as a residential mortgage exposure, a QRE, or another retail exposure.
The Board-regulated institution must identify which wholesale exposures
are HVCRE exposures, sovereign exposures, OTC derivative contracts,
repo-style transactions, eligible margin loans, eligible purchased
wholesale exposures, cleared transactions, default fund contributions,
and unsettled transactions to which section 217.136 applies, and eligible
guarantees or eligible credit derivatives that are used as credit
risk mitigants. The Board-regulated institution must identify any
on-balance sheet asset that does not meet the definition of a wholesale,
retail, equity, or securitization exposure, any non-material portfolio
of exposures described in paragraph (e)(4) of this section, and for
bank holding companies and savings and loan holding companies, any
on-balance sheet asset that is held in a non-guaranteed separate account.
(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
Board-regulated institution 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 Board-regulated institution
must identify which of its wholesale obligors are in default.
(2) Segmentation of retail exposures.
(i) The Board-regulated
institution must group the retail exposures in each retail subcategory
into segments that have homogeneous risk characteristics.
(ii) The Board-regulated
institution must identify which of its retail exposures are in default.
The Board-regulated institution must segment defaulted retail exposures
separately from non-defaulted retail exposures.
(iii) If the Board-regulated institution
determines the EAD for eligible margin loans using the approach in
section 217.132(b), the Board-regulated institution must identify
which of its retail exposures are eligible margin loans for which
the Board-regulated institution uses this EAD approach and must segment
such eligible margin loans separately from other retail exposures.
(3) Eligible purchased wholesale exposures. A Board-regulated institution may group its eligible purchased wholesale
exposures into segments that have homogeneous risk characteristics.
A Board-regulated institution must use the wholesale exposure formula
in Table 1 of 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 Board-regulated institution 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, the European Stability Mechanism,
the European Financial Stability Facility, or a multilateral development
bank, to which the Board-regulated institution 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 may not be less than 10 percent, except for segments of
residential mortgage exposures for which all or substantially all
of the principal of each exposure is either:
(i) Directly and unconditionally
guaranteed by the full faith and credit of a sovereign entity; or
(ii) Guaranteed by
a contingent obligation of the U.S. government or its agencies, the
enforceability of which is dependent upon some affirmative action
on the part of the beneficiary of the guarantee or a third party (for
example, meeting servicing requirements).
(4) Eligible purchased wholesale exposures. A Board-regulated institution
must assign a PD, LGD, EAD, and M to each segment of eligible purchased
wholesale exposures. If the Board-regulated institution can estimate
ECL (but not PD or LGD) for a segment of eligible purchased wholesale
exposures, the Board-regulated institution 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 Board-regulated institution
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 217.134 or, if applicable, applying
double default treatment to the exposure as provided in section 217.135.
A Board-regulated institution may decide separately for each wholesale
exposure that qualifies for the double default treatment under section
217.135 whether to apply the double default treatment or to use the
PD substitution or LGD adjustment treatment without recognizing double
default effects.
(ii) A Board-regulated institution 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. In doing so, a Board-regulated institution must consider
all relevant available information.
(iii) Except as provided in paragraph
(d)(6) of this section, a Board-regulated institution 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. In order
to do so, a Board-regulated institution must have established internal
requirements for collateral management, legal certainty, and risk
management processes.
(6) EAD for OTC
derivative contracts, repo-style transactions, and eligible margin
loans. A Board-regulated institution must calculate its EAD for
an OTC derivative contract as provided in section 217.132 (c) and
(d). A Board-regulated institution 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 Board-regulated institution’s
VaR-based measure under subpart F of this part through an adjustment
to EAD as provided in section 217.132(b) and (d). A Board-regulated
institution that takes collateral into account through such an adjustment
to EAD under section 217.132 may not reflect such collateral in LGD.
(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 is a
trade related letter of credit, or if the exposure has an original
maturity of less than one year and is not part of a Board-regulated
institution’s ongoing financing of the obligor. An exposure is not
part of a Board-regulated institution’s ongoing financing of the obligor
if the Board-regulated institution:
(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.
(8) EAD for exposures to certain central counterparties. A Board-regulated institution may attribute an EAD of zero to exposures
that arise from the settlement of cash transactions (such as equities,
fixed income, spot foreign exchange, and spot commodities) with a
central counterparty where there is no assumption of ongoing counterparty
credit risk by the central counterparty after settlement of the trade
and associated default fund contributions.
(e) Phase 4—Calculation of risk-weighted
assets.
(1) Non-defaulted
exposures.
(i) A Board-regulated institution must
calculate the dollar risk-based capital requirement for each of its
wholesale exposures to a non-defaulted obligor (except for eligible
guarantees and eligible credit derivatives that hedge another wholesale
exposure, IMM exposures, cleared transactions, default fund contributions,
unsettled transactions, and exposures to which the Board-regulated
institution applies the double default treatment in section 217.135)
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
1 and multiplying the output of the formula (K) by the EAD of the
exposure or segment. Alternatively, a Board-regulated institution
may apply a 300 percent risk weight to the EAD of an eligible margin
loan if the Board-regulated institution is not able to meet the Board’s
requirements for estimation of PD and LGD for the margin loan.
Figure 1. DISPLAY EQUATION
$$
\begin{align*}
\tiny
&\qquad\textbf{Retail} \\
&\textbf{Capital} & &\qquad\qquad K = \Bigg[ \small{LGD} \times N \Bigg\lgroup \frac{N^{-1}(PD) + \sqrt{R} \times N^{-1} (0.999)}{\sqrt{1-R}} \Bigg\rgroup - (\small{LGD} \times \small{PD}) \Bigg]\\
& \textbf{requirement} \\
& \textbf{(K)} \\
& \textbf{non-defaulted} \\
& \textbf{exposures} \\
\\
\\
&\textbf{Correlation} & &\text{For residential mortgage exposures: R= 0.15}\\
&\textbf{factor (R)} & &\text{For qualifying revolving exposures: R= 0.04}\\
& & &\text{For other retail exposures: }R= 0.03 + 0.13\times e^{-35xPD}\\
&\textbf{Capital} & & \small{K} = \Bigg[ \small{LGD} \times N \Bigg\lgroup \frac{N^{-1}(PD) + \sqrt{R} \times N^{-1} (0.999)}{\sqrt{1-R}} \Bigg\rgroup - (\small{LGD} \times \small{PD}) \Bigg] \times \Bigg\lgroup \frac{1+ (M - 2.5) \times b}{1-1.5 \times b} \Bigg\rgroup\\
& \textbf{requirement} \\
& \textbf{(K)} \\
& \textbf{non-defaulted} \\
& \textbf{exposures} \\
\\
\\
\\&\qquad\textbf{Wholesale} \\
\\&\textbf{Correlation} & &\text{For HVCRE exposures:}\\
\\&\textbf{factor (R)} & & \qquad\qquad\qquad\qquad R = 0.12 + 0.18 \times e^{-50 \times PD}\\
\\& & &\text{For wholesale exposures to unregulated financial institutions:}\\
\\& & & \qquad\qquad\qquad\qquad R = 1.25 \times \bigg( 0.12 + 0.12 \times e^{-50 \times PD} \bigg)\\
\\& & &\text{For wholesale exposures to regulated financial institutions with total}\\
\\& & &\text{assets greater than or equal to \$100 billion:}\\
\\& & &\qquad\qquad\qquad\qquad R = 1.25 \times \bigg( 0.12 + 0.12 \times e^{-50 \times PD} \bigg)\\
\\& & &\text{For wholesale exposures other than HVCRE exposures, unregulated financial}\\
\\& & &\text{institutions, and regulated financial institutions with total assets greater}\\
\\& & &\text{than or equal to \$100 billion:}\\
\\& & & \qquad\qquad\qquad\qquad R = 0.12 + 0.12 \times e^{-50 \times PD}\\
\\
&\textbf{Maturity} & & \qquad\qquad\qquad b = \big(0.11852 - 0.05478 \times 1\mathrm{n}(PD)\big)^2\\
&\textbf{adjustment (b)}
\\
\end{align*}
$$
(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 section 217.135(e) 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 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) Not covered by an eligible U.S. government guarantee: The dollar risk-based capital requirement for each wholesale exposure
not covered by an eligible guarantee from the U.S. government to a
defaulted obligor and each segment of defaulted retail exposures not
covered by an eligible guarantee from the U.S. government equals 0.08
multiplied by the EAD of the exposure or segment.
(ii) Covered by an eligible U.S. government guarantee: The dollar risk-based capital requirement for each wholesale exposure
to a defaulted obligor covered by an eligible guarantee from the U.S.
government and each segment of defaulted retail exposures covered
by an eligible guarantee from the U.S. government equals the sum of:
(A) The sum of the EAD of the portion of each wholesale exposure
to a defaulted obligor covered by an eligible guarantee from the U.S.
government plus the EAD of the portion of each segment of defaulted
retail exposures that is covered by an eligible guarantee from the
U.S. government and the resulting sum is multiplied by 0.016, and
(B) The sum of the EAD of
the portion of each wholesale exposure to a defaulted obligor not
covered by an eligible guarantee from the U.S. government plus the
EAD of the portion of each segment of defaulted retail exposures that
is not covered by an eligible guarantee from the U.S. government and
the resulting sum is multiplied by 0.08.
(iii) The sum of all the
dollar risk-based capital requirements for each wholesale exposure
to a defaulted obligor and each segment of defaulted retail exposures
calculated in paragraph (e)(2)(i) of this section plus the dollar
risk-based capital requirements each wholesale exposure to a defaulted
obligor and 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 or savings
and loan 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 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) A state member bank
may assign a risk-weighted asset amount to cash owned and held in
all offices of the state member bank or in transit and for gold bullion
held in the state member bank’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.
(iii) A Board-regulated
institution must assign a risk-weighted asset amount equal to 50 percent
of the carrying value to a pre-sold construction loan unless the purchase
contract is cancelled, in which case a Board-regulated institution
must assign a risk-weighted asset amount equal to a 100 percent of
the carrying value of the pre-sold construction loan.
(iv) The risk-weighted asset amount
for the residual value of a retail lease exposure equals such residual
value.
(v) The risk-weighted
asset amount for DTAs arising from temporary differences that the
Board-regulated institution could realize through net operating loss
carrybacks equals the carrying value, netted in accordance with section
217.22.
(vi) The
risk-weighted asset amount for MSAs, DTAs arising from temporary timing
differences that the Board-regulated institution could not realize
through net operating loss carrybacks, and significant investments
in the capital of unconsolidated financial institutions in the form
of common stock that are not deducted pursuant to section 217.22(a)(7)
equals the amount not subject to deduction multiplied by 250 percent.
(vii) The risk-weighted
asset amount for any other on-balance-sheet asset that does not meet
the definition of a wholesale, retail, securitization, IMM, or equity exposure,
cleared transaction, or default fund contribution and is not subject
to deduction under section 217.22(a), (c), or (d) equals the carrying
value of the asset.
(viii) The
risk-weighted asset amount for a Paycheck Protection Program covered
loan as defined in section 7(a)(36) of the Small Business Act (15
U.S.C. 636(a)(36)) equals zero.
(4) Non-material portfolios of exposures. The risk-weighted asset
amount of a portfolio of exposures for which the Board-regulated institution
has demonstrated to the Board’s satisfaction that the portfolio (when
combined with all other portfolios of exposures that the Board-regulated
institution seeks to treat under this paragraph (e)) is not material
to the Board-regulated institution 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 217.132.
(5) Assets held in non-guaranteed separate accounts. The risk-weighted asset amount for an on-balance sheet asset that
is held in a non-guaranteed separate account is zero percent of the
carrying value of the asset.
