(a) Limits on credit exposure.
(1) The policies and procedures on exposure
established by a bank under section 206.3(c) of this part shall limit
a bank’s interday credit exposure to an individual correspondent to
not more than 25 percent of the bank’s total capital, unless the bank
can demonstrate that its correspondent is at least adequately capitalized,
as defined in section 206.5(a) of this part.
2(2) Where a bank is no longer able to demonstrate
that a correspondent is at least adequately capitalized for the purposes
of section 206.4(a) of this part, including where the bank cannot
obtain adequate information concerning the capital ratios of the correspondent,
the bank shall reduce its credit exposure to comply with the requirements
of section 206.4(a)(1) of this part within 120 days after the date
when the current Report of Condition and Income or other relevant
report normally would be available.
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(b)
Calculation of credit exposure. Except
as provided in sections 206.4(c) and (d) of this part, the credit
exposure of a bank to a correspondent shall consist of the bank’s
assets and off-balance-sheet items that are subject to capital requirements
under the capital adequacy guidelines of the bank’s primary federal
supervisor
*, and that involve claims on the correspondent or capital instruments
issued by the correspondent. For this purpose, off-balance-sheet items
shall be valued on the basis of current exposure. The term “credit
exposure” does not include exposure related to the settlement of transactions,
intraday exposure, transactions in an agency or similar capacity where
losses will be passed back to the principal or other party, or other
sources of exposure that are not covered by the capital adequacy guidelines.
(c) Netting. Transactions
covered by netting agreements that are valid and enforceable under
all applicable laws may be netted in calculating credit exposure.
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(d) Exclusions. A bank
may exclude the following from the calculation of credit exposure
to a correspondent:
(1) transactions, including reverse repurchase
agreements, to the extent that the transactions are secured by government
securities or readily marketable collateral, as defined in paragraph
(f) of this section, based on the current market value of the collateral;
(2) the proceeds of checks
and other cash items deposited in an account at a correspondent that
are not yet available for withdrawal;
(3) quality assets, as defined in paragraph
(f) of this section, on which the correspondent is secondarily liable,
or obligations of the correspondent on which a creditworthy obligor
in addition to the correspondent is available, including but not limited
to—
(i) loans to third parties secured by
stock or debt obligations of the correspondent;
(ii) loans to third parties purchased
from the correspondent with recourse;
(iii) loans or obligations of third
parties backed by standby letters of credit issued by the correspondent;
or
(iv) obligations
of the correspondent backed by standby letters of credit issued by
a creditworthy third party;
(4) exposure that results from the merger
with or acquisition of another bank for one year after that merger
or acquisition is consummated; and
(5) the portion of the bank’s exposure
to the correspondent that is covered by federal deposit insurance.
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(e) Credit exposure of subsidiaries. In calculating credit exposure to a correspondent under this part,
a bank shall include credit exposure to the correspondent of any entity
that the bank is required to consolidate on its Report of Condition
and Income or Thrift Financial Report.
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(f) Definitions. As used in this section:
(1) Government securities means obligations of, or obligations fully
guaranteed as to principal and interest by, the United States government
or any department, agency, bureau, board, commission, or establishment
of the United States, or any corporation wholly owned, directly or
indirectly, by the United States.
(2) Readily marketable
collateral means financial instruments or bullion that may be
sold in ordinary circumstances with reasonable promptness at a fair
market value determined by quotations based on actual transactions
on an auction or a similarly available daily bid- and ask-price market.
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(3) Quality asset means an asset—
(i) that is not in a nonaccrual
status;
(ii) on which
principal or interest is not more than 30 days past due; and
(iii) whose terms have not
been renegotiated or compromised due to the deteriorating financial
condition of the additional obligor; except that
(iv) an asset is not considered a “quality
asset” if any other loans to the primary obligor on the asset have
been classified as “substandard,” “doubtful,” or “loss,” or treated
as “other loans specially mentioned” in the most recent report of
examination or inspection of the bank or an affiliate prepared by
either a federal or a state supervisory agency.
