A. Procedures Assets and credit-equivalent amounts
of off-balance-sheet items of bank holding companies are assigned
to one of several broad risk categories, according to the obligor,
or, if relevant, the guarantor or the nature of the collateral. The
aggregate dollar value of the amount in each category is then multiplied
by the risk weight associated with that category. The resulting weighted
values from each of the risk categories are added together, and this
sum is the banking organization’s total weighted-risk assets that
comprise the denominator of the risk-based capital ratio. Attachment
I provides a sample calculation.
Risk weights for all off-balance-sheet items are determined
by a two-step process. First, the “credit equivalent amount” of off-balance-sheet
items is determined, in most cases, by multiplying the off-balance-sheet
item by a credit-conversion factor. Second, the credit-equivalent
amount is treated like any balance-sheet asset and generally is assigned
to the appropriate risk category according to the obligor, or, if
relevant, the guarantor or the nature of the collateral.
In general, if a particular item
qualifies for placement in more than one risk category, it is assigned
to the category that has the lowest risk weight. A holding of a U.S.
municipal revenue bond that is fully guaranteed by a U.S. bank, for
example, would be assigned the 20 percent risk weight appropriate
to claims guaranteed by U.S. banks, rather than the 50 percent risk
weight appropriate to U.S. municipal revenue bonds.
34The Federal Reserve will, on a case-by-case
basis, determine the appropriate risk weight for any asset or credit-equivalent
amount of an off-balance-sheet item that does not fit wholly within
the terms of one of the risk-weight categories set forth below or
that imposes risks on a bank holding company that are incommensurate
with the risk weight otherwise specified below for the asset or off-balance-sheet
item. In addition, the Federal Reserve will, on a case-by-case basis,
determine the appropriate credit-conversion factor for any off-balance-sheet
item that does not fit wholly within the terms of one of the credit-conversion
factors set forth below or that imposes risks on a banking organization
that are incommensurate with the credit-conversion factors otherwise
specified below for the off-balance-sheet item. In making such a determination,
the Federal Reserve will consider the similarity of the asset or off-balance-sheet
item to assets or off-balance-sheet items explicitly treated in the
guidelines, as well as other relevant factors.
4-058.913
B. Collateral, Guarantees, and Other Considerations 1.
Collateral. The only forms of collateral that are formally recognized by the
risk-based capital framework are cash on deposit in a subsidiary lending
institution; securities issued
or guaranteed by the central governments
of the OECD-based group of countries,
35 U.S. government agencies,
or U.S. government-sponsored agencies; and securities issued by multilateral
lending institutions or regional development banks. Claims fully secured
by such collateral generally are assigned to the 20 percent risk category.
Collateralized transactions meeting all the conditions described in
section III.C.1. may be assigned a zero percent risk weight.
With regard to collateralized claims
that may be assigned to the 20 percent risk-weight category, the extent
to which qualifying securities are recognized as collateral is determined
by their current market value. If such a claim is only partially secured,
that is, the market value of the pledged securities is less than the
face amount of a balance-sheet asset or an off-balance-sheet item,
the portion that is covered by the market value of the qualifying
collateral is assigned to the 20 percent risk category, and the portion
of the claim that is not covered by collateral in the form of cash
or a qualifying security is assigned to the risk category appropriate
to the obligor or, if relevant, the guarantor. For example, to the
extent that a claim on a private-sector obligor is collateralized
by the current market value of U.S. government securities, it would
be placed in the 20 percent risk category and the balance would be
assigned to the 100 percent risk category.
2. Guarantees. Guarantees of the OECD and
non-OECD central governments, U.S. government agencies, U.S. government-sponsored
agencies, state and local governments of the OECD-based group of countries,
multilateral lending institutions and regional development banks,
U.S. depository institutions, and foreign banks are also recognized.
If a claim is partially guaranteed, that is, coverage of the guarantee
is less than the face amount of a balance-sheet asset or an off-balance-sheet
item, the portion that is not fully covered by the guarantee is assigned
to the risk category appropriate to the obligor or, if relevant, to
any collateral. The face amount of a claim covered by two types of
guarantees that have different risk weights, such as a U.S. government
guarantee and a state guarantee, is to be apportioned between the
two risk categories appropriate to the guarantors.
The existence of other forms of collateral
or guarantees that the risk-based capital framework does not formally
recognize may be taken into consideration in evaluating the risks
inherent in an organization’s loan portfolio—which, in turn, would
affect the overall supervisory assessment of the organization’s capital
adequacy.
3. Recourse
obligations, direct-credit substitutes, residual interests, and asset-
and mortgage-backed securities. Direct-credit substitutes, assets
transferred with recourse, and securities issued in connection with
asset securitizations and structured financings are treated as described
below. The term asset securitizations or securitizations in this rule includes structured financings, as well as asset-securitization
transactions.
a. Definitions.
i. Credit derivative means a
contract that allows one party (the protection purchaser) to transfer
the credit risk of an asset or off-balance-sheet credit exposure to
another party (the protection provider). The value of a credit derivative
is dependent, at least in part, on the credit performance of the “reference
asset.”
ii. Credit-enhancing
representations and warranties means representations and warranties
that are made or assumed in connection with a transfer of assets (including
loan-servicing assets) and that obligate the bank holding company
to protect investors from losses arising from credit risk in the assets
transferred or the loans serviced. Credit-enhancing representations
and warranties include promises to protect a party from losses resulting
from the default or nonperformance of another party or from an insufficiency
in the value of the collateral. Credit-enhancing representations and
warranties do not include—
1.
early-default clauses and similar warranties that permit
the return of, or premium-refund clauses covering, one- to four-family
residential first mortgage loans that qualify for a 50 percent risk
weight for a period not to exceed 120 days from the date of transfer.
These warranties may cover only those loans that were originated within
one year of the date of transfer;
2.
premium-refund clauses that cover assets guaranteed, in whole
or in part, by the U.S. government, a U.S. government agency or a
government-sponsored enterprise, provided the premium-refund clauses
are for a period not to exceed 120 days from the date of transfer;
or
3.
warranties that permit the return of assets in instances
of misrepresentation, fraud, or incomplete documentation.
iii. Direct-credit
substitute means an arrangement in which a bank holding company assumes,
in form or in substance, credit risk associated with an on- or off-balance-sheet
credit exposure that was not previously owned by the bank holding
company (third-party asset) and the risk assumed by the bank holding
company exceeds the pro rata share of the bank holding company’s interest
in the third-party asset. If the bank holding company has no claim
on the third-party asset, then the bank holding company’s assumption
of any credit risk with respect to the third-party asset is a direct-credit
substitute. Direct-credit substitutes include, but are not limited
to—
1.
financial standby letters of credit that support financial
claims on a third party that exceed a bank holding company’s pro rata
share of losses in the financial claim;
2.
guarantees, surety arrangements, credit derivatives, and
similar instruments backing financial claims that exceed a bank holding
company’s pro rata share in the financial claim;
3.
purchased subordinated interests or securities that absorb more
than their pro rata share of losses from the underlying assets;
4.
credit-derivative contracts under which the bank holding
company assumes more than its pro rata share of credit risk on a third-party
exposure;
5.
loans or lines of credit that provide credit enhancement
for the financial obligations of an account party;
6.
purchased loan-servicing assets if the servicer is responsible
for credit losses or if the servicer makes or assumes credit-enhancing
representations and warranties with respect to the loans serviced
(mortgage-servicer cash advances that meet the conditions of section
III.B.3.a.x. of this appendix are not direct-credit substitutes);
7.
cleanup calls on third-party assets (cleanup calls that are
10 percent or less of the original pool balance that are exercisable
at the option of the bank holding company are not direct-credit substitutes);
and
8.
liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
iv. Eligible
ABCP liquidity facility means a liquidity facility supporting
ABCP, in form or in substance, that is subject to an asset-quality
test at the time of draw that precludes funding against assets that
are 90 days or more past due or in default. In addition, if the assets
that an eligible ABCP liquidity facility is required to fund against
are externally rated assets or exposures at the inception of the facility,
the facility can be used to fund only those assets or exposures that
are externally rated investment grade at the time of funding. Notwithstanding
the eligibility requirements set forth in the two preceding sentences,
a liquidity facility will be considered an eligible ABCP liquidity
facility if the assets that are funded under the liquidity facility
and which do not meet the eligibility requirements are guaranteed,
either conditionally or unconditionally, by the U.S. government or
its agencies, or by the central government of an OECD country.
v. Externally rated means that an instrument or obligation has received a credit rating
from a nationally recognized statistical rating organization.
vi. Face amount means
the notional principal, or face value, amount of an off-balance-sheet
item; the amortized cost of an asset not held for trading purposes;
and the fair value of a trading asset.
vii. Financial asset means cash
or other monetary instrument, evidence of debt, evidence of an ownership
interest in an entity, or a contract that conveys a right to receive
or exchange cash or another financial instrument from another party.
viii. Financial
standby letter of credit means a letter of credit or similar arrangement
that represents an irrevocable obligation to a third-party beneficiary—
1.
to repay money borrowed by, or advanced to, or for the account
of, a second party (the account party), or
2.
to make payment on behalf of the account party, in the event
that the account party fails to fulfill its obligation to the beneficiary.
ix. Liquidity
facility means a legally binding commitment to provide liquidity
support to ABCP by lending to, or purchasing assets from, any structure,
program, or conduit in the event that funds are required to repay
maturing ABCP.
x. Mortgage-servicer cash advance means funds that a residential
mortgage loan servicer advances to ensure an uninterrupted flow of
payments, including advances made to cover foreclosure costs or other
expenses to facilitate the timely collection of the loan. A mortgage-servicer
cash advance is not a recourse obligation or a direct-credit substitute
if—
1.
the servicer is entitled to full reimbursement and this right
is not subordinated to other claims on the cash flows from the underlying
asset pool; or
2.
for any one loan, the servicer’s obligation to make nonreimbursable
advances is contractually limited to an insignificant amount of the
outstanding principal balance of that loan.
xi. Nationally
recognized statistical rating organization (NRSRO) means an entity
recognized by the Division of Market Regulation of the Securities
and Exchange Commission (or any successor division) (commission) as
a nationally recognized statistical rating organization for various
purposes, including the commission’s uniform net capital requirements
for brokers and dealers.
xii. Recourse means the retention,
by a bank holding company, in form or in substance, of any credit
risk directly or indirectly associated with an asset it has transferred
and sold that exceeds a pro rata share of the banking organization’s
claim on the asset. If a banking organization has no claim on a transferred
asset, then the retention of any risk of credit loss is recourse.
A recourse obligation typically arises when a bank holding company
transfers assets and retains an explicit obligation to repurchase
the assets or absorb losses due to a default on the payment of principal
or interest or any other deficiency in the performance of the underlying
obligor or some other party. Recourse may also exist implicitly if
a bank holding company provides credit enhancement beyond any contractual
obligation to support assets it has sold. The following are examples
of recourse arrangements:
1.
credit-enhancing representations and warranties made on the
transferred assets
2.
loan-servicing assets retained pursuant to an agreement under
which the bank holding company will be responsible for credit losses
associated with the loans being serviced (mortgage-servicer cash advances
that meet the conditions of section III.B.3.a.x. of this appendix
are not recourse arrangements)
3.
retained subordinated interests that absorb more than their
pro rata share of losses from the underlying assets
4.
assets sold under an agreement to repurchase, if the assets are
not already included on the balance sheet
5.
loan strips sold without contractual recourse where the maturity
of the transferred loan is shorter than the maturity of the commitment
under which the loan is drawn
6.
credit derivatives issued that absorb more than the bank
holding company’s pro rata share of losses from the transferred assets
7.
cleanup calls at inception that are greater than 10 percent
of the balance of the original pool of transferred loans (cleanup
calls that are 10 percent or less of the original pool balance that
are exercisable at the option of the bank holding company are not
recourse arrangements)
8.
liquidity facilities that provide support to ABCP (other
than ABCP liquidity facilities)
xiii. Residual
interest means any on-balance-sheet asset that represents an interest
(including a beneficial interest) created by a transfer that qualifies
as a sale (in accordance with generally accepted accounting principles)
of financial assets, whether through a securitization or otherwise,
and that exposes the bank holding company to credit risk directly
or indirectly associated with the transferred assets that exceeds
a pro rata share of the bank holding company’s claim on the assets,
whether through subordination provisions or other credit enhancement
techniques. Residual interests generally include credit-enhancing
I/Os, spread accounts, cash-collateral accounts, retained subordinated
interests, other forms of over-collateralization, and similar assets
that function as a credit enhancement. Residual interests further
include those exposures that, in substance, cause the bank holding
company to retain the credit risk of an asset or exposure that had
qualified as a residual interest before it was sold. Residual interests
generally do not include interests purchased from a third party, except
that purchased credit-enhancing I/Os are residual interests for purposes
of this appendix.
xiv. Risk participation means a participation in which the
originating party remains liable to the beneficiary for the full amount
of an obligation (e.g., a direct-credit substitute) notwithstanding
that another party has acquired a participation in that obligation.
xv. Securitization means the pooling and repackaging by a special-purpose entity of
assets or other credit exposures into securities that can be sold
to investors. Securitization includes transactions that create stratified
credit-risk positions whose performance is dependent upon an underlying
pool of credit exposures, including loans and commitments.
xvi. Sponsor means
a bank holding company that establishes an ABCP program; approves
the sellers permitted to participate in the program; approves the
asset pools to be purchased by the program; or administers the program
by monitoring the assets, arranging for debt placement, compiling
monthly reports, or ensuring compliance with the program documents
and with the program’s credit and investment policy.
xvii. Structured finance program means a program where receivable interests and asset-backed securities
issued by multiple participants are purchased by a special-purpose
entity that repackages those exposures into securities that can be
sold to investors. Structured finance programs allocate credit risks,
generally, between the participants and credit enhancement provided
to the program.
xviii. Traded position means a position that is externally
rated, and is retained, assumed, or issued in connection with an asset
securitization, where there is a reasonable expectation that, in the
near future, the rating will be relied upon by unaffiliated investors
to purchase the position; or an unaffiliated third party to enter
into a transaction involving the position, such as a purchase, loan,
or repurchase agreement.
b. Credit-equivalent
amounts and risk weight of recourse obligations and direct-credit
substitutes.
i. Credit-equivalent
amount. Except as otherwise provided in sections III.B.3.c. through
f. and III.B.5. of this appendix, the credit-equivalent amount for
a recourse obligation or direct-credit substitute is the full amount
of the credit-enhanced assets for which the bank holding company directly
or indirectly retains or assumes credit risk multiplied by a 100 percent
conversion factor.
ii. Risk-weight factor. To determine
the bank holding company’s risk-weight factor for off-balance-sheet
recourse obligations and direct-credit substitutes, the credit-equivalent
amount is assigned to the risk category appropriate to the obligor
in the underlying transaction, after considering any associated guarantees
or collateral. For a direct-credit substitute that is an on-balance-sheet
asset (e.g., a purchased subordinated security), a bank holding company
must calculate risk-weighted assets using the amount of the direct-credit
substitute and the full amount of the assets it supports, i.e., all
the more senior positions in the structure. The treatment of direct-credit
substitutes that have been syndicated or in which risk participations
have been conveyed or acquired is set forth in section III.D.1 of
this appendix.
c. Externally
rated positions: credit-equivalent amounts and risk weights of recourse
obligations, direct-credit substitutes, residual interests, and asset-
and mortgage-backed securities (including asset-backed commercial
paper).
i.
Traded
positions. With respect to a recourse obligation, direct-credit
substitute, residual interest (other than a credit-enhancing I/Ostrip)
or asset- and mortgage-backed security (including asset-backed commercial
paper) that is a traded position and that has received an external
rating on a long-term position that is one grade below investment
grade or better or a short-term rating that is investment grade, the
bank holding company may multiply the face amount of the position
by the appropriate risk weight, determined in accordance with the
tables below. Stripped mortgage-backed securities and other similar
instruments, such as interest-only or principal-only strips that are
not credit enhancements, must be assigned to the 100 percent risk
category. If a traded position has received more than one external
rating, the lowest single rating will apply.
Long-term rating
category
| Long-term rating category |
Examples |
Risk weight |
| Highest or second-highest investment grade |
AAA, AA |
20 percent |
| Third-highest investment grade |
A |
50 percent |
| Lowest investment grade |
BBB |
100 percent |
| One category below investment grade |
BB |
200 percent |
Short-term rating
| Short-term rating |
Examples |
Risk weight |
| Highest investment grade |
A-1, P-1 |
20 percent |
| Second-highest investment grade |
A-2, P-2 |
50 percent |
| Lowest investment
grade |
A-3,
P-3 |
100
percent |
ii. Nontraded positions. A recourse
obligation, direct-credit substitute, or residual interest (but not
a credit-enhancing I/O strip) extended in connection with a securitization
that is not a traded position may be assigned a risk weight in accordance
with section III.B.3.c.i.of this appendix if—
1.
it has been externally rated by more than one NRSRO;
2.
it has received an external rating on a long-term position
that is one grade below investment grade or better or on a short-term
position that is investment grade by all NRSROs providing a rating;
3.
the ratings are publicly available; and
4.
the ratings are based on the same criteria used to rate traded
positions.
If the ratings
are different, the lowest rating will determine the risk category
to which the recourse obligation, direct-credit substitute, or residual
interest will be assigned.
d. Senior positions
not externally rated. For a recourse obligation, direct-credit
substitute, residual interest, or asset- or mortgage- backed security
that is not externally rated but is senior or preferred in all features
to a traded position (including collateralization and maturity), a
bank holding company may apply a risk weight to the face amount of
the senior position in accordance with section III.B.3.c.i. of this
appendix, based on the traded position, subject to any current or
prospective supervisory guidance and the bank holding company satisfying
the Federal Reserve that this treatment is appropriate. This section
will apply only if the traded subordinated position provides substantive
credit support to the unrated position until the unrated position
matures.
e. Capital requirement for residual interests.
i. Capital
requirement for credit-enhancing I/O strips. After applying the
concentration limit to credit-enhancing I/O strips (both purchased
and retained) in accordance with sections II.B.2.c. through e. of
this appendix, a bank holding company must maintain risk-based capital
for a credit-enhancing I/O strip (both purchased and retained), regardless
of the external rating on that position, equal to the remaining amount
of the credit-enhancing I/O (net of any existing associated deferred
tax liability), even if the amount of risk-based capital required
to be maintained exceeds the full risk-based capital requirement for
the assets transferred. Transactions that, in substance, result in
the retention of credit risk associated with a transferred credit-enhancing
I/O strip will be treated as if the credit-enhancing I/O strip was
retained by the bank holding company and not transferred.
ii. Capital requirement for other residual interests.
1. If
a residual interest does not meet the requirements of sections III.B.3.c.
or d. of this appendix, a bank holding must maintain risk-based capital
equal to the remaining amount of the residual interest that is retained
on the balance sheet (net of any existing associated deferred tax
liability), even if the amount of risk-based capital required to be
maintained exceeds the full risk-based capital requirement for the
assets transferred. Transactions that, in substance, result in the
retention of credit risk associated with a transferred residual interest
will be treated as if the residual interest was retained by the bank
holding company and not transferred.
2. Where the aggregate capital requirement
for residual interests and other recourse obligations in connection
with the same transfer of assets exceed the full risk-based capital requirement
for those assets, a bank holding company must maintain risk-based
capital equal to the greater of the risk-based capital requirement
for the residual interest as calculated under section III.B.3.e.ii.1. of this appendix or the full risk-based capital requirement
for the assets transferred.
f.
Positions that are not rated by an NRSRO. A position (but not
a residual interest) maintained in connection with a securitization
and that is not rated by a NRSRO may be risk-weighted based on the
bank holding company’s determination of the credit rating of the position,
as specified in the table below, multiplied by the face amount of
the position. In order to obtain this treatment, the bank holding
company’s system for determining the credit rating of the position
must meet one of the three alternative standards set out in sections
III.B.3.f.i. through III.B.3.f.iii. of this appendix.
Rating category
| Rating category |
Examples |
Risk weight |
| Highest or second-highest investment grade |
AAA, AA |
100 percent |
| Third-highest investment grade |
A |
100 percent |
| Lowest investment grade |
BBB |
100 percent |
| One category
below investment grade |
BB |
200
percent |
i. Internal
risk rating used for asset-backed programs. A direct-credit substitute
(other than a purchased credit-enhancing I/O) is assumed in connection
with an asset-backed commercial paper program sponsored by the bank
holding company and the bank holding company is able to demonstrate
to the satisfaction of the Federal Reserve, prior to relying upon
its use, that the bank holding company’s internal credit-risk rating
system is adequate. Adequate internal credit-risk rating systems usually
contain the following criteria:
1.
the internal credit-risk system is an integral part of the
bank holding company’s risk-management system, which explicitly incorporates
the full range of risks arising from a bank holding company’s participation
in securitization activities;
2.
internal credit ratings are linked to measurable outcomes,
such as the probability that the position will experience any loss,
the position’s expected loss given default, and the degree of variance
in losses given default on that position;
3.
the bank holding company’s internal credit-risk system must
separately consider the risk associated with the underlying loans
or borrowers, and the risk associated with the structure of a particular
securitization transaction;
4.
the bank holding company’s internal credit-risk system must
identify gradations of risk among “pass” assets and other risk positions;
5.
the bank holding company must have clear, explicit criteria
that are used to classify assets into each internal risk grade, including
subjective factors;
6.
the bank holding company must have independent credit-risk
management or loan-review personnel assigning or reviewing the credit-risk
ratings;
7.
the bank holding company must have an internal-audit procedure
that periodically verifies that the internal credit-risk ratings are
assigned in accordance with the established criteria;
8.
the bank holding company must monitor the performance of
the internal credit-risk ratings assigned to nonrated, nontraded direct-credit
substitutes over time to determine the appropriateness of the initial
credit-risk rating assignment and adjust individual credit-risk ratings,
or the overall internal credit-risk ratings system, as needed; and
9.
the internal credit-risk system must make credit-risk rating
assumptions that are consistent with, or more conservative than, the
credit-risk rating assumptions and methodologies of NRSROs.
ii. Program ratings. A direct-credit substitute
or recourse obligation (other than a residual interest) is assumed
or retained in connection with a structured finance program and a
NRSRO has reviewed the terms of the program and stated a rating for
positions associated with the program. If the program has options
for different combinations of assets, standards, internal credit enhancements
and other relevant factors, and the NRSRO specifies ranges of rating
categories to them, the bank holding company may apply the rating
category that corresponds to the bank holding company’s position.
In order to rely on a program rating, the bank holding company must
demonstrate to the Federal Reserve’s satisfaction that the credit-risk
rating assigned to the program meets the same standards generally
used by NRSROs for rating traded positions. The bank holding company
must also demonstrate to the Federal Reserve’s satisfaction that the
criteria underlying the NRSRO’s assignment of ratings for the program
are satisfied for the particular position. If a bank holding company
participates in a securitization sponsored by another party, the Federal
Reserve may authorize the bank holding company to use this approach
based on a programmatic rating obtained by the sponsor of the program.
iii. Computer program. The bank holding company
is using an acceptable credit assessment computer program to determine
the rating of a direct-credit substitute or recourse obligation (but
not residual interest) issued in connection with a structured finance
program. A NRSRO must have developed the computer program, and the
bank holding company must demonstrate to the Federal Reserve’s satisfaction
that ratings under the program correspond credibly and reliably with
the rating of traded positions.
g. Limitations
on risk-based capital requirements.
i. Low-level exposure. If the maximum contractual
exposure to loss retained or assumed by a bank holding company in
connection with a recourse obligation or a direct-credit substitute
is less than the effective risk-based capital requirement for the
enhanced assets, the risk-based capital requirement is limited to
the maximum contractual exposure, less any liability account established
in accordance with generally accepted accounting principles. This
limitation does not apply when a bank holding company provides credit
enhancement beyond any contractual obligation to support assets it
has sold.
ii. Mortgage-related securities or participation
certificates retained in a mortgage loan swap. If a bank holding
company holds a mortgage-related security or a participation certificate
as a result of a mortgage loan swap with recourse, capital is required
to support the recourse obligation plus the percentage of the mortgage-related
security or participation certificate that is not covered by the recourse
obligation. The total amount of capital required for the on-balance-sheet
asset and the recourse obligation, however, is limited to the capital
requirement for the underlying loans, calculated as if the organization
continued to hold these loans as on-balance-sheet assets.
iii. Related on-balance-sheet assets. If a recourse
obligation or direct-credit substitute subject to section III.B.3.
of this appendix also appears as a balance-sheet asset, the balance-sheet
asset is not included in an organization’s risk-weighted assets to
the extent the value of the balance-sheet asset is already included
in the off-balance-sheet credit-equivalent amount for the recourse
obligation or direct-credit substitute, except in the case of loan-servicing
assets and similar arrangements with embedded recourse obligations
or direct-credit substitutes. In that case, both the on-balance-sheet
assets and the related recourse obligations and direct-credit substitutes
are incorporated into the risk-based capital calculation.
4. Maturity. Maturity is generally not a factor in assigning items to risk categories
with the exception of claims on non-OECD banks, commitments, and interest-rate
and foreign-exchange-rate contracts. Except for commitments, short-term
is defined as one year or less remaining maturity and long-term
is defined as over one year remaining maturity. In the case
of commitments, short-term is defined as one year or less original maturity and long-term is defined as over one year original maturity.
5. Small-business
loans and leases on personal property transferred with recourse.
a. Notwithstanding other provisions
of this appendix A, a qualifying banking organization that has transferred
small-business loans and leases on personal property (small-business
obligations) with recourse shall include in weighted-risk assets only
the amount of retained recourse, provided two conditions are met.
First, the transaction must be treated as a sale under GAAP and, second,
the banking organization must establish pursuant to GAAP a noncapital
reserve sufficient to meet the organization’s reasonably estimated
liability under the recourse arrangement. Only loans and leases 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 are eligible for this capital treatment.
b. For purposes of this appendix
A, a banking organization is qualifying if it meets the criteria for
well capitalized or, by order of the Board, adequately capitalized,
as those criteria are set forth in the Board’s prompt-corrective-action
regulation for state member banks (12 CFR 208.40). For purposes of
determining whether an organization meets these criteria, its capital
ratios must be calculated without regard to the capital treatment
for transfers of small-business obligations with recourse specified
in section III.B.5.a. of this appendix A. The total outstanding amount
of recourse retained by a qualifying banking organization on transfers
of small-business obligations receiving the preferential capital treatment
cannot exceed 15 percent of the organization’s total risk-based capital.
By order, the Board may approve a higher limit.
c. If a bank holding company ceases to
be qualifying or exceeds the 15 percent capital limitation, the preferential
capital treatment will continue to apply to any transfers of small-business
obligations with recourse that were consummated during the time that
the organization was qualifying and did not exceed the capital limit.
6. Asset-backed
commercial paper programs.
a. An asset-backed commercial paper (ABCP)
program means a program that primarily issues externally rated commercial
paper backed by assets or exposures held in a bankruptcy-remote, special-purpose
entity.
b. If a bank
holding company has multiple overlapping exposures (such as a program-wide
credit enhancement and multiple pool-specific liquidity facilities)
to an ABCP program that is not consolidated for risk-based capital
purposes, the bank holding company is not required to hold duplicative
risk-based capital under this appendix against the overlapping position.
Instead, the bank holding company should apply to the overlapping
position the applicable risk-based capital treatment that results
in the highest capital charge.
4-058.914
C. Risk Weights Attachment III contains a listing of the risk categories, a summary
of the types of assets assigned to each category and the risk weight
associated with each category, that is, 0 percent, 20 percent, 50
percent, and 100 percent. A brief explanation of the components of
each category follows.
1.
Category 1: zero percent. This category includes cash (domestic
and foreign) owned and held in all offices of subsidiary depository
institutions or in transit and gold bullion held in either a subsidiary
depository institution’s own vaults or in another’s vaults on an allocated
basis, to the extent it is offset by gold
bullion liabilities.
36 The category also includes all direct claims (including securities,
loans, and leases) on, and the portions of claims that are directly
and unconditionally guaranteed by, the central governments
37 of the OECD countries and U.S. government
agencies,
38 as well as all direct local currency claims on, and the portions
of local currency claims that are directly and unconditionally guaranteed
by, the central governments of non-OECD countries, to the extent that
subsidiary depository institu
tions have liabilities booked in that currency.
A claim is not considered to be unconditionally guaranteed by a central
government if the validity of the guarantee is dependent upon some
affirmative action by the holder or a third party. Generally, securities
guaranteed by the U.S. government or its agencies that are actively
traded in financial markets, such as GNMA securities, are considered
to be unconditionally guaranteed.
This category also includes claims collateralized by cash
on deposit in the subsidiary lending institution or by securities
issued or guaranteed by OECD central governments or U.S. government
agencies for which a positive margin of collateral is maintained on
a daily basis, fully taking into account any change in the banking
organization’s exposure to the obligor or counterparty under a claim
in relation to the market value of the collateral held in support
of that claim.
This category also includes ABCP (i) purchased by a bank
holding company on or after September 19, 2008, from an SEC-registered
open-end investment company that holds itself out as a money market
mutual fund under SEC Rule 2a-7 (17 CFR 270.2a-7) and (ii) pledged
by a bank holding company to a Federal Reserve Bank to secure financing
from the ABCP lending facility (AMLF) established by the Board on
September 19, 2008.
2. Category 2: 20 percent.
a. This category includes cash items in
the process of collection, both foreign and domestic; short-term claims
(including demand deposits) on, and the portions of short-term claims
that are guaranteed by,
39 U.S. depository
institutions
40 and foreign banks;
41 and long-term claims on, and the portions of long-term claims
that are guaranteed by, U.S. depository institutions and OECD banks.
42b. This category also includes the portions
of claims that are conditionally guaranteed by OECD central governments
and U.S. government agencies, as well as the por
tions
of local currency claims that are conditionally guaranteed by non-OECD
central governments, to the extent that subsidiary depository institutions
have liabilities booked in that currency. In addition, this category
also includes claims on, and the portions of claims that are guaranteed
by, U.S. government-sponsored agencies
43 and claims on, and the portions of claims guaranteed by, the
International Bank for Reconstruction and Development (World Bank),
the International Finance Corporation, the Inter-American Development
Bank, the Asian Development Bank, the African Development Bank, the
European Investment Bank, the European Bank for Reconstruction and
Development, the Nordic Investment Bank, and other multilateral lending
institutions or regional development
banks in which the U.S. government
is a shareholder or contributing member. General obligation claims
on, or portions of claims guaranteed by the full faith and credit
of, states or other political subdivisions of the United States or
other countries of the OECD-based group are also assigned to this
category.
44c. This category also includes the portions
of claims (including repurchase transactions) collateralized by cash
on deposit in the subsidiary lending institution or by securities
issued or guaranteed by OECD central governments or U.S. government
agencies that do not qualify for the zero percent risk-weight category;
collateralized by securities issued or guaranteed by U.S. government-sponsored
agencies; or collateralized by securities issued by multilateral lending
institutions or regional development banks in which the U.S. government
is a shareholder or contributing member.
d. This category also includes claims
45 on, or guaranteed
by, a qualifying securities firm
46 incorporated in the United States or
other member of the OECD-based group of countries provided that: the
qualifying securities firm has a long-term issuer credit rating, or
a rating on at least one issue of long-term debt, in one of the three
highest investment-grade rating categories from a nationally recognized
statistical rating organization; or the claim is guaranteed by the
firm’s parent company and the parent company has such a rating. If
ratings are available from more than one rating agency, the lowest
rating will be used to determine whether the rating requirement has
been met. This category also includes a collateralized claim on a
qualifying securities firm in such a country, without regard to satisfaction
of the rating standard, provided the claim arises under a contract
that—
1.
is
a reverse-repurchase/repurchase agreement or securities-lending/borrowing
transaction executed using standard industry documentation;
2.
is
collateralized by debt or equity securities that are liquid and readily
marketable;
3.
is
marked to market daily;
4.
is subject to a daily margin-maintenance requirement under the standard
industry documentation; and
5.
can
be liquidated, terminated, or accelerated immediately in bankruptcy
or similar proceeding, and the security or collateral agreement will
not be stayed or avoided, under applicable law of the relevant jurisdiction.
47
3.
Category
3: 50 percent. This category includes loans fully secured by
first liens
48 on 1- to 4-family residential properties, either owner-occupied
or rented, or on multifamily residential properties,
49 that meet certain criteria.
50 Loans included in this
category must have been made in accordance with prudent underwriting
standards;
51 be performing in accordance with their
original terms; and not be 90 days or more past due or carried in
nonaccrual status. For purposes of this 50 percent risk weight category,
a loan modified on a permanent or trial basis solely pursuant to the
U.S. Department of Treasury’s Home Affordable Mortgage Program will
be considered to be performing in accordance with its original terms.
The following additional criteria must also be applied to a loan secured
by a multifamily residential property that is included in this category:
all principal and interest payments on the loan must have been made
on time for at least the year preceding placement in this category,
or in the case where the existing property owner is refinancing a
loan on that property, all principal and interest payments on the
loan being refinanced must have been made on time for at least the
year preceding placement in this category; amortization of the principal
and interest must occur over a period of not more than 30 years and
the minimum original maturity for repayment of principal must not
be less than 7 years; and the annual net operating income (before
debt service) generated by the property during its most recent fiscal
year must not be less than 120 percent of the loan’s current annual
debt service (115 percent if the loan is based on a floating interest
rate) or, in the case of a cooperative or other not-for-profit housing
project, the property must generate sufficient cash flow to provide
comparable protection to the institution. Also included in this category
are privately-issued mortgage-backed securities provided that:
(1) The structure of the security meets
the criteria described in section III(B)(3) above;
(2) If the security is backed by a pool
of conventional mortgages, on 1- to 4-family residential or multifamily
residential properties, each underlying mortgage meets the criteria
described above in this section for eligibility for the 50 percent
risk category at the time the pool is originated;
(3) If the security is backed
by privately issued mortgage-backed securities, each underlying security
qualifies for the 50 percent risk category; and
(4) If the security is backed by a pool
of multifamily residential mortgages, principal and interest payments
on the security are not 30 days or more past due. Privately-issued
mortgage-backed securities that do not meet these criteria or that
do not qualify for a lower risk weight are generally assigned to the
100 percent risk category.
Also assigned to this category are revenue (non-general
obligation) bonds or similar obligations, including loans and leases,
that are obligations of states or other political subdivisions of
the U.S. (for example, municipal revenue bonds) or other countries
of the OECD-based group, but for which the government entity is committed
to repay the debt with revenues from the specific projects financed,
rather than from general tax funds.
Credit equivalent amounts of derivative contracts involving
standard risk obligors (that is, obligors whose loans or debt securities
would be assigned to the 100 percent risk category) are included in
the 50 percent category, unless they are backed by collateral or guarantees
that allow them to be placed in a lower risk category.
4. Category 4: 100 percent.
a. All assets not included
in the categories above are assigned to this category, which comprises
standard risk assets. The bulk of the assets typically found in a
loan portfolio would be assigned to the 100 percent category.
b. This
category includes long-term claims on, and the portions of long-term
claims that are guaranteed by, non-OECD banks, and all claims on non-OECD
central governments that entail some degree of transfer risk.
52 This category also includes all
claims on foreign and domestic private-sector obligors not included
in the categories above (including loans to nondepository financial
institutions and bank holding companies); claims on commercial firms
owned by the public sector; customer liabilities to the organization
on acceptances outstanding involving standard risk claims;
53 investments
in fixed assets, premises, and other real estate owned; common and
preferred stock of corporations, including stock acquired for debts
previously contracted; all stripped mortgage-backed securities and
similar instruments; and commercial and consumer loans (except those
assigned to lower risk categories due to recognized guarantees or
collateral and loans secured by residential property that qualify
for a lower risk weight). This category also includes claims representing
capital of a qualifying securities firm.
c. Also included in this category are industrial-development
bonds and similar obligations issued under the auspices of states
or political subdivisions of the OECD-based group of countries for
the benefit of a private party or enterprise where that party or enterprise,
not the government entity, is obligated to pay the principal and interest,
and all obligations of states or political subdivisions of countries
that do not belong to the OECD-based group.
d. The following assets also are assigned
a risk weight of 100 percent if they have not been deducted from capital:
investments in unconsolidated companies, joint ventures, or associated
companies; instruments that qualify as capital issued by other banking
organizations; and any intangibles, including those that may have
been grandfathered into capital.
4-058.915
D. Off-Balance-Sheet Items The face amount of an off-balance-sheet
item
is generally incorporated into risk-weighted assets in two steps.
The face amount is first multiplied by a credit-conversion factor,
except for direct-credit substitutes and recourse obligations as discussed
in section III.D.1. of this appendix. The resultant credit-equivalent
amount is assigned to the appropriate risk category according to the
obligor, or, if relevant, the guarantor, the nature of the collateral,
or external credit ratings.
541. Items
with a 100 percent conversion factor.
a. Except as otherwise provided in section
III.B.3. of this appendix, the full amount of an asset or transaction
supported, in whole or in part, by a direct-credit substitute or a
recourse obligation. Direct-credit substitutes and recourse obligations
are defined in section III.B.3. of this appendix.
b. Sale and repurchase agreements and forward
agreements. Forward agreements are legally binding contractual obligations
to purchase assets with certain drawdown at a specified future date.
Such obligations include forward purchases, forward forward deposits
placed,
55 and partly paid shares and securities; they do not include
commitments to make residential mortgage loans or forward foreign-exchange
contracts.
c. Securities
lent by a banking organization are treated in one of two ways, depending
upon whether the lender is at risk of loss. If a banking organization,
as agent for a customer, lends the customer’s securities and does
not indemnify the customer against loss, then the transaction is excluded
from the risk-based capital calculation. If, alternatively, a banking
organization lends its own securities or, acting as agent for a customer,
lends the customer’s securities and indemnifies the customer against
loss, the transaction is converted at 100 percent and assigned to
the risk-weight category appropriate to the obligor, or, if applicable,
to any collateral delivered to the lending organization, or the independent
custodian acting on the lending organization’s behalf. Where a banking
organization is acting as agent for a customer in a transaction involving
the lending or sale of securities that is collateralized by cash delivered
to the banking organization, the transaction is deemed to be collateralized
by cash on deposit in a subsidiary depository institution for purposes
of determining the appropriate risk-weight category, provided that
any indemnification is limited to no more than the difference between
the market value of the securities and the cash collateral received
and any reinvestment risk associated with that cash collateral is
borne by the customer.
d. In the case of direct-credit substitutes in which a risk participation
56 has been conveyed, the
full amount of the assets that are supported, in whole or in part,
by the credit enhancement are converted to a credit-equivalent amount
at 100 percent. However, the pro rata share of the credit-equivalent
amount that has been conveyed through a risk participation is assigned
to whichever risk category is lower: the risk category appropriate
to the obligor, after considering any relevant guarantees or collateral,
or the risk category appropriate to the institution acquiring the
participation.
57 Any remainder is assigned to the risk
category appropriate to the obligor, guarantor, or collateral. For
example, the pro rata share of the full amount of the assets supported,
in whole or in part, by a direct-credit substitute conveyed as a risk
participation to a U.S. domestic depository institution or foreign
bank
is assigned to the 20 percent risk category.
58e. In the case of direct-credit substitutes
in which a risk participation has been acquired, the acquiring banking
organization’s percentage share of the direct-credit substitute is
multiplied by the full amount of the assets that are supported, in
whole or in part, by the credit enhancement and converted to a credit-equivalent
amount at 100 percent. The credit-equivalent amount of an acquisition
of a risk participation in a direct-credit substitute is assigned
to the risk category appropriate to the account party obligor or,
if relevant, the nature of the collateral or guarantees.
f. In the case of direct-credit
substitutes that take the form of a syndication where each banking
organization is obligated only for its pro rata share of the risk
and there is no recourse to the originating banking organization,
each banking organization will only include its pro rata share of
the assets supported, in whole or in part, by the direct-credit substitute
in its risk-based capital calculation.
592. Items with a 50 percent conversion factor.
a. Transaction-related contingencies
are converted at 50 percent. Such contingencies include bid bonds,
performance bonds, warranties, standby letters of credit related to
particular transactions, and performance standby letters of credit,
as well as acquisitions of risk participations in performance standby
letters of credit. Performance standby letters of credit represent
obligations backing the performance of nonfinancial or commercial
contracts or undertakings. To the extent permitted by law or regulation,
performance standby letters of credit include arrangements backing,
among other things, subcontractors’ and suppliers’ performance, labor
and materials contracts, and construction bids.
b. The unused portion of commitments with
an
original maturity exceeding one year, including underwriting
commitments, and commercial and consumer credit commitments also are
converted at 50 percent. Original maturity is defined as the length
of time between the date the commitment is issued and the earliest
date on which (1) the banking organization can, at its option, unconditionally
(without cause) cancel the commitment
60 and (2)
the banking organization is scheduled to (and as a normal practice
actually does) review the facility to determine whether or not it
should be extended. Such reviews must continue to be conducted at
least annually for such a facility to qualify as a short-term commitment.
c. i. Commitments
are defined as any legally binding arrangements that obligate a banking
organization to extend credit in the form of loans or leases; to purchase
loans, securities, or other assets; or to participate in loans and
leases. They also include overdraft facilities, revolving credit,
home-equity and mortgage lines of credit, eligible ABCP liquidity
facilities, and similar transactions. Normally, commitments involve
a written contract or agreement and a commitment fee, or some other
form of consideration. Commitments are included in weighted-risk assets
regardless of whether they contain “material adverse change” clauses
or other provisions that are intended to relieve the issuer of its
funding obligation under certain conditions. In the case of commitments
structured as syndications, where the banking organization is obligated
solely for its pro rata share, only the organization’s proportional
share of the syndicated commitment is taken into account in calculating
the risk-based capital ratio.
ii. Banking organizations
that are subject to the market-risk rules are required to convert
the notional amount of eligible ABCP liquidity facilities, in form
or in substance, with an original maturity of over one year that are
carried in the trading account at 50 percent to determine the appropriate
credit-equivalent amount even though those facilities are structured
or characterized as derivatives or other trading book assets. Liquidity
facilities that support ABCP, in form or in substance, (including
those positions to which the market-risk rules may not be applied
as set forth in section 2(a) of appendix E of this part) that are
not eligible ABCP liquidity facilities are to be considered recourse
obligations or direct-credit substitutes, and assessed the appropriate
risk-based capital treatment in accordance with section III.B.3. of
this appendix.
d. Once a commitment has been converted at 50 percent, any portion
that has been conveyed to U.S. depository institutions or OECD banks
as participations in which the originating banking organization retains
the full obligation to the borrower if the participating bank fails
to pay when the instrument is drawn, is assigned to the 20 percent
risk category. This treatment is analogous to that accorded to conveyances
of risk participations in standby letters of credit. The acquisition
of a participation in a commitment by a banking organization is converted
at 50 percent and assigned to the risk category appropriate to the
account-party obligor or, if relevant, the nature of the collateral
or guarantees.
e. Revolving-underwriting
facilities (RUFs), note-issuance facilities (NIFs), and other similar
arrangements also are converted at 50 percent regardless of maturity.
These are facilities under which a borrower can issue on a revolving
basis short-term paper in its own name, but for which the underwriting
organizations have a legally binding commitment either to purchase
any notes the borrower is unable to sell by the rollover date or to
advance funds to the borrower.
3. Items with a 20 percent conversion factor. Short-term, self-liquidating, trade-related contingencies which
arise from the movement of goods are converted at 20 percent. Such
contingencies generally include commercial letters of credit and other
documentary letters of credit collateralized by the underlying shipments.
4. Items with a 10 percent
conversion factor.
a. Unused portions of eligible ABCP liquidity
facilities with an original maturity of one year or less also are
converted at 10 percent.
b. Banking organizations that are subject to the market-risk rules
are required to convert the notional amount of eligible ABCP liquidity
facilities, in form or in substance, with an original maturity of
one year or less that are carried in the trading account at 10 percent
to determine the appropriate credit-equivalent amount even though
those facilities are structured or characterized as derivatives or
other trading book assets. Liquidity facilities that support ABCP,
in form or in substance, (including those positions to which the market-risk
rules may not be applied as set forth in section 2(a) of appendix
E of this part) that are not eligible ABCP liquidity facilities are
to be considered recourse obligations or direct-credit substitutes
and assessed the appropriate risk-based capital requirement in accordance
with section III.B.3. of this appendix.
5. Items with a zero percent conversion
factor. These include unused portions of commitments (with the
exception of eligible ABCP liquidity facilities) with an original
maturity of one year or less, or which are unconditionally cancellable
at any time, provided a separate credit decision is made before each
drawing under the facility. Unused portions of lines of credit on
retail credit cards and related plans are deemed to be short-term
commitments if the banking organization has the unconditional right
to cancel the line of credit at any time, in accordance with applicable
law.
4-058.916
E. Derivative Contracts (Interest-Rate,
Exchange-Rate, Commodity- (Including Precious Metals) and Equity-Linked
Contracts) 1. Scope. Credit-equivalent amounts are computed for each of the
following off-balance-sheet derivative contracts:
a. Interest-rate
contracts. These include single-currency interest-rate swaps,
basis swaps, forward rate agreements, interest-rate options purchased
(including caps, collars, and floors purchased), and any other instrument
linked to interest rates that gives rise to similar credit risks (including
when-issued securities and forward forward deposits accepted).
b. Exchange-rate contracts. These include
cross-currency interest-rate swaps, forward foreign-exchange contracts,
currency options purchased, and any other instrument linked to exchange
rates that gives rise to similar credit risks.
c. Equity derivative
contracts. These include equity-linked swaps, equity-linked options
purchased, forward equity-linked contracts, and any other instrument
linked to equities that gives rise to similar credit risks.
d. Commodity (including precious metal) derivative contracts. These
include commodity-linked swaps, commodity-linked options purchased,
forward commodity-linked contracts, and any other instrument linked
to commodities that gives rise to similar credit risks.
e. Exceptions. Exchange-rate contracts with an original maturity
of 14 or fewer calendar days and derivative contracts traded on exchanges
that require daily receipt and payment of cash-variation margin may
be excluded from the risk-based ratio calculation. Gold contracts
are accorded the same treatment as exchange-rate contracts except
that gold contracts with an original maturity of 14 or fewer calendar
days are included in the risk-based ratio calculation. Over-the- counter
options purchased are included and treated in the same way as other
derivative contracts.
2. Calculation of credit-equivalent amounts.
a. The credit-equivalent amount
of a derivative contract that is not subject to a qualifying bilateral
netting contract in accordance with section III.E.3. of this appendix
A is equal to the sum of (i) the current exposure (sometimes referred
to as the replacement cost) of the contract; and (ii) an estimate
of the potential future credit exposure of the contract.
b. The current exposure is
determined by the mark-to-market value of the contract. If the mark-to-market
value is positive, then the current exposure is that mark-to-market
value. If the mark-to-market value is zero or negative, then the current
exposure is zero. Mark-to-market values are measured in dollars, regardless
of the currency or currencies specified in the contract, and should
reflect changes in underlying rates, prices, and indices, as well
as counterparty credit quality.
c. The potential future credit exposure
of a contract, including a contract with a negative mark-to-market
value, is estimated by multiplying the notional principal amount of
the contract by a credit-conversion factor. Banking organizations
should use, subject to examiner review, the effective rather than
the apparent or stated notional amount in this calculation. The conversion
factors are:
Conversion
Factors (in percent)
Conversion Factors
(in percent) |
| Remaining maturity |
Interest- rate |
Exchange- rate and gold |
Equity |
Commodity, excluding
precious metals |
Precious metals, except
gold |
| One year or less |
0.0 |
1.0 |
6.0 |
10.0 |
7.0 |
| Over one to five years |
0.5 |
5.0 |
8.0 |
12.0 |
7.0 |
| Over five years |
1.5 |
7.5 |
10.0 |
15.0 |
8.0 |
d. For a 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 is equal to the time until the next reset date.
For an interest-rate contract with a remaining maturity of more than
one year that meets these criteria, the minimum conversion factor
is 0.5 percent.
e.
For a contract with multiple exchanges of principal, the conversion
factor is multiplied by the number of remaining payments in the contract.
A derivative contract not included in the definitions of interest-rate,
exchange-rate, equity, or commodity contracts as set forth in section
III.E.1. of this appendix A is subject to the same conversion factors
as a commodity, excluding precious metals.
f. No potential future exposure is calculated
for a single-currency interest-rate swap in which payments are made
based upon two floating-rate indices (a so-called floating/floating
or basis swap); the credit exposure on such a contract is evaluated
solely on the basis of the mark-to-market value.
g. The Board notes that the
conversion factors set forth above, which are based on observed volatilities
of the particular types of instruments, are subject to review and
modification in light of changing volatilities or market conditions.
3. Netting.
a. For purposes of this appendix
A, netting refers to the offsetting of positive and negative mark-to-market
values when determining a current exposure to be used in the calculation
of a credit-equivalent amount. Any legally enforceable form of bilateral
netting (that is, netting with a single counterparty) of derivative
contracts is recognized for purposes of calculating the credit-equivalent
amount provided that—
i.
the netting is accomplished under a written netting contract that
creates a single legal obligation, covering all included individual
contracts, with the effect that the organization would have a claim
to receive, or obligation to pay, only the net amount of the sum of
the positive and negative mark-to-market values on included individual
contracts in the event that a counterparty, or a counterparty to whom
the contract has been validly assigned, fails to perform due to any
of the following events: default, bankruptcy, liquidation, or similar
circumstances;
ii.
the
banking organization obtains a written and reasoned legal opinion(s)
representing that in the event of a legal challenge—including one
resulting from default, bankruptcy, liquidation, or similar circumstances—the
relevant court and administrative authorities would find the banking
organization’s exposure to be the net amount under—
1.
the law of the jurisdiction in which the counterparty is chartered
or the equivalent location in the case of noncorporate entities, and
if a branch of the counterparty is involved, then also under the law
of the jurisdiction in which the branch is located;
2.
the law that governs the individual contracts covered by the netting
contract; and
3.
the law that governs the netting contract;
iii.
the banking organization establishes and maintains procedures to
ensure that the legal characteristics of netting contracts are kept
under review in the light of possible changes in relevant law; and
iv.
the banking organization maintains in its files documentation adequate
to support the netting of derivative contracts, including a copy of
the bilateral netting contract and necessary legal opinions.
b. A contract containing a
walkaway clause is not eligible for netting for purposes of calculating
the credit-equivalent amount.
61c. A banking organization netting individual
contracts for the purpose of calculating credit-equivalent amounts
of derivative contracts represents that it has met the requirements
of this appendix A and all the appropriate documents are in the organization’s
files and available for inspection by the Federal Reserve. The Federal
Reserve may determine that a banking organization’s files are inadequate
or that a netting contract, or any of its underlying individual contracts,
may not be legally enforceable under any one of the bodies of law
described in section III.E.3.a.ii. of this appendix A. If such a determination
is made, the netting contract may be disqualified from recognition
for risk-based capital purposes or underlying individual contracts
may be treated as though they are not subject to the netting contract.
d. The credit-equivalent
amount of contracts that are subject to a qualifying bilateral netting
contract is calculated by adding (i) the current exposure of the netting
contract (net current exposure) and (ii) the sum of the estimates
of potential future credit exposures on all individual contracts subject
to the netting contract (gross potential future exposure) adjusted
to reflect the effects of the netting contract.
62e.
The net current exposure is the sum of all positive and negative mark-to-market
values of the individual contracts included in the netting contract.
If the net sum of the mark-to-market values is positive, then the
net current exposure is equal to that sum. If the net sum of the mark-to-market
values is zero or negative, then the current exposure is zero. The
Federal Reserve may determine that a netting contract qualifies for
risk-based capital netting treatment even though certain individual
contracts included under the netting contract may not qualify. In
such instances, the nonqualifying contracts should be treated as individual
contracts that are not subject to the netting contract.
f. Gross potential future
exposure, or Agross is calculated by summing the estimates of potential future
exposure (determined in accordance with section III.E.2 of this appendix
A) for each individual contract subject to the qualifying bilateral
netting contract.
g.
The effects of the bilateral netting contract on the gross potential
future exposure are recognized through the application of a formula
that results in an adjusted add-on amount (Anet). The formula, which employs the ratio of net current
exposure to gross current exposure (NGR), is expressed as:
Anet = (0.4 × Agross) + 0.6 (NGR × Agross)
h. The NGR may be calculated in accordance
with either the counterparty-by-counterparty approach or the aggegate
approach.
i. Under the counterparty-by-counterparty
approach, the NGR is the ratio of the net current exposure for a netting
contract to the gross current exposure of the netting
contract. The gross current exposure is the sum of the current exposures
of all individual contracts subject to the netting contract calculated
in accordance with section III.E.2. of this appendix A. Net negative
mark-to-market values for individual netting contracts with the same
counterparty may not be used to offset net positive mark-to-market
values for other netting contracts with the same counterparty.
ii. Under the aggregate
approach, the NGR is the ratio of the sum of all of the net current
exposures for qualifying bilateral netting contracts to the sum of
all of the gross current exposures for those netting contracts (each
gross current exposure is calculated in the same manner as in section
III.E.3.h.i. of this appendix A). Net negative mark-to-market values
for individual counterparties may not be used to offset net positive
current exposures for other counterparties.
iii. A banking organization must use
consistently either the counterparty-by-counterparty approach or the
aggregate approach to calculate the NGR. Regardless of the approach
used, the NGR should be applied individually to each qualifying bilateral
netting contract to determine the adjusted add-on for that netting
contract.
i. In the event a netting contract covers contracts that are normally
excluded from the risk-based ratio calculation—for example, exchange-rate
contracts with an original maturity of 14 or fewer calendar days or
instruments traded on exchanges that require daily payment and receipt
of cash-variation margin—an institution may elect to either include
or exclude all mark-to-market values of such contracts when determining
net current exposure, provided the method chosen is applied consistently.
4.
Risk weights. Once the credit-equivalent amount for a derivative contract, or
a group of derivative contracts subject to a qualifying bilateral
netting contract, has been determined, that amount is assigned to
the risk category appropriate to the counterparty, or, if relevant,
the guarantor or the nature of any collateral.
63 However, the maximum risk weight applicable to
the credit-equivalent amount of such contracts is 50 percent.
Avoidance of double-counting.
a. In certain cases, credit
exposures arising from the derivative contracts covered by section
III.E. of this appendix A may already be reflected, in part, on the
balance sheet. To avoid double-counting such exposures in the assessment
of capital adequacy and, perhaps, assigning inappropriate risk weights,
counterparty credit exposures arising from the derivative instruments
covered by these guidelines may need to be excluded from balance-sheet
assets in calculating a banking organization’s risk-based capital
ratios.
b. Examples
of the calculation of credit-equivalent amounts for contracts covered
under this section III.E. are contained in attachment V of this appendix
A.
