Proposed Rule: Risk-Based Capital: Domestic Capital Modifications Capital Maintenance and Capital Adequacy Guidelines

Tuesday,
December 26, 2006
Part II
Department of the
Treasury
Office of the Comptroller of the
Currency
12 CFR Part 3
Federal Reserve System

12 CFR Parts 208 and 225
Federal Deposit
Insurance Corporation
12 CFR Part 325
Department of the
Treasury
Office of Thrift Supervision
12 CFR Parts 566 and 567
Risk-Based Capital Guidelines; Capital

Adequacy Guidelines; Capital
Maintenance: Domestic Capital
Modifications; Proposed Rules and Notice
sroberts on PROD1PC70 with PROPOSALS
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77446 Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules
DEPARTMENT OF THE TREASURY proposing to expand the number of risk Washington, DC. You can make an
weight categories, allow the use of appointment to inspect comments by
Office of the Comptroller of the external credit ratings to risk weight calling (202) 874–5043.
Currency certain exposures, expand the range of • Viewing Comments Electronically:
recognized collateral and eligible You may request e-mail or CD–ROM
12 CFR Part 3 guarantors, use loan-to-value ratios to copies of comments that the OCC has
risk weight most residential mortgages, received by contacting the OCC’s Public
[Docket No. 06–15]
increase the credit conversion factor for Information Room at
RIN 1557–AC95 certain commitments with an original regs.comments@occ.treas.gov.
maturity of one year or less, assess a • Docket: You may also request
FEDERAL RESERVE SYSTEM charge for early amortizations in available background documents and
securitizations of revolving exposures, project summaries using the methods
12 CFR Parts 208 and 225 and remove the 50 percent limit on the described above.
risk weight for certain derivative Board: You may submit comments,
[Regulations H and Y; Docket No. R–1238] identified by Docket No. R–1238, by any
transactions. A banking organization
FEDERAL DEPOSIT INSURANCE would have to apply all the proposed of the following methods:
changes if it chose to use these • Agency Web Site: http://
CORPORATION
revisions. www.federalreserve.gov. Follow the
Finally, in Section III of this NPR, the instructions for submitting comments at
12 CFR Part 325
Agencies seek further comment on http://www.federalreserve.gov/
RIN 3064–AC96 possible alternatives for implementing generalinfo/foia/ProposedRegs.cfm.
the ‘‘International Convergence of • Federal eRulemaking Portal: http://
DEPARTMENT OF THE TREASURY Capital Measurement and Capital www.regulations.gov. Follow the
Standards: A Revised Framework’’ instructions for submitting comments.
Office of Thrift Supervision (Basel II) in the United States as • E-mail:
proposed in the Basel II NPR. regs.comments@federalreserve.gov.
12 CFR Part 567 Include docket number in the subject
DATES: Comments on this joint notice of
line of the message.
[No. 2006–49] proposed rulemaking must be received
• FAX: (202) 452–3819 or (202) 452–
by March 26, 2007.
RIN 1550–AB98 3102.
ADDRESSES: Comments should be • Mail: Jennifer J. Johnson, Secretary,
Risk-Based Capital Guidelines; Capital directed to: Board of Governors of the Federal
Adequacy Guidelines; Capital OCC: You should include OCC and Reserve System, 20th Street and
Maintenance: Domestic Capital Docket Number 06–15 in your comment. Constitution Avenue, NW., Washington,
Modifications You may submit comments by any of DC 20551.
the following methods: All public comments are available
AGENCIES: Office of the Comptroller of • Federal eRulemaking Portal: http:// from the Board’s Web site at http://
the Currency, Treasury; Board of www.regulations.gov. Follow the www.federalreserve.gov/generalinfo/
Governors of the Federal Reserve instructions for submitting comments. foia/ProposedRegs.cfm as submitted,
System; Federal Deposit Insurance • OCC Web Site: http:// unless modified for technical reasons.
Corporation; and Office of Thrift www.occ.treas.gov. Click on ‘‘Contact Accordingly, your comments will not be
Supervision, Treasury. the OCC,’’ scroll down and click on edited to remove any identifying or
ACTION: Joint notice of proposed ‘‘Comments on Proposed Regulations.’’ contact information. Public comments
rulemaking. • E-mail address: may also be viewed electronically or in
regs.comments@occ.treas.gov. paper form in Room MP–500 of the
SUMMARY: The Office of the Comptroller • Fax: (202) 874–4448. Board’s Martin Building (20th and C
of the Currency (OCC), Board of • Mail: Office of the Comptroller of Street, NW.) between 9 a.m. and 5 p.m.
Governors of the Federal Reserve the Currency, 250 E Street, SW., Mail on weekdays.
System (Board), Federal Deposit Stop 1–5, Washington, DC 20219. FDIC: You may submit by any of the
Insurance Corporation (FDIC), and • Hand Delivery/Courier: 250 E following methods:
Office of Thrift Supervision (OTS) Street, SW., Attn: Public Information • Federal eRulemaking Portal: http://
(collectively, the Agencies) are Room, Mail Stop 1–5, Washington, DC www.regulations.gov. Follow the
proposing revisions to the existing risk- 20219. instructions for submitting comments.
based capital framework that would Instructions: All submissions received • Agency Web site: http://
enhance its risk sensitivity without must include the Agency name (OCC) www.FDIC.gov/regulations/laws/
unduly increasing regulatory burden. and docket number or Regulatory federal/propose.html
These changes would apply to banks, Information Number (RIN) for this • Mail: Robert E. Feldman, Executive
bank holding companies, and savings notice of proposed rulemaking. In Secretary, Attention: Comments/Legal
associations (banking organizations). A general, OCC will enter all comments ESS, Federal Deposit Insurance
banking organization would be able to received into the docket without Corporation, 550 17th Street, NW.,
elect to adopt these proposed revisions change, including any business or Washington, DC 20429.
or remain subject to the Agencies’ personal information that you provide. • Hand Delivered/Courier: The guard
existing risk-based capital rules, unless You may review comments and other station at the rear of the 550 17th Street
it uses the Advanced Capital Adequacy related materials by any of the following Building (located on F Street), on
Framework proposed in the notice of methods: business days between 7 a.m. and 5 p.m.
proposed rulemaking published on • Viewing Comments Personally: You • E-mail: comments@FDIC.gov.
September 25, 2006 (Basel II NPR). may personally inspect and photocopy • Public Inspection: Comments may
In this notice of proposed rulemaking comments at the OCC’s Public be inspected and photocopied in the
(NPR or Basel IA), the Agencies are Information Room, 250 E Street, SW., FDIC Public Information Center, Room
Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 77447
E–1002, 3502 Fairfax Drive, Arlington, Carl Kaminski, Attorney, Legislative and weaknesses in the various regulatory
VA 22226, between 9 a.m. and 5 p.m. Regulatory Activities Division, (202) capital regimes that were in force in
on business days. 874–5090; Office of the Comptroller of most of the world’s major banking
Instructions: Submissions received the Currency, 250 E Street, SW., jurisdictions. In the United States, the
must include the Agency name and title Washington, DC 20219. Basel I-based framework established a
for this notice. Comments received will Board: Thomas R. Boemio, Senior uniform regulatory capital system that
be posted without change to http:// Project Manager, Policy, (202) 452– captured some of the risks not otherwise
www.FDIC.gov/regulations/laws/ 2982; Barbara Bouchard, Deputy captured by the regulatory capital to
federal/propose.html, including any Associate Director, (202) 452–3072; total assets ratio, provided some modest
personal information provided. William Tiernay, Supervisory Financial differentiation of regulatory capital
OTS: You may submit comments, Analyst (202) 872–7579; or Juan C. based on broadly defined risk-weight
identified by No. 2006–49, by any of the Climent, Supervisory Financial Analyst, categories, and encouraged banking
following methods: (202) 872–7526, Division of Banking organizations to strengthen their capital
• Federal eRulemaking Portal: http:// Supervision and Regulation; or Mark E. positions.
www.regulations.gov. Follow the Van Der Weide, Senior Counsel, (202)
Consistent with Basel I, the Agencies’
instructions for submitting comments. 452–2263, Legal Division. For the
existing risk-based capital rules
• E-mail address: hearing impaired only,
generally assign each credit exposure to
regs.comments@ots.treas.gov. Please Telecommunication Device for the Deaf
one of five broad categories of credit
include No. 2006–49 in the subject line (TDD), (202) 263–4869.
risk, which allows for only limited
of the message and include your name FDIC: Karl R. Reitz, Capital Markets
differentiation in the assessment of
and telephone number in the message. Specialist, (202) 898–3857, or Bobby R.
credit risk for most exposures. Since the
• Fax: (202) 906–6518. Bean, Chief, Policy Section Capital
implementation of Basel I-based capital
• Mail: Regulation Comments, Chief Markets Branch, (202) 898–3575,
Division of Supervision and Consumer rules, the Agencies have made
Counsel’s Office, Office of Thrift
Protection; or Benjamin W. McDonough, numerous revisions to these rules in
Supervision, 1700 G Street, NW.,
Attorney, (202) 898–7411, or Michael B. response to changes in financial market
Washington, DC 20552, Attention: No.
2006–49. Phillips, Counsel, (202) 898–3581, practices and accounting standards as
• Hand Delivery/Courier: Guard’s Supervision and Legislation Branch, well as to implement legislative
Desk, East Lobby Entrance, 1700 G Legal Division, Federal Deposit mandates and address safety and
Street, NW., from 9 a.m. to 4 p.m. on Insurance Corporation, 550 17th Street, soundness issues. Over time, these
business days, Attention: Regulation NW., Washington, DC 20429. revisions have modestly increased the
Comments, Chief Counsel’s Office, OTS: Teresa Scott, Senior Project degree of risk sensitivity of the
Attention: No. 2006–49. Manager, Supervision Policy (202) 906– Agencies’ risk-based capital rules. The
Instructions: All submissions received 6478; or Karen Osterloh, Special Agencies and the industry generally
must include the Agency name and Counsel, Regulation and Legislation agree that the existing risk-based capital
docket number or Regulatory Division, Chief Counsel’s Office, (202) rules could be modified to better reflect
Information Number (RIN) for this 906–6639; Office of Thrift Supervision, the risks present in many banking
rulemaking. All comments received will 1700 G Street, NW., Washington, DC organizations’ portfolios without
be posted without change to the OTS 20552. imposing undue regulatory burden. In
Internet Site at http://www.ots.treas.gov/ recent years, however, the Agencies
SUPPLEMENTARY INFORMATION:
pagehtml.cfm?catNumber=67&an=1, have limited modifications to the
including any personal information I. Background existing risk-based capital rules while
provided. international efforts to create a new risk-
In 1989, the Office of the Comptroller
Docket: For access to the docket to based capital framework were in
of the Currency (OCC), Board of
read background documents or process.
Governors of the Federal Reserve
comments received, go to http:// System (Board), Federal Deposit In June 2004, the Basel Committee
www.ots.treas.gov/ Insurance Corporation (FDIC), and introduced a new, more risk-sensitive
pagehtml.cfm?catNumber=67&an=1. In Office of Thrift Supervision (OTS) capital adequacy framework,
addition, you may inspect comments at (collectively, the Agencies) ‘‘International Convergence of Capital
the Public Reading Room, 1700 G Street, implemented a risk-based capital Measurement and Capital Standards: A
NW., by appointment. To make an framework for U.S. banking Revised Framework’’ (Basel II).3 Basel II
appointment for access, call (202) 906– organizations.1 The Agencies based the is designed to promote improved risk
5922, send an e-mail to framework on the ‘‘International measurement and management
public.info@ots.treas.gov, or send a Convergence of Capital Measurement processes and better align minimum
facsimile transmission to (202) 906– and Capital Standards’’ (Basel I), capital requirements with risk. For
7755. (Prior notice identifying the published by the Basel Committee on credit risk, Basel II includes three
materials you will be requesting will Banking Supervision (Basel Committee) approaches for regulatory capital:
assist us in serving you.) We schedule in 1988.2 Basel I addressed certain Standardized, foundation internal
appointments on business days between ratings-based, and advanced internal
10 a.m. and 4 p.m. In most cases, 1 12 CFR part 3, appendix A (OCC); 12 CFR parts
ratings-based. For operational risk, Basel
appointments will be available the next 208 and 225, appendix A (Board); 12 CFR part 325, II also includes three methodologies:
business day following the date we appendix A (FDIC); and 12 CFR part 567 (OTS). The
risk-based capital rules generally do not apply to

receive a request. bank holding companies with less than $500 Luxembourg, the Netherlands, Spain, Sweden,
FOR FURTHER INFORMATION CONTACT: million in assets. 71 FR 9897 (Februray 28, 2006). Switzerland, the United Kingdom, and the United
OCC: Nancy Hunt, Risk Expert, (202) 2 The Basel Committee on Banking Supervision States.
was established in 1974 by central banks and 3 The complete text for Basel II as amended in
874–4923; or Kristin Bogue, Risk Expert, governmental authorities with bank supervisory November 2005 is available on the Bank for
(202) 874–5411, Capital Policy Division; responsibilities. Current member countries are International Settlements Web site at http://
Ron Shimabukuro, Special Counsel, or Belgium, Canada, France, Germany, Italy, Japan, www.bis.org/publ/bcbs118.htm.
Basic indicator, standardized, and II banking organizations, and another for Basel II banking organizations (Basel IA
advanced measurement. banking organizations that do not use ANPR).7 The proposals in this NPR are
In August 2003, the Agencies issued the proposed Basel II capital rules (non- based on those initial conceptual
an advance notice of proposed Basel II banking organizations). approaches and take into consideration
rulemaking (Basel II ANPR), which In comments responding to the Basel the public comments that the Agencies
explained how the Agencies might II ANPR, Congressional testimony, and received.
implement Basel II in the United other industry communications, several Together, the Agencies received 73
States.4 On September 25, 2006, the banking organizations, trade public comments from banking, trade,
Agencies issued a notice of proposed associations, and others raised concerns and other organizations and individuals.
rulemaking that provides the industry about the competitive effects of a Generally, most commenters supported
with a more definitive proposal for bifurcated regulatory framework on the Agencies’ goal to make the risk-
implementing Basel II in the United community and regional banking based capital rules more risk-sensitive.
States (Basel II NPR).5 organizations. Among other broad Several larger banking organizations and
The Basel II NPR identifies two types concerns, these commenters asserted industry groups favored increased risk
of U.S. banking organizations that that implementing the Basel II capital sensitivity, but argued that many of the
would use the Basel II rules: Those for regime in the United States could result proposed revisions should be optional
which application of the rules would be in lower minimum regulatory capital so that banking organizations may
mandatory (core banks), and those that requirements for Basel II banking weigh the costs and benefits of using the
might voluntarily apply the rules (opt- organizations with respect to certain revisions. Several non-Basel II banking
in banks) (collectively referred to as types of credit exposures. As a result, organizations and industry groups
Basel II banking organizations). In regulatory capital requirements for argued that the U.S. risk-based capital
general, the Basel II NPR defines a core similar products could differ depending rules should allow banking
bank as a banking organization that has on the capital regime under which a organizations to use internal
consolidated total assets of $250 billion banking organization operates. assessments of risk to determine their
or more, has consolidated on-balance Community and regional banking capital requirements. A few commenters
sheet foreign exposure of $10 billion or organizations asserted that this would endorsed a proposal for a four-tier
more, or is a subsidiary of a Basel II put them at a competitive disadvantage. capital framework that would apply
banking organization. The Basel II NPR To assist in quantifying the potential different approaches to banking
presents the advanced internal ratings- effects of implementing Basel II in the organizations based on the size and
based approach for credit risk and the United States, the Agencies conducted a complexity, and the robustness of a
advanced measurement approach for quantitative impact study during late banking organization’s internal ratings
operational risk. However, the Agencies 2004 and early 2005 (QIS 4).6 QIS 4 was systems. The commenters’ proposal
did seek comment in the Basel II NPR a comprehensive survey completed on a included an approach that would permit
on whether U.S. banking organizations best efforts basis by 26 of the largest some non-Basel II banking organizations
subject to the advanced approaches in U.S. banking organizations using their to use internal rating-based systems.
the proposed rule (that is, core banks own internal estimates of the key risk One commenter suggested tying Basel
and opt-in banks) should be permitted parameters driving the capital IA capital requirements directly to the
to use other credit and operational risk requirements under the Basel II aggregate results for Basel II
approaches provided for in Basel II. The framework. The results of the study calculations. This commenter suggested
Agencies are seeking further comment suggested that the aggregate minimum that Basel IA capital charges should link
on possible alternatives for Basel II risk-based capital requirements for the by loan category to the average risk-
banking organizations in Section III of 26 banking organizations could drop based capital requirements of the Basel
this NPR. approximately 15.5 percent relative to II banking organizations for that loan
The complexity and cost associated the existing Basel I-based framework. category, plus a small premium to
with implementing Basel II in the The QIS 4 results also indicated recognize the substantial costs of
United States effectively limit its dispersion in capital requirements implementing Basel II.
application to those banking across banking organizations and Most smaller and midsize banking
organizations that are able to take portfolios, which was attributed in part organizations generally requested that
advantage of economies of scale and to differences in the underlying data any changes to the existing capital rules
absorb the costs associated with the and methodologies used by banking be simple and not require large data
enhanced risk management practices organizations to quantify risk and their gathering and monitoring expenses. A
required of Basel II banking overall readiness to implement a Basel number of the smallest banking
organizations. Thus, the implementation II framework. The Basel II NPR contains organizations said that they do not wish
of Basel II would create a bifurcated several provisions designed to limit to have any changes in the capital rules
regulatory capital framework in the potential reductions in minimum that apply to them. They noted that they
United States: One set of rules for Basel regulatory capital, such as an extended already hold significantly more
transition period during which the regulatory capital than the Agencies’
4 As stated in its preamble, the Base II ANPR was Agencies can thoroughly review those risk-based capital rules require and,
based on the consultative document ‘‘The New Basel II systems that are subject to therefore, amending the rules would
Basel Capital Accord’’ that was published by the
supervisory oversight. have little or no effect.
Basel Committee on April 29, 2003. The Basel II This NPR makes a number of
ANPR anticipated the issuance of a final revised On October 20, 2005, the Agencies
accord. See 68 FR 45900 (August 4, 2003). issued an advanced notice of proposed proposals that should improve the risk
sensitivity of the existing risk-based
5 71 FR 55380 (September 25, 2006). The Basel II

rulemaking soliciting public comment
NPR would add new appendices to the Agencies’ on possible revisions to U.S. risk-based capital rules. The Agencies, however,
existing capital regulations. These new appendices
capital rules that would apply to non- are not proposing to allow a non-Basel
would be found at 12 CFR Part 3, Appendix C II banking organization to use internal
(OCC); 12 CFR Part 208, Appendix F and 12 CFR
Part 225, Appendix F (FRB); 12 CFR Part 325, 6 ‘‘Summary Findings of the Fourth Quantitative risk ratings or to use its internal risk
Appendix D (FDIC); and 12 CFR part 566, subpart Impact Study,’’ Joint Agency press release, February
A (OTS). 24, 2006. 7 70 FR 61068 (October 20, 2005).
measurement processes to calculate requirements potentially higher for Agencies believe that a banking
risk-based capital requirements for any organizations with riskier exposures and organization that chooses to adopt these
new categories of exposures.8 The lower for those with safer exposures. proposals will generally be able to do so
Agencies believe that the use of these The Agencies seek to achieve these with data it currently uses as part of its
internal ratings and measurement objectives while balancing operational credit approval and portfolio
processes should require the systems feasibility and regulatory burden management processes. Commenters are
controls, supervisory oversight, and considerations. particularly requested to address
other qualification requirements that are In this NPR, the Agencies are whether any of the proposed changes
proposed in the Basel II NPR. proposing to: would require data that are not
The Agencies also believe that any • Allow non-Basel II banking currently available as part of the
proposal to tie capital requirements organizations the choice of adopting all organization’s existing credit approval
under Basel IA to the capital charges of the revisions in this proposal or and portfolio management systems.
that would result under the proposed continuing to use the existing risk-based
Basel II rules is premature. The A. Opt-In Proposal
capital rules. The voluntary nature of
Agencies anticipate that the Basel II this proposed rule gives banking In the Basel IA ANPR, the Agencies
transition phase would not be organizations the opportunity to weigh recognized that certain banking
completed until 2011 at the earliest. The the various costs and benefits to them of organizations might not want to assume
Agencies also have other concerns about adopting the new system. the additional burden that might
the commenter’s proposal including the • Increase the number of risk weight accompany a more risk-sensitive
absence of a capital charge for categories to which credit exposures approach and might prefer to continue
operational risk; the method by which may be assigned. to apply the existing risk-based capital
any premium over the Basel II charges • Use external credit ratings to risk rules. Additionally, many commenters,
would be determined; difficulties in weight certain exposures. particularly community bank
defining comparable portfolios; and the • Expand the range of recognized respondents, favored an approach that
need to periodically update capital collateral and eligible guarantors. would allow well-capitalized banking
requirements, which would • Use loan-to-value ratios to risk organizations to remain under the
significantly increase complexity and weight most residential mortgages. existing risk-based capital rules. For
burden. • Increase the credit conversion factor these commenters, limiting regulatory
for various commitments with an burden was a higher priority than
II. Proposed Changes increasing the risk sensitivity of their
original maturity of one year or less.
In considering revisions to the • Assess a risk-based capital charge risk-based capital charges. One group of
existing risk-based capital rules, the for early amortizations in securitizations midsize banking organizations
Agencies were guided by five broad of revolving exposures. recommended applying the proposed
principles. A revised framework must: • Remove the 50 percent limit on the rules only to banking organizations with
(1) Promote safe and sound banking assets of $500 million or greater. Some
risk weight for certain derivative
practices and a prudent level of commenters noted the risk of ‘‘cherry
transactions.
regulatory capital; (2) maintain a picking’’ in permitting a choice between
The existing risk-based capital
balance between risk sensitivity and the framework discussed in the Basel IA
requirements focus primarily on credit
operational feasibility; (3) avoid undue ANPR and the existing risk-based
risk and do not impose explicit capital
regulatory burden; (4) create appropriate capital rules, or adoption of parts of
charges for interest rate, operational, or
incentives for banking organizations; each.
other risks. These risks, however, are
and (5) mitigate material distortions in The Agencies are proposing that a
implicitly covered by the existing risk-
the risk-based capital requirements for non-Basel II banking organization may,
based capital rules. The risk-based
large and small banking organizations. if it chooses, adopt the revisions in this
The Agencies are concerned about capital charges proposed in this NPR
proposed rule. If a banking organization
potential competitive disadvantages that continue the implicit coverage of risks chooses to use these proposed capital
could result from capital requirements other than credit risk. Moreover, the rules, however, it would be required to
that differ depending on the capital Agencies are not proposing revisions to implement them in their entirety. The
regime under which a banking the existing leverage ratio requirement Agencies are proposing to permit a
organization operates. By allowing non- (that is, the ratio of Tier 1 capital to total banking organization to adopt these
Basel II banking organizations the assets).9 proposals by notifying its primary
choice of adopting all of the provisions To ensure safety and soundness, the Federal supervisor. Before a banking
in this proposal or continuing to use the Agencies intend to closely monitor the organization decides to opt in to these
existing risk-based capital rules, the level of risk-based capital at those proposals, the Agencies expect that the
proposed regulation is intended to help banking organizations that choose to opt organization would review its ability to
maintain the competitive position of in to Basel IA. Any significant decline collect and utilize the information
these banks relative to Basel II banking in the aggregate level of risk-based required and evaluate the potential
organizations. Moreover, the proposed capital for these banking organizations impact on its regulatory capital. A
rule strives for better alignment of may warrant modifications to the banking organization that chooses to
capital and risk, with capital proposed risk-based capital rules. adopt these proposals (that is, opts in)
Question 1: The Agencies welcome would also be able to request returning
8 The Agencies’ existing capital rules, however, comments on all aspects of these to the existing capital rules by first
would continue to permit the use of internal ratings proposals, especially suggestions for notifying its primary Federal supervisor.
for a direct credit substitute (but not a purchased reducing the burden that may be
credit-enhancing interest-only strip) assumed in In its review of such a request, the
connection with an asset-backed commercial paper
associated with these proposals. The primary Federal supervisor would
program sponsored by a banking organization. 12 ensure that the risk-based capital
CFR part 3, appendix A section 4(g) (OCC); 12 CFR 9 12 CFR 3.6(b) and (c) (OCC); 12 CFR part 208,
parts 208 and 225, appendix A, section III.B.3.F appendix B and 12 CFR part 225, appendix D
requirements appropriately reflect the
(Board); 12 CFR part 325, appendix A, section (Board); 12 CFR part 325.3 (FDIC); and 12 CFR risk profile of the banking organization
II.B.5(g)(1) (FDIC); and 12 CFR 567.6(b)(4) (OTS). 567.8 (OTS). and the change is not for purposes of
capital arbitrage. Further, the Agencies framework should include more risk- C. Use of External Credit Ratings to Risk
expect that a banking organization weight categories than the four Weight Exposures
would not alternate between the suggested; and (4) increasing the The Agencies’ existing risk-based
existing and proposed risk-based capital number of risk-weight categories would capital rules permit the use of external
rules. The Agencies would reserve the impose unnecessary burden on banking credit ratings issued by a nationally
authority to require a banking organizations. recognized statistical rating organization
organization to calculate its minimum (NRSRO) 10 to assign risk weights to
risk-based capital requirements in Commenters generally supported
increasing the number of risk-weight recourse obligations, direct credit
accordance with this proposal or the substitutes (DCS), residual interests
existing risk-based capital rules. categories to enhance the overall risk-
sensitivity of the risk-based capital (other than a credit-enhancing interest-
Under this proposal, a non-Basel II only strip), and asset- and mortgage-
banking organization could continue to rules. However, many commenters
backed securities.11 For example, AAA-
calculate its risk-based capital noted that adding too many categories
and AA-rated mortgage-backed
requirements using the existing risk- could make the rules too complex. securities 12 are assigned to the 20
based capital rules. In this case, the Several commenters argued that the 350 percent risk weight category while BB-
banking organization would not need to percent risk weight is too high and rated mortgage-backed securities are
notify its primary Federal supervisor or suggested that any new risk-weight assigned to the 200 percent risk weight
take any other action. As noted, above, categories should be lower than 100 category. When the Agencies revised the
however, the Agencies would retain the percent to reflect the lower risks risk-based capital rules to allow for the
authority to require a non-Basel II associated with certain mortgages and use of external credit ratings issued by
banking organization to use either the other high-quality assets. A few an NRSRO for the types of exposures
existing or the proposed risk-based commenters suggested that the Agencies listed above, the Agencies
capital rules if the banking create a new 10 percent risk weight acknowledged that such ratings could
organization’s primary Federal be used to determine the risk-based
category to account for very low-risk
supervisor determines that a particular capital requirements for other types of
assets.
capital rule is more appropriate for the debt instruments, such as rated
risk profile of the banking organization. The Agencies agree with the
commenters that increasing the number corporate debt.
Question 2: The Agencies seek
In the Basel IA ANPR, the Agencies
comment on all aspects of the proposal of risk-weight categories would allow
suggested expanding the use of NRSRO
to allow banks to opt in to and out of for greater risk sensitivity than the ratings to determine the risk-based
the proposed rules. Specifically, the existing risk-based capital rules. capital charge for most categories of
Agencies seek comment on any Accordingly, the Agencies propose to NRSRO-rated exposures, including
operational challenges presented by the add 35, 75, and 150 percent risk-weight sovereign and corporate debt securities
proposed rules. How far in advance categories. The Agencies believe that and rated loans. The Agencies
should a banking organization be adding a 150 percent risk weight indicated, however, that they were
required to notify its primary Federal category and expanding the use of the considering retaining the existing risk-
supervisor that it intends to implement existing 200 percent risk weight
the proposed rule? If a banking based capital treatment for U.S.
category would allow for somewhat government and agency exposures, U.S.
organization wishes to ‘‘opt out’’ of the
greater differentiation of credit risk government-sponsored entity exposures,
proposed rule, what criteria should
guide the review of a request to opt out? among more risky exposures than is and municipal obligations. Tables 1 and
When should a banking organization’s permitted by the existing capital rules. 2 in the Basel IA ANPR matched ratings
election to opt in or opt out be effective? At the same time, for certain types of and possible corresponding risk weights
In addition, the Agencies seek comment relatively low-risk exposures, the for long- and short-term exposures. The
on the appropriateness of requiring a existing risk-based capital charge may Agencies requested comment on the use
banking organization to apply the be higher than warranted. Therefore, the of other methodologies to assign risk
proposed Basel IA capital rules based 35 and 75 percent risk weight categories weights to unrated exposures.
on a banking organization’s asset size, provide an opportunity to increase the
10 An NRSRO is an entity recognized by the
level of complexity, risk profile, or scope risk sensitivity of the regulatory capital
Division of Market Regulation of the Securities and
of operations. charges for these exposures. Exchange Commission (SEC) as a nationally
The Agencies agree that the credit recognized statistical rating organization for various
B. Increase the Number of Risk Weight purposes, including the SEC’s uniform net capital
Categories risks covered by this NPR generally do requirements for brokers and dealers 17 CFR
not warrant a 350 percent category, and 240.15c3–1). On September 29, 2006, the President
The Agencies’ existing risk-based signed the Credit Rating Agency Reform Act of 2006
capital rules contain five risk-weight are not proposing to add this risk
(Reform Act) (Pub. L. 109–291) into law. The
categories: Zero, 20, 50, 100, and 200 weight. Question 3: The Agencies seek Reform Act requires a credit rating agency that
percent. Differentiation of credit quality comment on whether these or any other wants to represent itself as an NRSRO to register
among individual exposures is generally new risk weight categories would be with the SEC. The Agencies may review their risk-
appropriate. More specifically, the based capital rules, guidance and proposals from
limited to these few risk-weight time to time in order to determine whether any
categories. In the Basel IA ANPR, the Agencies are interested in any modification of the Agencies’ definition of an
Agencies suggested adding four new comments regarding whether any NRSRO is appropriate.
risk-weight categories (35, 75, 150, and categories of assets might warrant a risk 11 Some synthetic structures may also be subject
weight higher than 200 percent and to the external rating approach. For example,
350 percent) and invited comment on
certain credit-linked notes issued from a synthetic

whether: (1) Increasing the number of what risk weight might be appropriate securitization are risk weighted according to the
risk-weight categories would allow for such assets. The Agencies also solicit rating given to the notes. 66 FR 59614, 59622
supervisors to more closely align capital comment on whether a 10 percent risk (November 29, 2001).
12 The ratings designations (for example, ‘‘AAA,’’
requirements with risk; (2) the suggested weight category would be appropriate
‘‘BBB,’’ ‘‘A–1,’’ and ‘‘P–1’’), are illustrative and do
additional risk-weight categories would and what exposures should be included not indicate any preference for, or endorsement of,
be appropriate; (3) the risk-based capital in this risk weight category. any particular rating agency description system.
Many commenters supported the use NRSRO, provided that the credit rating exposures) and Table 2 (short-term
of external ratings in principle but noted (1) fully reflects the entire amount of exposures) below. The Agencies are also
that non-Basel II banking organizations’ credit risk with regard to all payments proposing to replace the existing risk-
holdings of securities and loans owed to the holder and the credit risk weight tables for externally rated
generally are not rated. Thus, they associated with timely repayment of recourse obligations, DCS, residual
suggested that the expansion of the use principal and interest; (2) is published interests (other than a credit-enhancing
of NRSRO ratings would have little in an accessible public form, for interest-only strip), and asset- and
impact on these banking organizations. example, on the NRSRO’s Web site and mortgage-backed securities 15 with the
A few commenters also asserted that in financial media; (3) is monitored by risk weights in Tables 1 and 2.16 This
using NRSRO ratings might discourage the NRSRO; and (4) is, or will be,
proposed treatment would apply to all
lending to non-rated entities. included in the issuing NRSRO’s
Many commenters argued that the risk externally rated exposures unless the
publicly available transition matrix.13 If
weights suggested in the Basel IA ANPR an exposure has two or more external banking organization uses a market risk
were too high. In particular, many ratings, the banking organization must rule.17 For a banking organization that
commenters said that the 350 percent use the lowest assigned external rating uses a market risk rule, this treatment
and 200 percent risk weights for to risk weight the exposure. If an applies only to externally rated
exposures rated BB+ and lower would exposure has components that are exposures held in the banking book.
be unnecessarily punitive. A few assigned different external ratings, a The Agencies intend to retain the
commenters also expressed concerns banking organization would be required existing risk-based capital treatment for
about NRSRO ratings generally. These to assign the lowest rating to the entire direct exposures to public-sector
commenters said that there are too few exposure. If a component is not entities,18 the U.S. government and its
NRSROs to ensure adequate market externally rated, the entire exposure agencies, U.S. government-sponsored
discipline, NRSROs are inadequately would be treated as unrated. agencies, and depository institutions
supervised, and NRSRO ratings often
i. Direct Exposures (U.S. and foreign) and for unrated loans
react too slowly to crises.
A number of commenters suggested The Agencies are proposing to use made to non-sovereign entities.
alternative methods for differentiating external ratings to risk weight (1) Exposures issued by these entities are
risk among commercial exposures and sovereign 14 debt and debt securities, not subject to Table 1 or 2.
making the capital requirements for and (2) debt securities issued by and
these exposures more risk sensitive. rated loans to non-sovereign entities 15 12 CFR part 3, appendix A, section 4, Tables
Many larger banking organizations including securities firms, insurance B and C (OCC); 12 CFR parts 208 and 225, appendix
suggested allowing an internal risk companies, bank holding companies, A, section III.B.3.c.i. (Board); 12 CFR part 325,
appendix A, section II.B.5.(d) (FDIC); and 12 CFR
measurement approach to determine savings and loan holding companies, 567.6(b) (OTS) (the Recourse Rule).
risk-based capital requirements. Some multilateral lending and regional 16 With the exception of the clarification of the
smaller banking organizations sought development institutions, partnerships, definition of an external rating and the proposed
increased recognition of a variety of risk limited liability companies, business risk-based capital charge for securitizations with
mitigation techniques, such as personal trusts, special purpose entities, early amortization features described in section F of
this NPR, the Agencies are not proposing to make
guarantees and collateral. associations and other similar other changes to the existing risk-based capital rules
The Agencies acknowledge that organizations. External ratings for direct for recourse obligations, DCS, and residual
expanding the use of external ratings exposures to sovereigns would be based interests. See 12 CFR part 3, appendix A, section
may have little effect on the risk-based on the external rating of the exposure or, 4 (OCC); 12 CFR parts 208 and 225, appendix A,
capital requirements for existing loan section III.B.3 (Board); 12 CFR part 325, appendix
if the exposure is unrated, on the A, section II.B.5 (FDIC); and 12 CFR 567.6(b) (OTS)
portfolios at most banking sovereign’s issuer rating. Direct (Recourse Rule).
organizations. To the extent that assets exposures to non-sovereigns would be 17 See 12 CFR part 3, appendix B (OCC); 12 CFR
in a banking organization’s investment risk weighted based on the external parts 208 and 225, appendix E (Board); and 12 CFR
portfolio are rated, however, the rating of the exposure. For example, a part 325 appendix C (FDIC). The Agencies issued
Agencies believe that using external an NPR that proposes revisions to the Market Risk
banking organization would assign any rules. OTS does not currently have a market risk
ratings will improve risk sensitivity of AAA-rated debt security issued by a rule, but has proposed to add a new rule on this
the capital charges for these assets. corporation, insurance company, or topic in the Market Risk NPR. See 71 FR 55958
Furthermore, implementing broader use securities firm to the 20 percent risk (September 25, 2006).
18 Public-sector entities include states, local
of external ratings would also provide a weight category. The Agencies are, authorities and governmental subdivisions below
basis for expanding recognition of however, not proposing to permit the the central government level in an Organization for
eligible guarantees and recognized use of issuer ratings for non-sovereigns. Economic Cooperation and Development (OECD)
collateral. Accordingly, the Agencies are The risk weights for direct exposures country. In the United States, this definition
proposing to expand the use of external encompasses a state, county, city, town, or other
are detailed in Table 1 (long-term municipal corporation, a public authority, and
ratings for purposes of determining the
generally any publicly-owned entity that is an
risk-based capital charge for certain 13 A transition matrix tracks the performance and
instrument of a state or municipal corporation. This
externally rated exposures as described stability (or ratings migration) of an NRSRO’s issued definition does not include commercial companies
below in the sections on direct external ratings. owned by the public sector. The OECD-based group
14 A sovereign is defined as a central government, of countries comprises all full members of the
exposures, recognized collateral, and
including its agencies, departments, ministries, and OECD, as well as countries that have concluded
eligible guarantees. the central bank. A soverign does not include state, special lending arrangements with the International
An external rating would be defined provincial, or local governments, or commercial Monetary Fund (IMF) associated with the Fund’s
as a credit rating that is assigned by an enterprises owned by a central government. General Arrangements to Borrow.
TABLE 1.—PROPOSED RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR LONG-TERM EXPOSURES
Securitization
Sovereign risk Non-sovereign exposure 1 risk
Long-term rating category Example weight risk weight weight
(in percent) (in percent) (in percent)
Highest investment grade rating ............................................................................ AAA ......... 0 20 20

Second-highest investment grade rating ............................................................... AA ............ 20 20 20
Third-highest investment grade rating ................................................................... A .............. 20 35 35
Lowest-investment grade rating—plus .................................................................. BBB+ ....... 35 50 50
Lowest-investment grade rating ............................................................................ BBB ......... 50 75 75
Lowest-investment grade rating—minus ............................................................... BBB¥ ...... 75 100 100
One category below investment grade .................................................................. BB+, BB ... 75 150 200
One category below investment grade—minus ..................................................... BB¥ ........ 100 200 200
Two or more categories below investment grade ................................................. B, CCC .... 150 200 1
Unrated 2 ................................................................................................................ n/a ........... 200 200 1
1 A securitization exposure includes asset- and mortgage-backed securities, recourse obligations, DCS, and residuals (other than a credit-en-
hancing interest-only strip). For long-term securitization exposures that are externally rated more than one category below investment grade,
short-term exposures that are rated below investment grade, or any unrated securitization exposures, the existing risk-based capital treatment as
described in the Agencies’ Recourse Rule would be used.
2 Unrated sovereign exposures and unrated debt securities issued by non-sovereigns would receive the risk weight indicated in Tables 1 and
2. Other unrated exposures, for example, unrated loans to non-sovereigns, would continue to be risk weighted under the existing risk-based cap-
ital rules.
TABLE 2.—PROPOSED RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR SHORT-TERM EXPOSURES
Securitization
Sovereign risk Non-sovereign exposure 1 risk
Short-term rating category Example weight risk weight weight
Highest investment grade rating ............................................................................ A–1, P–1 .. 0 20 20

Second-highest investment grade rating ............................................................... A–2, P–2 .. 20 35 3
Lowest investment grade ....................................................................................... A–3, P–3 .. 50 75 75
Unrated 2 ................................................................................................................ n/a ........... 100 100 (1)
1 A securitization exposure includes asset- and mortgage-backed securities, recourse obligations, DCS, and residuals (other than a credit-en-
hancing interest-only strip). For long-term securitization exposures that are externally rated more than one category below investment grade,
short-term exposures that are rated below investment grade, or any unrated securitization exposures, the existing risk-based capital treatment as
described in the Agencies’ Recourse Rule would be used.
2 Unrated sovereign exposures and unrated debt securities issued by non-sovereigns would receive the risk weight indicated in Tables 1 and
2. Other unrated exposures, for example, unrated loans to non-sovereigns, would continue to be risk weighted under the existing risk-based cap-
ital rules.
The proposed risk weights in Tables securities issued or guaranteed by least investment grade by an NRSRO, or
1 and 2 are generally consistent with the central governments of the OECD issued or guaranteed by a sovereign
historical default rates reported in the countries; (3) securities issued or central government that is externally
default studies published by NRSROs. guaranteed by the U.S. government or rated at least investment grade by an
The Agencies believe that the additional its agencies; (4) securities issued or NRSRO. Consistent with the proposed
application of external ratings to the guaranteed by U.S. government- treatment for direct exposures, the Basel
exposures specified above would sponsored agencies; and (5) securities IA ANPR suggested assigning exposures
improve the risk sensitivity of the issued by certain multilateral lending or portions of exposures collateralized
capital treatment for those exposures. institutions or regional development by financial collateral to risk-weight
Furthermore, the Agencies believe that banks.19 In the past, the banking categories based on the external rating
the revised risk-weight tables for industry has commented that the of that collateral. To use this expanded
externally rated recourse obligations, Agencies should recognize a wider array list of collateral, the Basel IA ANPR
DCS, residual interests (other than of collateral types for purposes of considered requiring a banking
credit-enhancing interest only-strips), reducing risk-based capital organization to have collateral
and asset- and mortgage-backed requirements. management systems to track collateral
securities would also better reflect risk In the Basel IA ANPR, the Agencies and readily determine its realizable
than the Agencies’ existing risk-based noted that they were considering value. The Agencies sought comment on
capital rules. expanding the list of recognized whether this approach for expanding
Under the proposal, the Agencies collateral to include short-or long-term the scope of recognized collateral would
would retain their authority to reassign debt securities (for example, corporate improve risk sensitivity without being
an exposure to a different risk weight on and asset- and mortgage-backed overly burdensome.
a case-by-case basis to address the risk securities) that are externally rated at Many commenters supported
of a particular exposure. expanding the list of recognized

19 The Agencies’ rules for collateral transactions, collateral, but several also noted that
ii. Recognized Financial Collateral however, differ somewhat as described in the using NRSRO ratings would have little
Agencies’ joint report to Congress. ‘‘Joint Report:
The Agencies’ existing risk-based Differences in Accounting and Capital Standards
effect on most community banks. Some
capital rules recognize limited types of among the Federal Banking Agences,’’ 70 FR 15379 commenters suggested reducing the risk
collateral: (1) Cash on deposit; (2) (March 25, 2005). weights applied to exposures secured by
any collateral that is legally perfected government-sponsored agencies. The (2) Cover all or a pro rata portion of
and has objective methods of valuation Agencies are also retaining the existing contractual payments of the obligor on
or can be readily marked-to-market. risk-based capital rules for exposures the reference exposure; 21
Many commenters also stated that any collateralized by securities issued or (3) Give the beneficiary a direct claim
collateral valuation and monitoring guaranteed by other OECD central against the protection provider;
requirements likely would be too costly governments that meet certain criteria.20 (4) Be non-cancelable by the
to benefit smaller community banks. protection provider for reasons other
iii. Eligible Guarantors than the breach of the contract by the
To increase the risk sensitivity of the
existing risk-based capital rules, the Under the Agencies’ existing risk- beneficiary;
Agencies are proposing to revise the list (5) Be legally enforceable against the
based capital rules, the recognition of
of recognized collateral to include a protection provider in a jurisdiction
third party guarantees is limited to
broader array of externally rated, liquid, where the protection provider has
guarantees provided by central sufficient assets against which a
and readily marketable financial governments of OECD countries, U.S.
instruments. The revised list would judgment may be attached and enforced;
government and government-sponsored and
incorporate long- and short-term debt entities, public-sector entities in OECD
securities and securitization exposures (6) Require the protection provider to
countries, multilateral lending make payment to the beneficiary on the
that are: institutions and regional development
a. Issued or guaranteed by a sovereign occurrence of a default (as defined in
banks, depository institutions and the guarantee) of the obligor on the
where such securities are externally qualifying securities firms in OECD reference exposure without first
rated at least investment grade by an countries, depository institutions in requiring the beneficiary to demand
NRSRO; or an exposure issued or non-OECD countries (short-term payment from the obligor.
guaranteed by a sovereign with an issuer claims), and central governments of To be considered an eligible
rating that is at least investment grade; non-OECD countries (local currency guarantor, a sovereign or its senior long-
or exposures only). term debt (without credit enhancement)
b. Issued by non-sovereigns where must be externally rated at least
In the Basel IA ANPR, the Agencies
such securities are externally rated at investment grade. Non-sovereigns must
suggested expanding the scope of
least investment grade by an NRSRO. have long-term senior debt (without
eligible guarantors to include any entity
Consistent with the Agencies’ existing whose long-term senior debt has been credit enhancement) that is externally
risk-based capital rules, the Agencies assigned an external credit rating of at rated at least investment grade. Under
propose to continue to recognize least investment grade by an NRSRO. this proposal, a banking organization
collateral that is either issued or The applicable risk weight for could assign the portions of exposures
guaranteed by certain sovereigns. For guaranteed exposures would be based guaranteed by eligible guarantors to the
non-sovereign exposures, however, the on the risk weights corresponding to the proposed risk weight category
Agencies propose that the collateral rating of the long-term debt of the corresponding to the external rating of
itself must be externally rated guarantor. the eligible guarantors’ long-term senior
investment grade or better to qualify as debt in accordance with Table 1 above.
recognized collateral. The Agencies Most commenters supported, in The Agencies would retain the
believe that this more conservative principle, expanding the list of eligible existing risk-weight treatment of
approach for recognizing non-sovereign guarantors. However, many commenters exposures guaranteed by the U.S.
collateral is appropriate and expect that noted that very few community and government and its agencies, U.S.
any guarantee provided by a non- midsize banking organizations have government-sponsored agencies, public-
sovereign would be reflected in the exposures that are guaranteed by sector entities, depository institutions in
external rating of the collateral. externally rated entities. Thus, many OECD countries, and depository
A banking organization would assign commenters suggested that this institutions in non-OECD countries
exposures collateralized by financial provision would have little impact (short-term exposures only).
collateral externally rated at least unless the proposed revisions Question 4: The Agencies solicit
investment grade to the appropriate risk recognized more types of guarantees. comment on all aspects of the proposed
weight in Table 1 or 2 above. If an The Agencies believe that the range of use of external ratings including the
exposure is partially collateralized, a eligible third-party guarantors under the appropriateness of the risk weights,
banking organization could assign the existing risk-based capital rules is expanded collateral, and additional
portions of exposures collateralized by restrictive and ignores market practice. eligible guarantors. The Agencies also
the market value of the externally rated As a result, the Agencies are proposing seek comment on whether to exclude
collateral to the appropriate risk weight to expand the list of eligible guarantors certain externally rated exposures from
category in Tables 1 and 2 of this NPR. by recognizing entities that have long- the ratings treatment as proposed or to
For example, the portion of an exposure term senior debt (without credit use external ratings as a measure for all
collateralized by the market value of a enhancement) rated at least investment externally rated exposures, collateral,
AAA-rated corporate debt security grade by an NRSRO or, in the case of a and guarantees. Alternatively, should
would be assigned to the 20 percent risk sovereign, an issuer rating that is at least the Agencies retain the existing risk-
weight category. The Agencies are investment grade. Under this NPR, a based capital treatment for certain types
proposing a minimum risk weight of 20 recognized third-party guarantee would of exposures, for example, qualifying
percent for collateralized exposures have to: securities firms? The Agencies are also
except as noted below. (1) Be written and unconditional, and, interested in comments on all aspects of
The Agencies have decided to retain for a sovereign guarantee, be backed by the scope of the terms sovereign, non-
their respective risk-based capital rules the full faith and credit of the sovereign; 21 If an exposure is partially guaranteed, the pro
that govern the following collateral:
rata portion not covered by the guarantee would be
Cash, securities issued or guaranteed by 20 12 CFR part 3, appendix A, section 3(a)(1)(viii) assigned to the risk weight category appropriate to
the U.S. government or its agencies, and (OCC); and 12 CFR parts 208 and 225, appendix A, the obligor, after consideration of collateral and
securities issued or guaranteed by U.S. section III.C.1 (Board). external ratings.
sovereign, and securitization exposures. issuer rating that S&P initially provided proposed ratings treatment be
Specifically, the Agencies seek comment in 2001. Moody’s ‘‘bank financial applicable for direct exposures to public
on the scope of these terms, whether strength rating’’ (BFSR) uses a scale of sector entities or depository institutions?
they should be expanded to cover other A–E. In 2002, Moody’s provided a BFSR Likewise, should the proposed ratings
entities, or whether any entities of A¥ to both GSEs. On March 28, treatment be applicable to exposures
included in these definitions should be 2005, Moody’s downgraded Fannie guaranteed by public sector entities or
excluded. Mae’s BFSR to B+. Based on Moody’s depository institutions, and to
mapping of BFSRs to Moody’s basic exposures collateralized by debt
iv. Government-Sponsored Agencies
credit assessment ratings, A− is securities issued by those entities?
One area of particular interest to the the equivalent of an Aa1 and B+ maps
Agencies is the risk weighting of D. Mortgage Loans Secured by a Lien on
to an Aa2.
exposures to U.S. government- Both the risk to government rating a One-to-Four Family Residential
sponsored agencies, also commonly and the BFSR (collectively, financial Property
referred to as government-sponsored strength ratings) are issuer ratings that i. First Lien Risk Weights
entities (GSEs). The Agencies’ existing evaluate the financial strength of each The Agencies’ existing risk-based
risk-based capital regulations assign a GSE without respect to any implied capital rules assign first-lien, one-to-four
20 percent risk weight to exposures financial assistance from the U.S. family residential mortgages to either
issued or guaranteed by GSEs. The Basel government. These financial strength the 50 percent or 100 percent risk
IA NPR proposes to retain this risk- ratings are published and monitored by weight category. Most mortgage loans
based capital treatment. The Agencies the issuing NRSRO but they are not secured by a first lien on a one-to-four
are aware that there are various types of included in the NRSROs’ transition family residential property (first lien
ratings that might increase the risk matrices. These ratings are an indicator mortgages) meet the criteria to receive a
sensitivity of risk weights assigned to of each GSE’s overall financial 50 percent risk weight.25 The broad
GSE exposures. For example, NRSROs condition and safety and soundness assignment of most first lien mortgages
rate the creditworthiness of short-term and, thus, do not apply to any specific to the 50 percent risk weight category
senior debt, senior unsecured debt, financial obligation or the probability of has been criticized for not being
subordinated debt and preferred stock of timely payment thereof.24 If the sufficiently risk sensitive.
some GSEs. These ratings on individual Agencies were to use these S&P and In the Basel IA ANPR, the Agencies
exposures, however, are often based in Moody’s financial strength ratings to stated they were considering options to
part on the NRSROs’ assessment of the risk weight exposures to Fannie Mae make the risk-based capital requirement
extent to which the U.S. government and Freddie Mac in a manner similar to for residential mortgages more risk
might come to the financial aid of a GSE the use of external ratings for rated sensitive while not unnecessarily
if necessary. In this context, and as exposures as proposed in the Basel IA increasing regulatory burden. One
indicated in the preamble to the Basel NPR, the current ratings would map to option was to base the capital
II NPR, the Agencies do not believe that a 20 percent risk weight. requirement on loan-to-value ratios
risk weight determinations should be Question 5: The Agencies are (LTV), determined after consideration of
based on the possibility of U.S. considering whether to use financial private mortgage insurance (PMI). This
government financial assistance, except strength ratings to determine risk option was illustrated by an LTV risk
for the financial assistance the U.S. weights for exposures to GSEs, where weight table that suggested risk weights
government has legally committed to this type of rating is available, and are of 20, 35, 50, and 100 percent.
provide. The Agencies believe the seeking comment on how a financial Another option discussed in the Basel
existing approach has thus far met this strength rating might be applied. For IA ANPR was to assign risk weights
objective. However, the Agencies also example, should the financial strength based on LTV in combination with an
note that as part of the October 19, 2000 rating be mapped to the non-sovereign evaluation of borrower
agreement with their regulator,22 both risk weights in Tables 1 and 2? Should creditworthiness. Under this scenario,
Fannie Mae and Freddie Mac agreed to these ratings apply to all GSE exposures different ranges of LTV could be paired
obtain and disclose annually ratings that including short- and long-term debt, with specified credit assessments, such
would ‘‘assess the risk to the mortgage-backed securities, collateral, as credit scores. A first lien mortgage
government, or the independent and guarantees? How should exposures with a lower LTV made to a borrower
financial strength, of each of the to a GSE that lacks a financial strength with higher creditworthiness would
companies.’’ 23 rating be risk weighted? Are there any receive a lower risk weight than a loan
In accordance with the agreement, requirements in addition to publication with higher LTV made to a borrower
Fannie Mae and Freddie Mac currently and on-going monitoring that should be with lower creditworthiness.
obtain and disclose separate ratings incorporated into the definition of an The Agencies received many
from two NRSROs—‘‘Standard & Poor’s acceptable financial strength rating? comments about how to risk weight first
(S&P) and Moody’s Investors Service Question 6: The Agencies also seek lien mortgages. Many commenters
(Moody’s). The S&P ‘‘risk to the comment on whether to exclude certain cautioned against rules that would be
government rating’’ uses the same scale other externally rated exposures from burdensome and costly to implement.
as its standard corporate credit ratings. the ratings treatment as proposed or to Commenters generally supported the
Currently, Fannie Mae and Freddie Mac use external ratings as a measure for use of LTV and stated that use of LTV
both have a risk to the government additional externally rated exposures, in assigning risk weights would not be
issuer rating of AA¥ from S&P, which collateral, and guarantees. Should the overly burdensome because LTV
is unchanged from the initial AA¥
24 Moody’s and S&P’s financial strength ratings 25 12 CFR part 3 appendix A section 3(c)(iii)
22 ‘‘Freddie Mac and Fannie Mae Enhancements would not meet the definition of an ‘‘external (OCC); 12 CFR parts 208 and 225 appendix A
to Capital Strength, Disclosure and Market rating’’ as proposed in this NPR. Furthermore, the section III.C.3 (Board); 12 CFR part 325, appendix
Discipline’’, October 19, 2000 (agreement between difficulty of defining an event of default and the A, section II.C.3 (FDIC); and 12 CFR 567.1
the GSEs and the Office of Federal Housing lack of default data suggest that it would not be (definition of ‘‘qualifying mortgage loan’’) and 12
Enterprise Oversight). feasible to incorporate this type of rating into a CFR 567.6(a)(1)(iii)(B) (50 percent risk weight)
23 Ibid, p. 2. transition matrix. (OTS).
information is collected when lenders The Agencies believe the would maintain their respective capital
originate mortgage loans. implementation of this proposed treatment for a one-to-four family
Some commenters supported the use approach would not impose a residential mortgage loan to a borrower
of a matrix based on LTV and a measure significant burden on banking for the construction of the borrower’s
of creditworthiness, to further improve organizations because LTV information own home.28 Question 7: The Agencies
the risk sensitivity of the risk weights is readily available and is commonly seek comment on all aspects of using
assigned to residential mortgage loans. used in the underwriting process. LTV to determine the risk weights for
They stated that this approach would The Agencies believe that the use of first lien mortgages.
address both collateral and borrower LTV would enhance the risk sensitivity
risk and would mirror current practices of regulatory capital but it remains a The Agencies’ existing risk-based
among mortgage lenders. Other fairly simple measurement of risk. Use capital rules place certain privately-
commenters expressed concern about of LTV in risk weighting first lien issued mortgage-backed securities that
the potential burden of this approach, mortgages does not substitute for, or do not carry the guarantee of a
particularly for smaller banking otherwise release a banking organization government or a government-sponsored
organizations. Some commenters noted from, its obligation to have prudent loan entity (for example, unrated senior
that certain credit assessment measures underwriting and risk management positions) in the 50 percent risk weight
such as credit-scoring models vary by practices that are consistent with the category, provided the underlying
region or credit reporting agency, and size, type, and risk of a mortgage mortgages would qualify for a 50
may harm lower income borrowers, product. Through the supervisory percent risk weight. The Agencies
borrowers without credit histories, and process, the Agencies would continue to intend to continue to risk weight these
borrowers who have experienced ensure that banking organizations privately-issued mortgage-backed
unusual financial difficulties. Many of engage in prudent underwriting and risk securities using the risk weights
these commenters suggested that the use management practices consistent with assigned to underlying mortgages under
of credit scores as a measure of borrower existing rules, supervisory guidance, the Agencies’ existing capital rules.
creditworthiness be optional to alleviate and safety and soundness. The Agencies Question 8: The Agencies seek comment
the burden for some smaller banking would continue to reserve the authority
organizations. on this treatment and other methods for
to require banking organizations to hold risk-weighting these privately-issued
To increase the risk sensitivity of the additional capital where appropriate.
existing risk-based capital rules while mortgage-backed securities, including
In general, Table 3 would apply to the appropriateness of assigning risk
minimizing the overall burden to first lien mortgages. The Agencies
banking organizations, the Agencies are weights to these securities based on the
would maintain their respective risk- risk weights of the underlying mortgages
proposing to risk weight first lien based capital criteria for a first lien
mortgages based on LTV. LTV is a as determined under Table 3.
mortgage (for example, prudent
meaningful indicator of potential loss While the Agencies are not proposing
underwriting) to receive a risk weight
and the likelihood of borrower default. to use LTV and borrower
less than 100 percent.26 Table 3 would
Consequently, under this proposal a creditworthiness to risk weight
not apply to loans to builders secured
banking organization would assign a mortgages, the Agencies continue to
by certain pre-sold properties, which are
risk weight for a first lien mortgage,
subject to a statutory 50 percent risk evaluate approaches that would
including mortgages held for sale and
weight.27 Other loans to builders for the consider borrower creditworthiness in
mortgages held in portfolio as outlined
construction of residential property risk weighting first lien mortgages. One
in Table 3.
would continue to be subject to a 100 such approach could use LTV and a
TABLE 3.—PROPOSED LTV AND RISK percent risk weight. The Agencies measure of borrower creditworthiness to
WEIGHTS FOR 1–4 FAMILY FIRST assign risk weights in a manner similar
26 12 CFR part 3 appendix A, section 3(3)(iii)
LIENS to that shown in Table 3A below. Table

(OCC); 12 CFR Parts 208 and 225, appendix A,
section III.C.3 (Board); 12 CFR part 325, appendix 3A would assign a lower risk weight to
Risk A, section II.C.3 (FDIC); and 12 CFR 567.1 mortgages with a lower LTV that are
Loan-to-Value ratios (definition of ‘‘qualifying mortgage loan’’) and 12
(in percent) weight underwritten to borrowers with a
(in percent) CFR 567.6(a)(1)(iii)(B) (50 percent risk weight)
(OTS). stronger credit history and a higher risk
60 or less .................................. 20 27 This statutory risk weight applies to loans to weight to mortgages with a higher LTV
Greater than 60 and less than builders secured by one-to-four family residential that are underwritten to borrowers with
properties with substantial project equity for the a weaker credit history.
or equal to 80 ........................ 35
construction of one-to-four family residences that
Greater than 80 and less than have been pre-sold under firm contracts to
or equal to 85 ........................ 50 purchasers who have obtained firm commitments 28 12 CFR part 3 appendix A, section 3(3)(iv)
Greater than 85 and less than for permanent qualifying mortgage loans and have (OCC); 12 CFR parts 208 and 225, appendix A,
or equal to 90 ........................ 75 made substantial earnest money deposits. See section III.C.3. (Board); 12 CFR part 325, appendix
Greater than 90 and less than Resolution Trust Corporation Refinancing,
A, section II.C.3 (FDIC); and 12 CFR 567.1
or equal to 95 ........................ 100 Restructuring, and Improvement Act of 1991, Pub.
L. 102–233, § 618(a), 105 Stat. 1761, 1789–91 (definition of ‘‘qualifying mortgage loan’’) (OTS).
Greater than 95 ........................ 150
(codified at 12 U.S.C. 1831n note (1991)).
TABLE 3A.—ILLUSTRATIVE RISK-WEIGHT RANGES FOR LTV AND CREDIT HISTORY FOR 1–4 FAMILY
[First liens]
First lien mortgages Illustrative risk weight ranges
Credit history Credit history Credit history

Loan-to-Value ratios group 1 group 2 group 3
(in percent) (in percent) (in percent) (in percent)
60 or less ..................................................................................................................................... 20–35 20–35 20–35

Greater than 60 and less than or equal to 80 ............................................................................. 20–35 20–35 35–75
Greater than 95 ........................................................................................................................... 35–75 50–100 150–200
Table 3A presents three broad credit scores should be updated. In In proposing the LTV calculation
categories of relative credit performance addition, the Agencies seek comment on method, the Agencies aim to balance
(credit history groups). The Agencies determining the proper credit history burden and costs against the benefits of
would determine the credit history group for: an individual with multiple a more risk sensitive risk-weighting
groups using default odds. The default credit scores, a loan with multiple system. The Agencies propose to
odds would be based upon credit borrowers with different probabilities of calculate LTV at origination of the first
reporting agencies’ validation charts default, an individual whose credit mortgage as follows. First, the value of
(also known as odds tables). A banking history was analyzed using inaccurate the property would be equal to the
organization would determine a data, and individuals with insufficient lower of the purchase price for the
borrower’s default odds by mapping the credit history to calculate a probability property or the value at origination. The
borrower’s credit score, as obtained of default. value at origination must be based on an
from a credit reporting agency,29 to the appraisal or evaluation of the property
credit reporting agency’s validation ii. Calculation of LTV
in conformance with the Agencies’
chart. In order for a validation chart to The Agencies sought comment on appraisal regulations 30 and real estate
qualify, it would be based on: (1) The whether LTV should be based on LTV lending guidelines.31 The value of the
same vendor and model as the credit at origination or should be periodically property could only be updated for risk-
scores used by the banking organization, updated. Some commenters supported weight purposes when the borrower
(2) a nationally diverse group of credits, using LTV at origination only. These refinances its mortgage and the banking
and (3) relevant default odds measured commenters stated that regularly organization extends additional funds.
over no less than 18 months following updating and monitoring LTV would be Second, for loans that are positively
the scoring date used in the validation unduly burdensome and costly. Other amortizing, banking organizations may
chart. If the Agencies decide in the final commenters said the Agencies should adjust the LTV quarterly to reflect any
rule to risk weight first lien mortgages require periodic updates, especially decrease in the principal balance. For
based on LTV and borrower during significant declines in housing loans that negatively amortize, banking
creditworthiness, the Agencies would values in a banking organization’s organizations would be required to
generally determine a specific risk service area. Some commenters said that adjust the LTV quarterly to reflect the
weight based on the ranges provided in banking organizations should be able to increase in principal balance and risk
Table 3A. update LTV at their discretion. Certain weight the loan based on the updated
Question 9: While the Agencies are commenters suggested that updates be LTV. However, where property values
not proposing to use LTV and borrower based on periodic property appraisals in a banking organization’s market
creditworthiness to risk weight and loan balance updates. However, a subsequently experience a general
mortgages, the Agencies may decide to number of commenters expressed decline in value, the Agencies continue
risk weight first lien mortgages based on concern about the reliability of to reserve their authority to require
LTV and borrower creditworthiness in appraisals, especially in over-heated additional capital when warranted for
the final rule. Accordingly, the Agencies markets. supervisory reasons. The Agencies
continue to seek comment on an emphasize that the updating of LTV for
approach using LTV combined with Commenters had varying opinions
about how the Agencies should factor regulatory capital purposes is not
credit scores for determining risk-based intended to replace good risk
capital. More specifically, the Agencies PMI into the LTV calculations. Most of
the commenters that addressed the issue management practices at banking
seek comment on: operational aspects
supported calculating LTV net of loan- organizations for situations where more
for assessing the use of default odds to
level PMI coverage. However, some frequent updates of loan or property
determine creditworthiness
commenters suggested that the Agencies values might be appropriate.
qualifications to determine acceptable
models for calculating the default odds; should also consider the risk mitigation Question 10: The Agencies seek
the negative performance criteria benefits of pool-level PMI. A few comment on whether there are other
against which the default odds are commenters suggested considering PMI circumstances under which LTV should
determined (that is, 60-days past due, issued only by highly rated insurers. be adjusted for risk-weight purposes.
90-days past due, etc.); regional One commenter endorsed a Basel IA
disparity, especially for a banking ANPR suggestion to create risk-weight 30 12 CFR part 34 (OCC); 12 CFR part 208, subpart
organization whose borrowers are not floors for mortgages supported by loan- E and part 225, subpart G (Board); 12 CFR part 323,
level PMI from highly rated insurers. 12 CFR part 365 (FDIC); and 12 CFR part 564 (OTS).
geographically diverse; and how often 31 12 CFR part 34 Subpart C.43 (OCC); 12 CFR
Another commenter suggested part 208, subpart E and part 225, subpart G (Board);
29 See 15 U.S.C. 1681a(f), which defines a credit considering PMI issued by non-affiliate 12 CFR part 325, appendix A, section II.C.3
reporting agency. insurers only. (FDIC);12 CFR 560.100—560.101 (OTS).
The Agencies believe that the risk traditional features consistently with the the risk-based capital treatment for other
mitigating impact of loan-level PMI risk weighting for traditional first lien unfunded commitments (for example,
should be reflected in calculating the mortgages. These commenters suggested lines of credit). Under the proposed
LTV. Loan-level PMI is insurance that that any additional risks posed by these approach, the unfunded portion of the
protects a mortgage lender in the event mortgage products were the result of maximum negative amortization amount
of borrower default up to a imprudent underwriting practices or the would be risk weighted separately from
predetermined portion of the value of a combining of risks, not risks inherent in the funded portion of the loan. The
one-to-four family residential property the products. One commenter, however, funded portion of the loan would be risk
provided that there is no pool-level cap. supported higher capital requirements weighted according to the risk weights
A pool-level cap would effectively for all non-traditional mortgage loans. for first-lien mortgages, and the
reduce coverage to any amount less than Other commenters supported additional unfunded portion of the maximum
the predetermined portion. PMI would capital for specific products, such as negative amortization amount would be
be recognized only if the loan-level negative amortization loans. risk weighted as a commitment based on
insurer is not affiliated with the banking The Agencies recognize the difficultly the LTV for the maximum contractual
organization and has long-term senior in providing a clear and consistent loan amount.
debt (without credit enhancement) definition of higher-risk mortgage loans Therefore, banking organizations
externally rated at least the third highest with non-traditional features. Thus, the would need to calculate two LTVs for a
investment grade by an NRSRO. The Agencies generally propose to risk loan with a negative amortization
Agencies believe that pool-level PMI weight first lien mortgages with non- feature for risk-based capital purposes:
should not generally reduce the LTV, traditional features in the manner the LTV for the funded commitment and
because pool-level PMI absorbs losses described above. Notwithstanding this the LTV for the unfunded commitment.
based on a portfolio basis and is not proposed treatment, the Agencies To demonstrate how loans with negative
attributable to a given loan. recognize that certain underwriting amortization features would be risk
Question 11: The Agencies request practices may increase the risk weighted, assume that a property is
comment on all aspects of PMI associated with a particular mortgage valued at $100,000 and the banking
including, whether PMI providers must product. These practices may include organization grants a first-lien loan for
be non-affiliated companies of the underwriting of loans with less stringent $81,000 that includes a negative
banking organization. The Agencies also income and asset verification amortization feature with a 10 percent
seek comment on the treatment of PMI requirements without offsetting cap. The funded amount of $81,000
in the calculation of LTV when the PMI mitigating factors; offering loans with results in an 81 percent LTV, which is
provider is not an affiliate, but a portion very low introductory rates and short risk weighted at 50 percent based on
of the mortgage insurance is reinsured adjustment periods that may result in Table 3. In addition, the off-balance
by an affiliate of the banking significant payment shock; and sheet unfunded commitment of $8,100
organization. combining first lien loans with would receive a 50 percent credit
simultaneous junior lien loans that conversion factor (CCF) resulting in an
iii. Non-Traditional Mortgage Products
could result in an aggregate loan on-balance sheet credit equivalent
The Basel IA ANPR sought comment obligation with little borrower equity amount of $4,050. The combined LTV of
on whether mortgages with non- and the potential for a sizeable payment the funded and unfunded commitment
traditional features pose unique risks increase. The Agencies will continue to would be 89.1 percent, hence $4,050
that warrant higher risk-based capital review banking organizations’ lending would receive a 75 percent risk weight
requirements. Non-traditional loan practices on a case-by-case basis and based on Table 3. The total risk-
features include the possibility of may require additional capital or weighted assets for the first-lien
negative amortization of the loan reserves in appropriate circumstances. mortgage with negative amortization
balance, a borrower’s option to make Loans with a negative amortization feature would equal the risk-weighted
interest-only payments, and interest rate feature pose additional risks to a assets for the funded amount plus the
reset provisions that may result in banking organization in the form of an risk-weighted assets for the unfunded
significant payment shock to the unfunded commitment. Therefore, the amount.
borrower. Agencies propose to risk weight That loan would be risk weighted at
Commenters generally supported risk mortgage loans with negative origination as follows:
weighting mortgage loans with non- amortization features consistent with BILLING CODE 6720–01–P
BILLING CODE 6720–01–C amortization features. The Agencies iv. Junior Lien One-to-Four Family
The Agencies believe that this also seek comment on whether the Residential Mortgages
approach would result in a risk-based
maximum contractual amount is the The Basel IA ANPR discussed the
capital charge that more accurately
appropriate measure of the unfunded existing treatment for home equity lines
reflects the risk of mortgage loans with
negative amortization features. exposure to loans with negative of credit (HELOCs) and other junior lien
Question 12: The Agencies seek amortization features. The Agencies mortgages.32 If a banking organization
comment on the proposed risk-based seek comment on whether the unfunded
capital treatment for all mortgage loans commitment for a reverse mortgage 32 The unfunded portion of a HELOC that is a
should be subject to a similar risk-based commitment for more than one year and that is not
with non-traditional features and, in unconditionally cancelable is converted to an on-
particular the proposed approach for capital charge. balance sheet asset using a 50 percent CCF. That
EP26DE06.000</GPH>
mortgage loans with negative amount plus the funded portion of the HELOC are
holds both a first and a junior lien, and mortgages on a one-to-four family of the HELOC to the appropriate risk
no other party holds an intervening lien, residential property, where there is no weight category in Table 3 above, based
the Agencies’ existing capital rules intervening lien, would assign the on the loans’ combined LTV using the
require these loans to be combined to combined loans to the appropriate risk- senior loans and the funded portion of
determine the LTV and then risk weight category in Table 3 above, based the HELOC. The unfunded portion of
weighted as a first lien mortgage. The on the loans’ combined LTV. A banking the HELOC would be subject to the
Basel IA ANPR indicated that the organization that holds both the first appropriate CCF 33 and risk weighted,
Agencies intended to continue this and any subsequent liens may update using Table 3, based on the combined
approach. the property value for calculation of the LTV, (senior loans plus the funded and
Currently, stand-alone junior lien combined LTV of the senior loans and unfunded portions of the HELOC).
mortgages (a stand-alone junior lien the junior lien if the organization For stand-alone HELOCs, the funded
mortgage is one where an institution obtains an appraisal or evaluation of the and unfunded portion of the stand-alone
holds a second or more junior lien collateral in conformance with the HELOC would be risk weighted based
without holding all of the more senior Agencies’ appraisal regulations and on Table 5. The funded portion of a
liens) receive a 100 percent risk weight. related guidelines at the origination of HELOC would receive a risk weight
The Basel IA ANPR indicated that the the junior lien mortgage. based on the combined LTV of all senior
Agencies were considering retaining For a stand-alone junior lien loans and funded portion of the HELOC.
this risk weight for stand-alone junior mortgage, the Agencies propose that a The unfunded portion of the HELOC
lien mortgages where the LTV banking organization use the combined would be subject to the appropriate CCF
(computed by combining the loan LTV of that loan and all senior loans to and risk weighted, using Table 5, based
amounts for the junior lien and all determine the appropriate risk weight on the combined LTV of all senior loans
senior liens) does not exceed 90 percent. for the junior lien. Using the combined and the funded portion of the HELOC
However, for stand-alone junior lien LTV, a banking organization would risk and the unfunded portion of the
mortgages where the LTV of the weight the stand-alone junior lien based HELOC.
combined liens exceeds 90 percent, the on Table 5. Question 13: The Agencies request
Agencies suggested that a risk weight comment on the appropriateness of the
higher than 100 percent might be TABLE 5.—PROPOSED LTV AND RISK proposed risk-based capital treatment
appropriate in recognition of the for HELOCs including the burden of
elevated credit risk associated with
WEIGHTS FOR 1–4 FAMILY JUNIOR
LIENS adjusting LTV as the borrower utilizes
these exposures. the HELOC.
Many commenters opposed this While the Agencies are not proposing
Combined loan-to-value ratios Risk weight
approach and suggested that a more (in percent) (in percent) in this NPR to use LTV and borrower
risk-sensitive approach, similar to that
creditworthiness, they also continue to
proposed for first lien mortgages, would 60 or less .................................. 75 evaluate approaches that would
be more appropriate because not all Greater than 60 and less than
consider borrower creditworthiness in
stand-alone junior lien mortgages are or equal to 90 ........................ 100
Greater than 90 ........................ 150 risk weighting junior lien mortgages.
riskier than first lien mortgages. Other
The Agencies believe that greater risk
commenters stated that the risk-based
The combined LTV for the funded sensitivity can be achieved by
capital treatment of first and junior lien
portion of stand-alone junior liens evaluating not only LTV but also
mortgages, regardless of whether the
where the first lien can negatively borrower creditworthiness. If the
same banking organization holds both,
amortize would be calculated using the Agencies decide in the final rule to risk
should be consistent. In addition, many
commented that it would be illogical maximum contractual loan amount weight junior lien mortgages based on
and unjustifiable to impose higher risk under the terms of the first lien LTV and a measure of borrower
weights (for example, 150 percent) for mortgage plus the funded portion of the creditworthiness, the Agencies would
secured mortgage loans than for junior lien. The combined LTV for the generally determine a specific risk
unsecured retail loans (for example, 100 unfunded portion of all junior liens weight based on the ranges provided in
percent). where the first lien can negatively Table 5A.
Consistent with the existing risk- amortize would be calculated using the Question 14: Accordingly, the
based capital rules, the Agencies maximum contractual loan amount Agencies seek further comment on all
propose that a banking organization that under the terms of the first lien aspects of the use of LTV and borrower
holds both the first and junior lien mortgage plus the funded unfunded creditworthiness to determine the risk
portions of the junior lien. weight for a junior lien mortgage.
added together to determine the amount of the The Agencies propose that banking 33 The unfunded portion of a HELOC that is a
HELOC that is combined with the first lien position
and then risk weighted at either 50 percent or 100 organizations will be required to hold commitment for more than one year and that is not
percent. See generally, 12 CFR part 3 appendix A, capital for both the funded and unconditionally cancelable is converted to an on-
section (b)(2) and (a)(3)(iii) (OCC); 12 CFR parts 208 unfunded portion of a HELOC. Banking balance sheet asset using a 50 percent CCF. If the
and 225, appendix A, section III.C.3 and 12 CFR unfunded portion of the HELOC is a commitment
organizations that hold a HELOC where for less than a year or is unconditionally cancelable
parts 208 and 225, appendix A, section III.D.2
(Board); 12 CFR part 325, appendix A, section there is no intervening lien would it is converted to an on-balance sheet credit
II.D.2.b. (FDIC); and 12 CFR 567.6(a)(2)(ii)(B) (OTS). assign the first lien and funded portion equivalent using a 0 percent CCF.
TABLE 5A.—ILLUSTRATIVE RISK-WEIGHT RANGES FOR LTV AND CREDIT HISTORY FOR JUNIOR LIEN 1–4 FAMILY
MORTGAGES
Junior liens/HELOCs Illustrative risk weight ranges
Credit history Credit history Credit history

Loan-to-Value Ratios Group 1 Group 2 Group 3
60 or less ..................................................................................................................................... 20–50 75–150 150–200

Greater than 80 and less than or equal to 95 ............................................................................. 35–75 75–200 200
Greater than 90 and less than or equal to 95 ............................................................................. 35–75 75–200 200
Greater than 95 ........................................................................................................................... 35–75 75–200 200
v. Transitional Rule commitments), including eligible long- supported the Basel IA ANPR
Some commenters raised concerns term liquidity facilities that support suggestion to apply a 10 percent CCF to
about the cost and burden associated ABCP, are converted to on-balance sheet short-term commitments and 50 percent
with recoding existing loans to conform credit equivalent amounts using a 50 CCF to long-term commitments. One
to a new system. To minimize burden percent CCF. commenter suggested using a 20 percent
while moving toward a more risk- In the Basel IA ANPR, the Agencies CCF for short-term commitments and a
sensitive approach, the Agencies noted that they were considering 50 percent CCF for long-term
propose to allow banking organizations amending the risk-based capital commitments.
that choose to apply the proposed rule requirements for short-term In the Agencies’ view, banking
an option to continue to risk weight commitments. Even though organizations that provide short-term
existing mortgage loans using the commitments with an original maturity commitments that are not
existing risk-based capital rules. The of one year or less expose banking unconditionally cancelable are exposed
option would apply only to those loans organizations to a lower degree of credit to credit risk that the existing risk-based
that the banking organization owned at risk than longer-term commitments, capital rules do not adequately address.
the time it chose to apply the proposed some credit risk exists. Thus, the The Agencies also recognize that short-
rules. The banking organization would Agencies suggested applying a 10 term commitments generally expose
be required to apply the transitional percent CCF to short-term banking organizations to a lower degree
provision to all of its existing mortgage commitments. The resulting credit of credit risk than long-term
loans. A banking organization may not equivalent amount would be risk- commitments, thereby justifying a CCF
use this transitional treatment if it weighted according to the rating of the that is lower than the 50 percent CCF
previously used Tables 3 or 5 to risk facility or the underlying asset(s) or the currently assigned to long-term
weight these existing loans. obligor, after considering any collateral commitments. Thus, the Agencies are
and guarantees. The Agencies noted that proposing to assign a 10 percent CCF to
E. Short-Term Commitments they planned to retain the zero percent short-term commitments. The resulting
Under the Agencies’ existing risk- CCF for commitments that are credit equivalent amount would then be
based capital rules, commitments with unconditionally cancelable. The
risk-weighted according to the rating of
an original maturity of one year or less Agencies also sought comment on an
the facility, the underlying assets, or the
(short-term commitments) and alternative approach that would apply a
obligor, after considering any applicable
commitments that are unconditionally single CCF (for example, 20 percent) to
collateral and guarantees. Commitments
cancelable 34 are generally converted to all commitments, both short- and long-
that are unconditionally cancelable
an on-balance sheet credit equivalent term.
Almost universally, commenters would retain a zero percent CCF.
amount using a zero percent CCF. Finally, the Agencies are not
Accordingly, banking organizations agreed that unconditionally cancelable
commitments should not receive a proposing to apply a CCF to
extending short-term commitments or commitments to originate one-to-four
unconditionally cancelable capital charge. However, commenters’
recommendations varied about how to family residential mortgage loans that
commitments are not required to are provided in the ordinary course of
maintain risk-based capital against the approach other short- and long-term
commitments. Some commenters business. The Agencies believe these
credit risk inherent in these exposures. types of commitments present only
suggested that all commitments, except
Short-term commitments that are minimal credit risk because of their
unconditionally cancelable
eligible liquidity facilities that support short durations, the significant number
commitments, should receive a 20
asset-backed commercial paper (ABCP), that expire before being funded, and the
percent CCF, regardless of maturity.
however, are converted to on-balance large percentage of originations that are
These commenters argued that this
sheet assets using a 10 percent CCF. held for resale. In addition,
simple approach would ease burden and
Commitments with an original maturity commitments on held-for-sale mortgages
counterbalance new complexities
of more than one year (long-term are treated as derivatives and are
within the Basel IA ANPR.
34 An unconditionally cancelable commitment is
Conversely, several commenters accounted for at fair value on the
suggested that the capital treatment balance sheet of the issuer, and
one that can be canceled for any reason at any time

without prior notice. In the case of a home equity should reflect the fact that short-term therefore already receive a capital
line of credit, the banking organization is deemed commitments are less risky than long- charge. Given these mitigating factors,
able to unconditionally cancel the commitment if term commitments. Of these the Agencies do not wish to impose the
it can, at its option, prohibit additional extensions
of credit, reduce the line, and terminate the
commenters, a few argued that short- burden of determining risk weights by
commitment to the full extent permitted by relevant term commitments should not receive LTV during the short commitment
Federal law. any capital charge. A few others period.
Question 15: The Agencies continue an early amortization feature, are not average excess spread against the point
to seek comments on an alternative fully captured in the Agencies’ capital at which the securitization trust would
approach that would apply a single CCF rules. While the Agencies did not be required to trap excess spread in a
of 20 percent to all commitments, both impose a risk-based capital charge for spread or reserve account as a basis for
short- and long-term (that are not early amortization provisions in the the capital charge. To determine the
unconditionally cancelable), and the final Recourse Rule, they indicated that excess spread trapping point and the
advantages and disadvantages of such they would revisit the issue at some appropriate CCF, a banking organization
an approach. point in the future.39 would divide the level of excess spread
In the Basel IA ANPR, the Agencies by the spread trapping point as
F. Assess a Risk-Based Capital Charge suggested two approaches to address
for Early Amortization described below. In securitizations that
these risks. One option was to apply a do not require excess spread to be
The Agencies’ existing risk-based flat CCF to off-balance sheet receivables trapped, or that specify a trapping point
capital rules do not assess a capital in revolving securitizations with early based primarily on performance
charge for risks associated with early amortization provisions. Alternatively, measures other than the three-month
amortization of securitizations of the Agencies suggested using a risk- average excess spread, the excess spread
revolving credits (for example, credit sensitive methodology based on excess trapping point would be set for
card receivables). When assets are spread 40 compression. Under this purposes of this proposed rule at 4.5
securitized, the extent to which the methodology, the risk-based capital percent.
selling or sponsoring entity transfers the charge would increase as excess spread To calculate the securitization’s
risks associated with the assets depends decreased and approached the early excess spread trapping point ratio, a
on the structure of the securitization amortization trigger point. banking organization must first
and the nature of the underlying assets. Most commenters that addressed this calculate the annualized three month
Early amortization provisions 35 in issue opposed the application of any ratio for excess spread as follows:
securitizations of revolving retail credit capital charge on the investors’ interest a. For each of the three months,
facilities increase the likelihood that in credit card securitizations. Of the few divide the month’s excess spread by the
investors will be repaid before being that supported such a charge, one outstanding principal balance of the
subject to any risk of significant credit recommended that the rules apply a flat underlying pool of exposures at the end
losses. These provisions raise two CCF to securitizations with early of each month.
concerns about the risks to banking amortization provisions, and four b. Calculate the average ratio for the
organizations that sponsor supported the approach based on excess three months and convert the resulting
securitizations with early amortization spread. ratio to a compound annual rate.
provisions: (1) The payment allocation The Agencies are proposing to apply Then a banking organization must
formula can result in the subordination an approach based on excess spread to divide the annualized three month ratio
of the seller’s interest in the securitized all revolving securitizations of credits for excess spread by the excess spread
assets during early amortization, and (2) with early-amortization features. This trapping point that is specified in the
an early amortization event can increase capital charge would be assessed against documentation for the securitization.
a banking organization’s capital and the investors’ interest (that is, the total Finally, a banking organization must
liquidity needs in order to finance new amount of securities issued by a trust or apply the appropriate CCF from Table 6
draws on the revolving credit facilities. special purpose entity to investors, to the amount of investors’ interest. The
In recognition of the risks associated which is the portion of the resulting on-balance sheet credit
with these structures, the Agencies have securitization that is not on the banking equivalent amount would be assigned to
proposed a capital charge on organization’s balance sheet) and would the risk weight category appropriate to
securitizations of revolving credit be imposed only in the event that the the securitized assets.
exposures with early amortization excess spread has declined to a
provisions in prior rulemakings. On predetermined percentage of the TABLE 6.—EARLY AMORTIZATION
March 8, 2000, the Agencies published trapping point. The capital required CREDIT CONVERSION FACTORS
a proposed rule on recourse and direct would increase as the level of excess
credit substitutes.36 In that proposal, the spread approaches the early Excess spread trapping point CCF
Agencies proposed to apply a fixed CCF amortization trigger. The Agencies are ratio (in percent)
of 20 percent to the amount of assets proposing to compare the three-month
under management in all revolving 133.33 percent of trapping
securitizations that contained early 39 In October 2003, the Agencies issued another point or more ......................... 0
amortization features.37 The preamble to proposed rule that included a risk-based capital Less than 133.33 percent to
charge for early amortization. See 68 FR 56568, 100 percent of trapping point 5
the final Recourse Rule 38 reiterated the 56571–56573 (October 1, 2003). This proposal was Less than 100 percent to 75
concerns with early amortization, based upon the Basel Committee’s third percent of trapping point ....... 15
indicating that the risks associated with consultative paper issued April 2003. When the Less than 75 percent to 50 per-
securitization, including those posed by Agencies finalized other unrelated aspects of this
cent of trapping point ............ 50
proposed rule in July 2004, they did not implement
the early amortization proposal. The Agencies Less than 50 percent of trap-
35 An early amortization provision means a
determined that the change was inappropriate ping point .............................. 100
provision in the documentation governing a because the capital treatment of retail credit,
securitization that, when triggered, causes investors including securitizations of revolving credit, was Question 16: The Agencies solicit
in the securitization exposures to be repaid before subject to change as the Basel framework proceeded
the original stated maturity of the securitization comment on the appropriateness of the
through the U.S. rulemaking process. 69 FR 44908,
exposures, unless the provision is solely triggered 4.5 percent excess spread trapping point
44912–44913 (July 28, 2004).

by events not directly related to the performance of 40 Excess spread means gross finance charge and on other types and levels of early
the underlying exposures or the originating banking collections (including market interchange fees) and amortization triggers used in
organization (such as material changes in tax laws other income received by a trust or the special
or regulations). securitizations of revolving exposures
purpose entity (SPE) minus interest paid to
36 65 FR 12320 (March 8, 2000).
investors in the securitization exposures, servicing
that should be considered, especially for
37 Id. at 12330–12331.
fees, charge-offs, and other similar trust or SPE HELOC securitizations. The Agencies
38 66 FR 59614, 59619 (November 29, 2001). expenses. also seek comment on whether a flat 10
percent CCF is a more appropriate weight if certain requirements were according to the LTV using the ratio of
capital charge for revolving satisfied. These requirements would the amount of the loan to the value of
securitizations with early amortization include, for example, full amortization eligible collateral. This commenter
features. over a period of seven years or less, suggested that non-collateralized loans
performance according to the should be risk-weighted according to
G. Remove the 50 Percent Limit on the
contractual provisions of the loan several factors, including credit
Risk Weight for Derivatives
agreement, and full protection by assessments of personal guarantors, loan
Currently, the Agencies’ risk-based collateral. The banking organization terms, size of the loan, amortization
capital rules permit banks to apply a would also have to originate the loans schedule, and past history of the
maximum 50 percent risk weight to the according to its underwriting policies borrower. Other commenters offered
credit equivalent amount of certain (or purchase loans that have been similar suggestions that would use risk
derivative contracts. The risk weight underwritten in a manner consistent measures such as credit assessments
assigned to derivatives contracts was with the banking organization’s and debt-to-income ratios.
limited to 50 percent when the underwriting policies), which would Several commenters suggested that
derivatives counterparty credit risk rule have to include an acceptable the dollar threshold for receiving a
was finalized in 1995 because most assessment of the collateral and the lower risk weight was too low. A few
derivative counterparties were highly borrower’s financial condition and commenters suggested increasing the
rated and were generally financial ability to repay the debt. The Agencies threshold to $2 million. One commenter
institutions.41 At the time, the Agencies sought comment on whether this suggested setting the threshold at $5
noted that they intended to monitor the potential change would improve the risk million and indexing it to inflation.
quality of credits in the interest rate and sensitivity of the risk-based capital rules Although the Agencies are not making
exchange rate markets to determine without unduly increasing complexity a specific proposal in this NPR, they are
whether some transactions might merit and burden. exploring options for permitting certain
a 100 percent risk weight. The Agencies also suggested an small loans to businesses that meet
As the market for derivatives has alternative approach that would assess certain criteria to qualify for a 75
developed, the types of counterparties risk-based capital requirements for percent risk weight. The Agencies
acceptable to participants have small loans to businesses based on a believe that the application of the 75
expanded to include counterparties that credit assessment of the principals of percent risk weight to loans to
the Agencies believe should receive a the business and their ability to service businesses should be limited to
risk weight greater than 50 percent. the debt. This alternative could be situations where the banking
Although the Basel IA ANPR did not applied in those cases where the organization’s consolidated business
discuss the limit on the risk weight for principals personally guarantee the credit exposure to the individual or
derivatives contracts, the Agencies have loan. The Agencies sought comment on company is $1 million or less.
determined that it is appropriate to any alternative approaches for Second, the Agencies believe that to
propose removing the 50 percent risk improving the risk sensitivity of the qualify for the lower risk weight, these
weight limit that applies to certain risk-based capital treatment for small loans should be personally guaranteed
derivative contracts. In this proposed loans to businesses, including the use of by the owner or owners of the business
rule, the risk weight assigned to the credit assessments, LTV, collateral, and that the loans should be fully
credit equivalent amount of a derivative guarantees, or other methods for collateralized by the assets of the
contract would be the risk weight stratifying credit risk. business. The Agencies believe that
assigned to the counterparty after Most commenters supported a lower these requirements provide prudential
consideration of any collateral or risk weight for small loans to safeguards to ensure that the banking
guarantees. businesses. However, it was apparent organization is in the position to
from the comments that there is no minimize losses in the event of default.
H. Small Loans to Businesses universal set of risk drivers used to Third, the Agencies are considering
The Agencies’ existing risk-based measure credit risk for these loans. In requiring that qualifying loans fully
capital rules generally assign business addition, there was little agreement amortize over a period of no more than
loans to the 100 percent risk weight among commenters about how credit seven years. The full amortization
category unless the credit risk is risk for these loans should be measured requirement encourages conservative
mitigated by an acceptable guarantee or without generating undue burden. cash management practices by the
collateral. Banking organizations and One commenter asked the Agencies to borrower and ensures that the banking
other industry participants have create a small-business risk-based organization can monitor the continued
criticized the lack of sensitivity in the capital model that takes into account ability of the business to service the
measurement of credit risk associated various risk drivers, including financing debt. The Agencies have chosen a
with these exposures and maintained leverage, use of funds, loss modeling, seven-year limitation to coincide with
that the current risk-based capital and lending shelf and securitization. the maturity structure of many loans
charge is greater than warranted for high Another commenter recommended used to finance equipment purchases.
quality loans to businesses. measuring credit risk based on results The Agencies are also considering
In the Basel IA ANPR, the Agencies obtained by the Fair Isaac Small criteria for short-term loans that do not
noted that they were considering a Business Scoring Service, which the amortize, such as working capital loans
lower risk weight for certain business commenter claimed allows businesses and other revolving lines of credit.
loans under $1 million on a to assess the creditworthiness of the Under one alternative, the Agencies
consolidated basis to a single borrower principals of a small business and of the would allow loans or draws from a
(small loans to businesses). One ability of the small business to make revolving line of credit that matures
alternative discussed in the Basel IA repayment on credit obligations up to within 18 months to forgo the
ANPR would allow small loans to $750,000. amortization requirement to the extent
businesses to be eligible for a lower risk Another commenter suggested that that the loan is to be repaid from the
small loans to businesses that are anticipated proceeds of a previously
41 60 FR 46169–46185 (September 5, 1995). collateralized should be risk weighted established financial transaction and
such proceeds are pledged for the Question 18: The Agencies remain and the Advanced Measurement
repayment of the loan. interested in industry comments on any Approach (AMA) for operational risk?
Fourth, the Agencies are considering methods that would increase the risk What would be the appropriate length of
requiring that the loans be (1) prudently sensitivity of the risk-based capital time for such an option?
underwritten in a manner that justifies requirements for other retail exposures, Question 20: If Basel II banking
the assessment of a lower-than-100 particularly through the use of credit organizations are provided the option to
percent risk weight and (2) performing, assessments, such as the borrower’s use alternatives to the advanced
that is, the loan payments must be credit score or ability to service debt. approaches, would either this Basel IA
current. Thus, consistent with The Agencies are particularly interested proposal or the standardized approach
prudential standards required for the in whether and how credit assessments in Basel II be a suitable basis for a
underwriting of any small loans to might be applied consistently and regulatory capital framework for credit
businesses, the Agencies would require uniformly in the determination of risk risk for those organizations? What
that a banking organization establish weights without creating undue burden. modifications would make either of
standards for assessing the quality and J. Other Issues Raised by Commenters these proposals more appropriate for
sufficiency of pledged collateral, the use by large complex banking
financial condition of the borrower, the Although the issue was not addressed organizations? For example, what
financial condition of any guarantors to in the Basel IA ANPR, several approaches should be considered for
the loan, and the ability of the business commenters suggested that the Agencies derivatives and other capital markets
to meet certain debt service coverage should conduct a study of the potential transactions, unsettled trades, equity
criteria. The Agencies would also set effects of any proposed revisions to the exposures, and other significant risks
requirements for an acceptable debt Agencies’ existing risk-based capital and exposures typical of Basel II
service coverage ratio, that is, the ratio rules. They asserted that such a study banking organizations?
of net operating income divided by total would help the Agencies better Question 21: The risk weights in this
loan payments or net operating cash understand the potential costs and Basel IA proposal were designed with
flow divided by debt service cost. The benefits of the potential revisions, and the assumption that there would be no
Agencies are considering a minimum help compare the revisions to the Basel accompanying capital charge for
debt service coverage ratio of 1.3. II framework. operational risk. Basel II, however,
The Agencies intend to analyze the requires banking organizations to
Finally, the Agencies are analyzing potential impact of these proposed
the need for additional qualifying calculate capital requirements for
changes, as well as any changes to the exposure to both credit risk and
criteria. Among other criteria, the proposals that may result from the
Agencies might require that the loans operational risk. If the Agencies were to
public comment process. The Agencies proceed with a rulemaking for a U.S.
have not been restructured to prevent a may make changes to these proposals if
past due occurrence and that none of version of a standardized approach for
warranted based on this impact credit risk, should operational risk be
the proceeds of the loans are used to analysis.
service any other outstanding loan addressed using one of the three
obligation. III. Possible Alternatives for Basel II methods set forth in Basel II?
Question 17: The Agencies seek Banking Organizations Question 22: What additional
comment on this or other approaches requirements should the Agencies
As noted in the ‘‘Background’’
that might improve the risk sensitivity of consider to encourage Basel II banking
section, on September 25, 2006, the
the existing risk-based capital rules for organizations to enhance their risk
Agencies issued the Basel II NPR. The
small loans to businesses. management practices or their financial
Basel II advanced capital adequacy
disclosures, if they are provided the
I. Multifamily Residential Mortgages, framework proposed in the Basel II NPR
option to use alternatives to the
Other Retail Exposures, Loans 90 Days is highly complex and is directed
advanced approaches of the Basel II
or More Past Due or In Nonaccrual, and primarily at banking organizations with
NPR?
Commercial Real Estate (CRE) total consolidated assets of $250 billion
Exposures or more, or total consolidated on- IV. Regulatory Analysis
balance sheet foreign exposure of $10
In the Basel IA ANPR, the Agencies Regulatory Flexibility Act Analysis
billion or more, and other banks that opt
sought comment on the risk-based in to the Basel II framework—referred to Pursuant to section 605(b) of the
capital treatment for multifamily as ‘‘Basel II banking organizations.’’ In Regulatory Flexibility Act, 5 U.S.C.
residential mortgages, other retail the Basel II NPR, the Agencies requested 605(b) (RFA), the regulatory flexibility
exposures, loans 90 days or more past comment on whether Basel II banking analysis otherwise required under
due or in nonaccrual, and commercial organizations should be permitted to section 604 of the RFA is not required
real estate exposures. After considering use other credit and operational risk if an agency certifies that the rule will
the comments that addressed the approaches similar to those provided not have a significant economic impact
Agencies’ approaches to the risk-based under Basel II. on a substantial number of small entities
capital treatment for these exposures, The Agencies seek comment on all (defined for purposes of the RFA to
the Agencies have decided that any aspects of the following questions and include banking organizations with
increase in risk sensitivity is seek the perspectives of banking assets less than or equal to $165 million)
outweighed by the additional burden organizations of different sizes and and publishes its certification and a
that would result from the suggested complexity. short, explanatory statement in the
approaches. Consequently, the Agencies Question 19: To what extent should Federal Register along with its rule.
are not proposing any changes in this the Agencies consider allowing Basel II Pursuant to section 605(b) of the RFA,
NPR with respect to these exposures. banking organizations the option to the Agencies certify that this proposed
The Agencies will continue to examine calculate their risk based capital rule will not have a significant
these issues and may address the risk- requirements using approaches other economic impact on a substantial
based capital treatment for these than the Advanced Internal Ratings number of small entities. Accordingly, a
exposures at some future time. Based (A–IRB) approach for credit risk regulatory flexibility analysis is not
needed. The amendments to the analysis for an economically significant the Comptroller of the Currency (OCC)
Agencies’ regulations described above regulatory action, Executive Order to require banking organizations to hold
are elective. They will apply only to 12866 requires each Federal agency to adequate capital. The law authorizes
banking organizations that opt to take provide to the Administrator of the federal banking agencies to set
advantage of the proposed revisions to Office of Management and Budget’s minimum capital levels to ensure that
the existing domestic risk-based capital (OMB) Office of Information and banking organizations maintain
framework and that will not be required Regulatory Affairs (OIRA): adequate capital. The law also gives
to use the advanced approaches • The text of the draft regulatory banking agencies broad discretion with
contained in the Basel II proposal.42 The action, together with a reasonably respect to capital regulation by
Agencies believe that banking detailed description of the need for the authorizing them to also use any other
organizations that elect to adopt these regulatory action and an explanation of methods that they deem appropriate to
proposals will generally be able to do so how the regulatory action will meet that ensure capital adequacy.
with data they currently use as part of need; Capital regulation seeks to address
their credit approval and portfolio • An assessment of the potential costs market failures that stem from several
management processes. Banking and benefits of the regulatory action, sources. Asymmetric information about
organizations not exercising this option including an explanation of the manner the risk in a bank’s portfolio creates a
would remain subject to the current in which the regulatory action is market failure by hindering the ability
capital framework. The proposal does consistent with a statutory mandate and, of creditors and outside monitors to
not impose any new mandatory to the extent permitted by law, promotes discern a bank’s actual risk and capital
requirements or burdens. Moreover, the President’s priorities and avoids adequacy. Moral hazard creates market
industry groups representing small undue interference with State, local, failure in which the bank’s creditors fail
banking organizations that commented and tribal governments in the exercise to restrain the bank from taking
on the Basel IA ANPR noted that small of their governmental functions; excessive risks because deposit
banking organizations typically hold • An assessment, including the
insurance either fully or partially
more capital than is required by the underlying analysis, of benefits
protects them from losses. Public policy
capital rules and would prefer to remain anticipated from the regulatory action
addresses these market failures because
under the existing risk-based capital (such as, but not limited to, the
individual banks fail to adequately
framework. For these reasons, the promotion of the efficient functioning of
consider the positive externality or
proposal will not result in a significant the economy and private markets, the
public benefit that adequate capital
economic impact on a substantial enhancement of health and safety, the
brings to financial markets and the
number of small entities. protection of the natural environment,
economy as a whole.
and the elimination or reduction of
OCC Executive Order 12866 discrimination or bias) together with, to Capital regulations cannot be static.
Determination the extent feasible, a quantification of Innovation in and transformation of
those benefits; financial markets require periodic
Executive Order 12866 requires reassessments of what may count as
Federal agencies to prepare a regulatory • An assessment, including the
underlying analysis, of costs anticipated capital and what amount of capital is
impact analysis for agency actions that adequate. Continuing changes in
are found to be ‘‘significant regulatory from the regulatory action (such as, but
not limited to, the direct cost both to the financial markets create both a need and
actions.’’ ‘‘Significant regulatory an opportunity to refine capital
actions’’ include, among other things, government in administering the
regulation and to businesses and others standards in banking. The proposed
rulemakings that ‘‘have an annual effect revisions to U.S. risk-based capital
on the economy of $100 million or more in complying with the regulation, and
any adverse effects on the efficient rules, ‘‘Risk-Based Capital Guidelines;
or adversely affect in a material way the Capital Adequacy Guidelines; Capital
economy, a sector of the economy, functioning of the economy, private
markets (including productivity, Maintenance: Domestic Capital
productivity, competition, jobs, the Modifications’’ (‘‘Basel IA NPR’’), which
environment, public health or safety, or employment, and competitiveness),
health, safety, and the natural we address in this impact analysis,
State, local, or tribal governments or provide a new option for determining
communities.’’ 43 Regulatory actions environment), together with, to the
extent feasible, a quantification of those risk-based capital for banking
that satisfy one or more of these criteria organizations that would not be
are referred to as ‘‘economically costs; and
• An assessment, including the required to operate under the other risk-
significant regulatory actions.’’ based capital adequacy proposal, ‘‘Risk-
The OCC anticipates that the underlying analysis, of costs and
benefits of potentially effective and Based Capital Standards: Advanced
proposed rule will meet the $100 Capital Adequacy Framework’’ (‘‘Basel
million criterion and therefore is an reasonably feasible alternatives to the
planned regulation, identified by the II’’).
economically significant regulatory
action. In conducting the regulatory agencies or the public (including ii. Regulatory Background
improving the current regulation and
42 71 reasonably viable nonregulatory The proposed capital regulation
FR 55830 (September 25, 2006).
43 Executive Order 12866 (September 30, 1993), actions), and an explanation why the examined in this analysis would apply
58 FR 51735 (October 4, 1993), as amended by planned regulatory action is preferable to commercial banks and thrifts. Three
Executive Order 13258, 67 FR 9385 (February 28, to the identified potential alternatives. banking agencies, the OCC, the Board of
2002). For the complete text of the definition of Governors of the Federal Reserve
‘‘significant regulatory action,’’ see E.O. 12866 at
Set forth below is a summary of the
OCC’s regulatory impact analysis, which System (Board), and the FDIC regulate
section 3(f). A ‘‘regulatory action’’ is ‘‘any

substantive action by an agency (normally can be found in its entirety at http:// commercial banks, while the Office of
published in the Federal Register) that promulgates www.occ.treas.gov/law/basel.htm. Thrift Supervision (OTS) regulates all
or is expected to lead to the promulgation of a final federally chartered and many state-
rule or regulation, including notices of inquiry, i. The Need for Regulatory Action chartered thrifts. Throughout this
advance notices of proposed rulemaking, and
notices of proposed rulemaking.’’ E.O. 12866 at Federal banking law directs federal document, the four are jointly referred
section 3(e). banking agencies including the Office of to as the federal banking agencies.
The Basel IA proposal seeks to that the enhanced risk sensitivity of the and thrifts necessary to comply with the
improve the risk sensitivity of the proposed rule could allow banking new regulation and costs to the federal
existing risk-based capital rules. This organizations to more effectively banking agencies of implementing the
framework would be optional and achieve objectives that are consistent new rules. Because of a lack of cost
would be available to banking with a safe and sound banking system. estimates from banking organizations,
organizations not covered by the Basel Beyond the relatively minor societal the OCC found it necessary to use a
II proposal. Any institution that is not benefit from the relatively minor scope-of-work comparison with Basel II
a Basel II bank would be able to remain enhancement to bank safety and in order to arrive at a cost estimate for
under the existing risk-based capital soundness, we do not anticipate any Basel IA. Based on this rough
rules or elect to adopt Basel IA. The benefits accruing other than directly to assessment, we estimate that
proposed changes in Basel IA would: the banking organizations that elect to implementation costs for Basel IA could
1. Increase the number of risk weight adopt Basel IA. Because many factors range from $100,000 at smaller
categories from five to eight. besides regulatory capital requirements institutions to $3 million at larger
2. Allow the greater use of external affect pricing and lending decisions, we institutions.
credit ratings. do not expect the adoption or non-
3. Expand the range of recognized 1. Costs to Banking Organizations
adoption of Basel IA to affect pricing or
collateral and eligible guarantors. lending. Hence, we do not anticipate Explicit costs of implementing the
4. Use loan-to-value ratios to risk- any costs or benefits affecting the proposed rule at banking organizations
weight residential mortgages. customers or competitors of Basel IA fall into two categories: setup costs and
5. Increase the credit conversion institutions. For these reasons, the cost ongoing costs. Setup costs are typically
factor for certain commitments with an and benefit analysis of Basel IA reduces one-time expenses associated with
original maturity of one year or less. to an analysis of the costs and benefits introducing the new programs and
6. Assess a capital charge for early directly attributable to institutions that procedures necessary to achieve initial
amortizations in securitizations of might elect to adopt Basel IA capital compliance with the proposed rule.
revolving retail exposures. rules. Setup costs may also involve expenses
7. Remove the 50 percent limit on the related to tracking and retrieving data
risk weight for certain derivative A. Organizations Affected by the needed to implement the proposed rule.
transactions. Proposed Rule 44 Ongoing costs are also likely to reflect
The Agencies would continue to As of June 30, 2006, eleven banking data costs associated with retrieving and
reserve the authority to require banking organizations meet the criteria that preserving data.
organizations to hold additional capital would require them to adopt the U.S. The total cost to national banks of
where appropriate. implementation of Basel II. Removing adopting Basel IA depends entirely on
those 11 mandatory Basel II institutions the number of institutions that elect to
iii. Benefit-Cost Analysis of the
from the 7,606 FDIC-insured banking adopt the voluntary rule and the size of
Proposed Rule
organizations active in June 2006 leaves those institutions. Obviously, if no
A cost-benefit analysis considers the 7,595 organizations that would be institutions adopt Basel IA, the cost will
costs and benefits of a proposal as they eligible to adopt Basel IA. Among be zero. Based on comment letters and
relate to society as a whole. The social national banks, six of the eleven discussions with bank supervision staff,
benefits of a proposal are benefits that mandatory Basel II institutions are we sought to identify national banks
accrue directly to those subject to a national banks. Out of 1,545 banking that would be more likely to adopt Basel
proposal plus benefits that might accrue organizations with national banks, 1,539 IA. We selected national banks with
indirectly to the rest of society. national banking organizations would significant mortgage holdings (over $500
Similarly, the overall social costs of a thus be eligible to adopt Basel IA. million in 1–4 family first-lien
proposal are costs incurred directly by mortgages and mortgages comprise at
those subject to the rule and costs B. Benefits of the Proposed Rule least 10 percent of their portfolio) as
incurred indirectly by others. In the case The proposed rule aims to improve well as national banks that do not
of Basel IA, direct costs and benefits are the risk sensitivity of regulatory capital currently meet the well-capitalized
those that apply to the banking requirements. The five benefits of the threshold for their risk based capital-to-
organizations that are subject to the proposed rule are: assets ratio. Using those criteria, we
proposal. Indirect costs and benefits 1. Enhances the risk sensitivity of identified 46 national banks. We
then stem from banks and other capital charges. estimate that the total cost of the rule for
financial institutions that are not subject 2. More efficient use of required bank national banks will be approximately
to the proposal, bank customers, and, capital. $78 million. Over time, Basel IA may
through the safety and soundness 3. Recognizes new developments in become more appealing to a larger
externality, society as a whole. financial markets. number of banks. The total cost of the
The enormous social and economic 4. Mitigates potential distortions in proposed rule would consequently
benefit that derives from a safe and minimum regulatory capital increase to the extent that more
sound banking system supported by requirements between large and small institutions opt into Basel IA over time.
vigorous and comprehensive banking organizations. At present, it is unclear how many
supervision, including ensuring 5. Ability to opt in offers long-term national banks will ultimately elect to
adequate capital clearly dwarfs any flexibility to banking organizations. adopt Basel IA.
direct benefits that might accrue to C. Costs of the Proposed Rule
institutions adopting Basel IA. 2. Government Administrative Costs
Similarly, the social and economic cost As with any rule, the costs of the Like the banking organizations subject
of any reduction in the safety and proposal include expenditures by banks to new requirements, the costs to
soundness of the banking system would 44 Unless otherwise noted, the population of
government agencies of implementing
dramatically overshadow any cost borne banks and thrifts used in this analysis consists of
the proposed rule also involve both
by banking organizations subject to the all FDIC-insured institutions. Banking organizations startup and ongoing costs. Startup costs
rule. The banking agencies are confident are aggregated to the top holding company level. include expenses related to the
development of the regulatory a hypothetical regulatory regime that would spend up to $78 million on
proposals, costs of establishing new might exist without Basel IA. Because implementation-related expenditures.
programs and procedures, and costs of the baseline scenario considers costs Retaining current capital rules would
initial training of bank examiners in the and benefits as if the proposed rule eliminate any costs associated with the
new programs and procedures. Ongoing never existed, we set the costs and proposed rule, even though banking
costs include maintenance expenses for benefits of the baseline scenario to zero. organizations would only incur those
any additional examiners and analysts Obviously, banking organizations face costs if they elected to do so.
needed to regularly apply the new compliance costs and reap the benefits 2. Alternative: Require all U.S.
supervisory processes. In the case of of a well-capitalized banking system banking organizations not subject to
Basel IA, because modest changes to even under the baseline. However, Basel II to adopt Basel IA.
Call Reports will capture most of the because we cannot quantify these costs
rule changes, these ongoing costs are and benefits, we normalize the baseline Description of Alternative
likely to be minor. costs and benefits to zero and estimate The only change under the alternative
OCC expenditures fall into three the costs and benefits of the proposed is that adoption of the proposed rule
broad categories: training, guidance, and rule and alternative as deviations from would be mandatory rather than
supervision. Training includes expenses this zero baseline. voluntary. Under this alternative, the
for workshops and other training 1. Baseline Scenario: Current capital provisions of the proposed rule would
courses and seminars for examiners. standards based on the 1988 Basel remain intact and apply to all national
Guidance expenses reflect expenditures Accord continue to apply. banks that are not subject to Basel II.
on the development of Basel IA Institutions subject to Basel II would
guidance. Supervision expenses reflect Description of Baseline Scenario
include mandatory Basel II institutions
organization-specific supervisory Under the Baseline Scenario, current
and those institutions that elect to adopt
activities. We estimate that OCC capital rules would continue to apply to
the U.S. implementation of the Basel II
expenses for Basel IA will be all banking organizations in the United
framework.
approximately $2.4 million through States that are not subject to the U.S.
2006. We also expect expenditures of $1 implementation of Basel II. Under this Change in Benefits: Alternative
million per year between 2007 and scenario, the United States would not
Because there are no changes to the
2010. Applying a five percent discount adopt the proposed Basel IA rule but the
elements of the proposed rule under the
rate to future expenditures, past implementation of the Basel II
alternative, the list of benefits remains
expenses ($2.4 million) plus the present framework would continue.
the same. Among these benefits, only
value of future expenditures ($3.6
Change in Benefits: Baseline Scenario one benefit is lost by making the
million) equals total OCC expenditures
Staying with current capital rules proposed rule mandatory: the benefit
of $6 million on Basel IA.
instead of adopting the Basel IA derived from the fact that the proposed
3. Total Cost Estimate of Proposed Rule proposal would eliminate essentially all rule is voluntary. As for the benefits
The OCC’s estimate of the total cost of of the benefits of the proposed rule relating to the enhanced risk sensitivity
the proposed rule includes expenditures listed above. Under the baseline, of capital charges, because adoption of
by banking organizations and the OCC banking organizations not subject to Basel IA is mandatory under the
from the present through 2010. Based on Basel II would not be given the option alternative, more banks will be subject
our estimate that approximately 46 of voluntarily selecting Basel IA. to Basel IA provisions and the aggregate
national banks will adopt Basel IA at a Institutions that would have adopted level of benefits will be higher. Because
cost to each institution of between the proposed rule would not be able to we anticipate that only 46 national
$100,000 and $3 million depending on take advantage of the enhanced risk banks would adopt Basel IA voluntarily,
the size of the institution, we estimate sensitivity of Basel IA capital charges the difference in the aggregate benefit
that national banks will spend and the more efficient use of bank level could be considerable.
approximately $78 million on Basel IA. capital that implies. Changes in Costs: Alternative
Combining expenditures provides an One benefit that would remain under
estimate of $84 million for the total cost the baseline is that there would be no Clearly the most significant drawback
of the proposed rule for the OCC and rule changes instead of just simple and to the alternative is the dramatically
national banks. voluntary rule changes. Without Basel increased cost of applying a new set of
IA as an available option, an institution capital rules to all U.S. banking
iv. Analysis of Baseline and Alternatives would have to choose between the organizations. Under the alternative,
In order to place the costs and advanced approaches of Basel II and the direct costs would increase for every
benefits of the proposed rule in context, status quo. The baseline without Basel U.S. banking organization that would
Executive Order 12866 requires a IA would leave a level playing field for have elected to continue to use current
comparison between the proposed rule, all the non-Basel II banks. However, the capital rules under the proposed rule.
a baseline of what the world would look absence of an opportunity to mitigate The cost estimate for the alternative is
like without the proposed rule, and a potential distortions in minimum the total cost estimate for a 100 percent
reasonable alternative to the proposed required capital would likely diminish adoption rate of Basel IA. With 1,545
rule. In this regulatory impact analysis, this benefit in the eyes of an institution national banking organizations eligible
we analyze one baseline and one concerned about potential distortions for Basel IA, we estimate that the cost
alternative to the proposed rule. The created by Basel II. to national banking organizations of the
baseline considers the possibility that alternative is approximately $662
the proposed Basel IA rule is not Changes in Costs: Baseline Scenario million. The actual cost may be
adopted and current capital standards Continuing to use current capital somewhat less depending on the
continue to apply. rules eliminates the benefits and the number of national banks that elect to
The baseline scenario appears in this costs of adopting the proposed rule. As adopt Basel II capital rules, but it is
analysis in order to estimate the effects discussed above, under the proposed much greater than our cost estimate of
of adopting the proposed rule relative to rule we estimate that organizations $78 million for the proposed rule.
3. Overall Comparison of Proposed an RIA incorporating OCC’s analysis by minimum capital requirements.47 For
Rule with Baseline and Alternative. reference and adding appropriate OTS-regulated savings associations, the
The objective of the proposed rule is material reflecting the unique aspects of most important change involves the risk
to enhance the risk sensitivity of capital the thrift industry. The full text of OTS’s weighting of residential mortgages.
charges for institutions not subject to RIA is available at the locations for Well-underwritten residential mortgages
Basel II capital regulations. The viewing the OTS docket indicated in the with LTV ratios at origination of less
proposal also seeks to mitigate any ADDRESSES section above. OTS believes than 90 percent are all currently risk
potential distortions in minimum that its analysis meets the requirements weighed for regulatory capital purposes
regulatory capital requirements that the of Executive Order 12866. The following at 50 percent. Data from a variety of
U.S. implementation of Basel II might discussion supplements OCC’s sources, including the security markets,
create between large and small banking summary of its RIA. indicate that this risk weight may be too
organizations. Like Basel II, the high for the credit risk of low LTV
anticipated benefits of the Basel IA OTS is the primary federal regulator
mortgages and insufficient for the credit
proposal are difficult to quantify in for 854 federal and state-chartered
risk of higher LTV mortgages. As a
dollar terms. Nevertheless, the OCC savings associations with assets of $1.5
result, to the extent that minimum
believes that the proposed rule provides trillion as of June 30, 2006. OTS-
regulatory capital requirements affect
benefits without posing any threat to the regulated savings associations assets are
savings associations’ investment
safety and soundness of the banking highly concentrated in residential
decisions, the current rules may
industry or the security of the Federal mortgage-related assets. Approximately
discourage saving associations from
Deposit Insurance system. To offset the 68 percent of total thrift assets are retaining higher quality low LTV
costs of the proposed rule, its voluntary residential mortgage-related assets. As a mortgages in their portfolios or
nature offers regulatory flexibility that result, the most important change made encourage them to retain lower quality
will allow institutions to adopt Basel IA by the proposed rule for OTS-regulated high LTV mortgages.
on a bank-by-bank basis when an savings associations involves the In addition, for the largest banking
institution’s anticipated benefits exceed proposed changes to the risk weighting organizations, the recently published
the anticipated costs of adopting this of residential mortgages. Other aspects Basel II NPR addresses the credit risks
regulation. of the Basel IA NPR should not have a of exposures more directly than under
The banking agencies are confident significant effect on saving the current capital requirement regime
that the proposed rule could serve to associations.45 Accordingly, OTS’s by relating their probability of default
strengthen institutions electing to adopt analysis focuses on the proposed risk- and loss given default to minimum
Basel IA while the safety and soundness weighting of residential mortgages. regulatory capital requirements.
of institutions electing to forgo Basel IA Preliminary survey results suggest that,
and Basel II will not diminish. On the Benefit-Cost Analysis
on average, residential mortgages are
basis of our analysis, we believe that the Overall OTS believes that the benefits likely to receive a lower credit risk
benefits of the proposed rule are of the proposed rule justify its costs. weight under the Basel II NPR than
sufficient to offset the costs of Under OTS’s analysis, direct costs and under the current regime. The Basel IA
implementing the proposed rule. benefits include costs and benefits to NPR is intended to offer savings
However, because there is no social cost savings associations that opt-in to the associations not covered under the Basel
to allowing institutions to remain proposed rule. OTS estimates that II NPR a more risk sensitive weighting
subject to current capital rules, we approximately 115 savings associations scheme for residential mortgages, and, if
believe it is best to make the proposed will opt-in to the proposed rule.46 Direct adopted, may offer saving associations a
rule voluntary in order to let each costs and benefits also include OTS’s more level playing field on which to
national bank decide whether it is in compete against Basel II banking
costs of implementing the proposed
that institution’s best interest to adopt organizations in offering residential
rule. Indirect costs and benefits are
Basel IA. Because adoption is voluntary, mortgage related products.
those that may affect the economy as a
the proposed rule offers an
whole. These indirect and direct costs B. Direct Costs
improvement over the baseline scenario
arise from how the primary business of
and the alternative. The proposed rule OTS estimates that the total direct
banking (i.e., credit availability) is
offers an important degree of flexibility costs of the proposed rule for the six-
impacted by requirements for risk-based
unavailable with either the baseline or year period from design through
capital adequacy.
the alternative. The baseline does not implementation will be $72 million.
give banking organizations a way into A. Direct Benefits This includes direct costs of $67 million
Basel IA and the alternative does not for the 115 savings associations that
offer them a way out. The alternative In general, the proposed rule seeks to may opt-in to the proposed rule, and
would compel most banking improve the risk sensitivity of minimum direct costs of $5 million for OTS
organizations to follow a new set of regulatory capital requirements and, by implementation expenses.
capital rules and require them to doing so, to address some of the
undertake the time and expense of shortcomings of the current regulatory C. Indirect Benefits and Costs
adjusting to these new rules. The The primary business of banking is
proposed rule offers a better balance 45 Savings associations, for example, do not have
making credit available to borrowers. A
between costs and benefits than either significant holdings that would be affected by the
ratings-based approaches for exposures, collateral,
myriad of considerations affect credit
the baseline or the alternative. Overall, or guarantors. Rather, savings associations’ assets decisions by individual institutions.
the OCC believes that the benefits of the Among these considerations are the
are more heavily concentrated in mortgage-backed

proposed rule justify its costs. securities issued or guaranteed by the government regulatory cost of capital and how
sponsored enterprises, whose risk weightings
OTS Executive Order 12866 would not change under the Basel IA NPR.
closely the regulatory cost matches an
Determination 46 This is the number of well-capitalized thrifts institution’s internal assessment of its
that hold total assets of $500 million or more, and
OTS concurs with OCC’s RIA. Rather that have a total risk-based capital ratio of 15 47 The other benefits of the Basel IA NPR are more
than replicate that analysis, OTS drafted percent or less. fully discussed in the OCC analysis.
capital needs. To the extent that It would be nearly impossible to increase because 1,539, rather than 46,
regulatory risk-based capital estimate a dollar amount of the potential national banks would implement the
requirements for capital adequacy may indirect cost or benefit to the economy alternative. Under the alternative
overstate (or understate) the amount of derived from introduction of an optional scenario, OTS estimates that the
capital that an institution must risk-based capital framework that more aggregate costs to savings associations
otherwise hold to support its credit closely aligns capital requirements with would also increase considerably.
decisions, the regulatory requirements credit risk for residential mortgages. Specifically, OTS estimates that these
add costs of compliance and, thus, However, since the decision to opt in or costs would increase from $67 million
introduce inefficiencies to the extent not would be made by thousands of (for 115 savings associations) to $164
that a savings association is unable to banks, even partial success at million (for 850 savings associations).
price its credit products consistent with harmonizing risk-based capital with The alternative scenario would
the underlying credit risk. internal risk assessment should improve impose direct costs on institutions and
The Basel II NPR attempted to the efficiency of the mortgage credit indirect costs on the economy generally.
develop a models-based system that decision and therefore reduce the cost to Many savings associations elect to hold
more closely harmonized risk-based the economy. capital in excess of the well-capitalized
capital at the largest internationally levels to address other risks. This is a
active banks with their internal capital Analysis of Baseline and Alternatives prudent decision regulators should
allocation models. For residential The OCC analysis includes a encourage and not discourage. For these
mortgages, the underwriting, risk comparison between the Basel IA NPR, institutions, the mandatory imposition
differentiation, and system tracking a baseline scenario of what the world of the Basel IA NPR would only increase
processes described in the Basel II NPR would look like without the Basel IA capital compliance costs. These
are much closer to industry practice NPR, and an alternative to the Basel IA institutions would not obtain an
than the simple risk weight bucket NPR. The alternative would require all offsetting benefit in the form of lower
system based on Basel I. The banking organizations that are not capital requirements for mortgage credit
centerpiece of the Basel IA NPR is the subject to the Basel II NPR to apply the risk. In such a scenario, some of these
expansion of the number of risk buckets Basel IA NPR. Except for the institutions could choose to pass on the
and the establishment of new risk-based discussions focusing on the benefit increased costs, which would render
capital criteria that should, for derived from the recognition of new them less competitive and could lead to
residential mortgages, more closely developments in financial markets, inefficiently and mis-priced mortgage
mirror the underwriting, risk which is only a minor benefit for credits for borrowers, and hence, the
differentiation, and system tracking at savings associations, OTS believes that economy generally. Alternatively, some
likely opt-in institutions. the OCC analysis is reasonable and of these institutions might choose to
To the extent that the Basel IA NPR equally applicable to savings absorb the costs in the form of weaker
achieves its goal of more closely associations. OTS supports the OCC’s earnings, which would make them more
aligning risk-based capital requirements conclusion that the Basel IA NPR offers vulnerable targets for consolidation, and
to real credit risk, it should reduce the a better balance between costs and reduce the competitive environment in
inefficiency inherent in the simpler benefits than the alternative. OTS has that manner.
Basel I-based framework. This should the following additional comments:
enable adopters to price their mortgage OCC Executive Order 13132
credits more closely to their internal A. Baseline Scenario Determination
assessment of credit risk. Competitive In its analysis of the baseline scenario, The OCC has determined that this
equity would be easier to maintain, which would leave the current risk- proposed rule does not have any
particularly vis-á-vis the largest based capital rules unchanged, OCC Federalism implications, as required by
institutions. Moreover, there may be determines that national banks could Executive Order 13132.
fewer forced consolidations, which avoid $78 million of implementation- Paperwork Reduction Act
could also help maintain a more related expenditures that would
competitive mortgage credit otherwise be required by the Basel IA Implementation of these proposed
environment. Credit decisions could be NPR. As noted above, OTS estimates rules would require revisions to the
made more rationally, and could be that 115 savings associations would Agencies’ quarterly regulatory reports 48
based more exclusively on sound spend up to $67 million to implement to reflect the program and system
underwriting since capital adequacy the Basel IA NPR. Retaining the current changes required for a banking
requirements would more closely match capital rules without adopting Basel IA organization that adopts Basel IA. The
internal risk assessments. would permit these savings associations Agencies project issuing a Federal
Smaller institutions that choose to to avoid these new expenditures. Register notice for certain upcoming
hold risk-based capital in excess of the As an indirect cost to the economy, changes to the quarterly regulatory
well-capitalized level could continue to the baseline scenario of maintaining a reports in early 2007. This notice will
operate under their distinct business less risk-sensitive capital framework separately present a detailed discussion
model. These institutions hold those would continue to pose some cost of of the program and system changes and
capital levels primarily due to inefficiency and compliance for some associated burden estimates for the
concentration risk, their localized needs institutions. This may lead to less potential future changes to the quarterly
for liquidity, and other factors. Because competitive equity for those regulatory reports for banking
their capital levels already exceed the institutions, and less efficiently and organizations that decide to adopt Basel
regulatory minimums, these institutions mis-priced mortgage credits for IA. This will afford the public ample
have already harmonized their own borrowers generally.

assessment of risk with a Basel I-based 48 Consolidated Reports of Condition and Income
system, and can presumably price their B. Alternative Scenario (Call Report) (OMB Nos. 7100–0036, 3064–0052,
1557–0081), Thrift Financial Report (TFR) (OMB
mortgage credits efficiently and In its analysis of the alternative No. 1550–0023), Consolidated Financial Statemetns
competitively in the current scenario, OCC concludes that the for Bank Holding Companies (FR Y–9C) (OMB No.
environment. aggregate benefits would considerably 7100–0128).
opportunity to consider potential future changes to the format would make the transaction and may find that the
reporting changes associated with the regulation easier to understand? assigned risk weight for any asset, the
Basel IA proposed rule before the • Would more, but shorter, sections credit equivalent amount or credit
comment period for this proposed be better? If so, which sections should conversion factor for any off-balance
rulemaking closes. Prior to the be changed? sheet item, or the use of an external
publication of the upcoming notice, • What else could we do to make the rating or the external rating on any
public commenters may submit regulation easier to understand? instrument does not appropriately
comments on aspects of this notice that List of Subjects reflect the risks imposed on a bank and
may affect reporting requirements at the may require another risk weight, credit
addresses listed in the ADDRESSES 12 CFR Part 3 equivalent amount, credit conversion
section of this NPR. The Agencies will Administrative practice and factor or external rating that the OCC
submit such required revisions to the procedure, Capital, National banks, deems appropriate. Similarly, if no risk
quarterly regulatory reports to the Office Reporting and recordkeeping weight, credit equivalent amount, credit
of Management and Budget (OMB) for requirements, Risk. conversion factor, or external rating is
review and approval under the specifically assigned, the OCC may
Paperwork Reduction Act. 12 CFR Part 208 assign any risk weight, credit equivalent
Accounting, Agriculture, Banks, amount, credit conversion factor, or
OCC and OTS Unfunded Mandates external rating that the OCC deems
Banking, Confidential business
Reform Act of 1995 Determination appropriate. In making its
information, Crime, Currency,
Section 202 of the Unfunded Mortgages, Reporting and recordkeeping determination, the OCC considers risks
Mandates Reform Act of 1995, Public requirements, Securities. associated with the asset or off-balance
Law 104–4 (Unfunded Mandates Act) sheet item as well as other relevant
12 CFR Part 225 factors.
requires that an agency prepare a
budgetary impact statement before Administrative practice and (c) In addition to the reservations of
promulgating a rule that includes a procedure, Banks, Banking, Holding authority described in paragraph (b) of
Federal mandate that may result in companies, Reporting and this section, the OCC reserves the
expenditure by State, local, and tribal recordkeeping requirements, Securities. authority to assign different risk weights
governments, in the aggregate, or by the to exposures as set forth in sections
12 CFR Part 325
private sector, of $100 million or more 1(c)(2)(i), and (ii) of appendix C and
in any one year. If a budgetary impact Administrative practice and section 6 of appendix B of this part.
statement is required, section 205 of the procedure, Bank deposit insurance, (d) Applicability. The OCC reserves
Unfunded Mandates Act also requires Banks, banking, Capital adequacy, the authority to require a bank calculate
an agency to identify and consider a Reporting and recordkeeping its minimum risk-based capital ratio
reasonable number of regulatory requirements, Savings associations, according to either appendix A,
alternatives before promulgating a rule. State non-member banks. appendix C, or appendix D of this part.
The OCC and OTS each has determined 12 CFR Part 567 In making this determination, the OCC
that this proposed rule will not result in will consider the bank’s information
Capital, Reporting and recordkeeping systems and risk profile and apply
expenditures by State, local, and tribal requirements, Savings associations.
governments, or by the private sector, of notice and response procedures in the
$100 million or more. Accordingly, DEPARTMENT OF THE TREASURY same manner and to the same extent as
neither the OCC nor the OTS has the notice and response procedures in
Office of the Comptroller of the § 3.12. Additionally, the OCC reserves
prepared a budgetary impact statement Currency
or specifically addressed the regulatory the authority to require any bank to
alternatives considered. 12 CFR Chapter I apply the market risk capital adjustment
set forth in appendix B of this part.
Solicitation of Comments on Use of Authority and Issuance 3. Revise § 3.6 to read as follows:
Plain Language For the reasons set out in the
§ 3.6 Minimum capital ratios.
Section 722 of the GLBA requires the preamble, part 3 of chapter I of title 12
of the Code of Federal Regulations is (a) General. A national bank must
Federal banking agencies to use plain maintain a capital to total assets
language in all proposed and final rules proposed to be amended as follows:
leverage ratio and a risk-based capital
published after January 1, 2000. The ratio. The risk-based capital ratio may
Federal banking agencies invite PART 3—MINIMUM CAPITAL RATIOS;
ISSUANCE OF DIRECTIVES be subject to a market risk adjustment.
comment on how to make this proposed (b) Total assets leverage ratio. All
rule easier to understand. For example: 1. The authority citation for part 3 national banks must have and maintain
• Have we organized the material to continues to read as follows: Tier 1 capital in an amount equal to at
suit your needs? If not, how could this Authority: 12 U.S.C. 93a, 161, 1818, least 3.0 percent of adjusted total assets.
material be better organized? 1828(n), 1828 note, 1831n note, 1835, 3907, (c) Additional leverage ratio
• Are the requirements in the rule and 3909. requirement. An institution operating at
clearly stated? If not, how could the rule 2. Amend § 3.4 by revising paragraph or near the level in paragraph (a) of this
be more clearly stated? (b) and adding paragraphs (c) and (d) to section should have well-diversified
• Do the regulations contain technical read as follows: risks, including no undue interest rate
language or jargon that is not clear? If risk exposure; excellent control systems;
so, which language requires § 3.4 Reservation of Authority. good earnings; high asset quality; high
clarification? * * * * * liquidity; and well managed on- and off-
• Would a different format (grouping (b) Risk-weight categories. balance sheet activities; and in general
and order of sections, use of headings, Notwithstanding the risk categories in be considered a strong banking
paragraphing) make the regulation appendices A and D of this part, the organization, rated composite 1 under
easier to understand? If so, what OCC will look to the substance of the the Uniform Financial Institutions
Rating System (CAMELS) rating system Examination Council (FFIEC) 009 capital ratio (or alternative risk-based
of banks. For all but the most highly- Country Exposure Report); capital ratio, if applicable), as calculated
rated banks meeting the conditions set (C) The bank is a subsidiary of a in accordance with appendix B of this
forth in this paragraph (c), the minimum depository institution that is subject to part.
Tier 1 leverage ratio is 4 percent. In all 12 CFR Part 3, Appendix C, 12 CFR Part 4. Appendix C to Part 3 is added and
cases, banking institutions should hold 208, Appendix F, 12 CFR Part 325, reserved.
capital commensurate with the level Appendix D, or 12 CFR Part 566, 5. Add Appendix D to Part 3 to read
and nature of all risks. subpart A; or as follows:
(d) Risk-based capital ratio. A (D) The bank is a subsidiary of a bank
national bank must have and maintain holding company (as defined in 12 Appendix D To Part 3—Alternative
the minimum risk-based capital ratio in U.S.C. 1841) that is subject to 12 CFR Risk-Based Capital Guidelines
either appendix A (risk-based capital Part 225, Appendix F. Section 1. Purpose, Applicability of
ratio), appendix C (internal ratings- (ii) Mandatory banks. A bank that Guidelines, and Definitions
based and advanced measurement meets the applicability requirements
(a) Scope. This Appendix applies to all
approaches), or appendix D (alternative under paragraph (d)(3)(i) of this section banks that have opted-in in accordance with
risk-based capital ratio), and, for certain must maintain a minimum risk-based section 1(b) of this appendix D.
banks, in appendix B of this part capital ratio as calculated in accordance (b) Opt-in procedures. (1) Initial opt-in.
(market risk capital adjustment). with appendix C of this part. Unless otherwise subject to appendix C of
(iii) Opt-in banks. A bank not this part, any bank may adopt the capital
(1) Risk-based capital ratio
otherwise required to use appendix C, requirements set forth in this appendix D by
requirement. Except as provided by notifying the OCC of its intent to do so.
may elect to use the internal ratings-
paragraph (d)(2) (alternative risk-based (2) Opt-Out. Any bank that has opted into
based and advanced measurement
capital ratio) and paragraph (f) of this the capital requirements of this appendix D
approaches to calculate its minimum
section (internal ratings-based and subsequently may elect to adopt the capital
risk-based capital ratio, subject to prior
advanced measurement approaches), a requirements set forth in appendix A by
OCC approval as provided by section 21 filing a notice with the appropriate
bank must maintain a minimum risk-
of appendix C of this part. A bank supervisory office.
based capital ratio as calculated in
approved to use the internal ratings- (c) Reservation of authority. (1) The OCC
accordance with appendix A of this
based and advanced measurement may apply this appendix D to any bank if the
part.
approaches, must maintain a minimum OCC deems it necessary or appropriate for
(2) Alternative risk-based capital ratio safe and sound banking practices or if the
risk-based capital ratio as calculated in
requirement. A bank that is not subject OCC determines that this appendix D would
accordance with appendix C of this part
(either mandatorily or by election) to the produce risk-based capital requirements that
[Basel II].
internal ratings-based and advanced (4) Market risk capital adjustment more accurately reflect the risk profile of the
measurement approaches under requirement. (i) Market risk capital bank. In making a determination under this
Appendix C, may adopt the alternative paragraph, the OCC will apply notice and
adjustment applicability requirement. A response procedures in the same manner and
risk-based capital ratio requirements bank that meets any of the following
pursuant to section 1(c) of appendix D to the same extent as the notice and response
applicability requirements, as procedures in § 3.12.
of this part. A bank subject to appendix determined by the bank’s most recent (2) The OCC may exclude a bank that has
D must maintain a minimum alternative year-end Call Report, must apply the otherwise opted-in according to section
risk-based capital ratio as calculated in additional market risk capital 1(b)(1) of this appendix from applying the
accordance with appendix D of this adjustment as provided by appendix B capital requirements of this appendix D, if
part. of this part: the OCC determines such action is consistent
(3) Internal ratings-based and (A) The bank has trading activities (on with safe and sound banking practices. In
advanced measurement approaches making a determination under this
a worldwide consolidated basis) equals
requirement. (i) Applicability. A bank paragraph, the OCC will apply notice and
to, or greater than, 10 percent of its total response procedures in the same manner and
that meets any of the following internal assets; or to the same extent as the notice and response
ratings-based and advanced (B) The bank has trading activities (on procedures in § 3.12.
measurement approaches applicability a worldwide consolidated basis) equal (d) Definitions. (1) Except where noted, the
requirements must apply appendix C of to $1 billion or more. definitions listed in sections 1 and 4 of
this part in determining its minimum (ii) Mandatory market risk bank. A appendix A to this part 3 shall apply to this
risk-based capital ratio: bank that meets the market risk appendix D to this part 3. For the purposes
(A) The bank’s consolidated total applicability requirements under of this appendix D, where the definitions in
assets, as reported on its most recent paragraph (d)(4) of this section must appendix A include cross references to other
year-end Call Report, equal to $250 apply the additional market risk capital sections in appendix A, the OCC will
billion or more; construe them to refer to the appropriate
adjustment in determining its minimum sections in this appendix D.
(B) The bank’s most recent year-end risk-based capital ratio (or alternative (2) For the purposes of this appendix D, the
consolidated total on-balance sheet risk-based capital ratio, if applicable), as following additional definitions apply:
foreign exposure equals to $10 billion or calculated in accordance with appendix Affiliate means, with respect to a company,
more (where total on-balance sheet B of this part. any company that controls, is controlled by,
foreign exposure equals total cross- (iii) Opt-in market risk bank. A bank or is under common control with, the
border claims less claims with head not otherwise required to use appendix company. For the purposes of this definition,
office or guarantor located in another B, may elect to use the market risk a person or company controls a company if
country plus redistributed guaranteed capital adjustment, subject to prior OCC it:
amounts to the country of head office or approval as provided by section 3(c) of (A) Owns, controls, or holds with power to
vote 25 percent or more of a class of voting
guarantor plus local country claims on appendix B of this part. A bank securities of the company; or
local residents plus revaluation gains on approved to use the market risk capital (B) Consolidates the company for financial
foreign exchange and derivative adjustment, must apply the additional reporting purposes.
products, calculated in accordance with market risk capital adjustment in Company means a corporation,
the Federal Financial Institutions determining its minimum risk-based partnership, limited liability company,
business trust, special purpose entity, (2) Is monitored by the issuing NRSRO; to require a bank to compute its risk-based
association, or similar organization. (3) Is published in an accessible public capital ratio on the basis of average, rather
Early amortization provision means a form; and than period-end, risk-weighted assets when
provision in the documentation governing a (4) Is, or will be, included in the issuing necessary to carry out the purposes of these
securitization that, when triggered, causes NRSRO’s publicly available transition matrix, guidelines.
investors in the securitization exposures to which tracks the performance and stability (2) Indirect Holdings. Some of the assets on
be repaid before the original stated maturity (or ratings migrations) of an NRSRO’s issued a bank’s balance sheet may represent an
of the securitization exposures, unless the external ratings for the specific type of claim indirect holding of a pool of assets, e.g.,
provision is solely triggered by events not (for example, corporate debt); or mutual funds, that encompasses more than
directly related to the performance of the (B) An unrated claim on a foreign central one risk weight within the pool. In those
underlying exposures or the originating government shall be deemed to have an situations, the bank may assign the asset to
banking organization (such as material external rating equal to the foreign central the risk-weight category applicable to the
changes in tax laws or regulations). government’s issuer rating assigned by an highest risk-weighted asset that pool is
Eligible guarantee means a guarantee NRSRO. permitted to hold pursuant to its stated
provided by a third party eligible guarantor Investor’s interest means the total amount investment objectives in the fund’s
that is: of securitization exposures represented by prospectus. Alternatively, the bank may
(A) Written and unconditional; and if securities issued by a trust or special purpose assign the asset on a pro rata basis to
extended by a central government, is backed entity to investors. different risk categories according to the
by the full faith and credit of the central Loan-level private mortgage insurance investment limits in the fund’s prospectus. In
government; means insurance provided by a regulated either case, the minimum risk weight that
(B) Covers all or a pro rata portion of the mortgage insurance company that protects may be assigned to such a pool is 20 percent.
contractual payments of the obligor on the If a bank assigns the asset on a pro rata basis,
the mortgage lender in the event of a default
reference exposure; and the sum of the investment limits in the
of a mortgage borrower up to a
(C) Gives the beneficiary a direct claim fund’s prospectus exceeds 100 percent, the
predetermined portion of the value of a
against the protection provider; bank must assign the highest pro rata
single one-to-four residential property,
(D) Is non-cancelable by the protection amounts of its total investment to the higher
provided there is no pool-level cap that risk-weight category. If, in order to maintain
provider for reasons other than the breach of would effectively reduce coverage.
the contract by the beneficiary; a necessary degree of liquidity, the fund is
Non-central government entity means an permitted to hold an insignificant amount of
(E) Is legally enforceable against the entity that is not a central government as that
protection provider in a jurisdiction where its assets in short-term, highly-liquid
term is defined in this section. This term securities of superior credit quality (that do
the protection provider has sufficient assets includes securities firms, insurance not qualify for a preferential risk weight),
against which a judgment may be attached companies, bank holding companies, savings such securities generally will not be taken
and enforced; and loan holding companies, multilateral into account in determining the risk category
(F) Requires the protection provider to lending and regional development into which the bank’s holding in the overall
make payment to the beneficiary on the institutions, partnerships, limited liability pool should be assigned. The prudent use of
occurrence of a default (as defined in the companies, business trusts, special purpose hedging instruments by a fund to reduce the
guarantee) of the obligor on the reference entities, associations and other similar risk of its assets will not increase the risk
exposure without first requiring the organizations. weighting of the investment in that fund
beneficiary to demand payment from the Revolving credit means a line of credit above the 20 percent category. However, if a
obligor. where the borrower is permitted to vary both fund engages in any activities that are
Eligible guarantor means: the drawn amount and the amount of deemed to be speculative in nature or has
(A) A foreign central government with repayment. any other characteristics that are inconsistent
senior long-term debt externally rated at least with the preferential risk weighting assigned
investment grade by a NRSRO; or Section 2. Components of Capital
to the fund’s assets, the bank’s investment in
(B) An entity, other than a central (a) A national bank’s qualifying capital the fund will be assigned to the 100 percent
government, (for example, securities firms, base is comprised as set forth in section 2 of risk-weight category. More detail on the
insurance companies, bank holding appendix A to this part 3. treatment of mortgage-backed securities is
companies, savings and loan holding (b) For the purposes of this appendix D, the provided in sections 3(b)(1)(ii)(F) and (G),
companies, multilateral lending and regional OCC will construe cross references in 3(b)(1)(iv)(D), and 4(c) and (d) of this
development institutions, partnerships, appendix A of this part to other sections in appendix D.
limited liability companies, business trusts, appendix A as cross references to the (b) On-Balance Sheet Assets. (1) Risk-
special purpose entities, associations and appropriate sections in this appendix D. Weight Categories. Unless otherwise
other similar organizations) with senior long- provided by sections 3(b)(2) or 3(b)(3) of this
term debt externally rated at least investment Section 3. Risk Categories/Weights for On-
Balance Sheet Assets and Off-Balance Sheet appendix, a bank must assign a risk weight
grade by a NRSRO. to an on-balance sheet asset according to the
Excess spread means gross finance charge Items.
following risk-weight categories.
collections (including market interchange (a) General. (1) Calculations. The (i) Zero percent risk weight. (A) Cash,
fees) and other income received by a trust or denominator of the risk-based capital ratio, including domestic and foreign currency
the special purpose entity (SPE) minus i.e., a national bank’s risk-weighted assets, is owned and held in all offices of a national
interest paid to investors in the securitization derived by assigning that bank’s assets and bank or in transit. Any foreign currency held
exposures, servicing fees, charge-offs, and off-balance sheet items to one of the risk by a national bank should be converted into
other similar trust or SPE expenses. categories set out in this appendix D. Each U.S. dollar equivalents.
Excess spread trapping point means the category has a specific risk weight. Off- (B) Deposit reserves and other balances at
point at which the bank is required by the balance sheet items are converted to on- Federal Reserve Banks.
documentation governing a securitization to balance sheet equivalent amounts according (C) Gold bullion held in the bank’s own
divert and hold excess spread in a spread or to section 3(c) of this appendix D and then vaults or in another bank’s vaults on an
reserve account, expressed as a percentage. assigned a risk category. The risk weight allocated basis, to the extent it is backed by
External rating means: assigned to a particular asset or on-balance gold bullion liabilities.
(A) A credit rating that is assigned by an sheet credit equivalent amount determines (D) The book value of paid-in Federal
NRSRO to a claim, provided that the credit the percentage of that asset/credit equivalent Reserve Bank stock.
rating: that is included in the denominator of the (E) Securities issued by, and other direct
(1) Fully reflects the entire amount of bank’s risk-based capital ratio. Any asset claims on, the United States Government or
credit risk with regard to all payments owed deducted from a bank’s capital in computing its agencies.
on the claim (that is, the rating must fully the numerator of the risk-based capital ratio (F) That portion of assets directly and
reflect the credit risk associated with timely is not included as part of the bank’s risk- unconditionally guaranteed by the United
repayment of principal and interest); weighted assets. The OCC reserves the right States Government or its agencies.
(G) That portion of assets and off-balance but are assigned to the 100 percent risk and must be in compliance with the SEC’s
sheet transactions 1 collateralized by cash or category. net capital regulation (17 CFR 240.15c3(1)).
securities issued or directly and (B) Claims on, or guaranteed by depository (2) If the securities firm is incorporated in
unconditionally guaranteed by the United institutions, other than the central bank, any other OECD country, then the bank must
States Government or its agencies, or the incorporated in a non-OECD country, with a be able to demonstrate that the firm is subject
central government of an OECD country, residual maturity of one year or less. to consolidated supervision and regulation,
provided that: 2 (C) Cash items in the process of collection. including its subsidiaries, comparable to that
(1) The bank maintains control over the (D) That portion of assets collateralized by imposed on depository institutions in OECD
collateral: cash or by securities issued or directly and countries; such regulation must include risk-
(i) If the collateral consists of cash, the cash unconditionally guaranteed by the United based capital standards comparable to those
must be held on deposit by the bank or by States Government or its agencies that does applied to depository institutions under the
a third-party for the account of the bank; not qualify for the zero percent risk-weight Basel Capital Accord.
(ii) If the collateral consists of OECD category. (3) The securities firm, whether
government securities, then the securities (E) That portion of assets conditionally incorporated in the United States or another
must be held by the bank or by a third-party guaranteed by the United States government OECD country, must also have a long-term
acting on behalf of the bank; or its agencies. credit rating in accordance with section
(2) The bank maintains a daily positive (F) Securities issued by, or other direct 3(b)(1)(ii)(K)(3)(i) of this appendix D; a parent
margin of collateral fully taking into account claims on, United States Government- company guarantee in accordance with
any change in the market value of the sponsored agencies. section 3(b)(1)(ii)(K)(3)(ii) of this appendix D;
collateral held as security; (G) That portion of assets guaranteed by or a collateralized claim in accordance with
(3) Where the bank is acting as a United States Government-sponsored section 3(b)(1)(ii)(K)(3)(iii) of this appendix
customer’s agent in a transaction involving agencies.3 D. Claims representing capital of a securities
the loan or sale of securities that is (H) That portion of assets collateralized by firm must be risk weighted at 100 percent.
collateralized by cash or OECD government the current market value of securities issued (i) Credit rating. The securities firm must
securities delivered to the bank, any or guaranteed by United States Government- have either a long-term issuer credit rating or
obligation by the bank to indemnify the sponsored agencies. a credit rating on at least one issue of long-
customer is limited to no more than the (I) Claims representing general obligations term unsecured debt, from a NRSRO that is
difference between the market value of the of any public-sector entity in an OECD in one of the three highest investment-grade
securities lent and the market value of the country, and that portion of any claims categories used by the NRSRO. If the
collateral received, and any reinvestment risk guaranteed by any such public-sector entity. securities firm has a credit rating from more
associated with the collateral is borne by the In the United States, these obligations must than one NRSRO, the lowest credit rating
customer; and meet the requirements of 12 CFR 1.2(b). must be used to determine the credit rating
(4) The transaction involves no more than (J) Unrated loans to official multilateral under this paragraph.
minimal risk. lending institutions or regional development (ii) Parent company guarantee. The claim
(H) Externally rated debt securities issued institutions in which the United States on the securities firm must be guaranteed by
by, certain other externally rated claims on, Government is a shareholder or contributing the firm’s parent company, and the parent
and that portion of assets supported by an member.4 Rated loans to, debt securities company must have either a long-term issuer
eligible guarantee of, a foreign central issued by, claims guaranteed by, and claims credit rating or a credit rating on at least one
government that receive a zero percent risk collateralized by debt securities issued by, issue of long-term unsecured debt, from a
weight, as provided in section 3(b)(3) of this official multilateral lending institutions or NRSRO that is in one of the three highest
appendix D. regional development institutions shall be investment-grade categories used by the
(ii) Twenty Percent Risk Weight. (A) All risk weighted according to section 3(b)(3) of NRSRO.
claims on depository institutions this appendix D. (iii) Collateralized claim. The claim on the
incorporated in an OECD country, and all (K) An unrated loan to a securities firm securities firm must be collateralized subject
assets backed by the full faith and credit of incorporated in an OECD country, that to all of the following requirements:
depository institutions incorporated in an satisfies the following conditions: (A) The claim must arise from a reverse
OECD country. This includes the credit (1) If the securities firm is incorporated in repurchase/repurchase agreement or
equivalent amount of participations in the United States, then the firm must be a securities lending/borrowing contract
commitments and standby letters of credit broker-dealer that is registered with the SEC executed using standard industry
sold to other depository institutions
documentation.
incorporated in an OECD country, but only 3 Privately issued mortgage-backed securities, e.g., (B) The collateral must consist of debt or
if the originating bank remains liable to the CMOs and REMICs, where the underlying pool is equity securities that are liquid and readily
customer or beneficiary for the full amount comprised solely of mortgage-related securities marketable.
of the commitment or standby letter of credit. issued by GNMA, FNMA and FHLMC, will be (C) The claim and collateral must be
Also included in this category are the credit treated as an indirect holding of the underlying
equivalent amounts of risk participations in assets and assigned to the 20 percent risk category.
marked-to-market daily.
bankers’ acceptances conveyed to other If the underlying pool is comprised of assets which (D) The claim must be subject to daily
depository institutions incorporated in an attract different risk weights, e.g., FNMA securities margin maintenance requirements under
OECD country. However, bank-issued and conventional mortgages, the bank should standard industry documentation.
securities that qualify as capital of the issuing generally assign the security to the highest risk (E) The contract from which the claim
category appropriate for any asset in the pool. arises can be liquidated, terminated, or
bank are not included in this risk category, However, on a case-by-case basis, the OCC may accelerated immediately in bankruptcy or
allow the bank to assign the security similar proceedings, and the security or
1 See footnote 18 in section 3(c)(1)(vii)(C) of this proportionately to the various risk categories based
appendix D (collateral held against derivative on the proportion in which the risk categories are
collateral agreement will not be stayed or
contracts). represented by the composition cash flows of the avoided under the applicable law of the
2 Assets and off-balance sheet transactions underlying pool of assets. Before the OCC will relevant jurisdiction. To be exempt from the
collateralized by securities issued or guaranteed by consider a request to proportionately risk-weight automatic stay in bankruptcy in the United
the United States Government or its agencies such a security, the bank must have current States, the claim must arise from a securities
include, but are not limited to, securities lending information for the reporting date that details the contract or a repurchase agreement under
transactions, repurchase agreements, collateralized composition and cash flows of the underlying pool section 555 or 559, respectively, of the
letters of credit, such as reinsurance letters of of assets. Bankruptcy Code (11 U.S.C. 555 or 559), a
credit, and other similar financial guarantees. 4 These institutions include, but are not limited
qualified financial contract under section
Swaps, forwards, futures, and options transactions to, the International Bank for Reconstruction and
are also eligible, if they meet the collateral Development (World Bank), the Inter-American
11(e)(8) of the Federal Deposit Insurance Act
requirements. However, the OCC may at its Development Bank, the Asian Development Bank, (12 U.S.C. 1821(e)(8)), or a netting contract
discretion require that certain collateralized the European Investments Bank, the International between or among financial institutions
transactions be risk weighted at 20 percent if they Monetary Fund, and the Bank for International under sections 401–407 of the Federal
involve more than a minimal risk. Settlements. Deposit Insurance Corporation Improvement
Act of 1991 (12 U.S.C. 4407), or Regulation and has the ability to obtain a mortgage loan otherwise 90 days or more past due, or on
EE (12 CFR part 231). Externally rated loans sufficient to purchase the home (i.e., a firm nonaccrual status;
to, externally rated debt securities issued by, written commitment for permanent financing (4) The loan is made in accordance with all
claims guaranteed by, and claims of the home upon completion), subject to the applicable requirements and prudent
collateralized by externally rated debt following additional criteria: underwriting standards;
securities issued by, securities firms shall be (1) The builder must incur at least the first (5) If the rate of interest does not change
risk weighted according to section 3(b)(3) of 10 percent of the direct costs (i.e., actual over the term of the loan:
this appendix. costs of the land, labor, and material) before (i) The current loan amount outstanding
(L) Externally rated debt securities issued any drawdown is made under the does not exceed 80 percent of the current
by, certain other externally rated claims on, construction loan and the construction loan value of the property, as measured by either
and that portion of assets supported by an may not exceed 80 percent of the sales price the value of the property at origination of the
eligible guarantee from, a foreign central of the resold home; loan (which is the lower of the purchase
government that receive a 20 percent risk (2) The individual purchaser has made a price or the value as determined by the initial
weight as provided in section 3(b)(3) of this substantial earnest money deposit of no less appraisal, or if appropriate, the initial
appendix D. than 3 percent of the sales price of the home evaluation) or the most current appraisal, or
(M) Externally rated debt securities issued that must be subject to forfeiture by the if appropriate, the most current evaluation;
by, certain other rated claims on, and that individual purchaser if the sales contract is and
portion of assets supported by an eligible terminated by the individual purchaser; (ii) In the most recent fiscal year, the ratio
guarantee of, a non-central government however, the earnest money deposit shall not of annual net operating income generated by
entity, that receive a 20 percent risk weight be subject to forfeiture by reason of breach or the property (before payment of any debt
as provided in section 3(b)(3) of this termination of the sales contract on the part service on the loan) to annual debt service on
appendix D. of the builder; the loan is not less than 120 percent; 6
(N) Assets collateralized by liquid and (3) The earnest money deposit must be (6) If the rate of interest changes over the
readily marketable externally rated debt held in escrow by the bank financing the term of the loan:
securities that receive a 20 percent risk builder or by an independent party in a (i) The current loan amount outstanding
weight as provided in section 3(b)(3) of this fiduciary capacity; the escrow agreement does not exceed 75 percent of the current
appendix D, and recourse obligations, direct must provide that in the event of default the value of the property, as measured by either
credit substitutes, residual interests, and escrow funds must be used to defray any cost the value of the property at origination of the
asset- and mortgage-backed securities that incurred relating to any cancellation of the loan (which is the lower of the purchase
receive a 20 percent risk weight as provided sales contract by the buyer; price or the value as determined by the initial
in section 4(c)(1) of this appendix D. (4) If the individual purchaser terminates appraisal, or if appropriate, the initial
(O) Mortgage loans secured by liens on the contract or if the loan fails to satisfy any evaluation) or the most current appraisal, or
one-to-four family residential properties that other criterion under this section, then the if appropriate, the most current evaluation;
receive a 20 percent risk weight as provided bank must immediately recategorize the loan and
in section 3(b)(2) of this appendix D. at a 100 percent risk weight and must (ii) In the most recent fiscal year, the ratio
(iii) Thirty Five Percent Risk Weight. (A) accurately report the loan in the bank’s next of annual net operating income generated by
Externally rated debt securities issued by, quarterly Consolidated Reports of Condition the property (before payment of any debt
certain other externally rated claims on, and and Income (Call Report); service on the loan) to annual debt service on
that portion of assets supported by an eligible (5) The individual purchaser must intend the loan is not less than 115 percent; and
guarantee of, a foreign central government, that the home will be owner-occupied; (7) If the loan was refinanced by the
that receive a 35 percent risk weight as (6) The loan is made by the bank in borrower:
provided in section 3(b)(3) of this appendix accordance with prudent underwriting (i) All principal and interest payments on
D. standards; the loan being refinanced which were made
(B) Externally rated debt securities issued (7) The loan is not more than 90 days past in the preceding year prior to refinancing
by, certain other rated claims on, and that due, or on nonaccrual; and shall apply in determining the one-year
portion of assets supported by an eligible (8) The purchaser is an individual(s) and timely payment requirement under section
guarantee of, a non-central government not a partnership, joint venture, trust, 3(b)(1)(iv)(C)(3) of this appendix D; and
entity, that receive a 35 percent risk weight corporation, or any other entity (including an (ii) The net operating income generated by
as provided in section 3(b)(3) of this entity acting as a sole proprietorship) that is the property in the preceding year prior to
appendix D. purchasing one or more of the homes for refinancing shall apply in determining the
(C) Assets collateralized by liquid and speculative purposes. applicable debt service requirements under
readily marketable externally rated debt (C) Loans secured by a first mortgage on sections 3(b)(1)(iv)(C)(5) and (a)(2)(iv)(C)(6)
securities that receive a 35 percent risk multifamily residential properties: 5 of this appendix D.
weight as provided in section 3(b)(3) of this (1) The amortization of principal and (D) Unrated privately-issued mortgage-
appendix D, and recourse obligations, direct interest occurs in not more than 30 years; backed securities, i.e. those that do not carry
credit substitutes, residual interests, and the guarantee of a government or
(2) The minimum original maturity for
asset- and mortgage-backed securities that government-sponsored agency, if the unrated
repayment of principal is not less than 7
receive a 35 percent risk weight as provided privately-issued mortgage-backed securities
years;
in section 4(c)(1) of this appendix D. are at the time the mortgage-backed securities
(3) All principal and interest payments
(D) Mortgage loans secured by liens on are originated fully secured by or otherwise
have been made on a timely basis in
one-to-four family residential properties that accordance with the terms of the loan for at
6 For the purposes of the debt service
receive a 35 percent risk weight as provided least one year immediately preceding the risk
in section 3(b)(2) of this appendix D. requirements in sections 3(b)(1)(iv)(C)(5)(ii) and
weighting of the loan in the 50 percent risk-
3(b)(1)(iv)(C)(6)(ii) of this Appendix D, other forms
(iv) Fifty Percent Risk Weight. (A) Revenue weight category, and the loan is not of debt service coverage that generate sufficient
obligations of any public-sector entity in an cash flows to provide comparable protection to the
OECD country for which the underlying 5 The portion of multifamily residential property institution may be considered for (a) a loan secured
obligor is the public-sector entity, but which loans that is sold subject to a pro rata loss sharing by cooperative housing or (b) a multifamily
are repayable solely from the revenues arrangement may be treated by the selling bank as residential property loan if the purpose of the loan
generated by the project financed through the sold to the extent that the sales agreement provides is for the development or purchase of multifamily
issuance of the obligations. for the purchaser of the loan to share in any loss residential property primarily intended to provide
(B) Loans to residential real estate builders incurred on the loan on a pro rata basis with the low- to moderate-income housing, including special
selling bank. The portion of multifamily residential operating reserve accounts or special operating
for one-to-four family residential property property loans sold subject to any loss sharing subsidies provided by federal, state, local or private
construction, if the bank obtains sufficient arrangement other than pro rata sharing of the loss sources. However, the OCC reserves the right, on a
documentation demonstrating that the buyer shall be accorded the same treatment as any other case-by-case basis, to review the adequacy of any
of the home intends to purchase the home asset sold under an agreement to repurchase or sold other forms of comparable debt service coverage
(i.e., a legally binding written sales contract) with recourse under section 4(b) of appendix D. relied on by the bank.
represent a sufficiently secure interest in receive a 50 percent risk weight as provided government, that receive a 100 percent risk
mortgages secured by multifamily residential in section 3(b)(2) of this appendix D. weight as provided in section 3(b)(3) of this
properties that qualify for the 50 percent risk (v) Seventy Five Percent Risk Weight. (A) appendix D.
weight under section 3(b)(1)(iv)(C) of this Externally rated debt securities issued by, (K) Externally rated marketable debt
appendix D; loans to residential real estate certain other externally rated claims on, and securities issued by, certain other rated
builders for one-to-four family residential that portion of assets supported by an eligible claims on, and that portion of assets
property construction that qualify for the fifty guarantee of, a foreign central government, supported by an eligible guarantee of, a non-
percent risk weight under section that receive a 75 percent risk weight as central government entity, that receive a 100
3(b)(1)(iv)(B) of this appendix D; and provided in section 3(b)(3) of this appendix percent risk weight as provided in section
mortgages secured by residential properties D. 3(b)(3) of this appendix D.
that are either owner-occupied or rented, (B) Externally rated debt securities issued (L) Assets collateralized by liquid and
meet prudent underwriting standards in by, certain other rated claims on, and that readily marketable externally rated debt
accordance with 12 CFR Part 34, and are not portion of assets supported by an eligible securities that receive a 100 percent risk
90 days or more past due, have not been guarantee of non-central government entity, weight as provided in section 3(b)(3) of this
placed in nonaccrual status, and have not that receive a 75 percent risk weight as appendix D, and recourse obligations, direct
been restructured, provided that they meet provided in section 3(b)(3) of this appendix credit substitutes, residual interests, and
the following criteria: 7 D. asset- and mortgage-backed securities that
(1) The underlying assets must be held by (C) Assets collateralized by liquid and receive a 100 percent risk weight as provided
an independent trustee that has a first readily marketable externally rated debt in section 4(c)(1) of this appendix D.
priority, perfected security interest in the securities that receive a 75 percent risk (M) Mortgage loans secured by liens on
underlying assets for the benefit of the weight as provided in section 3(b)(3) of this one-to-four family residential properties that
holders of the security; appendix D, and recourse obligations, direct receive a 100 percent risk weight as provided
(2) The holder of the security must have an credit substitutes, residual interests, and in section 3(b)(2) of this appendix D.
undivided pro rata ownership interest in the asset- and mortgage-backed securities that (vii) One Hundred and Fifty Percent Risk
underlying assets or the trust that issues the receive a 75 percent risk weight as provided Weight. (A) Externally rated debt securities
security must have no liabilities unrelated to in section 4(c)(1) of this appendix D. issued by, certain other externally rated
the issued securities; (D) Mortgage loans secured by liens on claims on, and that portion of assets
(3) The trust that issues the security must one-to-four family residential properties that supported by an eligible guarantee of, a
be structured such that the cash flows from receive a 75 percent risk weight as provided foreign central government, that receive a 150
the underlying assets fully meet the cash in section 3(b)(2) of this appendix D. percent risk weight as provided in section
flows requirements of the security without (vi) One Hundred Percent Risk Weight. All 3(b)(3) of this appendix D.
undue reliance on any reinvestment income; other assets not specified in this appendix (B) Externally rated debt securities issued
and D,8 including: by, certain other rated claims on, and that
(4) There must not be any material (A) Asset- or mortgage-backed securities portion of assets supported by an eligible
reinvestment risk associated with any funds that are externally rated are risk weighted in guarantee of, a non-central government
awaiting distribution to the holder of the accordance with section 4 of this appendix entity, that receive a 150 percent risk weight
security. D. as provided in section 3(b)(3) of this
(E) Externally rated debt securities issued (B) All stripped mortgage-backed appendix D.
by, certain other externally rated claims on, securities, including interest only portions (C) Mortgage loans secured by liens on one-
and that portion of assets supported by an (IOs), principal only portions (POs) and other to-four family residential properties that
eligible guarantee of, a foreign central similar instruments, regardless of the issuer receive a 150 percent risk weight as provided
government, that receive a 50 percent risk or guarantor. in section 3(b)(2) of this appendix D.
weight as provided in section 3(b)(3) of this (C) Obligations issued by any state or any (viii) Two Hundred Percent Risk Weight.
appendix D. political subdivision thereof for the benefit of (A) Unrated debt securities issued by, certain
(F) Externally rated debt securities issued a private party or enterprise where that party other unrated and rated claims on, and that
by, certain other rated claims on, and that or enterprise, rather than the issuing state or portion of assets supported by an eligible
portion of assets supported by an eligible political subdivision, is responsible for the guarantee of, a foreign central government,
guarantee of, a non-central government timely payment of principal and interest on that receive a 200 percent risk weight as
entity, that receive a 50 percent risk weight the obligation, e.g., industrial development provided in section 3(b)(3) of this appendix
as provided in section 3(b)(3) of this bonds. D.
appendix D. (D) Claims on commercial enterprises (B) Externally rated and unrated debt
(G) Assets collateralized by liquid and owned by foreign central governments. securities issued by, certain other externally
readily marketable externally rated debt (E) Any investment in an unconsolidated rated and unrated claims on, and that portion
securities that receive a 50 percent risk subsidiary that is not required to be deducted of assets supported by an eligible guarantee
weight as provided in section 3(b)(3) of this from total capital pursuant to section 2(c) of
of, a non-central government entity, that
appendix D, and recourse obligations, direct this appendix D.
credit substitutes, residual interests, and receive a 200 percent risk weight as provided
(F) Instruments issued by depository
asset- and mortgage-backed securities that in section 3(b)(3) of this appendix D.
institutions incorporated in OECD and non-
receive a 50 percent risk weight as provided (2) Mortgage Loans Secured by Liens on
OECD countries that qualify as capital of the
in section 4(c)(1) of this appendix D. One-to-Four Family Residential Properties. (i)
issuer.
(H) Mortgage loans secured by liens on First Lien Mortgages. (A) Risk-Weight Table.
(G) Investments in fixed assets, premises,
one-to-four family residential properties that Unless otherwise provided in section
and other real estate owned.
3(b)(2)(iii) (mortgage loans with negative
(H) Claims representing capital of a
amortization features) of this appendix D, a
7 If all of the underlying mortgages in the pool do securities firm.
not qualify, the bank should generally assign the (I) Bank-issued securities that qualify as bank shall assign a mortgage loan secured by
entire value of the unrated security to the 200 capital of the issuing bank. a first lien on a one-to-four family residential
percent risk category of this appendix D; however, (J) Externally rated debt securities issued property to a risk weight based on its loan-
on a case-by-case basis, the OCC may allow the by, certain other externally rated claims on, to-value ratio, in accordance with Table 1 of
bank to assign only the portion of the security
and that portion of assets supported by an this appendix D.
which represents an interest in, and the cash flows (B) Minimum Risk Weight for Certain
eligible guarantee of, a foreign central
of, nonqualifying mortgages to the 200 percent risk Mortgage Loans Secured by Liens on One-to-
category, with the remainder being assigned a risk Four Family Residential Properties.
weight of 50 percent. Before the OCC will consider 8 A bank subject to the market risk capital
a request to risk weight a mortgage-backed security requirements pursuant to Appendix B of this part
Notwithstanding section 3(b)(2)(i)(A) of this
on a proportionate basis, the bank must have 3 may calculate the capital requirement for appendix D, a loan secured by a one-to-four
current information for the reporting date that qualifying securities borrowing transactions family residential property that is not either
details the composition and cash flows of the pursuant to section 3(a)(1)(ii) of appendix B of this owner-occupied or rented, that is 90 days or
underlying pool of mortgages. part 3. more past due, that has been placed in
nonaccrual status, has been restructured, or (ii) Junior lien mortgages. (A) Risk-weight TABLE 2.—RISK WEIGHTS APPLICABLE
that does not meet prudent underwriting table. Unless otherwise provided in section TO MORTGAGE LOANS SECURED BY
standards, shall receive a risk weight of 100 3(b)(2)(i) (when a junior lien mortgages and
percent, or higher if warranted by the loan- all senior lien mortgages are held by same
STAND-ALONE JUNIOR LIENS ON
to-value ratio, according to Table 1 of this bank, the transaction is treated as a single ONE-TO-FOUR FAMILY RESIDENTIAL
appendix D. loan), or section 3(b)(2)(iii) (mortgage loans PROPERTIES
(C) First and Junior Liens. If a bank holds with negative amortization features) of this
a first lien and junior lien on a one-to-four appendix D, a bank shall assign a mortgage Risk weight
family residential property and no other Combined loan-to-value ratio
loan secured by a junior lien on a one-to-four (in percent)
party holds an intervening lien, the
family residential property to a risk weight
combined exposure is treated as a single loan Less than 60 percent ................ 75
secured by a first lien for the purposes of based on its loan-to-value ratio, in
Greater than 60 percent but
both determining the loan-to-value ratio and accordance with Table 2 of this appendix D.
less than or equal to 90 per-
assigning a risk weight to the combined (B) Minimum Risk Weight for Certain
cent ....................................... 100
exposure. Mortgage Loans Secured by Junior Liens on Greater than 90 percent ........... 150
(D) Loan-to-value ratio. (1) Initial loan-to- One-to-Four Family Residential Properties.
value ratio calculation. (i) Generally. For the Notwithstanding paragraph (b)(2)(ii)(A) of (iii) Mortgage loans with negative
purpose of determining the appropriate risk this section, a loan secured by a one-to-four amortization features. (A) Risk weight table.
weight in accordance with Table 1 of this family residential property that is not either The funded portion of a mortgage loan
appendix D, a bank shall determine the loan- owner-occupied or rented, that is 90 days or secured by a lien on a one-to-four family
to-value ratio for a mortgage loan secured by more past due, that has been placed in residential property that includes a negative
first lien mortgage on a one-to-four family nonaccrual status, has been restructured, or amortization feature shall be assigned to a
residential property using the lower of the that does not meet prudent underwriting risk-weight category based on that portion’s
purchase price or the appraisal or evaluation standards, shall receive a risk weight of 100 loan-to-value ratio, in accordance with Table
at origination. percent or higher, if warranted by the loan- 1 or Table 2. The amount equal to the
(ii) Loan level private mortgage insurance. to-value ratio, according to Table 2 of this maximum unfunded amount of the loan if it
In determining the loan-to-value ratio, a bank were to negatively amortize to the fullest
appendix D.
may take in to account loan-level private extent allowed under the applicable loan
(C) Loan-to-value ratio calculation. (1)
mortgage insurance, provided the insurer is contract shall be treated as a commitment, as
not affiliated with the bank and has long- Initial loan-to-value ratio calculation. (i)
Generally. For the purpose of determining set forth in section 3(c) of this appendix D.
term debt rated at least third highest The risk weight applicable to the unfunded
investment grade (without credit the appropriate risk weight in accordance
amount is the risk weight that would be
enhancements) by an NRSRO. with Table 2 of this appendix D, a bank shall
assigned to a loan with a LTV ratio computed
(iii) Appraisal or Evaluation. Any appraisal determine the loan-to-value ratio for a
using a loan amount that is equal to the
or evaluation used by a bank for the purposes mortgage loan secured by junior lien a one- funded amount of the loan plus the
of this appendix D must satisfy the real estate to-four family residential property, including maximum unfunded amount of the loan if it
lending and appraisal requirements set forth a structured mortgage or a home equity line were to negatively amortize to the fullest
in subpart C of 12 CFR part 34. of credit, by dividing the aggregate principal extent allowed under the applicable contract.
(2) Adjustments to the loan-to-value ratio. outstanding on the junior lien mortgage and (B) Loan-to-value ratio calculation. (1)
After origination of a mortgage loan, a bank all senior lien mortgages by the appraisal or Initial LTV ratio calculation. (i) Generally.
may update the value of a one-to-four family evaluation at the origination of the junior For the purpose of determining the
residential property based on an appraisal or lien. For the purposes of this calculation, if appropriate risk weight for a mortgage loan
evaluation only if the borrower refinances the a third party holds a senior or intervening secured by lien on a one-to-four family
mortgage loan and the bank extends lien mortgage with a negative amortization residential property in accordance with Table
additional funds. On a quarterly basis, a bank feature, the bank must adjust the principal 1 or Table 2 of this appendix D, a bank
may adjust the amount of the loan to reflect amount of the senior or intervening lien initially shall determine the loan-to-value
any decrease in the principal balance. In the mortgage to reflect the amount of that loan ratio using the lower of the purchase price or
case of a home equity line of credit, the bank the appraisal or evaluation at origination.
if it were to fully negatively amortize under
shall adjust the amount of the loan quarterly (ii) Loan level private mortgage insurance.
the applicable contract.
to reflect any increase in the balance of the In determining the loan-to-value ratio, a bank
(ii) Loan level private mortgage insurance.
loan. may take into account loan-level private
In determining the loan-to-value ratio, a bank
may take into account loan-level private mortgage insurance, provided the insurer is
TABLE 1.—RISK WEIGHTS APPLICABLE mortgage insurance, provided the insurer is not affiliated with the bank and has long-
TO MORTGAGE LOANS SECURED BY not affiliated with the bank and has long term term debt rated at least third highest
FIRST LIENS ON ONE-TO-FOUR FAM- debt rated at least third highest investment investment grade (without credit
enhancements) by an NRSRO.
ILY RESIDENTIAL PROPERTIES grade (without credit enhancements) by an
(iii) Appraisal or evaluation. Any appraisal
NRSRO.
or evaluation used by a bank for the purposes
Risk weight (iii) Appraisal or evaluation. Any appraisal
Loan-to-value ratio of this appendix D must satisfy the real estate
(in percent) or evaluation used by a bank for the purposes
lending and appraisal requirements set forth
of this section must satisfy the real estate
Less than or equal to 60 per- in subpart C of part 34 of this title 12.
lending and appraisal requirements set forth (2) Adjustments to the loan-to-value ratio.
cent ....................................... 20 in subpart C of 12 CFR part 34.
Greater than 60 percent but After origination of a mortgage loan, a bank
(2) Adjustments to the loan-to-value ratio. may update the value of a one-to-four family
less than or equal to 80 per- After origination of a mortgage loan, a bank
cent ....................................... 35 residential property based on an appraisal or
may update the value of a one-to-four family evaluation only if the borrower refinances the
Greater than 80 percent but residential property based on an appraisal or
less than or equal to 85 per- mortgage loan and the bank extends
evaluation only if the borrower refinances the additional funds. As the loan balance
cent ....................................... 50 mortgage loan and the bank extends
Greater than 85 percent but increases, banks must recalculate the LTV
additional funds. On a quarterly basis, a bank ratio on a quarterly basis.

less than or equal to 90 per-
may adjust the amount of the loan to reflect (iv) Grandfathered loans. (A) If a bank
cent ....................................... 75
any decrease in the principal balance. In the owns mortgage loans secured by liens on
Greater than 90 percent but
less than or equal to 95 per- case of a home equity line of credit, the bank one-to-four-family residential properties
cent ....................................... 100 shall adjust the amount of the loan quarterly prior to electing to apply the requirements set
Greater than 95 percent ........... 150 to reflect any increase in the balance of the forth in this appendix D of this Part 3, the
loan. bank may elect to determine the risk weights
applicable to all such mortgage loans Appendix D. The lowest single rating shall residual interests are risk-weighted according
according to the requirements set forth in apply if the collateral receives more than one to section 4 of this appendix D.
appendix A of this part 3. external rating. If the collateral is not rated, (v) Other collateralized claims. Unless
(B) If a bank has previously applied the a bank may determine the risk weight otherwise provided in section 3(b)(1) in this
requirements set forth in this appendix D to applicable to the collateralized portion of the appendix D (risk-weight categories), a bank
determine the risk weight applicable to a claim based on the risk weight of the central may determine the risk weight applicable to
mortgage loan secured by a lien on a one-to- government that issued the security, in the portion of a claim collateralized by a
four family residential property, the bank accordance with Table 3 or Table 4 of this
liquid and readily marketable externally
may not thereafter elect to determine the risk appendix D. The lowest single rating shall
weight applicable the mortgage loan rated debt security based on the external
apply if the central government receives two
according to the requirements set forth in or more external ratings. rating of the security, provided that the
section 3(b)(2)(iv)(A) of this appendix D. (iii) Claims guaranteed by foreign central security is externally rated at least
(3) Externally rated exposures. (i) Claims governments. A bank may determine the risk investment grade by an NRSRO, in
on foreign central governments. A bank shall weight applicable to the portion of a claim accordance with Table 3 or Table 4 of this
determine the risk weight applicable to an supported by an eligible guarantee from a appendix D. A bank may determine the risk
externally rated short-or long-term foreign foreign central government based on the weight applicable to a claim collateralized by
central government security or claim based long-term external rating of the central an externally rated recourse obligation, direct
on the external rating of the issued security government or the external rating of the credit substitute, residual interest, or asset-or
or claim in accordance with Table 3 or Table foreign central government’s senior long-term mortgage-backed security, provided the
4 of this appendix D. The lowest single rating debt (without credit enhancement), provided collateral is rated at least investment grade by
shall apply if there are two or more relevant that it is rated at least investment grade by an NRSRO, in accordance with section 4(c)(1)
external ratings. If the security or loan is not an NRSRO, in accordance with Table 3 of and Table 6 of this appendix D. The lowest
rated, a bank shall determine the risk weight this appendix D. The lowest single rating single rating shall apply if the collateral
based on the external rating of the issuing shall apply if there are two or more relevant receives more than one external rating.
central government in accordance with Table external ratings. (vi) Other guaranteed claims. Unless
3 of this appendix D. The lowest single rating (iv) Other externally rated claims. Unless
otherwise provided in section 3(b)(1) in this
shall apply if the central government receives otherwise provided in section 3(b)(1) in this
appendix D (risk-weight categories), a bank
two or more external ratings. Appendix D (risk-weight categories), a bank
(ii) Claims collateralized by foreign central may determine the risk weight applicable to
shall determine the risk weight applicable to
government debt securities. A bank may a claim on non-central government entity 9 the portion of a claim supported by an
determine the risk weight applicable to the based on the external rating of the claim, in eligible guarantee based on the external
portion of a claim collateralized by a liquid accordance with Table 3 or Table 4 of this rating of the guarantor’s senior long-term
and readily marketable short-or long-term appendix D. The lowest single rating shall debt (without credit enhancement), provided
foreign central government security based on apply if the claim receives more than one that it is rated at least investment grade by
the external rating of the issued security, external rating. This section does not apply an NRSRO, in accordance with Table 3 of
provided that either the central government to asset- and mortgage-backed securities, this appendix D. The lowest single rating
or the security is externally rated at least direct credit substitutes, and residual shall apply if the guarantor’s externally rated
investment grade by an NRSRO, in interests. Asset- and mortgage-backed senior long-term debt receives more than one
accordance with Table 3 or Table 4 of this securities, direct credit substitutes and external rating.
TABLE 3.—RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR LONG-TERM EXPOSURES

Central Non-central
government government
Long-term rating category Examples risk weight risk weight
(in percent) (in percent)
Highest investment grade rating .................................................................................................... AAA ............. 0 20

Second-highest investment grade rating ....................................................................................... AA ............... 20 20
Third-highest investment grade rating ........................................................................................... A .................. 20 35
Lowest-investment grade rating—plus ........................................................................................... BBB+ ........... 35 50
Lowest-investment grade rating ..................................................................................................... BBB ............. 50 75
Lowest-investment grade rating—minus ........................................................................................ BBB¥ ......... 75 100
One category below investment grade .......................................................................................... BB+,BB ....... 75 150
One category below investment grade—minus ............................................................................. BB¥ ............ 100 200
Two or more categories below investment grade ......................................................................... B, CCC ........ 150 200
Unrated (excludes unrated loans to non-central government 1 ..................................................... n/a ............... 200 200
1 Unrated claims on foreign central governments and unrated debt securities issued by non-central governments would receive the risk weight
indicated in Table 3. Other unrated claims, for example, unrated loans to non-central governments, would continue to be risk weighted under the
existing risk-based capital rules.
TABLE 4.—RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR SHORT-TERM EXPOSURES

Central Non-central
Short-term rating category Examples risk weight risk weight
Highest investment grade rating ........................................................................................................ A–1, P–1 .. 0 20

Second-highest investment grade rating ........................................................................................... A–2, P–2 .. 20 35
Lowest investment grade rating ........................................................................................................ A–3, P–3 .. 50 75
9 Non-central government entities include multilateral lending and regional development companies, business trusts, special purpose entities,
securities firms, insurance companies, bank holding institutions, partnerships, limited liability associations and other similar organizations.
companies, savings and loan holding companies,
TABLE 4.—RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR SHORT-TERM EXPOSURES—Continued

Central Non-central
Short-term rating category Examples risk weight risk weight
Unrated (excludes unrated loans to non-sovereigns) 1 ..................................................................... n/a ........... 100 100
1 Unrated claims on foreign central governments and unrated debt securities issued by non-central governments would receive the risk weight
indicated in Table 4. Other unrated claims, for example, unrated loans to non-central governments, would continue to be risk weighted under the
existing risk-based capital rules.
(c) Off-Balance Sheet Activities. (1) The (B) Unused portions of commitments with unconditionally cancelable,13 except for
risk weights assigned to off-balance sheet an original maturity exceeding one-year that commitments to originate mortgage loans
activities are determined by a two-step are not unconditionally cancelable; 12 secured by one-to-four family residential
process. First, the face amount of the off- however, commitments that are asset-backed properties provided in the ordinary course of
balance sheet item is multiplied by the commercial paper liquidity facilities must business.
appropriate credit conversion factor specified satisfy the eligibility requirements under (C) Unused portions of negatively
in this section. This calculation translates the section 3(c)(1)(vi)(B) of this appendix D. amortizing mortgage loans with an original
face amount of an off-balance sheet item into (C) Unused portions of negatively maturity of one-year or less that are secured
an on-balance sheet credit equivalent amortizing mortgage loans with an original by liens on one-to-four family residential
amount. Second, the resulting credit maturity exceeding one-year that are secured properties and that are not unconditionally
equivalent amount is then assigned to the by liens on one-to-four family residential cancelable. If a mortgage loan secured by a
proper risk-weight category using the criteria properties and are not unconditionally lien on a one-to-four family residential
regarding obligors, guarantors, and collateral cancelable. If a mortgage loan secured by a property may negatively amortize, the bank
listed in sections 3(b)(1) and 3(b)(3) of this lien on a one-to-four family residential shall calculate the risk-weighted asset
appendix D. Collateral and guarantees are property may negatively amortize, the bank amount for the unfunded portion of the loan
applied to the face amount of an off-balance shall calculate the risk-weighted asset by multiplying the amount of the off-balance
sheet item; however, with respect to amount for the unfunded portion of the loan sheet exposure by the applicable credit
derivative contracts, collateral and by multiplying the amount of the off-balance conversion factor.
guarantees are applied to the credit sheet exposure by the applicable credit (1) The amount of the off-balance sheet
equivalent amounts of such derivative conversion factor. exposure is the maximum unfunded amount
contracts. The following are the off-balance (1) The amount of the off-balance sheet of the loan if it were to negatively amortize
sheet items subject to this appendix D, and to the fullest extent allowed under the
exposure is the maximum unfunded amount
their respective credit conversion factors. applicable contract; and
of the loan if it were to negatively amortize
(i) 100 percent credit conversion factor. (A) (2) The applicable risk weight is the risk
to the fullest extent allowed under the
Risk participations purchased in bankers’ weight that would be assigned under section
applicable contract; and
acceptances. 3(b)(2) of this appendix D to a loan with a
(2) The applicable risk weight is the risk loan-to-value ratio computed using a loan
(B) Contingent obligations with a certain weight that would be assigned under section
draw down, e.g., legally binding agreements amount that is equal to the funded amount
3(b)(2) of this appendix D to a loan with an of the loan plus the maximum unfunded
to purchase assets at a specified future date. LTV computed using a loan amount that is
(C) Indemnification of customers whose amount of the loan if it were to negatively
equal to the funded amount of the loan plus amortize to the fullest extent allowed under
securities the bank has lent as agent. If the the maximum unfunded amount of the loan
customer is not indemnified against loss by the applicable contract.
if it were to negatively amortize to the fullest (v) Zero percent credit conversion factor.
the bank, the transaction is excluded from extent allowed under the applicable contract.
the risk-based capital calculation.10 (A) Unused portion of commitments,
(D) Revolving underwriting facilities, note regardless of maturity, if they are
(ii) 50 percent credit conversion factor. (A) issuance facilities, and similar arrangements
Transaction-related contingencies including, unconditionally cancelable 14 at any time at
pursuant to which the bank’s customer can the option of the bank and the bank has the
among other things, performance bonds and issue short-term debt obligations in its own
performance-based standby letters of credit contractual right to make, and in fact does
name, but for which the bank has a legally make, either—
related to a particular transaction.11 To the binding commitment to either:
extent permitted by law or regulation, (1) A separate credit decision based upon
(1) Purchase the obligations the customer the borrower’s current financial condition,
performance-based standby letters of credit is unable to sell by a stated date; or
include such things as arrangements backing before each drawing under the lending
(2) Advance funds to its customer if the facility; or
subcontractors’ and suppliers’ performance, obligations cannot be sold.
labor and materials contracts, and (2) An annual (or more frequent) credit
(iii) 20 percent credit conversion factor. (A) review based upon the borrower’s current
construction bids; Trade-related contingencies. These are short- financial condition to determine whether or
term self-liquidating instruments used to not the lending facility should be continued.
10 When a bank lends its own securities, the finance the movement of goods and are (B) The unused portion of retail credit card
transaction is treated as a loan. When a bank lends collateralized by the underlying shipment. A lines or other related plans that are
its own securities or, acting as agent, agrees to commercial letter of credit is an example of
indemnify a customer, the transaction is assigned unconditionally cancelable by the bank in
such an instrument. accordance with applicable law.
to the risk weight appropriate to the obligor or
collateral that is delivered to the lending or
(B) [Reserved]. (vi) Liquidity facility provided to asset-
indemnifying institution or to an indepdent (iv) 10 percent credit conversion factor. (A) backed commercial paper. (A) Noneligible
custodian acting on their behalf. Unused portion of asset-backed commercial asset-backed commercial paper liquidity
11 For purposes of this section, a ‘‘performance- paper liquidity facilities with an original facilities treated as recourse or direct credit
based standby letter of credit’’ is any letter of credit, maturity of one year or less that satisfy the substitute. Unused portion of asset-backed
or similar arrangement, however named or eligibility requirements under section commercial paper liquidity facilities that do
described, which represents an irrevocable 3(c)(1)(vi)(B) of this appendix. not meet the criteria for an eligible liquidity
obligation to the beneficiary on the part of the (B) Unused portions of commitments with
issuer to make payment on account of any default maturities of one year or less that are not 13 Participations in commitments are treated in
by the account party in the performance of a non-
financial or commercial obligation. Participations in accordance with section of appendix D.
performance-based standy letters of credit are 12 Participations in commitments are treated in 14 See section 1(c)(35) of appendix A to this
treated in accordance with 4 of this appendix D. accordance with section 4 of appendix D. part 3.
facility provided to asset-backed commercial any draws, the bank’s funding obligation is to-market value is positive, then the current
paper in accordance with section reduced to cover only those assets that satisfy credit exposure equals that mark-to-market
3(c)(1)(vi)(B) of this appendix must be treated the funding criteria under the asset quality value. If the mark-to-market is zero or
as recourse or as a direct credit substitute, test as provided in section 3(c)(1)(vi)(B)(1) of negative, then the current credit exposure is
and assessed the appropriate risk-based this appendix D. zero. The current credit exposure for
capital charge in accordance with section 4 (C) Exception to eligibility requirements for multiple derivative contracts executed with a
of this appendix. assets guaranteed by the United States single counterparty and subject to a
(B) Eligible asset-backed commercial paper Government or its agencies, or the central qualifying bilateral netting contract is
liquidity facility. Except as provided in government of an OECD country. determined as provided by section
section 3(c)(1)(vi)(C) of this appendix D, in Notwithstanding the eligibility requirements 3(c)(1)(vii)(B) of this appendix D.
order for the unused portion of an asset- for asset-backed commercial paper program (2) Potential future credit exposure. The
backed commercial paper liquidity facility to liquidity facilities in section 3(c)(1)(vi)(B), potential future credit exposure for a single
be eligible for either the 50 percent or 10 the unused portion of an asset-backed derivative contract, including a derivative
percent credit conversion factors under commercial paper liquidity facility may still contract with negative mark-to-market value,
sections 3(c)(1)(ii)(B) or 3(c)(1)(iv)(A) of this qualify for either the 50 percent or 10 percent
is calculated by multiplying the notional
appendix D, the asset-backed commercial credit conversion factors under sections
principal 15 of the derivative contract by one
paper liquidity facility must satisfy the 3(c)(1)(ii)(B) or 3(c)(1)(iv)(A) of this appendix
of the credit conversion factors in Table 5 of
following criteria: D, if the assets required to be funded by the
(1) At the time of draw, the asset-backed asset-backed commercial paper liquidity this appendix D, for the appropriate
commercial paper liquidity facility must be facility are guaranteed, either conditionally category.16 The potential future credit
subject to an asset quality test that: or unconditionally, by the United States exposure for gold contracts shall be
(i) Precludes funding of assets that are 90 Government or its agencies, or the central calculated using the foreign exchange rate
days or more past due or in default; and government of an OECD country. conversion factors. For any derivative
(ii) If the assets that an asset-backed (vii) Derivative contracts. (A) Calculation contract that does not fall within one of the
commercial paper liquidity facility is of credit equivalent amounts. The credit specified categories in Table 5 of this
required to fund are externally rated equivalent amount of a derivative contract appendix D, the potential future credit
securities at the time they are transferred into equals the sum of the current credit exposure exposure shall be calculated using the other
the program, the asset-backed commercial and the potential future credit exposure of commodity conversion factors. Subject to
paper liquidity facility must be used to fund the derivative contract. The calculation of examiner review, banks should use the
only securities that are externally rated credit equivalent amounts must be measured effective rather than the apparent or stated
investment grade at the time of funding. If in U.S. dollars, regardless of the currency or notional amount in calculating the potential
the assets are not externally rated at the time currencies specified in the derivative future credit exposure. The potential future
they are transferred into the program, then contract. credit exposure for multiple derivatives
they are not subject to this investment grade (1) Current credit exposure. The current contracts executed with a single counterparty
requirement. credit exposure for a single derivative and subject to a qualifying bilateral netting
(2) The asset-backed commercial paper contract is determined by the mark-to-market contract is determined as provided by section
liquidity facility must provide that, prior to value of the derivative contract. If the mark- 3(c)(1)(vii)(B)(1) of this appendix D.
TABLE 5.—CONVERSION FACTOR MATRIX 1

Foreign Precious Other
Interest rate exchange rate Equity
Remaining maturity 2 metals commodity
(in percent) and gold (in percent) (in percent) (in percent)
(in percent)
One year or less .................................................................. 0.0 1.0 6.0 7.0 10.0

Over one year to five ........................................................... 0.5 5.0 8.0 7.0 12.0
Over five years ..................................................................... 1.5 7.5 10.0 8.0 15.0
1 For derivative contracts with multiple exchanges of principal, the conversion factors are multiplied by the number of remaining payments in
the derivative contract.
2 For derivative contracts that automatically reset to zero value following a payment, the remaining maturity equals the time until the next pay-
ment. However, interest rate contracts with remaining maturities of greater than one year shall be subject to a minimum conversion factor of 0.5
percent.
(B) Derivative contracts subject to a (i) Net current credit exposure. The net potential future credit exposure is calculated
qualifying bilateral netting contract. (1) current credit exposure is the net sum of all as:
Netting calculation. The credit equivalent positive and negative mark-to-market values Anet=0.4×Agross+(0.6×NGR×Agross)
amount for multiple derivative contracts of the individual derivative contracts subject Anet is the adjusted sum of the potential
executed with a single counterparty and to a qualifying bilateral netting contract. If future credit exposure, Agross is the gross
subject to a qualifying bilateral netting the net sum of the mark-to-market value is potential future credit exposure, and NGR is
contract as provided by section positive, then the net current credit exposure the net to gross ratio. Agross is the sum of the
(3)(c)(1)(vii)(B)(2) of this appendix D is equals that net sum of the mark-to-market potential future credit exposure (as
calculated by adding the net current credit value. If the net sum of the mark-to-market determined under section 3(c)(1)(vii)(A)(2) of
exposure and the adjusted sum of the value is zero or negative, then the net current this appendix D) for each individual
potential future credit exposure for all credit exposure is zero. derivative contract subject to the qualifying
derivative contracts subject to the qualifying (ii) Adjusted sum of the potential future bilateral netting contract. The NGR is the
bilateral netting contract. credit exposure. The adjusted sum of the ratio of the net current credit exposure to the
gross current credit exposure. In calculating
15 For purposes of calculating either the potential which the notional principal is equivalent to the which payments are made based upon two floating
future credit exposure under section cash flows, total notional principal is the net indices, so-called floating/floating or basis swaps;
3(c)(1)(vii)(A)(2) of this appendix D or the gross receipts to each party falling due on each value date the credit equivalent amount is measured solely on
potential future credit exposure under section in each currency. the basis of the current credit exposure.
3(c)(1)(vii)(B)(1)(ii) of this appendix D for foreign 16 No potential future credit exposure is
exchange contracts and other similar contracts in calculated for single currency interest rate swaps in
the NGR, the gross current credit exposure (C) Risk weighting. Once the bank (1) In the case of a direct credit substitute
equals the sum of the positive current credit determines the credit equivalent amount for in which a bank has conveyed a risk
exposures (as determined under section a derivative contract or a set of derivative participation, the full amount of the assets
3(c)(1)(vii)(A)(1) of this appendix D) of all contracts subject to a qualifying bilateral that are supported by the direct credit
individual derivative contracts subject to the netting contract, the bank assigns that substitute is converted to a credit equivalent
qualifying bilateral netting contract. amount to the risk weight category amount using a 100 percent conversion
(2) Qualifying bilateral netting contract. In appropriate to the counterparty, or, if factor. The pro rata share of the credit
determining the current credit exposure for relevant, the nature of any collateral or equivalent amount that has been conveyed
multiple derivative contracts executed with a guarantee.18 through a risk participation is then assigned
single counterparty, a bank may net (D) Exceptions. The following derivative to whichever risk-weight category is lower:
derivative contracts subject to a qualifying contracts are not subject to the above
the risk-weight category appropriate to the
bilateral netting contract by offsetting calculation, and therefore, are not part of the
obligor in the underlying transaction, after
positive and negative mark-to-market values, denominator of a national bank’s risk-based
capital ratio: considering any associated guarantees or
provided that: collateral, or the risk-weight category
(i) The qualifying bilateral netting contract (1) An exchange rate contract with an
original maturity of 14 calendar days or appropriate to the party acquiring the
is in writing.
less; 19 and participation. The pro rata share of the credit
(ii) The qualifying bilateral netting contract
(2) A derivative contract that is traded on equivalent amount that has not been
is not subject to a walkaway clause.
(iii) The qualifying bilateral netting an exchange requiring the daily payment of participated out is assigned to the risk-weight
contract creates a single legal obligation for any variations in the market value of the category appropriate to the obligor after
all individual derivative contracts covered by contract. considering any associated guarantees or
the qualifying bilateral netting contract. In collateral.
Section 4. Securitizations. (2) In the case of a direct credit substitute
effect, the qualifying bilateral netting contract
must provide that the bank would have a (a) Credit equivalent amounts and risk in which the bank has acquired a risk
single claim or obligation either to receive or weights of recourse obligations and direct participation, the acquiring bank’s pro rata
to pay only the net amount of the sum of the credit substitutes. (1) Credit-equivalent share of the direct credit substitute is
positive and negative mark-to-market values amount. Except as otherwise provided, the multiplied by the full amount of the assets
on the individual derivative contracts credit-equivalent amount for a recourse that are supported by the direct credit
covered by the qualifying bilateral netting obligation or direct credit substitute is the substitute and converted using a 100 percent
contract. The single legal obligation for the full amount of the credit-enhanced assets for credit conversion factor. The resulting credit
net amount is operative in the event that a which the bank directly or indirectly retains equivalent amount is then assigned to the
counterparty, or a counterparty to whom the or assumes credit risk multiplied by a 100
risk-weight category appropriate to the
percent conversion factor.
qualifying bilateral netting contract has been obligor in the underlying transaction, after
(2) Risk-weight factor. To determine the
assigned, fails to perform due to any of the considering any associated guarantees or
bank’s risk-weighted assets for off-balance
following events: default, insolvency, collateral.
sheet recourse obligations and direct credit
bankruptcy, or other similar circumstances. (3) In the case of a direct credit substitute
substitutes, the credit equivalent amount is
(iv) The bank obtains a written and that takes the form of a syndication where
assigned to the risk category appropriate to
reasoned legal opinion(s) that represents, the obligor in the underlying transaction, each bank or participating entity is obligated
with a high degree of certainty, that in the after considering any associated guarantees only for its pro rata share of the risk and
event of a legal challenge, including one or collateral. For a direct credit substitute there is no recourse to the originating entity,
resulting from default, insolvency, that is an on-balance sheet asset (e.g., a each bank’s credit equivalent amount will be
bankruptcy, or similar circumstances, the purchased subordinated security), a bank calculated by multiplying only its pro rata
relevant court and administrative authorities must calculate risk-weighted assets using the share of the assets supported by the direct
would find the bank’s exposure to be the net amount of the direct credit substitute and the credit substitute by a 100 percent conversion
amount under: full amount of the assets it supports, i.e., all factor. The resulting credit equivalent
(A) The law of the jurisdiction in which the the more senior positions in the structure. amount is then assigned to the risk-weight
counterparty is chartered or the equivalent (b) Credit equivalent amount and risk category appropriate to the obligor in the
location in the case of noncorporate entities, weight of participations in, and syndications underlying transaction, after considering any
and if a branch of the counterparty is of, direct credit substitutes. The credit associated guarantees or collateral.
involved, then also under the law of the equivalent amount for a participation interest (c) Externally rated positions: credit-
jurisdiction in which the branch is located; in, or syndication of, a direct credit substitute equivalent amounts and risk weights. (1)
(B) The law of the jurisdiction that governs is calculated and risk weighted as follows: Traded positions. With respect to a recourse
the individual derivative contracts covered obligation, direct credit substitute, residual
by the bilateral netting contract; and qualifying bilateral netting contract may not be interest (other than a credit-enhancing
(C) The law of the jurisdiction that governs legally enforceable in any one of the bodies of law interest-only strip) or asset-or mortgage-
the qualifying bilateral netting contract. described in sections 3(c)(1)(vii)(B)(2)(i) through backed security that is a ‘‘traded position’’
(v) The bank establishes and maintains (iii) of this appendix D, the underlying derivative and that has received an external rating on
procedures to monitor possible changes in contracts may not be netted for the purposes of this
section.
a long-term position that is one grade below
relevant law and to ensure that the qualifying investment grade or better or a short-term
18 Derivative contracts are an exception to the
bilateral netting contract continues to satisfy position that is investment grade, the bank
the requirement of this section. general rule of applying collateral and guarantees to
the face value of off-balance sheet items. The may multiply the face amount of the position
(vi) The bank maintains in its files sufficiency of collateral and guarantees is by the appropriate risk weight, determined in
documentation adequate to support the determined on the basis of the credit equivalent accordance with Table 6 or Table 7 of this
netting of a derivative contract.17 amount of derivative contracts. However, collateral appendix D.20 If a traded position receives
and guarantees held against a qualifying bilateral more than one external rating, the lowest
17 By netting individual derivative contracts for netting contract is not recognized for capital
purposes unless it is legally available for all
single rating will apply.
the purpose of calculating its credit equivalent
amount, a bank represents that documentation contracts included in the qualifying bilateral netting
adequate to support the netting of a set of derivative contract. 20 Stripped mortgage-backed securities or other
contract is in the bank’s files and available for 19 Notwithstanding section 3(c)(1)(v)(A) of this similar instruments, such as interest-only or
inspection by the OCC. Upon determination by the appendix D, gold contracts do not qualify for this principal-only strips, that are not credit enhancing
OCC that a bank’s files are inadequate or that a exception. must be assigned to the 100 percent risk category.
TABLE 6.—RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR LONG-TERM EXPOSURES
Risk weight
Long-term rating category Examples (in percent)
Highest investment grade ............................................................................................................................ AAA ........................... 20

Second highest investment grade ............................................................................................................... AA .............................. 20
Third highest investment grade ................................................................................................................... A ................................ 35
Lowest investment grade—plus .................................................................................................................. BBB+ ......................... 50
Lowest investment grade ............................................................................................................................. BBB ........................... 75
Lowest-investment grade—minus ............................................................................................................... BBB¥ ........................ 100
One category below investment grade ........................................................................................................ BB+, BB ..................... 200
One category below investment grade—minus .......................................................................................... BB¥ .......................... 200
TABLE 7.—RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR SHORT-TERM EXPOSURES
Risk Weight
Short-term rating category Examples (in percent)
Highest investment grade ............................................................................................................................ A–1, P–1 ................... 20

Second highest investment grade ............................................................................................................... A–2, P–2 ................... 35
Lowest investment grade ............................................................................................................................. A–3, P–3 ................... 75
(2) Non-traded positions. A recourse credit support to the unrated position until balance sheet (net of any existing associated
obligation, direct credit substitute, residual the unrated position matures. deferred tax liability), even if the amount of
interest (but not a credit-enhancing interest- (e) Residual Interests—(1) Concentration risk-based capital required to be maintained
only strip) or asset-or mortgage-backed limit on credit-enhancing interest-only strips. exceeds the full risk-based capital
security extended in connection with a In addition to the capital requirement requirement for the assets transferred.
securitization that is not a ‘‘traded position’’ provided by section 4(e)(2) of this appendix Transactions that, in substance, result in the
may be assigned a risk weight in accordance D, a bank must deduct from Tier 1 capital all retention of credit risk associated with a
with section 4(c)(1) of this appendix D if: credit-enhancing interest-only strips in transferred residual interest will be treated as
(i) It has been externally rated by more excess of 25 percent of Tier 1 capital in if the residual interest was retained by the
than one NRSRO; accordance with section 2(c)(2)(iv) of bank and not transferred.
(ii) It has received an external rating on a appendix A of this part. (4) Residual interests and other recourse
long-term position that is one category below (2) Credit-enhancing interest-only strip obligations. Where the aggregate capital
investment grade or better or a short-term capital requirement. After applying the requirement for residual interests (including
position that is investment grade by all concentration limit to credit-enhancing credit-enhancing interest-only strips) and
NRSROs providing a rating; interest-only strips in accordance with recourse obligations arising from the same
(iii) The ratings are publicly available; and section 4(e)(1) of this appendix D, a bank transfer of assets exceed the full risk-based
(iv) The ratings are based on the same must maintain risk-based capital for a credit- capital requirement for those assets, a bank
criteria used to rate traded positions. enhancing interest-only strip equal to the must maintain risk-based capital equal to the
If the ratings are different, the lowest rating remaining amount of the credit-enhancing greater of the risk-based capital requirement
will determine the risk category to which the interest-only strip (net of any existing for the residual interest as calculated under
recourse obligation, residual interest or direct associated deferred tax liability), even if the section 4(e)(1)–(3) of this appendix D or the
credit substitute will be assigned. amount of risk-based capital required to be full risk-based capital requirement for the
(d) Senior positions not externally rated. maintained exceeds the full risk-based assets transferred.
For a recourse obligation, direct credit capital requirement for the assets transferred. (f) Positions that are not rated by an
substitute, residual interest or asset- or Transactions that, in substance, result in the NRSRO. A position (but not a residual
mortgage-backed security that is not retention of credit risk associated with a interest) extended in connection with a
externally rated but is senior or preferred in transferred credit-enhancing interest-only securitization and that is not rated by an
all features to a traded position (including strip will be treated as if the credit-enhancing NRSRO may be risk-weighted based on the
collateralization and maturity), a bank may interest-only strip was retained by the bank bank’s determination of the credit rating of
apply a risk weight to the face amount of the and not transferred. the position, as specified in Table 8 of this
senior position in accordance with section (3) Other residual interests capital appendix D, multiplied by the face amount
4(c)(1) of this appendix D, based upon the requirement. Except as provided in sections of the position. In order to qualify for this
traded position, subject to any current or 3(d) or (e) of this appendix D, a bank must treatment, the bank’s system for determining
prospective supervisory guidance and the maintain risk-based capital for a residual the credit rating of the position must meet
bank satisfying the OCC that this treatment interest (excluding a credit-enhancing one of the three alternative standards set out
is appropriate. This section will apply only interest-only strip) equal to the face amount in section 4(f)(1)through (3) of this appendix
if the traded position provides substantive of the residual interest that is retained on the D.
TABLE 8.—RISK WEIGHTS BASED ON INTERNAL RATINGS

Risk weight
Rating category Examples (in percent)
Investment grade ......................................................................................................................................... BBB or better ............ 100

One category below investment grade ........................................................................................................ BB .............................. 200
(1) Internal risk rating used for asset- satisfaction that the criteria underlying the treatment outlined in section 2(c)(4) and any
backed programs. A direct credit substitute NRSRO’s assignment of ratings for the other paragraph (other than paragraph (h)) of
(but not a purchased credit-enhancing program are satisfied for the particular this section 4, with respect to a transfer of a
interest-only strip) is assumed by a bank in position. If a bank participates in a small business loan or a lease of personal
connection with an asset-backed commercial securitization sponsored by another party, property with recourse that is a sale under
paper program sponsored by the bank and the OCC may authorize the bank to use this generally accepted accounting principles, a
the bank is able to demonstrate to the approach based on a program rating obtained qualified bank may elect to apply the
satisfaction of the OCC, prior to relying upon by the sponsor of the program. following treatment:
its use, that the bank’s internal credit risk (3) Computer Program. The bank is using (i) The bank establishes and maintains a
rating system is adequate. Adequate internal an acceptable credit assessment computer non-capital reserve under generally accepted
credit risk rating systems usually contain the program to determine the rating of a direct accounting principles sufficient to meet the
following criteria: credit substitute or recourse obligation (but reasonable estimated liability of the bank
(i) The internal credit risk system is an not a residual interest) extended in under the recourse arrangement; and
integral part of the bank’s risk management connection with a structured finance (ii) For purposes of calculating the bank’s
system that explicitly incorporates the full program. A NRSRO must have developed the risk-based capital ratio, the bank includes
range of risks arising from a bank’s computer program and the bank must only the face amount of its recourse in its
participation in securitization activities; demonstrate to the OCC’s satisfaction that risk-weighted assets.
(ii) Internal credit ratings are linked to ratings under the program correspond (3) Limit on aggregate amount of recourse.
measurable outcomes, such as the probability credibly and reliably with the rating of traded The total outstanding amount of recourse
that the position will experience any loss, the positions. retained by a qualified bank with respect to
position’s expected loss given default, and (g) Limitations on risk-based capital transfers of small business loans and leases
the degree of variance in losses given default requirements. (1) Low-level exposure rule. If
of personal property and included in the risk-
on that position; the maximum contractual exposure to loss
weighted assets of the bank as described in
(iii) The bank’s internal credit risk system retained or assumed by a bank is less than
section 4(h)(2) of this appendix D may not
must separately consider the risk associated the effective risk-based capital requirement,
exceed 15 percent of the bank’s total capital
with the underlying loans or borrowers, and as determined in accordance with section
after adjustments and deductions, unless the
the risk associated with the structure of a 4(a) of this appendix D, for the asset
OCC specifies a greater amount by order.
particular securitization transaction; supported by the bank’s position, the risk
(4) Bank that ceases to be qualified or that
(iv) The bank’s internal credit risk system based capital required under this appendix D
exceeds aggregate limit. If a bank ceases to
must identify gradations of risk among is limited to the bank’s contractual exposure,
be a qualified bank or exceeds the aggregate
‘‘pass’’ assets and other risk positions; less any recourse liability account
(v) The bank must have clear, explicit established in accordance with generally limit in section 4(h)(3) of this appendix D,
criteria that are used to classify assets into accepted accounting principles. This the bank may continue to apply the capital
each internal risk grade, including subjective limitation does not apply when a bank treatment described in section 4(h)(2) of this
factors; provides credit enhancement beyond any appendix D to transfers of small business
(vi) The bank must have independent contractual obligation to support assets that loans and leases of personal property that
credit risk management or loan review it has sold. occurred when the bank was qualified and
personnel assigning or reviewing the credit (2) Related on-balance sheet assets. If an did not exceed the limit.
risk ratings; asset is included in the calculation of the (5) Prompt Corrective Action not affected.
(vii) An internal audit procedure should risk-based capital requirement under this (i) A bank shall compute its capital without
periodically verify that internal risk ratings section 4 of this appendix D and also appears regard to this section 4(h) for purposes of
are assigned in accordance with the bank’s as an asset on a bank’s balance sheet, the prompt corrective action (12 U.S.C. 1831o
established criteria; asset is risk-weighted only under this section and 12 CFR part 6) unless the bank is an
(viii) The bank must monitor the 4 of this appendix D, except in the case of adequately or well capitalized bank (without
performance of the internal credit risk ratings loan servicing assets and similar applying the capital treatment described in
assigned to nonrated, nontraded direct credit arrangements with embedded recourse this section 4(h)) and, after applying the
substitutes over time to determine the obligations or direct credit substitutes. In that capital treatment described in this section
appropriateness of the initial credit risk case, both the on-balance sheet servicing 4(h), the bank would be well capitalized.
rating assignment and adjust individual assets and the related recourse obligations or (ii) A bank shall compute its capital
credit risk ratings, or the overall internal direct credit substitutes must both be without regard to this section 4(h) for
credit risk ratings system, as needed; and separately risk weighted and incorporated purposes of 12 U.S.C. 1831o(g) regardless of
(ix) The internal credit risk system must into the risk-based capital calculation. the bank’s capital level.
make credit risk rating assumptions that are (h) Alternative Capital Calculation for (i) Additional capital charge for revolving
consistent with, or more conservative than, Small Business Obligations. (1) Definitions. securitizations with an early amortization
the credit risk rating assumptions and For purposes of this section 4(h): trigger. A bank that securitizes revolving
methodologies of NRSROs. Qualified bank means a bank that: credits where the securitization structure
(2) Program Ratings. A direct credit (A) Is well capitalized as defined in 12 CFR contains an early amortization provision
substitute or recourse obligation (but not a 6.4 without applying the capital treatment must maintain risk-based capital against the
residual interest) is assumed or retained by described in this section 4(h), or investors’ interest as required under this
a bank in connection with a structured (B) Is adequately capitalized as defined in section.
finance program and a NRSRO has reviewed 12 CFR 6.4 without applying the capital (1) Capital for securitizations of revolving
the terms of the program and stated a rating treatment described in this section 4(h) and credit exposures that incorporate early-
for positions associated with the program. If has received written permission from the amortization provisions will be assessed
the program has options for different appropriate district office of the OCC to based on a comparison of the securitization’s
combinations of assets, standards, internal apply the capital treatment described in this annualized three-month average excess
credit enhancements and other relevant section 4(h). spread against the excess spread trapping
factors, and the NRSRO specifies ranges of Recourse has the meaning given to such point.
rating categories to them, the bank may apply term under generally accepted accounting (2) To calculate the securitization’s excess
the rating category applicable to the option principles. spread trapping point ratio:
that corresponds to the bank’s position. In Small business means a business that (i) A bank must first calculate the
order to rely on a program rating, the bank meets the criteria for a small business annualized three month ratio for excess
must demonstrate to the OCC’s satisfaction concern established by the Small Business spread as follows:
that the credit risk rating assigned to the Administration in 13 CFR part 121 pursuant (A) For each of the three months, divide
program meets the same standards generally to 15 U.S.C. 632. the month’s excess spread by the outstanding
used by NRSROs for rating traded positions. (2) Capital and reserve requirements. principal balance of the underlying pool of
The bank must also demonstrate to the OCC’s Notwithstanding the risk-based capital exposures at the end of each month.
(B) Calculate the average ratio for the three (3) Banks shall compare the excess spread collateral, or guarantor. For securitizations
months, then convert the result to a trapping point ratio to the ratios contained in that do not require excess spread to be
compound annual rate. Table 9 in appendix D to determine the trapped, or that specify trapping points based
(ii) Then the bank must divide the appropriate conversion factor to apply to the primarily on performance measures other
annualized three month ratio for excess investor’s interest. The amount of investor’s than the three-month average excess spread,
spread by the excess spread trapping point interest after conversion is then assigned to
that is specified in the documentation for the a risk-weight category in accordance with the excess spread trapping point is 4.5
securitization. that appropriate to the underlying obligor, percent.
TABLE 9.—EARLY AMORTIZATION CREDIT CONVERSION FACTORS

CCF
3-month average excess spread (in percent)
133.33 percent of trapping point or more ............................................................................................................................................ 0

Less than 133.33 percent to 100 percent of trapping point ................................................................................................................ 5
Less than 100 percent to 75 percent of trapping point ....................................................................................................................... 15
Less than 75 percent to 50 percent of trapping point ......................................................................................................................... 50
Less than 50 percent of trapping point ............................................................................................................................................... 100
(4) Limitations on risk-based capital 78o–4(c)(5), 78q, 78q–1, and 78w; 31 U.S.C. The risk-based capital guidelines include
requirements. For a bank subject to the early 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, both a definition of capital and a framework
amortization requirements in this section, the and 4128. for calculating weighted risk assets by
total risk-based capital requirement for all of assigning assets and off-balance sheet items
the bank’s exposures to a securitization of
2. In appendix A to part 208, the to broad risk categories. A bank’s risk-based
revolving retail credits is limited to the following amendments are proposed: capital ratio is calculated by dividing its
greater of the risk-based capital requirement a. Section I, Overview, is revised. qualifying capital (the numerator of the ratio)
for residual interests plus any early b. In section II, Definition of by its weighted risk assets (the
amortization charges as described in this Qualifying Capital for the Risk-Based denominator).3 The definition of qualifying
section 4(i), or the risk-based capital Capital Ratio, the first paragraph is capital is outlined in section II, and the
requirement for the underlying securitized revised. procedures for calculating weighted risk
assets calculated as if the bank continued to c. In section III.A, Procedures, the first assets are discussed in sections III and IV.
hold the assets on its balance sheet. paragraph is revised, the fifth paragraph In addition, when certain banks that
Section 5. Target Ratios engage in trading activities calculate their
is redesignated as the sixth paragraph,
risk-based capital ratios under this appendix
(a) All national banks are expected to and a new fifth paragraph is added. A, they must also refer to appendix E of this
maintain a minimum ratio of total capital d. In section III.C, the first paragraph part, which incorporates capital charges for
(after deductions) to risk-weighted assets of is revised. certain market risks into the risk-based
8.0 percent. e. Section IV is removed and a new capital ratios. When calculating their risk-
(b) Tier 2 capital elements qualify as part section IV, Alternative Approach for based capital ratios under this appendix A,
of a national bank’s total capital base up to Computing Weighted Risk Assets and such banks are required to refer to appendix
a maximum of 100 percent of that bank’s Tier E of this part for supplemental rules to
1 capital. Off-Balance-Sheet Items, is added.
f. Attachment I is removed. determine qualifying and excess capital,
(c) In addition to the standards established calculate weighted risk assets, calculate
by these risk-based capital guidelines, all Appendix A To Part 208—Capital market risk equivalent assets, and calculate
national banks must maintain a minimum Adequacy Guidelines For State Member risk-based capital ratios adjusted for market
capital-to-total assets ratio in accordance risk.
with the provisions of 12 CFR part 3. Banks: Risk-Based Measure
The risk-based capital guidelines apply to
I. Overview all state member banks on a consolidated
Federal Reserve System
The Board of Governors of the Federal basis. They are to be used in the examination
12 CFR Chapter II Reserve System has adopted a risk-based and supervisory process as well as in the
capital measure to assist in the assessment of analysis of applications acted upon by the
Authority and Issuance the capital adequacy of state member banks.1 Federal Reserve. Thus, in considering an
For the reasons set forth in the joint The principal objectives of this measure are application filed by a state member bank, the
preamble, the Board of Governors of the to: (i) Make regulatory capital requirements Federal Reserve will take into account the
more sensitive to differences in risk profiles bank’s risk-based capital ratios, the
Federal Reserve System proposes to reasonableness of its capital plans, and the
amend parts 208 and 225 of chapter II among banks; (ii) factor off-balance sheet
exposures into the assessment of capital extent to which it meets the risk-based
of title 12 of the Code of Federal capital standards.
adequacy; (iii) minimize disincentives to
Regulations as follows: holding liquid, low-risk assets; and (iv) The risk-based capital ratios focus
achieve greater consistency in the evaluation principally on broad categories of credit risk,
PART 208—MEMBERSHIP OF STATE of the capital adequacy of major banks although the framework for assigning assets
BANKING INSTITUTIONS IN THE throughout the world.2 and off-balance-sheet items to risk categories
FEDERAL RESERVE SYSTEM does incorporate elements of transfer risk, as
(REGULATION H) 1 A leverage capital measure for state member
well as limited instances of interest rate and
banks is outlined in appendix B of this part. market risk. The framework incorporates
1. The authority citation for part 208 2 The risk-based capital measure is based upon a risks arising from traditional banking
continues to read as follows: framework developed jointly by supervisory
Authority: 12 U.S.C. 24, 36, 92a, 93a, authorities from the countries represented on the 3 Banks will initially be expected to utilize
Basel Committee on Banking Supervision (Basel period-end amounts in calculating their risk-based
248(a), 248(c), 321–338a, 371d, 461, 481–486,
Supervisors’ Committee) and endorsed by the capital ratios. When necessary and appropriate,
601, 611, 1814, 1816, 1818, 1820(d)(9), Group of Ten Central Bank Governors. The ratios based on average balances may also be
1823(j), 1828(o), 1831, 1831o, 1831p–1, framework is described in a paper prepared by the calculated on a case-by-case basis. Moreover, to the
1831r–1, 1831w, 1831x, 1835a, 1882, 2901– Basel Supervisors’ Committee entitled extent banks have data on average balances that can
2907, 3105, 3310, 3331–3351, and 3906– ‘‘International Convergence of Capital be used to calculate risk-based ratios, the Federal
3909; 15 U.S.C. 78b, 78l(b), 78l(g), 78l(i), Measurement,’’ July 1988. Reserve will take such data into account.
activities as well as risks arising from consider the need to modify the guidelines in IV. Alternative Approach for Computing
nontraditional activities. The risk-based light of any significant changes in the Weighted Risk Assets and Off-Balance-sheet
capital ratios do not, however, incorporate economy, financial markets, banking Items
other factors that can affect an institution’s practices, or other relevant factors. A. Scope of Application
financial condition. These factors include
II. * * * A bank may elect to use the Alternative
overall interest-rate exposure; liquidity,
funding and market risks; the quality and A bank’s qualifying total capital consists of Approach for computing weighted risk assets
level of earnings; investment, loan portfolio, two types of capital components: ‘‘core and off-balance sheet items set forth in this
and other concentrations of credit; certain capital elements’’ (comprising tier 1 capital) section IV by giving the Federal Reserve
risks arising from nontraditional activities; and ‘‘supplementary capital elements’’ written notice on the first day of the quarter
the quality of loans and investments; the (comprising tier 2 capital). These capital during which the bank elects to begin using
effectiveness of loan and investment policies; elements and the various limits, restrictions, the Alternative Approach. A bank that has
and management’s overall ability to monitor and deductions to which they are subject, are elected to apply the Alternative Approach
and control financial and operating risks, discussed in this section II. may opt out of the Alternative Approach after
including the risks presented by * * * * * it has given the Federal Reserve 30 days prior
concentrations of credit and nontraditional written notice. The Federal Reserve may
activities. III. * * * require a bank to apply the Alternative
In addition to evaluating capital ratios, an A. * * * Approach if the Federal Reserve determines
overall assessment of capital adequacy must Assets and credit-equivalent amounts of that the Alternative Approach would
take account of those factors, including, in off-balance-sheet items of state member produce risk-based capital requirements that
particular, the level and severity of problem banks are assigned to one of several broad more accurately reflect the risk profile of the
and classified assets as well as a bank’s risk categories, according to the obligor, or, bank or would otherwise enhance the safety
exposure to declines in the economic value if relevant, the guarantor, the nature of the and soundness of the bank.
of its capital due to changes in interest rates. collateral, or an external rating. The aggregate A bank that applies the Alternative
For this reason, the final supervisory dollar value of the amount in each category Approach must apply all the procedures set
judgment on a bank’s capital adequacy may is then multiplied by the risk weight forth in this section IV and also must apply
differ significantly from conclusions that associated with the category. The resulting all the procedures set forth in section III that
might be drawn solely from the level of its weighted values from each of the risk are not inconsistent with the procedures in
risk-based capital ratios. categories are added together, and this sum section IV.
The risk-based capital guidelines establish is the bank’s total weighted risk assets that B. External Ratings, Collateral, Guarantees,
a minimum ratio of qualifying total capital to comprise the denominator of the risk-based and Other Considerations
weighted risk assets of 8 percent, of which capital ratios.
at least 4 percentage points must be in the 1. External Credit Ratings. A bank must use
form of tier 1 capital. In light of the * * * * * Table 1 in this section IV.B.1. to assign risk
considerations just discussed, banks A bank may elect to apply the alternative weights to covered claims with an original
generally are expected to operate well above procedures for computing weighted risk maturity of one year or more and Table 2 in
the minimum risk-based ratios. In particular, assets set forth in section IV of this appendix this section IV.B.1. to assign risk weights to
banks contemplating significant expansion A (‘‘Alternative Approach’’). The Federal covered claims with an original maturity of
proposals are expected to maintain strong Reserve also may require a bank to apply the less than one year. Covered claims are all
capital levels substantially above the Alternative Approach if the Federal Reserve claims other than (i) claims on an excluded
minimum ratios and should not allow determines that the Alternative Approach entity, (ii) loans to non-sovereigns that do not
significant diminution of financial strength would produce risk-based capital have an external rating, and (iii) OTC
below these strong levels to fund their requirements that more accurately reflect the derivative contracts. Excluded entities are (i)
expansion plans. Institutions with high or risk profile of the bank or would otherwise the U.S. central government and U.S.
inordinate levels of risk are also expected to enhance the safety and soundness of the government agencies, (ii) state and local
operate well above minimum capital bank. A bank that applies the Alternative governments of the United States and other
standards. In all cases, institutions should Approach must apply all the procedures set countries of the OECD, (iii) U.S. government-
hold capital commensurate with the level forth in section IV of this appendix A and sponsored agencies, and (iv) U.S. depository
and nature of the risks to which they are also must apply all the procedures set forth institutions and foreign banks.
exposed. Banks that do not meet the in this section that are not inconsistent with A bank must use column three of the tables
minimum risk-based capital standard, or that the procedures in section IV. for covered claims on a non-U.S. sovereign 58
are otherwise considered to be inadequately * * * * * and column four of the tables for covered
capitalized, are expected to develop and C. * * * claims on an entity other than a non-U.S.
implement plans acceptable to the Federal sovereign (excluding securitization
Reserve for achieving adequate levels of Assets and on-balance-sheet credit exposures). A bank must use column five of
capital within a reasonable period of time. equivalent amounts are assigned to the the tables for covered claims that are
The Board will monitor the following risk weight categories: 0 percent, securitization exposures, which include
implementation and effect of these guidelines 20 percent, 50 percent, or 100 percent. A asset-backed securities, mortgage-backed
in relation to domestic and international brief explanation of the components of each securities, recourse obligations, direct credit
developments in the banking industry. When category follows. substitutes, and residual interests (other than
necessary and appropriate, the Board will * * * * * credit-enhancing interest-only strips).
TABLE 1.—RISK WEIGHTS BASED ON LONG-TERM EXTERNAL RATINGS

Non-U.S. sov- Securitization
Non-sovereign
ereign risk exposure risk
Long-term rating category Rating risk weight
weight weight
(percent)
(percent) (percent)
Highest investment grade rating ........................................................................ AAA ............. 0 20 20

Second-highest investment grade rating ........................................................... AA ............... 20 20 20
Third-highest investment grade rating ............................................................... A .................. 20 35 35
Lowest investment grade rating—plus ............................................................... BBB+ ........... 35 50 50
58 For purposes of this section IV, a sovereign is agencies, departments, ministries, and the central provincial, or local governments, or commercial
defined as a central government, including its bank. This definition does not include state, enterprises owned by a central government.
TABLE 1.—RISK WEIGHTS BASED ON LONG-TERM EXTERNAL RATINGS—Continued

Non-sovereign
weight weight
(percent)
(percent) (percent)
Lowest investment grade rating—naught .......................................................... BBB ............. 50 75 75

Lowest investment grade rating—negative ........................................................ BBB¥ ......... 75 100 100
One category below investment grade—plus & naught .................................... BB+, BB ...... 75 150 200
One category below investment grade—negative ............................................. BB¥ ............ 100 200 200
Two or more categories below investment grade .............................................. B, CCC ........ 150 200 2
Unrated ............................................................................................................... n/a ............... 200 200 2
1 Claims collateralized by AAA-rated non-U.S. sovereign debt would be assigned to the 20 percent risk weight category.
2 Apply the risk-based capital requirements set forth in section III.B.3.b. of this appendix A.
TABLE 2.—RISK WEIGHTS BASED ON SHORT-TERM EXTERNAL RATINGS

Non-U.S. sov- Non-U.S. sov- Securitization
ereign risk ereign risk
Short-term rating category Examples exposure risk
weight* weigh weight
(percent) (percent)
Highest investment grade rating 1 ...................................................................... A–1, P–1 ..... 0 20 20

Second-highest investment grade rating ........................................................... A–2, P–2 ..... 20 35 35
Lowest investment grade rating ......................................................................... A–3, P–3 ..... 50 75 75
Unrated ............................................................................................................... ..................... 100 100 100
1 Claims collateralized by A1/P1 rated sovereign debt would be assigned to the 20 percent risk weight category.
For purposes of this section IV, an external that an instrument poses to banking 3. Guarantees. Claims, or portions of
rating is defined as a credit rating that is organizations. claims, guaranteed by a third-party entity
assigned by an NRSRO, provided that the 2. Collateral. In addition to the forms of (other than an excluded entity) whose
credit rating: recognized financial collateral set forth in unsecured long-term senior debt (without
a. Fully reflects the entire amount of credit section III.B.1. of this appendix A, a bank credit enhancements) is externally rated at
risk with regard to all payments owed on the also may recognize as collateral (i) covered least investment grade or by a non-U.S.
claim (that is, the rating must fully reflect the claims in the form of liquid and readily sovereign that has an issuer rating of at least
credit risk associated with timely repayment marketable debt securities that are externally investment grade may be assigned to the risk
of principal and interest); rated no less than investment grade and (ii) weight of the guarantor as set forth in Table
b. Is monitored by the issuing NRSRO; liquid and readily marketable debt securities 1 of section IV.B.1., corresponding to the
c. Is published in an accessible public form guaranteed by non-U.S. sovereigns whose protection provider’s long-term senior debt
issuer rating is at least investment grade. rating (or issuer rating in the case of a non-
(for example, on the NRSRO’s Web site or in
Claims, or portions of claims, collateralized U.S. sovereign), provided that the guarantee:
financial media); and
by such collateral may be assigned to the risk a. Is written and unconditional,
d. Is, or will be, included in the issuing b. Covers all or a pro rata portion of
weight appropriate to the collateral’s external
NRSRO’s publicly available ratings transition contractual payments of the obligor on the
rating as set forth in Table 1 or 2 of section
matrix which tracks the performance and underlying claim,
IV.B.1. For example, the portion of a claim
stability (or ratings migration) of an NRSRO’s c. Gives the beneficiary a direct claim
collateralized with an AA-rated mortgage-
issued external ratings for the specific type backed security is assigned to the 20 percent against the protection provider,
of claim (for example, corporate debt). risk weight category. d. Is non-cancelable by the protection
In addition, an unrated covered claim on Subject to the final sentence of this provider for reasons other than the breach of
a non-U.S. sovereign that has an external paragraph, there is, however, a 20 percent contract by the beneficiary,
rating from an NRSRO should be deemed to risk weight floor on collateralized claims e. Is legally enforceable against the
have an external rating equal to the under this section IV. Thus, the portion of a protection provider in a jurisdiction where
sovereign’s issuer rating. If a claim has two claim collateralized by a security issued by the protection provider has sufficient assets
or more external ratings, the bank must use a non-U.S. sovereign with an issuer rating of against which a judgment may be attached
the least favorable external rating to risk AAA would be assigned to the 20 percent and enforced, and
weight the claim. Similarly, if a claim has risk weight category instead of the zero f. Requires the protection provider to make
components that are assigned different percent risk weight category. The procedures payment to the beneficiary upon default of
external ratings, the lowest component rating the obligor on the underlying claim without
set forth in section III of this appendix A
must be applied to the entire claim. For first requiring the beneficiary to demand
continue to apply, however, to claims
example, if a securitization exposure has a payment from the obligor.
collateralized by securities issued or
principal component externally rated BBB, guaranteed by OECD central governments for C. Residential Mortgages
but the interest component is externally rated which a positive margin of collateral is 1. A bank may separate its residential
B, the entire exposure will be subject to the maintained on a daily basis, fully taking into mortgage portfolio into two subportfolios,
gross-up treatment accorded to a account any change in the bank’s exposure to where the first subportfolio includes
securitization exposure rated B or lower. the obligor and counterparty under the claim mortgage loans originated by the bank or
Similarly, if a portion of a specific claim is in relation to the market value of the acquired by the bank prior to the date the
unrated, then the entire claim must be treated collateral held to support the claim. bank becomes subject to this section IV and
as if it were unrated. The Federal Reserve In the event that the external rating of a the second includes mortgage loans
retains the authority to override the use of security used to collateralize a claim results originated or acquired by the bank after that
certain ratings or the ratings on certain in a higher risk weight than would have date. The bank may apply the risk-based
instruments, either on a case-by-case basis or otherwise been assigned to the claim, then capital treatment set forth in section III of
through broader supervisory policy, if the lower risk weight appropriate to the this appendix A to the first subportfolio
necessary or appropriate to address the risk underlying claim could be applied. while applying the requirements set forth in
this section IV to the second subportfolio. A appraisal or evaluation is more recent than equivalent amount of the remaining negative
bank that does not so separate its residential the most recent purchase and was obtained amortization ‘‘commitment’’ less the amount
mortgage portfolio must apply the capital by the bank in connection with an extension covered by any loan-level PMI divided by the
treatment in this section IV to all of its of new credit). The procedures for residential most recent purchase price of the property or
qualifying residential mortgage exposures. If mortgage exposures that have negative the most recent appraisal or evaluation value
a bank at any time opts-out of the Alternative amortization features are set forth in section of the property (if the appraisal or evaluation
Approach and, subsequently, again becomes IV.C.3.c. is more recent than the most recent purchase
subject to this section IV, it may not apply a. First Lien Residential Mortgage Exposures and was obtained by the bank in connection
the procedures set forth in this section with an extension of new credit). A bank
First lien residential mortgage exposures with a stand-alone second lien where the
IV.C.1.
are risk-weighted in accordance with Table 3 more senior lien(s) can negatively amortize
2. Subject to section IV.C.1., a bank assigns of this section IV.C.3.a. (with nonqualifying
its residential mortgage exposures to risk must first adjust the principal amount of
residential mortgage exposures subject to a those senior or intervening liens that can
weight categories based on their loan-to- risk weight floor of 100 percent). If a bank
value (LTV) or combined loan-to-value negatively amortize to reflect the maximum
holds both the senior and junior lien(s) on a
(CLTV) ratios, as appropriate, in accordance contractual loan amount as if it were to fully
residential property and no other party holds
with Tables 3 and 4 of sections IV.C.3.a. and negatively amortize under the applicable
an intervening lien, the bank’s claims are
IV.C.3.b., respectively, but must risk-weight a contract. The adjusted LTV would then be
treated as a single claim secured by a senior
nonqualifying residential mortgage exposure added to the stand-alone junior lien to
lien for purposes of determining the LTV
at no less than 100 percent. Residential calculate the appropriate CLTV.
ratio and assigning a risk weight.
mortgage exposures include all loans secured D. Short-Term Commitments
by a lien on a one- to four-family residential
property 59 that is either owner-occupied or
TABLE 3.—RISK WEIGHTS FOR FIRST Unused portions of commitments with an
LIEN RESIDENTIAL MORTGAGE EXPO- original maturity of one year or less
rented. Qualifying residential mortgage (including eligible asset backed commercial
exposures are residential mortgage exposures SURES
paper liquidity facilities) (that is, short-term
that (1) have been made in accordance with commitments) are converted using the 10
prudent underwriting standards; (2) are Loan-to-Value ratio Risk weight percent conversion factor. Unconditionally
performing in accordance with their original (percent)
cancelable commitments, as defined in
terms; (3) are not 90 days or more past due section III.D.2.b. of this appendix, retain the
or carried in nonaccrual status; and (4) are Up to 60% ................................. 20
>60% and up to 80% ............... 35 zero percent conversion factor. Short-term
not made for the purpose of speculative commitments to originate one-to four-family
property development. Nonqualifying >80% and up to 85% ............... 50
>85% and up to 90% ............... 75 residential mortgage loans provided in the
residential mortgage exposures are ordinary course of business that are not
residential mortgage exposures other than >90% and up to 95% ............... 100
>95% ........................................ 150 treated as a derivative under GAAP will
qualifying residential mortgage exposures. continue to be converted to an on-balance-
3. For purposes of Tables 3 and 4, LTV is sheet credit equivalent amount using the zero
defined as (i) the current outstanding b. Stand-Alone Junior Liens
percent conversion factor.
principal balance of the loan less the amount Stand-alone junior lien residential
covered by any loan-level private mortgage mortgage exposures, including structured E. Securitizations of Revolving Credit with
insurance (‘‘PMI’’) divided by (ii) the most mortgages and home equity lines of credit, Early Amortization Provisions
recent purchase price of the property or the must be risk weighted using the CLTV ratio 1. Definitions
most recent appraisal or evaluation value of of the stand-alone junior lien and all senior a. Early amortization provision means a
the property (if the appraisal or evaluation is liens in accordance with Table 4 (with provision in the documentation governing a
more recent than the most recent purchase nonqualifying residential mortgage exposures securitization that, when triggered, causes
and was obtained by the bank in connection subject to a risk weight floor of 100 percent). investors in the securitization exposures to
with an extension of new credit). Loan-level be repaid before the original stated maturity
PMI means insurance (i) provided by a non- TABLE 4.—RISK WEIGHTS FOR STAND- of the securitization exposures, unless the
affiliated PMI provider whose unsecured provision is triggered solely by events not
ALONE JUNIOR LIEN RESIDENTIAL directly related to the performance of the
long-term senior debt (without credit
enhancements) is externally rated at least the MORTGAGE EXPOSURES underlying exposures or the originating bank
third highest investment grade by an NRSRO, (such as material changes in tax laws or
and (ii) which protects a mortgage lender in Risk weight regulations).
Combined Loan-to-Value ratio
the event of the default of a mortgage (percent) b. Excess spread means gross finance
borrower up to a predetermined portion of charge collections and other income received
Up to 60% ................................. 75 by a trust or special purpose entity minus
the value of a residential mortgage exposure.
>60% and up to 90% ............... 100 interest paid to the investors in the
For purposes of the loan-level PMI definition,
>90% ........................................ 150 securitization exposures, servicing fees,
(i) an affiliate of a company means any
company that controls, is controlled by, or is charge-offs, and other similar trust or special
c. Residential Mortgage Exposures With purpose entity expenses.
under common control with, the company;
Negative Amortization Features c. Excess spread trapping point is the point
and (ii) a person or company controls a
company if it owns, controls, or has power Residential mortgage exposures with at which the bank is required by the
to vote 25 percent or more of a class of voting negative amortization features are assigned to documentation governing a securitization to
securities of the company or consolidates the a risk weight category using a loan’s current divert and hold excess spread in a spread or
company for financial reporting purposes. LTV ratio in accordance with Table 3 of reserve account, expressed as a percentage.
CLTV for a junior lien mortgage is defined as section IV.C.3.a. Any remaining potential d. Investors’ interest is the total amount of
(i) the current outstanding principal balance increase in the mortgage’s principal balance securitization exposures issued by a trust or
of the junior mortgage and all more senior permitted through the negative amortization special purpose entity to investors.
mortgages less the amount covered by any feature is to be treated as a long-term e. Revolving credit means a line of credit
loan-level PMI covering the junior lien commitment and converted to an on-balance where the borrower is permitted to vary both
divided by (ii) the most recent purchase price sheet credit equivalent amount as set forth in the drawn amount and the amount of
of the property or the most recent appraisal section III.D.2. of this appendix. The credit repayment within an agreed limit.
or evaluation value of the property (if the equivalent amount of the commitment is then 2. A bank that securitizes revolving credits
risk-weighted according to Table 3 based on where the securitization structure contains
59 Loans that qualify as mortgages that are secured the loan’s ‘‘highest contractual LTV ratio.’’ an early amortization provision must
by 1- to 4-family residential properties are listed in The highest contractual LTV ratio of a maintain risk-based capital against the
the instructions to the commercial bank Call mortgage loan equals the current outstanding investors’ interest as required under this
Reports. principal balance of the loan plus the credit section. Capital for securitizations of
revolving credit exposures that incorporate Authority: 12 U.S.C. 1817(j)(13), 1818, their risk-based capital ratios under this
early-amortization provisions will be 1828(o), 1831i, 1831p–1, 1843( c)(8), 1844(b), appendix A, they must also refer to appendix
assessed based on a comparison of the 1972(1), 3106, 3108, 3310, 3331–3351, 3907, E of this part, which incorporates capital
securitization’s annualized three-month and 3909; 15 U.S.C. 6801 and 6805.1. charges for certain market risks into the risk-
average excess spread against the excess based capital ratios. When calculating their
spread trapping point. To calculate the 2. In Appendix A to part 225, the risk-based capital ratios under this appendix
securitization’s excess spread trapping point following amendments are proposed: A, such organizations are required to refer to
ratio, a bank must calculate the three-month a. Section I, Overview, is revised. appendix E of this part for supplemental
average of (1) the dollar amount of excess b. In section III.A, Procedures, the rules to determine qualifying and excess
spread divided by (2) the outstanding first paragraph is revised, the fourth capital, calculate weighted risk assets,
principal balance of underlying pool of paragraph is redesignated as the fifth calculate market risk equivalent assets, and
exposures at the end of each of the prior paragraph, and a new fourth paragraph calculate risk-based capital ratios adjusted for
three months. The annualized three month market risk.
is added.
average of excess spread is then divided by The risk-based capital guidelines apply on
the excess spread trapping point that is c. In section III.C, the first paragraph
is revised. a consolidated basis to bank holding
required by the securitization structure. The companies with consolidated assets of $500
excess spread trapping point ratio is d. Section IV is removed and a new
million or more. For bank holding companies
compared to the ratios contained in Table 5 section IV, Alternative Approach for with less than $500 million in consolidated
of section IV.E.3 to determine the appropriate Computing Weighted Risk Assets and assets, the guidelines will be applied on a
conversion factor to apply to the investor’s Off-Balance-Sheet Items, is added. bank-only basis unless: (a) The parent bank
interest. The amount of investor’s interest e. Attachment I is removed. holding company is engaged in nonbank
after conversion is then assigned capital in activity involving significant leverage; 4 or (b)
accordance with that appropriate to the Appendix A to Part 225—Capital the parent company has a significant amount
underlying obligor, collateral or guarantor. Adequacy Guidelines for Bank Holding of outstanding debt that is held by the
For securitizations that do not require excess Companies: Risk-Based Measure general public.
spread to be trapped, or that specify trapping
I. Overview The risk-based capital guidelines are to be
points based primarily on performance
used in the inspection and supervisory
measures other than the three-month average The Board of Governors of the Federal process as well as in the analysis of
excess spread, the excess spread trapping Reserve System has adopted a risk-based applications acted upon by the Federal
point is 4.5 percent. capital measure to assist in the assessment of Reserve. Thus, in considering an application
3. For a bank subject to the early the capital adequacy of bank holding filed by a bank holding company, the Federal
amortization requirements in this section companies (banking organizations).1 The Reserve will take into account the
IV.E., if the aggregate risk-based capital principal objectives of this measure are to: (i) organization’s risk-based capital ratio, the
requirement for residual interests, direct Make regulatory capital requirements more reasonableness of its capital plans, and the
credit substitutes, other securitization sensitive to differences in risk profiles among
exposures, and early amortization provisions extent to which it meets the risk-based
banking organizations; (ii) factor off-balance capital standards.
in connection with the same securitization of sheet exposures into the assessment of
revolving credit exposures exceeds the risk- The risk-based capital ratios focus
capital adequacy; (iii) minimize disincentives principally on broad categories of credit risk,
based capital requirement on the underlying to holding liquid, low-risk assets; and (iv)
securitized assets, then the capital although the framework for assigning assets
achieve greater consistency in the evaluation and off-balance-sheet items to risk categories
requirement for the securitization transaction of the capital adequacy of major banking
will be limited to the greater of the risk-based does incorporate elements of transfer risk, as
organizations throughout the world.2 well as limited instances of interest rate and
capital requirement for (1) residual interests The risk-based capital guidelines include
or (2) the underlying securitized assets market risk. The risk-based capital ratio does
both a definition of capital and a framework not, however, incorporate other factors that
calculated as if the bank continued to hold for calculating weighted risk assets by
the assets on its balance sheet. can affect an organization’s financial
assigning assets and off-balance sheet items condition. These factors include overall
to broad risk categories. An institution’s risk- interest-rate exposure; liquidity, funding and
TABLE 5.—EARLY AMORTIZATION based capital ratio is calculated by dividing market risks; the quality and level of
CREDIT CONVERSION FACTOR its qualifying capital (the numerator of the earnings; investment or loan portfolio
ratio) by its weighted risk assets (the concentrations; the quality of loans and
Credit con- denominator).3 The definition of qualifying investments, the effectiveness of loan and
Excess spread trapping point version fac- capital is outlined in section II, and the investment policies; and management’s
ratio tor (CCF) procedures for calculating weighted risk ability to monitor and control financial and
(percent) assets are discussed in sections III and IV. operating risks.
In addition, when certain organizations In addition to evaluating capital ratios, an
133.33 percent or more ............ 0 that engage in trading activities calculate
less than 133.33 percent to 100 overall assessment of capital adequacy must
percent .................................. 5 take account of these other factors, including,
1 A leverage capital measure for state member
less than 100 percent to 75 in particular, the level and severity of
banks is outlined in appendix D of this part. problem and classified assets. For this
percent .................................. 15 2 The risk-based capital measure is based upon a
less than 75 percent to 50 per- reason, the final supervisory judgment on an
framework developed jointly by supervisory
cent ....................................... 50 authorities from the countries represented on the
organization’s capital adequacy may differ
less than 50 percent ................. 100 Basel Committee on Banking Supervision (Basel significantly from conclusions that might be
Supervisors’ Committee) and endorsed by the drawn solely from the level of the
F. Risk Weights for Derivatives Group of Ten Central Bank Governors. The organization’s risk-based capital ratio.
framework is described in a paper prepared by the The risk-based capital guidelines establish
A bank may not apply the 50 percent risk Basel Supervisors’ Committee entitled a minimum ratio of qualifying total capital to
weight cap for derivative contract ‘‘International Convergence of Capital weighted risk assets of 8 percent, of which
counterparties set forth in section III.E. of Measurement,’’ July 1988. at least 4 percentage points must be in the
this appendix A. 3 Banking organizations will initially be expected
form of tier 1 capital. In light of the
to utilize period-end amounts in calculating their

risk-based capital ratios. When necessary and
considerations just discussed, banking
PART 225—BANK HOLDING organizations generally are expected to
appropriate, ratios based on average balances may
COMPANIES AND CHANGE IN BANK also be calculated on a case-by-case basis.
CONTROL (REGULATION Y) Moreover, to the extent banking organizations have 4 A parent company that is engaged in significant
data on average balances that can be used to off-balance sheet activities would generally be
1. The authority citation for part 225 calculate risk-based ratios, the Federal Reserve will deemed to be engaged in activities that involve
continues to read as follows: take such data into account. significant leverage.
operate well above the minimum risk-based weighted risk assets that comprise the The Federal Reserve may require a bank
ratios. In particular, banking organizations denominator of the risk-based capital ratios. holding company to apply the Alternative
contemplating significant expansion * * * * * Approach if the Federal Reserve determines
proposals are expected to maintain strong A bank holding company may elect to that the Alternative Approach would
capital levels substantially above the apply the alternative procedures for produce risk-based capital requirements that
minimum ratios and should not allow computing weighted risk assets set forth in more accurately reflect the risk profile of the
significant diminution of financial strength section IV of this appendix A (‘‘Alternative banking organization or would otherwise
below these strong levels to fund their Approach’’). The Federal Reserve also may enhance the safety and soundness of the
expansion plans. Institutions with high or require a bank holding company to apply the institution.
inordinate levels of risk are also expected to Alternative Approach if the Federal Reserve A bank holding company that applies the
operate well above minimum capital determines that the Alternative Approach Alternative Approach must apply all the
standards. In all cases, institutions should would produce risk-based capital procedures set forth in this section IV and
hold capital commensurate with the level requirements that more accurately reflect the also must apply all the procedures set forth
and nature of the risks to which they are risk profile of the banking organization or in section III that are not inconsistent with
would otherwise enhance the safety and the procedures in section IV.
exposed. Banking organizations that do not
soundness of the institution. A bank holding
meet the minimum risk-based capital B. External Ratings, Collateral, Guarantees,
company that applies the Alternative
standard, or that are otherwise considered to and Other Considerations
Approach must apply all the procedures set
be inadequately capitalized, are expected to forth in section IV of this appendix A and 1. External Credit Ratings. A bank holding
develop and implement plans acceptable to also must apply all the procedures set forth company must use Table 1 in this section
the Federal Reserve for achieving adequate in this section that are not inconsistent with IV.B.1. to assign risk weights to covered
levels of capital within a reasonable period the procedures in section IV. claims with an original maturity of one year
of time. or more and Table 2 in this section IV.B.1.
* * * * *
The Board will monitor the to assign risk weights to covered claims with
implementation and effect of these guidelines C. * * * an original maturity of less than one year.
in relation to domestic and international Assets and on-balance-sheet credit Covered claims are all claims other than (i)
developments in the banking industry. When equivalent amounts are assigned to the claims on an excluded entity, (ii) loans to
necessary and appropriate, the Board will following risk weight categories: 0 percent, non-sovereigns that do not have an external
consider the need to modify the guidelines in 20 percent, 50 percent, or 100 percent. A rating, and (iii) OTC derivative contracts.
light of any significant changes in the brief explanation of the components of each Excluded entities are (i) the U.S. central
economy, financial markets, banking category follows. government and U.S. government agencies,
practices, or other relevant factors. * * * * * (ii) state and local governments of the United
* * * * * States and other countries of the OECD, (iii)
IV. Alternative Approach for Computing U.S. government-sponsored agencies, and (iv)
III. * * * Weighted Risk Assets and Off-Balance-Sheet U.S. depository institutions and foreign
Items banks.
A. * * *
A. Scope of Application A bank holding company must use column
Assets and credit-equivalent amounts of three of the tables for covered claims on a
A bank holding company may elect to use
off-balance-sheet items of bank holding the Alternative Approach for computing non-U.S. sovereign 58 and column four of the
companies are assigned to one of several weighted risk assets and off-balance sheet tables for covered claims on an entity other
broad risk categories, according to the items set forth in this section IV by giving the than a non-U.S. sovereign (excluding
obligor, or, if relevant, the guarantor, the Federal Reserve written notice on the first securitization exposures). A bank holding
nature of the collateral, or an external rating. day of the quarter during which the banking company must use column five of the tables
The aggregate dollar value of the amount in organization elects to begin using the for covered claims that are securitization
each category is then multiplied by the risk Alternative Approach. A bank holding exposures, which include asset-backed
weight associated with the category. The company that has elected to apply the securities, mortgage-backed securities,
resulting weighted values from each of the Alternative Approach may opt out of the recourse obligations, direct credit substitutes,
risk categories are added together, and this Alternative Approach after it has given the and residual interests (other than credit-
sum is the banking organization’s total Federal Reserve 30 days prior written notice. enhancing interest-only strips).
TABLE 1.—RISK WEIGHTS BASED ON LONG-TERM EXTERNAL RATINGS

Non-sovereign
weight 1 weight
(percent)
(percent) (percent)
Highest investment grade rating ........................................................................ AAA ............. 0 20 20

Second-highest investment grade rating ........................................................... AA ............... 20 20 20
Third-highest investment grade rating ............................................................... A .................. 20 35 35
Lowest investment grade rating—plus ............................................................... BBB+ ........... 35 50 50
Lowest investment grade rating—naught .......................................................... BBB ............. 50 75 75
Lowest investment grade rating—negative ........................................................ BBB¥ ......... 75 100 100
One category below investment grade—plus & naught .................................... BB+, BB ...... 75 150 200
One category below investment grade—negative ............................................. BB¥ ............ 100 200 200
Two or more categories below investment grade .............................................. B, CCC ........ 150 200 2
Unrated ............................................................................................................... n/a ............... 200 200 2
1 Claims
collateralized by AAA-rated non-U.S. sovereign debt would be assigned to the 20 risk weight category.
2 Apply the risk-based capital requirements set forth in section III.B.3.b. of this appendix A.
58 For purposes of this section IV, a sovereign is agencies, departments, ministries, and the central provincial, or local governments, or commercial
defined as a central government, including its bank. This definition does not include state, enterprises owned by a central government.
TABLE 2.—RISK WEIGHTS BASED ON SHORT-TERM EXTERNAL RATINGS

Non-sovereign
Short-term rating category Examples risk weight
weight 1 weight
(percent)
(percent) (percent)
Highest investment grade rating * ....................................................................... A–1, P–1 ..... 0 20 20

Second-highest investment grade rating ............................................................ A–2, P–2 ..... 20 35 35
Lowest investment grade rating ......................................................................... A–3, P–3 ..... 50 75 75
Unrated ............................................................................................................... ..................... 100 100 100
1 Claims collateralized by A1/P1 rated sovereign debt would be assigned to the 20 percent risk weight category.
For purposes of this section IV, an external AA-rated mortgage-backed security is C. Residential Mortgages
rating is defined as a credit rating that is assigned to the 20 percent risk weight 1. A bank holding company may separate
assigned by an NRSRO, provided that the category. its residential mortgage portfolio into two
credit rating: Subject to the final sentence of this subportfolios, where the first subportfolio
a. Fully reflects the entire amount of credit paragraph, there is, however, a 20 percent includes mortgage loans originated by the
risk with regard to all payments owed on the risk weight floor on collateralized claims banking organization or acquired by the
claim (that is, the rating must fully reflect the under this section IV. Thus, the portion of a banking organization prior to the date the
credit risk associated with timely repayment claim collateralized by a security issued by institution becomes subject to this section IV
of principal and interest); a non-U.S. sovereign with an issuer rating of and the second includes mortgage loans
b. Is monitored by the issuing NRSRO; AAA would be assigned to the 20 percent originated or acquired by the bank holding
c. Is published in an accessible public form risk weight category instead of the zero company after that date. The bank holding
(for example, on the NRSRO’s Web site or in percent risk weight category. The procedures company may apply the risk-based capital
financial media); and set forth in section III of this appendix A treatment set forth in section III of this
d. Is, or will be, included in the issuing continue to apply, however, to claims appendix A to the first subportfolio while
NRSRO’s publicly available ratings transition collateralized by securities issued or applying the requirements set forth in this
matrix which tracks the performance and guaranteed by OECD central governments for section IV to the second subportfolio. A bank
stability (or ratings migration) of an NRSRO’s which a positive margin of collateral is holding company that does not so separate its
issued external ratings for the specific type maintained on a daily basis, fully taking into residential mortgage portfolio must apply the
of claim (for example, corporate debt). account any change in the banking capital treatment in this section IV to all of
In addition, an unrated covered claim on its qualifying residential mortgage exposures.
organization’s exposure to the obligor and
a non-U.S. sovereign that has an external If a banking organization at any time opts-out
counterparty under the claim in relation to
rating from an NRSRO should be deemed to of the Alternative Approach and,
the market value of the collateral held to
have an external rating equal to the subsequently, again becomes subject to this
support the claim.
sovereign’s issuer rating. If a claim has two section IV, it may not apply the procedures
In the event that the external rating of a
or more external ratings, the bank holding set forth in this section IV.C.1.
company must use the least favorable security used to collateralize a claim results
2. Subject to section IV.C.1., a bank holding
external rating to risk weight the claim. in a higher risk weight than would have
company assigns its residential mortgage
Similarly, if a claim has components that are otherwise been assigned to the claim, then
exposures to risk weight categories based on
assigned different external ratings, the lowest the lower risk weight appropriate to the
their loan-to-value (LTV) or combined loan-
component rating must be applied to the underlying claim could be applied.
to-value (CLTV) ratios, as appropriate, in
entire claim. For example, if a securitization 3. Guarantees. Claims, or portions of
accordance with Tables 3 and 4 of sections
exposure has a principal component claims, guaranteed by a third party entity
IV C.3.a. and IV.C.3.b., respectively, but must
externally rated BBB, but the interest (other than an excluded entity) whose risk-weight a nonqualifying residential
component is externally rated B, the entire unsecured long-term senior debt (without mortgage exposure at no less than 100
exposure will be subject to the gross-up credit enhancements) is externally rated at percent. Residential mortgage exposures
treatment accorded to a securitization least investment grade or by a non-U.S. include all loans secured by a lien on a one-
exposure rated B or lower. Similarly, if a sovereign that has an issuer rating of at least to four-family residential property 59 that is
portion of a specific claim is unrated, then investment grade may be assigned to the risk either owner-occupied or rented. Qualifying
the entire claim must be treated as if it were weight of the guarantor as set forth in Table residential mortgage exposures are
unrated. The Federal Reserve retains the 1 of section IV.B.1 corresponding to the residential mortgage exposures that (1) have
authority to override the use of certain protection provider’s long-term senior debt been made in accordance with prudent
ratings or the ratings on certain instruments, rating (or issuer rating in the case of a non- underwriting standards; (2) are performing in
either on a case-by-case basis or through U.S. sovereign), provided that the guarantee: accordance with their original terms; (3) are
broader supervisory policy, if necessary or a. Is written and unconditional, not 90 days or more past due or carried in
appropriate to address the risk that an b. Covers all or a pro rata portion of nonaccrual status; and (4) are not made for
instrument poses to banking organizations. contractual payments of the obligor on the the purpose of speculative property
2. Collateral. In addition to the forms of underlying claim, development. Nonqualifying residential
recognized financial collateral set forth in c. Gives the beneficiary a direct claim mortgage exposures are residential mortgage
section III.B.1 of this appendix A, a bank against the protection provider, exposures other than qualifying residential
holding company also may recognize as d. Is non-cancelable by the protection mortgage exposures.
collateral (i) covered claims in the form of provider for reasons other than the breach of 3. For purposes of Tables 3 and 4, LTV is
liquid and readily marketable debt securities contract by the beneficiary, defined as (i) the current outstanding
that are externally rated no less than e. Is legally enforceable against the principal balance of the loan less the amount
investment grade and (ii) liquid and readily protection provider in a jurisdiction where covered by any loan-level private mortgage
marketable debt securities guaranteed by the protection provider has sufficient assets insurance (‘‘PMI’’) divided by (ii) the most
non-U.S. sovereigns whose issuer rating is at against which a judgment may be attached recent purchase price of the property or the
least investment grade. Claims, or portions of and enforced, and most recent appraisal or evaluation value of
claims, collateralized by such collateral may f. Requires the protection provider to make
be assigned to the risk weight appropriate to payment to the beneficiary upon default of 59 Loans that qualify as mortgages that are secured
the collateral’s external rating as set forth in the obligor on the underlying claim without by 1- to 4-family residential properties are listed in
Table 1 or 2 of section IV.B.1. For example, first requiring the beneficiary to demand the instructions to the commercial bank Call
the portion of a claim collateralized with an payment from the obligor. Reports.
the property (if the appraisal or evaluation is TABLE 4.—RISK WEIGHTS FOR STAND- be repaid before the original stated maturity
more recent than the most recent purchase of the securitization exposures, unless the
and was obtained by the bank holding
ALONE JUNIOR LIEN RESIDENTIAL provision is triggered solely by events not
company in connection with an extension of MORTGAGE EXPOSURES directly related to the performance of the
new credit). Loan-level PMI means insurance underlying exposures or the originating
(i) provided by a non-affiliated PMI provider Risk weight banking organization (such as material
Combined loan-to-value ratio
whose unsecured long-term senior debt (percent) changes in tax laws or regulations).
(without credit enhancements) is externally b. Excess spread means gross finance
rated at least the third highest investment Up to 60% ................................. 75 charge collections and other income received
grade by an NRSRO, and (ii) which protects >60% and up to 90% ............... 100 by a trust or special purpose entity minus
a mortgage lender in the event of the default >90% ........................................ 150 interest paid to the investors in the
of a mortgage borrower up to a securitization exposures, servicing fees,
predetermined portion of the value of c. Residential Mortgage Exposures With charge-offs, and other similar trust or special
residential mortgage exposure. For purposes Negative Amortization Features purpose entity expenses.
of the loan level PMI definition, (i) an Residential mortgage exposures with c. Excess spread trapping point is the point
affiliate of a company means any company negative amortization features are assigned to at which the banking organization is required
that controls, is controlled by, or is under a risk weight category using a loan’s current by the documentation governing a
common control with, the company; and (ii) LTV ratio in accordance with Table 3 of securitization to divert and hold excess
a person or company controls a company if section IV.C.3.a. Any remaining potential spread in a spread or reserve account,
it owns, controls, or has power to vote 25 increase in the mortgage’s principal balance expressed as a percentage.
percent or more of a class of voting securities permitted through the negative amortization d. Investors’ interest is the total amount of
of the company or consolidates the company feature is to be treated as a long-term securitization exposure issued by a trust or
for financial reporting purposes. CLTV for a commitment and converted to an on-balance special purpose entity to investors.
junior lien mortgage is defined as (i) the sheet credit equivalent amount as set forth in e. Revolving credit means a line of credit
current outstanding principal balance of the section III.D.2. of this appendix. The credit where the borrower is permitted to vary both
junior mortgage and all more senior equivalent amount of the commitment is then the drawn amount and the amount of
mortgages less the amount covered by any risk-weighted according to Table 3 based on repayment within an agreed limit.
loan-level PMI covering the junior lien the loan’s ‘‘highest contractual LTV ratio.’’ 2. A bank holding company that securitizes
divided by (ii) the most recent purchase price The highest contractual LTV ratio of a revolving credits where the securitization
of the property or the most recent appraisal mortgage loan equals the current outstanding structure contains an early amortization
or evaluation value of the property (if the principal balance of the loan plus the credit provision must maintain risk-based capital
appraisal or evaluation is more recent than equivalent amount of the remaining negative against the investors’ interest as required
the most recent purchase and was obtained amortization ‘‘commitment’’ less the amount under this section. Capital for securitizations
by the bank holding company in connection covered by any loan-level PMI divided by the of revolving credit exposures that incorporate
with an extension of new credit). The most recent purchase price of the property or early-amortization provisions will be
procedures for residential mortgage the most recent appraisal or evaluation value assessed based on a comparison of the
exposures that have negative amortization of the property (if the appraisal or evaluation securitization’s annualized three-month
features are set forth in section IV.C.3.c. is more recent than the most recent purchase average excess spread against the excess
a. First Lien Residential Mortgage and was obtained by the bank holding spread trapping point. To calculate the
Exposures company in connection with an extension of securitization’s excess spread trapping point
First lien residential mortgage exposures new credit). A bank holding company with ratio, a bank holding company must calculate
are risk-weighted in accordance with Table 3 a stand-alone second lien where the more the three-month average of (1) the dollar
of this section IV.C.3.a (with nonqualifying senior lien(s) can negatively amortize must amount of excess spread divided by (2) the
residential mortgage exposures subject to a first adjust the principal amount of those outstanding principal balance of underlying
risk weight floor of 100 percent). If a banking senior or intervening liens that can pool of exposures at the end of each of the
organization holds both the senior and junior negatively amortize to reflect the maximum prior three months. The annualized three
lien(s) on a residential property and no other contractual loan amount as if it were to fully month average of excess spread is then
party holds an intervening lien, the banking negatively amortize under the applicable divided by the excess spread trapping point
organization’s claims are treated as a single contract. The adjusted LTV would then be that is required by the securitization
claim secured by a senior lien for purposes added to the stand-alone junior lien to structure. The excess spread trapping point
of determining the LTV ratio and assigning calculate the appropriate CLTV. ratio is compared to the ratios contained in
a risk weight.
D. Short-Term Commitments Table 5 of section IV.E.3 to determine the
Unused portions of commitments with an appropriate conversion factor to apply to the
TABLE 3.—RISK WEIGHTS FOR FIRST investor’s interest. The amount of investor’s
original maturity of one year or less
LIEN RESIDENTIAL MORTGAGE EXPO- (including eligible asset backed commercial interest after conversion is then assigned
SURES paper liquidity facilities) (that is, short-term capital in accordance with that appropriate to
commitments) are converted using the 10 the underlying obligor, collateral or
Risk weight percent conversion factor. Unconditionally guarantor. For securitizations that do not
Loan-to-value ratio require excess spread to be trapped, or that
(percent) cancelable commitments, as defined in
section III.D.2.b. of this appendix, retain the specify trapping points based primarily on
Up to 60% ................................. 20 zero percent conversion factor. Short-term performance measures other than the three-
>60% and up to 80% ............... 35 commitments to originate one- to four-family month average excess spread, the excess
>80% and up to 85% ............... 50 residential mortgage loans provided in the spread trapping point is 4.5 percent.
>85% and up to 90% ............... 75 ordinary course of business that are not 3. For a banking organization subject to the
>90% and up to 95% ............... 100 treated as a derivative under GAAP will early amortization requirements in this
>95% ........................................ 150 continue to be converted to an on-balance- section IV.E., if the aggregate risk-based
sheet credit equivalent amount using the zero capital requirement for residual interests,
b. Stand-Alone Junior Liens percent conversion factor. direct credit substitutes, other securitization
Stand-alone junior lien residential exposures, and early amortization provisions
mortgage exposures, including structured E. Securitizations of Revolving Credit with in connection with the same securitization of
mortgages and home equity lines of credit, Early Amortization Provisions revolving credit exposures exceeds the risk-
must be risk weighted using the CLTV ratio 1. Definitions based capital requirement on the underlying
of the stand-alone junior lien and all senior a. Early amortization provision means a securitized assets, then the capital
liens in accordance with Table 4 (with provision in the documentation governing a requirement for the securitization transaction
nonqualifying residential mortgage exposures securitization that, when triggered, causes will be limited to the greater of the risk-based
subject to a risk weight floor of 100 percent). investors in the securitization exposures to capital requirement for (1) residual interests
or (2) the underlying securitized assets establishes the criteria and standards mechanisms available to the FDIC,
calculated as if the banking organization FDIC will use in calculating the including cease-and-desist orders,
continued to hold the assets on its balance minimum leverage capital requirement orders of correction, the approval or
sheet. and in determining capital adequacy. In denial of applications, or any other
addition, appendices A, D, and E to part actions authorized by law. In addition to
TABLE 5.—EARLY AMORTIZATION 325 (appendices A, D, and E) set forth addressing a bank’s minimum leverage
CREDIT CONVERSION FACTOR the FDIC’s risk-based capital policy capital requirement, the capital
statements and appendix B to this directive may also address minimum
Credit con-
Excess spread trapping point version fac- subpart includes a statement of policy risk-based capital requirements that are
ratio tor (CCF) on capital adequacy that provides to be maintained and calculated in
(percent) interpretational guidance as to how this accordance with appendices A, D, and
subpart will be administered and E to this part 325.
133.33 percent or more ............ 0 enforced. In accordance with subpart B 5. Revise § 325.103(a) of subpart B to
Less than 133.33 percent to of part 325, the FDIC also must evaluate read as follows:
100 percent ........................... 5
Less than 100 percent to 75
an institution’s capital for purposes of
§ 325.103 Capital measures and capital
percent .................................. 15 determining whether the institution is
category definitions.
Less than 75 percent to 50 per- subject to the prompt corrective action
provisions set forth in section 38 of the (a) Capital measures (1) For purposes
cent ....................................... 50
Less than 50 percent ................ 100 Federal Deposit Insurance Act (12 of section 38 and this subpart the
U.S.C. 1831o). relevant capital measures shall be:
F. Risk Weights for Derivatives 3. Revise § 325.2(s), (w) and (y) of (i) The total risk-based capital ratio;
(ii) The Tier 1 risk-based capital ratio;
A bank holding company may not apply subpart A to read as follows:
and
the 50 percent risk weight cap for derivative
contract counterparties set forth in section § 325.2 Definitions (iii) The leverage ratio.
III.E. of this appendix A. * * * * * (2) Risk-based capital ratios. All state
(s) Risk-weighted assets means total nonmember banks must maintain the
* * * * * minimum risk-based capital ratios as
risk-weighted assets, as calculated in
Federal Deposit Insurance Corporation accordance with appendices A, D, or E calculated under appendices A, D, or E
to part 325. to part 325 (and under appendix C to
12 CFR Part 325 part 325, as applicable).
For the reasons set out in the * * * * * (i) Except as provided in paragraph
preamble, part 325 of chapter III of title (w) Tier 1 risk-based capital ratio (a)(2)(ii) of this section, any state
12 of the Code of Federal Regulations is means the ratio of Tier 1 capital to risk- nonmember bank that does not use
proposed to be amended as follows: weighted assets, as calculated in appendix D, as provided in section 1(b)
accordance with appendices A, D, or E of appendix D to part 325, must
PART 325—CAPITAL MAINTENANCE to part 325. calculate its minimum risk-based capital
* * * * * ratios under appendix A.
1. The authority citation for part 325
(y) Total risk-based capital ratio (ii) Any state nonmember bank that
continues to read as follows:
means the ratio of qualifying total uses appendix D to part 325 must
Authority: U.S.C. 1815(a), 1815(b), 1816, capital to risk-weighted assets, as calculate its minimum risk-based capital
1818(a), 1818(b), 1818(c), 1818(t), 1819 calculated in accordance with ratios under appendix D.
(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), appendices A, D, or E to part 325. (iii) Any state nonmember bank that
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub.
L. 102–233, 105 Stat. 1761, 1789, 1790 (12 * * * * * does not use appendix D to part 325
U.S.C. 1831n note); Pub. L. 102–242, 105 4. Revise § 325.6(d) of subpart A to may elect to calculate its minimum risk-
Stat. 2236, 2355, as amended by Pub. L. 103– read as follows: based capital ratios under appendix E to
325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 part 325. Any state nonmember bank
note); Pub. L. 102–242, 105 Stat. 2236, 2386, § 325.6 Issuance of directives that makes this election must comply
as amended by Pub. L. 102–550, 106 Stat. * * * * * with the notice procedures in appendix
3672, 4089 (12 U.S.C. 1828 note). (d) Enforcement of a directive. (1) E.
2. Revise § 325.1 of subpart A to read Whenever a bank fails to follow the * * * * *
as follows: directive or to submit or adhere to its 6. Add Appendix E to part 325 to read
capital adequacy plan, the FDIC may as follows:
§ 325.1 Scope. seek enforcement of the directive in the
The provisions of this part apply to appropriate United States district court, Appendix E to Part 325—Statement of
those circumstances for which the pursuant to 12 U.S.C. 3907(b)(2)(B)(ii), Policy on Risk-Based Capital:
Federal Deposit Insurance Act or this in the same manner and to the same Alternative Approach for Computing
chapter requires an evaluation of the extent as if the directive were a final Risk-Weighted Assets and Off-Balance-
adequacy of an insured depository cease-and-desist order. In addition to Sheet Items
institution’s capital structure. The FDIC enforcement of the directive, the FDIC I–1. Risk-Based Capital Framework
is required to evaluate capital before may seek assessment of civil money
approving various applications by penalties for violation of the directive A. Introduction
insured depository institutions. The against any bank, any officer, director, 1. Capital adequacy is one of the critical
FDIC also must evaluate capital, as an employee, agent, or other person factors that the FDIC is required to analyze
essential component, in determining the participating in the conduct of the when taking action on various types of
applications and when conducting
safety and soundness of state affairs of the bank, pursuant to 12 U.S.C. supervisory activities related to the safety
nonmember banks it insures and 3909(d). and soundness of individual banks and the
supervises and in determining whether (2) The directive may be issued banking system. In view of this, the FDIC’s
depository institutions are in an unsafe separately, in conjunction with, or in Board of Directors has adopted part 325 of its
or unsound condition. This subpart A addition to, any other enforcement regulations (12 CFR part 325), which sets
forth minimum standards of capital adequacy overall interest rate risk exposure, liquidity, D. Definitions
for insured state nonmember banks and funding and market risks; the quality and 1. Affiliate means, with respect to a
standards for determining when an insured level of earnings; investment, loan portfolio, company, any company that controls, is
bank is in an unsafe or unsound condition by and other concentrations of credit risk, controlled by, or is under common control
reason of the amount of its capital. certain risks arising from nontraditional with, the company. For purposes of this
2. This capital maintenance regulation was activities; the quality of loans and definition, a person or company controls a
designed to establish, in conjunction with investments; the effectiveness of loan and company if it:
other federal bank regulatory agencies, investment policies; and management’s (a) Owns, controls, or holds with power to
uniform capital standards for all federally- overall ability to monitor and control vote 25 percent or more of a class of voting
regulated banking organizations, regardless of financial and operating risks, including the securities of the company; or
size. The uniform capital standards were risk presented by concentrations of credit (b) Consolidates the company for financial
based on ratios of capital to total assets. and nontraditional activities. In addition to reporting purposes.
While those leverage ratios have served as a evaluating capital ratios, an overall 2. Company means a corporation,
useful tool for assessing capital adequacy, the assessment of capital adequacy must take partnership, limited liability company,
FDIC believes there is a need for a capital account of each of these other factors, business trust, special purpose entity,
measure that is more explicitly and including, in particular, the level and association, or similar organization.
systematically sensitive to the risk profiles of severity of problem and adversely classified 3. Eligible guarantee means a guarantee
individual banks. As a result, the FDIC’s provided by a third party eligible guarantor
assets as well as a bank’s interest rate risk as
Board of Directors has adopted appendices A, that:
measured by the bank’s exposure to declines
D, and E that establish the minimum risk- (a) Is written and unconditional;
in the economic value of its capital due to
based capital requirements for banks. This (b) Covers all or a pro rata portion of the
changes in interest rates. For this reason, the
statement of policy does not replace or contractual payments of the obligor on the
final supervisory judgment on a bank’s
eliminate the existing part 325 capital-to-total reference exposure;
assets leverage ratios. capital adequacy may differ significantly
from the conclusions that might be drawn (c) Gives the beneficiary a direct claim
3. The framework set forth in appendices against the protection provider;
A, D, and E to this part 325 consists of a solely from the absolute level of the bank’s
risk-based capital ratio. (d) Is non-cancelable by the protection
definition of capital for risk-based capital provider for reasons other than the breach of
purposes, and a system for calculating risk- B. Election Into and Exit From Appendix E the contract by the beneficiary;
weighted assets. A bank’s risk-based capital 1. Unless a bank uses appendix D of this (e) Is legally enforceable against the
ratio is calculated by dividing its qualifying part, any state nonmember bank may elect to protection provider in a jurisdiction where
total capital base (the numerator of the ratio) use the capital requirements set forth in this the protection provider has sufficient assets
by its risk-weighted assets (the appendix E by filing the appropriate against which a judgment may be attached
denominator).1 Schedule of the Consolidated Reports of and enforced;
4. In addition, when certain banks that (f) Requires the protection provider to
Condition and Income (Call Reports) to
engage in trading activities calculate their make payment to the beneficiary on the
calculate its risk-based capital requirements.
risk-based capital ratio under these occurrence of a default (as defined in the
After a bank has filed its quarterly Call
appendices A, D, and E, they must also refer guarantee) of the obligor on the reference
Reports under this appendix E, the bank’s
to appendix C of this part, which exposure without first requiring the
incorporates capital charges for certain election to use appendix E will be effective
on the date of filing its Call Reports and will beneficiary to demand payment from the
market risks into the risk-based capital ratio. obligor; and
When calculating their risk-based capital apply retrospectively to the quarter covered
by the filing. (g) If extended by a sovereign, is backed by
ratio under these appendices A, D, and E, the full faith and credit of the sovereign.
such banks are required to refer to appendix 2. Any bank that has elected to use this
appendix E to calculate its risk-based capital 4. Eligible guarantor means a sovereign
C of this part for supplemental rules to with senior long-term debt externally rated at
determine qualifying and excess capital, ratios may elect to use appendix A of this
least investment grade (without credit
calculate risk-weighted assets, calculate part to calculate its risk-based capital ratios
enhancements) by a nationally recognized
market risk equivalent assets and add them by giving the FDIC prior notice. This election
statistical rating organization (NRSRO) 2 or a
to risk-weighted assets, and calculate risk- will not apply retrospectively to the current
non-sovereign with senior long-term debt
based capital ratios as adjusted for market quarter, but will apply prospectively for the
externally rated at least investment grade
risk. next quarter. After the notice becomes
(without credit enhancements) by a NRSRO.
5. This statement of policy applies to all effective, the bank must use appendix A, and
A sovereign or non-sovereign rated less than
FDIC-insured state-chartered banks the bank must file all subsequent Call
investment grade by any NRSRO is not an
(excluding insured branches of foreign banks) Reports in accordance with appendix A. eligible guarantor for purposes of this
that have elected to use this appendix E and C. Reservation of Authority definition.
that are not members of the Federal Reserve 5. External rating means a credit rating that
The FDIC reserves the authority to exclude
System, hereafter referred to as ‘‘state is assigned by a NRSRO to a claim or issuer,
a bank from coverage under this appendix E
nonmember banks,’’ regardless of size, and to provided that the credit rating:
if the FDIC determines that the exclusion is
all circumstances in which the FDIC is (a) Fully reflects the entire amount of
appropriate based on the risk profile of the
required to evaluate the capital of a banking credit risk with regard to all payments owed
bank or would otherwise enhance the safety
organization. Therefore, the risk-based on the claim (that is, the rating must fully
and soundness of the bank. The FDIC also
capital framework set forth in this statement reflect the credit risk associated with timely
reserves the authority to: Require a bank that
of policy will be used in the examination and repayment of principal and interest);
has elected to use the capital requirements in
supervisory process as well as in the analysis (b) Is monitored by the issuing NRSRO;
this appendix E to continue to use appendix
of applications that the FDIC is required to (c) Is published in an accessible public
act upon. E; or require a bank that uses appendix A to
calculate its risk-based capital requirements forum, for example, on the NRSRO’s Web site
6. The risk-based capital ratio focuses and in financial media; and
principally on broad categories of credit risk, to instead use appendix E to calculate its
capital requirements, if the FDIC determines (d) Is, or will be, included in the issuing
however, the ratio does not take account of NRSRO’s publicly available ratings transition
many other factors that can affect a bank’s that the exclusion from coverage under
financial condition. These factors include appendix A to this part 325 is appropriate
2 A nationally recognized statistical rating

based on the risk profile of the bank or would
otherwise enhance the safety and soundness organization is an entity recognized by the Division
1 Period-end amounts, rather than average of Market Regulation of the Securities and Exchange
balances, normally will be used when calculating
of the bank. In making a determination under Commission (or any successor Division)
risk-based capital ratios. However, on a case-by-case this paragraph, the FDIC will apply notice (Commission) as a nationally recognized statistical
basis, ratios based on average balances may also be and response procedures in the same manner rating organization for various purposes, including
required if supervisory concerns render it as the notice and response procedures in 12 the Commission’s uniform net capital requirements
appropriate. CFR 325.6(c). for brokers and dealers (17 CFR 240.15c3–1).
matrix which tracks the performance and unconditionally cancelable if the bank can, at this general rule will be made if the minority
stability (or ratings migration) of an NRSRO’s its option, prohibit additional extensions of interests fail to provide meaningful capital
issued external ratings for the specific type credit, reduce the line, and terminate the support to the consolidated bank. Such a
of claim (for example, corporate debt). commitment to the full extent permitted by situation could arise if the minority interests
6. Loan level private mortgage insurance applicable Federal law. are entitled to a preferred claim on
(PMI) means insurance provided by a essentially low risk assets of the subsidiary.
regulated mortgage insurance company, with I–2. Definition of Capital for the Risk-Based Similarly, although credit-enhancing interest-
senior long-term debt rated at least third- Capital Ratio only strips and intangible assets in the form
highest investment grade (without credit A bank’s qualifying total capital base of mortgage servicing assets, nonmortgage
enhancements) by a NRSRO, that protects a consists of two types of capital elements: servicing assets and purchased credit card
mortgage lender in the event of the default ‘‘core capital elements’’ (Tier 1) and relationships are generally recognized for
of a mortgage borrower up to a ‘‘supplementary capital elements’’ (Tier 2). risk-based capital purposes, the deduction of
predetermined portion of the value of a To qualify as an element of Tier 1 or Tier 2 part or all of the credit-enhancing interest-
single one-to four-family residential property, capital, a capital instrument should not only strips, mortgage servicing assets,
provided the mortgage insurance company is contain or be subject to any conditions, nonmortgage servicing assets and purchased
not an affiliate of the bank and provided covenants, terms, restrictions, or provisions credit card relationships may be required if
there is no pool-level cap that would that are inconsistent with safe and sound the carrying amounts of these assets are
effectively reduce coverage. banking practices. excessive in relation to their market value or
7. Non-sovereign. A. The Components of Qualifying Capital the level of the bank’s capital accounts.
(a) Non-sovereign means: (see Table I) Credit-enhancing interest-only strips,
(i) A company (including a securities firm, mortgage servicing assets, nonmortgage
insurance company, bank holding company, 1. Core capital elements (Tier 1) consists servicing assets, purchased credit card
and savings and loan holding company), or of: Common stockholders’ equity capital relationships and deferred tax assets that do
(ii) A multilateral lending institution or (includes common stock and related surplus, not meet the conditions, limitations and
regional development institution. undivided profits, disclosed capital reserves restrictions described in § 325.5(f) and (g) of
(b) For purposes of this definition, non- that represent a segregation of undivided
this part will not be recognized for risk-based
sovereign does not include the United States profits, and foreign currency translation
capital purposes.
(including U.S. Government Agencies); states adjustments, less net unrealized holding
(d) Minority interests in small business
or other political subdivisions of the United losses on available for-sale equity securities
investment companies, investment funds that
States and other OECD countries; U.S. with readily determinable fair values);
hold nonfinancial equity investments (as
Government-sponsored Agencies; or U.S. noncumulative perpetual preferred stock,4
defined in section II.B.6(b) of this appendix
depository institutions and foreign banks. In including any related surplus; and minority
E), and subsidiaries that are engaged in
addition, for purposes of determining the interests in the equity capital accounts of
nonfinancial activities are not included in a
appropriate risk weight of claims on or consolidated subsidiaries.
(a) At least 50 percent of the qualifying bank’s Tier 1 or total capital base if the bank
guaranteed by qualifying securities firms that excludes the consolidated assets of such
are collateralized by cash or securities issued total capital base should consist of Tier 1
capital. Core (Tier 1) capital is defined as the programs from risk-weighted assets pursuant
or guaranteed by OECD central governments to section II.B.6(b) of this appendix.
and that meet the requirements of section sum of core capital elements minus all
intangible assets (other than mortgage 2. Supplementary capital elements (Tier 2).
II.C.1(c) of this appendix E, non-sovereign The maximum amount of Tier 2 capital that
servicing assets, nonmortgage servicing assets
also does not include a qualifying securities may be recognized for risk-based capital
and purchased credit card relationships
firm.3 purposes is limited to 100 percent of Tier 1
eligible for inclusion in core capital pursuant
8. Securitization exposures include asset- capital (after any deductions for disallowed
to § 325.5(f)),5 minus credit-enhancing
and mortgage-backed securities, recourse intangibles and disallowed deferred tax
interest-only strips that are not eligible for
obligations, direct credit substitutes, and assets). In addition, the combined amount of
inclusion in core capital pursuant to
residual interests (other than credit- term subordinated debt and intermediate-
§ 325.5(f)), minus any disallowed deferred
enhancing interest-only strips). term preferred stock that may be treated as
tax assets, and minus any amount of
9. Sovereign. part of Tier 2 capital for risk-based capital
nonfinancial equity investments required to
(a) Sovereign means a central government, purposes is limited to 50 percent of Tier 1
be deducted pursuant to section II.B.6 of this
including its departments and ministries, and capital. Amounts in excess of these limits
appendix E.
the central bank. It does not include states, (b) Although nonvoting common stock, may be issued but are not included in the
provinces, local governments, or other noncumulative perpetual preferred stock, calculation of the risk-based capital ratio.
political subdivisions of a country, or and minority interests in the equity capital Supplementary capital elements (Tier 2)
commercial enterprises owned by a central accounts of consolidated subsidiaries are consist of: Allowance for loan and lease
government. normally included in Tier 1 capital, voting losses, up to a maximum of 1.25 percent of
(b) For purposes of this appendix E, common stockholders’ equity generally will risk-weighted assets; cumulative perpetual
sovereign does not include the United States, be expected to be the dominant form of Tier preferred stock, long-term preferred stock
U.S. Government agencies, or the U.S. central 1 capital. Thus, banks should avoid undue (original maturity of at least 20 years) and
bank (including the twelve Federal Reserve reliance on nonvoting equity, preferred stock any related surplus; perpetual preferred stock
banks). In addition, for purposes of and minority interests. (and any related surplus) where the dividend
determining the appropriate risk weight of (c) Although minority interests in is reset periodically based, in whole or part,
claims on qualifying securities firms that are consolidated subsidiaries are generally on the bank’s current credit standing,
collateralized by securities issued or included in regulatory capital, exceptions to regardless of whether the dividends are
guaranteed by OECD central governments cumulative or noncumulative; hybrid capital
that meet the requirements of section II.C.1(c) 4 Preferred stock issues where the dividend is instruments, including mandatory
of this appendix E, sovereign does not reset periodically based, in whole or in part, upon convertible debt securities; term
include an OECD central government the bank’s current credit standing, including but not subordinated debt and intermediate-term
(including the United States). limited to, auction rate, money market or preferred stock (original average maturity of
10. Unconditionally cancelable means, remarketable preferred stock, are assigned to Tier 2 five years or more) and any related surplus;
with respect to a commitment-type lending capital, regardless of whether the dividends are and net unrealized holding gains on equity
arrangement, that a bank may, at any time, cumulative or noncumulative. securities (subject to the limitations
5 An exception is allowed for intangible assets
with or without cause, refuse to advance discussed in paragraph I–2.A.2(f) of this
funds or extend credit under the facility. In that are explicitly approved by the FDIC as part of
the bank’s regulatory capital on a specific case
section).
the case of home equity lines of credit or (a) Allowance for loan and lease losses. (i)
basis. These intangibles will be included in capital
mortgage lines of credit, a commitment is for risk-based capital purposes under the terms and Allowances for loan and lease losses are
conditions that are specifically approved by the reserves that have been established through
3 See footnote 31. FDIC. a charge against earnings to absorb future
losses on loans or lease financing receivables. the FDIC. This requirement implies that its depositors and to the bank’s other
Allowances for loan and lease losses exclude holders of such instruments may not obligations to its general and secured
‘‘allocated transfer risk reserves.’’ 6 and accelerate the payment of principal except in creditors; and
reserves created against identified losses. the event of bankruptcy, insolvency, or (B) Is ineligible as collateral for a loan by
(ii) This risk-based capital framework reorganization. the issuing bank;
provides a phasedown during the transition (C) The instrument should be available to (iv) Is unsecured;
period of the extent to which the allowance participate in losses while the issuer is (v) States expressly that the issuing bank
for loan and lease losses may be included in operating as a going concern. (Term may not retire any part of its obligation
an institution’s capital base. By year-end subordinated debt would not meet this without any prior written consent of the
1990, the allowance for loan and lease losses, requirement.) To satisfy this requirement, the FDIC or other primary federal regulator; and
as an element of supplementary capital, may instrument should convert to common or (vi) Includes, if the obligation is issued to
constitute no more than 1.5 percent of risk- perpetual preferred stock in the event that a depository institution, a specific waiver of
weighted assets and, by year-end 1992, no the sum of the undivided profits and capital the right of offset by the lending depository
more than 1.25 percent of risk-weighted surplus accounts of the issuer results in a institution.
assets.7 negative balance. (e) Subordinated debt obligations issued
(b) Preferred stock. (i) Perpetual preferred (D) The instrument should provide the prior to December 2, 1987 that satisfied the
stock is defined as preferred stock that does option for the issuer to defer principal and definition of the term ‘‘subordinated note and
not have a maturity date, that cannot be interest payments if: the issuer does not debenture’’ that was in effect prior to that
redeemed at the option of the holder, and report a profit in the preceding annual date also will be deemed to be term
that has no other provisions that will require period, defined as combined profits (i.e., net subordinated debt for risk-based capital
future redemption of the issue. Long-term income) for the most recent four quarters; purposes. An optional redemption (‘‘call’’)
preferred stock includes limited-life and the issuer eliminates cash dividends on provision in a subordinated debt instrument
preferred stock with an original maturity of its common and preferred stock. that is exercisable by the issuing bank in less
20 years or more, provided that the stock (ii) Mandatory convertible debt securities, than five years will not be deemed to
cannot be redeemed at the option of the which are subordinated debt instruments that constitute a maturity of less than five years,
holder prior to maturity, except with the require the issuer to convert such provided that the obligation otherwise has a
prior approval of the FDIC. instruments into common or perpetual stated contractual maturity of at least five
(ii) Cumulative perpetual preferred stock preferred stock by a date at or before the years; the call is exercisable solely at the
and long-term preferred stock qualify for maturity of the debt instruments, will qualify discretion or option of the issuing bank, and
inclusion in supplementary capital provided as hybrid capital instruments provided the not at the discretion or option of the holder
that the instruments can absorb losses while maturity of these instruments is 12 years or of the obligation; and the call is exercisable
the issuer operates as a going concern (a less and the instruments meet the criteria set only with the express prior written consent
fundamental characteristic of equity capital) forth below for ‘‘term subordinated debt.’’ of the FDIC under 12 U.S.C. 1828(i)(1) at the
and provided the issuer has the option to There is no limit on the amount of hybrid time early redemption or retirement is
defer payment of dividends on these capital instruments that may be included sought, and such consent has not been given
instruments. Given these conditions, and the within Tier 2 capital. in advance at the time of issuance of the
perpetual or long-term nature of the (d) Term subordinated debt and obligation. Optional redemption provisions
instruments, there is no limit on the amount intermediate-term preferred stock. The will be accorded similar treatment when
of these preferred stock instruments that may aggregate amount of term subordinated debt determining the perpetual nature and/or
be included with Tier 2 capital. (excluding mandatory convertible debt maturity of preferred stock and other capital
(iii) Noncumulative perpetual preferred securities) and intermediate-term preferred instruments.
stock where the dividend is reset periodically stock (including any related surplus) that (f) Discount of limited-life supplementary
based, in whole or in part, on the bank’s may be treated as Tier 2 capital for risk-based capital instruments. As a limited-life capital
current credit standing, including auction capital purposes is limited to 50 percent of instrument approaches maturity, the
rate, money market, or remarketable Tier 1 capital. Term subordinated debt and instrument begins to take on characteristics
preferred stock, are also assigned to Tier 2
intermediate-term preferred stock should of a short-term obligation and becomes less
capital without limit, provided the above
have an original average maturity of at least like a component of capital. Therefore, for
conditions are met.
five years to qualify as supplementary capital risk-based capital purposes, the outstanding
(c) Hybrid capital instruments. (i) Hybrid
and should not be redeemable at the option amount of term subordinated debt and
capital instruments include instruments that
of the holder prior to maturity, except with limited-life preferred stock eligible for
have certain characteristics of both debt and
the prior approval of the FDIC. For state inclusion in capital will be adjusted
equity. In order to be included as
nonmember banks, a ‘‘term subordinated downward, or discounted, as the instruments
supplementary capital elements, these
debt’’ instrument is an obligation other than approach maturity. Each limited-life capital
instruments should meet the following
a deposit obligation that: instrument will be discounted by reducing
criteria:
(A) The instrument should be unsecured, (i) Bears on its face, in boldface type, the the outstanding amount of the capital
subordinated to the claims of depositors and following: This obligation is not a deposit instrument eligible for inclusion as
general creditors, and fully paid-up. and is not insured by the Federal Deposit supplementary capital by a fifth of the
(B) The instrument should not be Insurance Corporation; original amount (less redemptions) each year
redeemable at the option of the holder prior (ii)(A) Has a maturity of at least five years; during the instrument’s last five years before
to maturity, except with the prior approval of or maturity. Such instruments, therefore, will
(B) In the case of an obligation or issue that have no capital value when they have a
6 Allocated transfer risk reserves are reserves that
provides for scheduled repayments of remaining maturity of less than a year.
have been established in accordance with section
principal, has an average maturity of at least (g) Unrealized gains on equity securities
905(a) of the International Lending Supervision Act five years; provided that the Director of the and unrealized gains (losses) on other assets.
of 1983 against certain assets whose value has been Division of Supervision may permit the Up to 45 percent of pretax net unrealized
found by the U.S. supervisory authorities to have issuance of an obligation or issue with a holding gains (that is, the excess, if any, of
been significantly impaired by protracted transfer shorter maturity or average maturity if the the fair value over historical cost) on
risk problems. Director has determined that exigent available-for-sale equity securities with
7 The amount of the allowance for loan and lease
circumstances require the issuance of such readily determinable fair values may be
losses that may be included as a supplementary obligation or issue; provided further that the included in supplementary capital. However,
capital element is based on a percentage of gross provisions of this paragraph I.A.2(d)(2) shall the FDIC may exclude all or a portion of
risk-weighted assets. A bank may deduct reserves
for loan and lease losses that are in excess of the
not apply to mandatory convertible debt these unrealized gains from Tier 2 capital if
amount permitted to be included in capital, as well obligations or issues; the FDIC determines that the equity
as allocated transfer risk reserves, from gross risk- (iii) States expressly that the obligation: securities are not prudently valued.
weighted assets when computing the denominator (A) Is subordinated and junior in right of Unrealized gains (losses) on other types of
of the risk-based capital ratio. payment to the issuing bank’s obligations to assets, such as bank premises and available-
for-sale debt securities, are not included in include equity and debt capital securities and imposes risks on a bank that are not
supplementary capital, but the FDIC may any other instruments or commitments that commensurate with the risk weight otherwise
take these unrealized gains (losses) into are deemed to be capital of the subsidiary. specified in this appendix E for the asset or
account as additional factors when assessing These investments are deducted from the credit equivalent amount. In addition, the
a bank’s overall capital adequacy. bank’s total (Tier 1 plus Tier 2) capital base. Director of DSC may, on a case-by-case basis,
B. Deductions from Capital and Other (3) Investments in securities subsidiaries determine the appropriate credit conversion
Adjustments. Certain assets are deducted established pursuant to 12 CFR 337.4. The factor for any off-balance sheet item that does
from a bank’s capital base for the purpose of FDIC may also consider deducting not fit wholly within one of the credit
calculating the numerator of the risk-based investments in other subsidiaries, either on a conversion factors set forth in this appendix
capital ratio.8 These assets include: case-by-case basis or, as with securities E or that imposes risks on a bank that are not
(1) All intangible assets other than subsidiaries, based on the general commensurate with the credit conversion
mortgage servicing assets, nonmortgage characteristics or functional nature of the factor otherwise specified in this appendix E
servicing assets and purchased credit card subsidiaries. for the off-balance sheet item. In making such
relationships.9 These disallowed intangibles (4) Reciprocal holdings of capital a determination, the Director of DSC will
are deducted from the core capital (Tier 1) instruments of banks that represent consider the similarity of the asset or off-
elements. intentional cross-holdings by the banks. balance sheet item to assets or off-balance
(2) Investments in unconsolidated banking These holdings are deducted from the bank’s sheet items explicitly treated in sections II.B
and finance subsidiaries.10 This includes any total capital base. and II.C of this appendix E, as well as other
equity or debt capital investments in banking (5) Deferred tax assets in excess of the limit relevant factors.
or finance subsidiaries if the subsidiaries are set forth in § 325.5(g). These disallowed B. Other Considerations
not consolidated for regulatory capital deferred tax assets are deducted from the
requirements.11 Generally, these investments core capital (Tier 1) elements. On a case-by- 1. Indirect Holdings of Assets. Some of the
case basis, and in conjunction with assets on a bank’s balance sheet may
8 Any assets deducted from capital when supervisory examinations, other deductions represent an indirect holding of a pool of
computing the numerator of the risk-based capital from capital may also be required, including assets; for example, mutual funds. An
ratio will also be excluded from risk-weighted any adjustments deemed appropriate for investment in shares of a mutual fund whose
assets when computing the denominator of the assets classified as loss. portfolio consists solely of various securities
ratio. or money market instruments that, if held
9 In addition to mortgage servicing assets, II. Procedures For Computing Risk-Weighted separately, would be assigned to different
nonmortgage servicing assets and purchased credit Assets risk categories, generally is assigned to the
card relationships, certain other intangibles may be A. General Procedures risk category appropriate to the highest risk-
allowed if explicitly approved by the FDIC as part weighted asset that the fund is permitted to
of the bank’s regulatory capital on a specific case 1. Under the risk-based capital framework, hold in accordance with the stated
basis. In evaluating whether other types of a bank’s balance sheet assets and credit investment objectives set forth in its
intangibles should be recognized for regulatory equivalent amounts of off-balance sheet items
capital purposes on a specific case basis, the FDIC
prospectus. The bank may, at its option,
are assigned to one of eight broad risk assign the investment on a pro rata basis to
will accord special attention to the general categories according to the obligor or, if
characteristics of the intangibles, including: (1) the different risk categories according to the
relevant, the guarantor or the nature of the investment limits in the fund’s prospectus,
separability of the intangible asset and the ability
to sell it separate and apart from the bank or the collateral. The aggregate dollar amount in but in no case will indirect holdings through
bulk of the bank’s assets, (2) the certainty that a each category is then multiplied by the risk shares in any mutual fund be assigned to a
readily identifiable stream of cash flows associated weight assigned to that category. The risk weight less than 20 percent. If the bank
with the intangible asset can hold its value resulting weighted values from each of the chooses to assign its investment on a pro rata
notwithstanding the future prospects of the bank, eight risk categories are added together and basis, and the sum of the investment limits
and (3) the existence of a market of sufficient depth this sum is the risk-weighted assets total that,
to provide liquidity for the intangible asset.
in the fund’s prospectus exceeds 100 percent,
as adjusted,12 comprises the denominator of the bank must assign risk weights in
10 For risk-based capital purposes, these
the risk-based capital ratio. descending order. If, in order to maintain a
subsidiaries are generally defined as any company 2. The risk-weighted amounts for all off-
that is primarily engaged in banking or finance and necessary degree of short-term liquidity, a
balance sheet items are determined by a two- fund is permitted to hold an insignificant
in which the bank, either directly or indirectly,
owns more than 50 percent of the outstanding step process. First, the notional principal, or amount of its assets in short-term, highly
voting stock but does not consolidate the company face value, amount of each off-balance sheet liquid securities of superior credit quality
for regulatory capital purposes. In addition to item generally is multiplied by a credit that do not qualify for a preferential risk
investments in unconsolidated banking and finance conversion factor to arrive at a balance sheet weight, such securities will generally be
subsidiaries, the FDIC may, on a case-by-case basis, ‘‘credit equivalent amount.’’ Second, the disregarded in determining the risk category
deduct investments in associated companies or credit equivalent amount generally is
joint ventures, which are generally defined as any
to which the bank’s holdings in the overall
assigned to the appropriate risk category, like fund should be assigned. The prudent use of
companies in which the bank, either directly or
any balance sheet asset, according to the hedging instruments by a mutual fund to
indirectly, owns 20 to 50 percent of the outstanding
voting stock. Alternatively, the FDIC may, in certain obligor or, if relevant, the guarantor or the reduce the risk of its assets will not increase
cases, apply an appropriate risk-weighted capital nature of the collateral. the risk weighting of the mutual fund
charge against a bank’s proportionate interest in the 3. The Director of the Division of investment. For example, the use of hedging
assets of associated companies and joint ventures. Supervision and Consumer Protection instruments by a mutual fund to reduce the
The definitions for subsidiaries, associated (Director) of DSC may, on a case-by-case interest rate risk of its government bond
companies and joint ventures are contained in the basis, determine the appropriate risk weight portfolio will not increase the risk weight of
instructions for the preparation of the Consolidated for any asset or credit equivalent amount that
Reports of Condition and Income.
that fund above the 20 percent category.
11 Consolidation requirements for regulatory
does not fit wholly within one of the risk Nonetheless, if the fund engages in any
categories set forth in this appendix E or that activities that appear speculative in nature or
capital purposes generally follow the consolidation
requirements set forth in the instructions for has any other characteristics that are
preparation of the consolidated Reports of of such subsidiaries will be consolidated with those inconsistent with the preferential risk
Condition and Income. However, although of the parent bank when calculating the risk-based weighting assigned to the fund’s assets,
investments in subsidiaries representing majority capital ratio. In addition, although securities holdings in the fund will be assigned to the
ownership in another federally-insured depository subsidiaries established pursuant to 12 CFR 337.4 100 percent risk category.
institution are not consolidated for purposes of the are consolidated for Report of Condition and
2. Collateral (a) Cash and securities issued
consolidated Reports of Condition and Income that Income purposes, they are not consolidated for
regulatory capital purposes. or guaranteed by the United States, other
are filed by the parent bank, they are generally
consolidated for purposes of determining FDIC 12 Any asset deducted from a bank’s capital OECD central Governments and U.S.
regulatory capital requirements. Therefore, accounts when computing the numerator of the Government-sponsored entities. In
investments in these depository institution risk-based capital ratio will also be excluded from determining risk weights of various assets,
subsidiaries generally will not be deducted for risk- risk-weighted assets when calculating the the following forms of collateral are formally
based capital purposes; rather, assets and liabilities denominator for the ratio. recognized under this appendix E: cash on
deposit in the lending bank; securities issued securities are recognized as collateral for risk- nonperformance of another party or from an
or guaranteed by the United States, other based capital purposes is determined by their insufficiency in the value of the collateral.
central governments of the OECD-based current market value. If a claim is partially Credit-enhancing representations and
group of countries,13 U.S. Government secured, the pro rata portion of the claim that warranties do not include:
agencies, and U.S. Government-sponsored is not covered by the collateral is assigned to (A) Early default clauses and similar
agencies. Claims fully secured by such the risk category appropriate to the obligor warranties that permit the return of, or
collateral are assigned to the 20 percent risk or, if relevant, the guarantor. premium refund clauses covering, 1–4 family
category.14 The extent to which these Notwithstanding Tables F1 and F2 there is a residential first mortgage loans that qualify
securities are recognized as collateral for risk- 20 percent risk weight floor on collateral. for a 50 percent risk weight for a period not
based capital purposes is determined by their 3. Guarantees (a) Guarantees of the United to exceed 120 days from the date of transfer.
current market value. If a claim is partially States, U.S. Government-sponsored entities, These warranties may cover only those loans
secured, the portion of the claim that is not OECD state and local governments, and that were originated within 1 year of the date
covered by the collateral is assigned to the certain banking organizations. Guarantees of of transfer;
risk category appropriate to the obligor or, if the United States, U.S. Government agencies, (B) Premium refund clauses that cover
relevant, the guarantor. U.S. Government-sponsored agencies, state assets guaranteed, in whole or in part, by the
(b) Collateral that requires an external and local governments of the OECD-based U.S. Government, a U.S. Government agency
rating. The following forms of liquid and group of countries, U.S. depository or a government-sponsored enterprise,
readily marketable financial collateral also institutions, and foreign banks in OECD provided the premium refund clauses are for
are recognized: both short- and long-term countries are recognized under this appendix a period not to exceed 120 days from the date
debt securities that are either issued or E. If a claim is partially guaranteed, the of transfer; or
guaranteed by sovereigns where either the portion of the claim that is not fully covered (C) Warranties that permit the return of
sovereign or the issued debt security are by the guarantee is assigned to the risk assets in instances of misrepresentation,
externally rated at least than investment category appropriate to the obligor or, if fraud or incomplete documentation.
grade by a NRSRO; issued by non-sovereigns relevant, the collateral. (iv) Direct credit substitute means an
where the issued security is externally rated (b) Eligible guarantees by sovereigns and arrangement in which a bank assumes, in
at least investment grade by a NRSRO; or non-sovereigns. A claim backed by an eligible form or in substance, credit risk associated
securitization exposures rated at least guarantee may be assigned to the risk weight with an on- or off-balance sheet credit
investment grade by a NRSRO. Claims or in section II.C.9(a) and Table F1 of this exposure that was not previously owned by
portion of claims collateralized by financial appendix E corresponding to the eligible the bank (third-party asset) and the risk
collateral externally rated at least investment guarantor(s)’ senior long-term debt rating or assumed by the bank exceeds the pro rata
grade are assigned to the risk weight issuer rating, in the case of a sovereign. share of the bank’s interest in the third-party
appropriate to the collateral’s external rating
Portions of claims backed by an eligible asset. If the bank has no claim on the third-
as set forth in section II.C.9(a) and Tables F1
guarantee may be assigned to the risk-weight party asset, then the bank’s assumption of
and F2, or section II.B.5 and Tables A and
category appropriate to the external credit any credit risk with respect to the third party
B.15 The extent to which externally rated
rating of the eligible guarantor(s)’ senior long- asset is a direct credit substitute. Direct credit
term debt or issuer rating in accordance with substitutes include, but are not limited to:
13 Securities issued or guaranteed by OECD
section II.C.9(a) and Table F1 of this (A) Financial standby letters of credit,
central governments are only recognized under the
zero percent risk weight if they meet the collateral
appendix E. which includes any letter of credit or similar
requirements of section II.C.1 of appendix E. The 4. Maturity. Maturity is generally not a arrangement, however named or described,
OECD-based group of countries comprises all full factor in assigning items to risk categories that support financial claims on a third party
members of the Organization for Economic with the exceptions of claims on non-OECD that exceeds a bank’s pro rata share of losses
Cooperation and Development (OECD) regardless of banks, commitments, and interest rate and in the financial claim;
entry date, as well as countries that have concluded foreign exchange rate related contracts. (B) Guarantees, surety arrangements, credit
special lending arrangements with the International Except for commitments, short-term is derivatives, and similar instruments backing
Monetary Fund (IMF) associated with the IMF’s defined as one year or less remaining financial claims;
General Arrangements to Borrow, but excludes any
country that has rescheduled its external sovereign
maturity and long-term is defined as over one (C) Purchased subordinated interests or
debt within the previous five years. As of November year remaining maturity. In the case of securities that absorb more than their pro rata
1995, the OECD included the following countries: commitments, short-term is defined as one share of credit losses from the underlying
Australia, Austria, Belgium, Canada, Denmark, year or less original maturity and long-term assets;
Finland, France, Germany, Greece, Iceland, Ireland, is defined as over one year original maturity. (D) Credit derivative contracts under which
Italy, Japan, Luxembourg, Mexico, the Netherlands, 5. Recourse, Direct Credit Substitutes, the bank assumes more than its pro rata share
New Zealand, Norway, Portugal, Spain, Sweden, Residual Interests and Mortgage- and Asset- of credit risk on a third party asset or
Switzerland, Turkey, the United Kingdom and the Backed Securities. For purposes of this exposure;
United States; and Saudi Arabia had concluded
special lending arrangements with the IMF
section II.B.5 of this appendix E, the (E) Loans or lines of credit that provide
associated with the IMF’s General Arrangements to following definitions will apply. credit enhancement for the financial
Borrow. A rescheduling of external sovereign debt (a) Definitions. (i) Credit derivative means obligations of an account party;
generally would include any renegotiation of terms a contract that allows one party (‘‘the (F) Purchased loan servicing assets if the
arising from a country’s inability or unwillingness protection purchaser’’) to transfer the credit servicer: is responsible for credit losses
to meet its external debt service obligations, but risk of an asset or off-balance sheet credit associated with the loans being serviced; is
generally would not include renegotiations of debt exposure to another party (the protection responsible for making mortgage servicer
in the normal course of business, such as provider). The value of a credit derivative is cash advances (unless the advances are not
renegotiation to allow the borrower to take
advantage of a decline in interest rates or other
dependent, at least in part, on the credit direct credit substitutes because they meet
change in market conditions. performance of the ‘‘reference asset.’’ the conditions specified in II.B.5 (a)(ix) of
14 However, claims on or guaranteed by (ii) Credit-enhancing interest-only strip is this appendix E), or makes or assumes credit-
qualifying securities firms may receive a zero defined in § 325.2(g). enhancing representations and warranties
percent risk weight if such claims are: (i) (iii) Credit-enhancing representations and with respect to the loans serviced;
collateralized by cash or securities issued by an warranties means representations and (G) Clean-up calls on third party assets.
OECD central government (including the United warranties that are made or assumed in Clean-up calls that are exercisable at the
States) and (ii) meet the other requirements of connection with a transfer of assets option of the bank (as servicer or as an
section II.C.1(c) of this appendix E. See footnote 31. (including loan servicing assets) and that affiliate of the servicer) when the pool
15 In the event that the external rating of a
obligate a bank to protect investors from balance is 10 percent or less of the original
security used to collateralize a claim results in a
higher risk weight than would have otherwise been
losses arising from credit risk in the assets pool balance are not direct credit substitutes;
assigned based on the claim’s underlying asset type, transferred or the loans serviced. Credit- and
obligor, or external rating, if applicable, then the enhancing representations and warranties (v) Eligible ABCP liquidity facility means a
lower risk weight appropriate to the underlying include promises to protect a party from liquidity facility supporting ABCP, in form or
asset type or the obligor may be applied. losses resulting from the default or in substance, that is subject to an asset
quality test at the time of draw that precludes (xiii) Recourse means an arrangement in that, in substance, cause the bank to retain
funding against assets that are 90 days or which a bank retains, in form or in substance, the credit risk of an asset or exposure that
more past due or in default. In addition, if of any credit risk directly or indirectly had qualified as a residual interest before it
the assets that an eligible ABCP liquidity associated with an asset it has sold (in was sold. Residual interests generally do not
facility is required to fund against are accordance with generally accepted include interests purchased from a third
externally rated assets or exposures at the accounting principles) that exceeds a pro rata party, except that purchased credit-
inception of the facility, the facility can be share of the bank’s claim on the asset. If a enhancing I/Os are residual interests for
used to fund only those assets or exposures bank has no claim on an asset it has sold, purposes of the risk-based capital treatment
that are externally rated investment grade at then the retention of any credit risk is in this appendix.
the time of funding. Notwithstanding the recourse. A recourse obligation typically (xv) Risk participation means a
eligibility requirements set forth in the two arises when an institution transfers assets in participation in which the originating party
preceding sentences, a liquidity facility will a sale and retains an obligation to repurchase remains liable to the beneficiary for the full
be considered an eligible ABCP liquidity the assets or absorb losses due to a default amount of an obligation (e.g., a direct credit
facility if the assets that are funded under the of principal or interest or any other substitute) notwithstanding that another
liquidity facility and which do not meet the deficiency in the performance of the party has acquired a participation in that
eligibility requirements are guaranteed, either underlying obligor or some other party. obligation.
conditionally or unconditionally, by the U.S. Recourse may exist implicitly where a bank (xvi) Securitization means the pooling and
government or its agencies, or by the central provides credit enhancement beyond any repackaging by a special purpose entity of
government of an OECD country. contractual obligation to support assets it has assets or other credit exposures into
(vi) External rating is defined above in the sold. The following are examples of recourse securities that can be sold to investors.
definitions to this appendix E. arrangements: Securitization includes transactions that
(vii) Face amount means the notional (A) Credit-enhancing representations and create stratified credit risk positions whose
principal, or face value, amount of an off- warranties made on the transferred assets; performance is dependent upon an
balance sheet item; the amortized cost of an (B) Loan servicing assets retained pursuant underlying pool of credit exposures,
asset not held for trading purposes; and the to an agreement under which the bank: is including loans and commitments.
fair value of a trading asset. responsible for losses associated with the (xvii) Sponsor means a bank that
(viii) Financial asset means cash or other loans being serviced; or is responsible for establishes an ABCP program; approves the
monetary instrument, evidence of debt, making mortgage servicer cash advances sellers permitted to participate in the
evidence of an ownership interest in an (unless the advances are not a recourse program; approves the asset pools to be
entity, or a contract that conveys a right to obligation because they meet the conditions purchased by the program; or administers the
receive or exchange cash or another financial specified in section II.B.5(a)(xi) of this ABCP program by monitoring the assets,
instrument from another party.
appendix E). arranging for debt placement, compiling
(ix) Financial standby letter of credit
(C) Retained subordinated interests that monthly reports, or ensuring compliance
means a letter of credit or similar
absorb more than their pro rata share of with the program documents and with the
arrangement that represents an irrevocable
losses from the underlying assets; program’s credit and investment policy.
obligation to a third-party beneficiary:
(D) Assets sold under an agreement to (xviii) Structured finance program means a
(A) To receive money borrowed by, or
advanced to, or for the account of, a second repurchase, if the assets are not already program where receivable interests and asset-
party (the account party), or included on the balance sheet; backed securities issued by multiple
(B) To make payment on behalf of the (E) Loan strips sold without contractual participants are purchased by a special
account party, in the event that the account recourse where the maturity of the purpose entity that repackages those
party fails to fulfill its obligation to the transferred portion of the loan is shorter than exposures into securities that can be sold to
beneficiary. the maturity of the commitment under which investors. Structured finance programs
(x) Liquidity facility means a legally the loan is drawn; allocate credit risks, generally, between the
binding commitment to provide liquidity (F) Credit derivative contracts under which participants and credit enhancement
support to ABCP by lending to, or purchasing the bank retains more than its pro rata share provided to the program.
assets from, any structure, program, or of credit risk on transferred assets; (xix) Traded position means a position that
conduit in the event that funds are required (G) Clean-up calls at inception that are has an external rating and is retained,
to repay maturing ABCP. greater than 10 percent of the balance of the assumed or issued in connection with an
(xi) Mortgage servicer cash advance means original pool of transferred loans. Clean-up asset securitization, where there is a
funds that a residential mortgage servicer calls that are 10 percent or less of the original reasonable expectation that, in the near
advances to ensure an uninterrupted flow of pool balance that are exercisable at the future, the rating will be relied upon by
payments, including advances made to cover option of the bank are not recourse unaffiliated investors to purchase the
foreclosure costs or other expenses to arrangements; and position; or an unaffiliated third party to
facilitate the timely collection of the loan. A (H) Liquidity facilities that provide enter into a transaction involving the
mortgage servicer cash advance is not a liquidity support to ABCP (other than eligible position, such as a purchase, loan, or
recourse obligation or a direct credit ABCP liquidity facilities). repurchase agreement.
substitute if: (xiv) Residual interest means any on- (b) Credit equivalent amounts and risk
(A) The mortgage servicer is entitled to full balance sheet asset that represents an interest weights of recourse obligations and direct
reimbursement and this right is not (including a beneficial interest) created by a credit substitutes—(i) General rule for
subordinated to other claims on the cash transfer that qualifies as a sale (in accordance determining the credit-equivalent amount.
flows from the underlying asset pool; or with generally accepted accounting Except as otherwise provided, the credit-
(B) For any one loan, the servicer’s principles (GAAP)) of financial assets, equivalent amount for a recourse obligation
obligation to make nonreimbursable whether through a securitization or or direct credit substitute is the full amount
advances is contractually limited to an otherwise, and that exposes a bank to credit of the credit-enhanced assets for which the
insignificant amount of the outstanding risk directly or indirectly associated with the bank directly or indirectly retains or assumes
principal of that loan. transferred assets that exceeds a pro rata credit risk multiplied by a 100% conversion
(xii) Nationally recognized statistical rating share of the bank’s claim on the assets, factor. Thus, a bank that extends a partial
organization (NRSRO) means an entity whether through subordination provisions or direct credit substitute, e.g., a financial
recognized by the Division of Market other credit enhancement techniques. standby letter of credit that absorbs the first
Regulation of the Securities and Exchange Residual interests generally include credit- 10 percent of loss on a transaction, must
Commission (or any successor Division) enhancing I/Os, spread accounts, cash maintain capital against the full amount of
(Commission) as a nationally recognized collateral accounts, retained subordinated the assets being supported.
statistical rating organization for various interests, other forms of over- (ii) Risk-weight factor. To determine the
purposes, including the Commission’s collateralization, and similar assets that bank’s risk-weighted assets for an off-balance
uniform net capital requirements for brokers function as a credit enhancement. Residual sheet recourse obligation or a direct credit
and dealers (17 CFR 240.15c3–1). interests further include those exposures substitute, the credit equivalent amount is
assigned to the risk category appropriate to appropriate to the party acquiring the underlying transaction, after considering any
the obligor in the underlying transaction, participation. The pro rata share of the credit associated guarantees or collateral.
after considering any associated guarantees equivalent amount that has not been (d) Positions with external ratings: credit-
or collateral. For a direct credit substitute participated out is assigned to the risk-weight equivalent amounts and risk weights.—(i)
that is an on-balance sheet asset, e.g., a category appropriate to the obligor guarantor, Traded positions. With respect to a recourse
purchased subordinated security, a bank or collateral. For example, the pro rata share obligation, direct credit substitute, residual
must calculate risk-weighted assets using the of the full amount of the assets supported, in interest (other than a credit-enhancing
amount of the direct credit substitute and the whole or in part, by a direct credit substitute interest-only strip) or mortgage- or asset-
full amount of the assets it supports, i.e., all conveyed as a risk participation to a U.S. backed security that is a ‘‘traded position’’
the more senior positions in the structure. domestic depository institution or an OECD and that has received an external rating on
The treatment covered in this paragraph (ii) bank is assigned to the 20 percent risk a long-term position that is one grade below
is subject to the low-level exposure rule category.16 investment grade or better or a short-term
provided in section II.B.5(h)(i) of this (ii) Treatment for direct credit substitutes position that is investment grade, the bank
appendix E. in which the bank has acquired a risk may multiply the face amount of the position
(c) Credit equivalent amount and risk participation. In the case of a direct credit
by the appropriate risk weight, determined in
weight of participations in, and syndications substitute in which the bank has acquired a
accordance with Table A or B of this
of, direct credit substitutes. Subject to the risk participation, the acquiring bank’s pro
appendix E, as appropriate.17 If a traded
low-level exposure rule provided in section rata share of the direct credit substitute is
II.B.5(h)(i) of this appendix E, the credit multiplied by the full amount of the assets position receives more than one external
equivalent amount for a participation interest that are supported by the direct credit rating, the lowest rating will apply and that
in, or syndication of, a direct credit substitute substitute and converted using a 100% credit external rating must apply to the claim or
(excluding purchased credit-enhancing conversion factor. The resulting credit exposure in its entirety. Thus, for banks that
interest-only strips) is calculated and risk equivalent amount is then assigned to the hold split or partially-rated instruments, the
weighted as follows: risk-weight category appropriate to the risk weight that corresponds to the lowest
(i) Treatment for direct credit substitutes obligor in the underlying transaction, after component rating will apply to the entire
for which a bank has conveyed a risk considering any associated guarantees or exposure. For example, a purchased
participation. In the case of a direct credit collateral. subordinated security where the principal
substitute in which a bank has conveyed a (iii) Treatment for direct credit substitutes component is rated BBB, but the interest
risk participation, the full amount of the related to syndications. In the case of a direct component is rated B, will be subject to the
assets that are supported by the direct credit credit substitute that takes the form of a gross-up treatment accorded to residual
substitute is converted to a credit equivalent syndication where each party is obligated interests rated B or lower. Similarly, if a
amount using a 100% conversion factor. only for its pro rata share of the risk and portion of an instrument is unrated, the
However, the pro rata share of the credit there is no recourse to the originating entity, entire position will be treated as if it were
equivalent amount that has been conveyed each bank’s credit equivalent amount will be unrated. The FDIC reserves the authority to
through a risk participation is then assigned calculated by multiplying only its pro rata override the use of certain ratings or the
to whichever risk-weight category is lower: share of the assets supported by the direct ratings on certain instruments, either on a
the risk-weight category appropriate to the credit substitute by a 100% conversion case-by-case basis or through broader
obligor in the underlying transaction, after factor. The resulting credit equivalent supervisory policy, if necessary or
considering any associated guarantees or amount is then assigned to the risk-weight appropriate to address the risk that an
collateral, or the risk-weight category category appropriate to the obligor in the instrument poses to a bank.
TABLE A.—RISK WEIGHTS FOR LONG-TERM EXTERNAL RATINGS OF SECURITIZATION EXPOSURES

Risk weight
Long-term rating category Examples (percent)
Highest investment grade rating ................................................................................................................................ AAA ............. 20

Second-highest investment grade rating ................................................................................................................... AA ............... 20
Third-highest investment grade rating ....................................................................................................................... A .................. 35
Lowest-investment grade rating—plus ....................................................................................................................... BBB+ ........... 50
Lowest-investment grade rating—naught .................................................................................................................. BBB ............. 75
Lowest-investment grade rating—negative ................................................................................................................ BBB¥ ......... 100
One category below investment grade—plus & naught ............................................................................................ BB+, BB ...... 200
One category below investment grade—negative ..................................................................................................... BB¥ ............ 200
Two or more categories below investment grade ..................................................................................................... B, CCC ........ Dollar for
Dollar
Unrated ....................................................................................................................................................................... n/a Dollar for
Dollar
TABLE B.—RISK WEIGHTS FOR SHORT-TERM EXTERNAL RATINGS OF SECURITIZATION EXPOSURES

Risk weight
Short-term rating category Examples (percent)
Highest investment grade rating ................................................................................................................................ A–1, P–1 ..... 20

Second-highest investment grade rating ................................................................................................................... A–2, P–2 ..... 35
Lowest investment grade rating ................................................................................................................................. A–3, P–3 ..... 75
Unrated ....................................................................................................................................................................... n/a
16 A risk participation with a remaining maturity 17 Stripped mortgage-backed securities and are not credit-enhancing and principal-only strips,
of one year or less that is conveyed to a non-OECD similar instruments, such as interest-only strips that must be assigned to the 100% risk category.
bank is also assigned to the 20 percent risk category.
(ii) Non-traded positions. A recourse credit support for the entire life of the any existing associated deferred tax liability
obligation, direct credit substitute, residual unrated position. recorded on the balance sheet), even if the
interest (but not a credit-enhancing interest- (f) Residual interests—(i) Concentration amount of risk-based capital required to be
only strip) or mortgage- or asset-backed limit on credit-enhancing interest-only strips. maintained exceeds the full risk-based
security extended in connection with a In addition to the capital requirement capital requirement for the assets transferred.
securitization that is not a ‘‘traded position’’ provided by section II.B.5(f)(ii) of this Transactions that, in substance, result in the
may be assigned a risk weight in accordance appendix E, a bank must deduct from Tier 1 retention of credit risk associated with a
with section II.B.5(d)(i) of this appendix E if: capital the face amount of all credit- transferred residual interest will be treated as
(A) It has been externally rated by more enhancing interest-only strips in excess of 25 if the residual interest was retained by the
than one NRSRO; percent of Tier 1 capital in accordance with bank and not transferred.
(B) It has received an external rating on a § 325.5(f)(3). (iv) Residual interests and other recourse
long-term position that is one category below (ii) Credit-enhancing interest-only strip obligations. Where the aggregate capital
investment grade or better or a short-term capital requirement. After applying the requirement for residual interests (including
position that is investment grade by all concentration limit to credit-enhancing credit-enhancing interest-only strips) and
NRSROs providing a rating; interest-only strips in accordance with
recourse obligations arising from the same
(C) The ratings are publicly available; and § 325.5(f)(3), a bank must maintain risk-based
transfer of assets exceed the full risk-based
(D) The ratings are based on the same capital for a credit-enhancing interest-only
capital requirement for assets transferred, a
criteria used to rate traded positions. If the strip, equal to the remaining face amount of
ratings are different, the lowest rating will the credit-enhancing interest-only strip (net bank must maintain risk-based capital equal
determine the risk category to which the of the remaining proportional amount of any to the greater of the risk-based capital
recourse obligation, direct credit substitute, existing associated deferred tax liability requirement for the residual interest as
residual interest, or mortgage- or asset-backed recorded on the balance sheet), even if the calculated under sections II.B.5(f)(ii) through
security will be assigned. amount if risk-based capital required to be (iii) of this appendix E or the full risk-based
(e) Senior positions not externally rated. maintained exceeds the full risk-based capital requirement for the assets transferred.
For a recourse obligation, direct credit capital requirement for the assets transferred. (g) Positions that are not rated by an
substitute, residual interest or mortgage-or Transactions that, in substance, result in the NRSRO. A bank’s position (other than a
asset-backed security that is not externally retention of credit risk associated with a residual interest) in a securitization or
rated but is senior in all features to a traded transferred credit-enhancing interest-only structured finance program that is not rated
position (including collateralization and strip will be treated as if the credit-enhancing by an NRSRO may be risk-weighted based on
maturity), a bank may apply a risk weight to interest-only strip was retained by the bank the bank’s determination of the credit rating
the face amount of the senior position in and not transferred. of the position, as specified in Table C of this
accordance with section II.B.5(d)(i) of this (iii) Other residual interests capital appendix E, multiplied by the face amount of
appendix E, based upon the risk weight of requirement. Except as otherwise provided in the position. In order to qualify for this
the traded position, subject to any current or section II.B.5(d) or (e) of this appendix E, a treatment, the bank’s system for determining
prospective supervisory guidance and the bank must maintain risk-based capital for a the credit rating of the position must meet
bank satisfying the FDIC that this treatment residual interest (excluding a credit- one of the three alternative standards set out
is appropriate. This section will apply only enhancing interest-only strip) equal to the in section II.B.5(g)(i) through (iii) of this
if the traded position provides substantial face amount of the residual interest (net of appendix E. Table C
Risk weight
Rating category Examples (percent)
Investment grade .................................................................................................................................................. BBB or other ..... 100

One category below investment grade ................................................................................................................. BB ..................... 200
(i) Internal risk rating used for asset- (C) The internal credit risk rating system than, the credit risk rating assumptions and
backed programs. A bank extends a direct must separately consider the risk associated methodologies of NRSROs.
credit substitute (but not a purchased credit- with the underlying loans or borrowers, and (ii) Program Ratings. A bank extends a
enhancing interest-only strip) to an asset- the risk associated with the structure of a direct credit substitute or retains a recourse
backed commercial paper program sponsored particular securitization transaction; obligation (but not a residual interest) in
by the bank and the bank is able to (D) The internal credit risk rating system connection with a structured finance
demonstrate to the satisfaction of the FDIC, identifies gradations of risk among ‘‘pass’’ program and an NRSRO has reviewed the
prior to relying upon its use, that the bank’s assets and other risk positions; terms of the program and stated a rating for
internal credit risk rating system is adequate. (E) The internal credit risk rating system positions associated with the program. If the
must have clear, explicit criteria (including program has options for different
Adequate internal credit risk rating systems
for subjective factors), that are used to combinations of assets, standards, internal
usually contain the following criteria: 18
classify assets into each internal risk grade; credit enhancements and other relevant
(A) The internal credit risk rating system (F) The bank must have independent credit
is an integral part of the bank’s risk factors, and the NRSRO specified ranges of
risk management or loan review personnel
management system that explicitly rating categories to them, the bank may apply
assigning or reviewing the credit risk ratings;
incorporates the full range of risks arising the rating category applicable to the option
(G) An internal audit procedure should
form a bank’s participation in securitization periodically verify that internal risk ratings that corresponds to the bank’s position. In
activities; are assigned in accordance with the bank’s order to rely on a program rating, the bank
(B) Internal credit ratings are linked to established criteria; must demonstrate to the FDIC’s satisfaction
measurable outcomes, such as the probability (H) The bank must monitor the that the credit risk rating assigned to the
that the position will experience any loss, the performance of the internal credit risk ratings program meets the same standards generally
position’s expected loss given default, and assigned to nonrated, nontraded direct credit used by NRSROs for rating traded positions.
the degree of variance in losses given default substitutes over time to determine the The bank must also demonstrate to the
on that position; appropriateness of the initial credit risk FDIC’s satisfaction that the criteria
rating assignment and adjust individual underlying the NRSRO’s assignment of
18 The adequacy of a bank’s use of its internal credit risk ratings, or the overall internal ratings for the program are satisfied for the
credit risk system must be demonstrated to the credit risk ratings system, as needed; and particular position issued by the bank. If a
FDIC considering the criteria listed on this section (I) The internal credit risk rating system bank participates in a securitization
and the size and complexity of the credit exposures must make credit risk rating assumptions that sponsored by another party, the FDIC may
assumed by the bank. are consistent with, or more conservative authorize the bank to use this approach based
on a program rating obtained by the sponsor (i) Alternative Capital Calculation for this section II.B.5(i), the bank would be well
of the program. Small Business Obligations. capitalized.
(iii) Computer Program. A bank is using an (i) Definitions. For purposes of this section (B) A bank shall compute its capital
acceptable credit assessment computer II.B.5(i): without regard to this section II.B.5(i) for
program that has been developed by an (A) Qualified bank means a bank that: is purposes of 12 U.S.C. 1831o(g) regardless of
NRSRO to determine the rating of a direct well capitalized as defined in § 325.103(b)(1) the bank’s capital level.
credit substitute or recourse obligation (but without applying the capital treatment 6. Nonfinancial equity investments. (a)
not a residual interest) extended in described in this section II.B.5(i), or is General. A bank must deduct from its Tier 1
connection with a structured finance adequately capitalized as defined in capital the sum of the appropriate percentage
program. In order to rely on the rating § 325.103(b)(2) without applying the capital (as determined below) of the adjusted
determined by the computer program, the treatment described in this section II.B.5(i) carrying value of all nonfinancial equity
bank must demonstrate to the FDIC’s and has received written permission by order investments held by the bank or by its direct
satisfaction that ratings under the program of the FDIC to apply the capital treatment or indirect subsidiaries. For purposes of this
correspond credibly and reliably with the described in this section II.B.5(i). section II.B.6, investments held by a bank
ratings of traded positions. The bank must (B) Small business means a business that include all investments held directly or
also demonstrate to the FDIC’s satisfaction meets the criteria for a small business
indirectly by the bank or any of its
the credibility of the program in financial concern established by the Small Business
subsidiaries.
markets, the reliability of the program in Administration in 13 CFR part 121 pursuant
(b) Scope of nonfinancial equity
assessing credit risk, the applicability of the to 15 U.S.C. 632.
investments. A nonfinancial equity
program to the bank’s position, and the (ii) Capital and reserve requirements.
proper implementation of the program. Notwithstanding the risk-based capital investment means any equity investment
(h) Limitations on risk-based capital treatment outlined in any other paragraph held by the bank in a nonfinancial company:
requirements—(i) Low-level exposure rule. If (other than paragraph (i) of this section through a small business investment
the maximum exposure to loss retained or II.B.5), with respect to a transfer with company (SBIC) under section 302(b) of the
assumed by a bank in connection with a recourse of a small business loan or a lease Small Business Investment Act of 1958 (15
recourse obligation, a direct credit substitute, to a small business of personal property that U.S.C. 682(b)); 19 under the portfolio
or a residual interest is less than the effective is a sale under generally accepted accounting investment provisions of Regulation K issued
risk-based capital requirement for the credit- principles, and for which the bank by the Board of Governors of the Federal
enhanced assets, the risk-based capital establishes and maintains a non-capital Reserve System (12 CFR 211.8(c)(3)); or
required under this appendix E is limited to reserve under generally accepted accounting under section 24 of the Federal Deposit
the bank’s maximum contractual exposure, principles sufficient to meet the reasonable Insurance Act (12 U.S.C. 1831a), other than
less any recourse liability account estimated liability of the bank under the an investment held in accordance with
established in accordance with generally recourse arrangement; a qualified bank may section 24(f) of that Act.20 A nonfinancial
accepted accounting principles. This elect to include only the face amount of its company is an entity that engages in any
limitation does not apply when a bank recourse in its risk-weighted assets for activity that has not been determined to be
provides credit enhancement beyond any purposes of calculating the bank’s risk-based permissible for the bank to conduct directly,
contractual obligation to support assets it has capital ratio. or to be financial in nature or incidental to
sold. (iii) Limit on aggregate amount of recourse. financial activities under section 4(k) of the
(ii) Mortgage-related securities or The total outstanding amount of recourse Bank Holding Company Act (12 U.S.C.
participation certificates retained in a retained by a qualified bank with respect to 1843(k)).
mortgage loan swap. If a bank holds a transfers of small business loans and leases (c) Amount of deduction from core capital.
mortgage-related security or a participation to small businesses of personal property and (i) The bank must deduct from its Tier 1
certificate as a result of a mortgage loan swap included in the risk-weighted assets of the capital the sum of the appropriate
with recourse, capital is required to support bank as described in section II.B.5(i)(ii) of percentages, as set forth in Table D following
the recourse obligation plus the percentage of this appendix E may not exceed 15 percent this paragraph, of the adjusted carrying value
the mortgage-related security or participation of the bank’s total risk-based capital, unless of all nonfinancial equity investments held
certificate that is not covered by the recourse the FDIC specifies a greater amount by order. by the bank. The amount of the percentage
obligation. The total amount of capital (iv) Bank that ceases to be qualified or that deduction increases as the aggregate amount
required for the on-balance sheet asset and exceeds aggregate limit. If a bank ceases to of nonfinancial equity investments held by
the recourse obligation, however, is limited be a qualified bank or exceeds the aggregate the bank increases as a percentage of the
to the capital requirement for the underlying limit in section II.B.5(i)(iii) of this appendix bank’s Tier 1 capital.
loans, calculated as if the bank continued to E, the bank may continue to apply the capital
hold these loans as an on-balance sheet asset. treatment described in section II.B.5(i)(ii) of 19 An equity investment made under section
(iii) Related on-balance sheet assets. If a this appendix E to transfers of small business 302(b) of the Small Business Investment Act of 1958
recourse obligation or direct credit substitute loans and leases to small businesses of in a SBIC that is not consolidated with the bank is
also appears as a balance sheet asset, the personal property that occurred when the treated as a nonfinancial equity investment.
asset is risk-weighted only under this section bank was qualified and did not exceed the 20 The Board of Directors of the FDIC, acting
II.B.5 of this appendix E, except in the case limit. directly, may, in exceptional cases and after a
of loan servicing assets and similar (v) Prompt correction action not affected. review of the proposed activity, permit a lower
arrangements with embedded recourse (A) A bank shall compute its capital without capital deduction for investments approved by the
obligations or direct credit substitutes. In that regard to this section II.B.5(i) for purposes of Board of Directors under section 24 of the FDI Act
so long as the bank’s investments under section 24
case, the on-balance sheet servicing assets prompt corrective action (12 U.S.C. 1831o) and SBIC investments represent, in the aggregate,
and the related recourse obligations or direct unless the bank is a well capitalized bank less than 15 percent of the Tier 1 capital of the
credit substitutes must both be separately (without applying the capital treatment bank. The FDIC reserves the authority to impose
risk weighted and incorporated into the risk- described in this section II.B.5(i)) and, after higher capital charges on any investment where
based capital calculation. applying the capital treatment described in appropriate.
TABLE D.—DEDUCTION FOR NONFINANCIAL EQUITY INVESTMENTS

Deduction
from Tier 1
Capital (as a
percentage of
Aggregate adjusted carrying value of all nonfinancial equity investments held directly or indirectly by the bank (as a percentage the adjusted
of the Tier 1 capital of the bank) 1 carrying value
of the invest-
ment)
(percent)
Less than 15 percent ........................................................................................................................................................................... 8

15 percent to 24.99 percent ................................................................................................................................................................ 12
25 percent and above .......................................................................................................................................................................... 25
1 For purposes of calculating the adjusted carrying value of nonfinancial equity investments as a percentage of Tier 1 capital. Tier 1 capital is
defined as the sum of core capital elements net of goodwill and net of all identifiable intangible assets other than mortgage servicing assets, non-
mortgage servicing assets and purchased credit card relationships, but prior to the deduction for any disallowed mortgage servicing assets, any
disallowed nonmortgage servicing assets, any disallowed purchased credit card relationships, any disallowed credit-enhancing interest-only strips
(both purchased and retained), any disallowed deferred tax assets, and any nonfinancial equity investments.
(ii) These deductions are applied on a particular investment or portfolio of bank’s Tier 1 capital. In addition, the
marginal basis to the portions of the adjusted investments, the risk management systems of aggregate adjusted carrying value of all
carrying value of nonfinancial equity the bank, or other information, indicate that nonfinancial equity investments held by a
investments that fall within the specified a higher minimum capital requirement is bank through a consolidated SBIC and in a
ranges of the parent bank’s Tier 1 capital. For appropriate. non-consolidated SBIC (including any
example, if the adjusted carrying value of all (d) SBIC investments. (i) No deduction is investments for which no deduction is
nonfinancial equity investments held by a required for nonfinancial equity investments required) must be included in determining,
bank equals 20 percent of the Tier 1 capital that are held by a bank through one or more for purposes of the table in section
of the bank, then the amount of the SBICs that are consolidated with the bank or II.B.6(c)(i), the total amount of nonfinancial
deduction would be 8 percent of the adjusted in one or more SBICs that are not equity investments held by the bank in
carrying value of all investments up to 15 consolidated with the bank to the extent that relation to its Tier 1 capital.
percent of the bank’s Tier capital, and 12 all such investments, in the aggregate, do not (e) Transition provisions. No deduction
percent of the adjusted carrying value of all exceed 15 percent of the bank’s Tier 1 under this section II.B.6 is required to be
investments in excess of 15 percent of the capital. Any nonfinancial equity investment made with respect to the adjusted carrying
bank’s Tier 1 capital. that is held through an SBIC or in an SBIC value of any nonfinancial equity investment
(iii) The total adjusted carrying value of and that is not required to be deducted from (or portion of such an investment) that was
any nonfinancial equity investment that is Tier 1 capital under this section II.B.6(d) will made by the bank prior to March 13, 2000,
subject to deduction under this paragraph is be assigned a 100 percent risk-weight and or that was made by the bank after such date
excluded from the bank’s risk-weighted included in the bank’s consolidated risk- pursuant to a binding written commitment 23
assets for purposes of computing the weighted assets.22 entered into prior to March 13, 2000,
denominator of the bank’s risk-based capital (ii) To the extent the adjusted carrying provided that in either case the bank has
ratio and from total assets for purposes of value of all nonfinancial equity investments continuously held the investment since the
calculating the denominator of the leverage that a bank holds through one or more SBICs relevant investment date.24 For purposes of
ratio.21 that are consolidated with the bank or in one this section II.B.6(e) a nonfinancial equity
(iv) This appendix E establishes minimum or more SBICs that are not consolidated with investment made prior to March 13, 2000,
risk-based capital ratios and banks are at all the bank exceeds, in the aggregate, 15 percent includes any shares or other interests
times expected to maintain capital of the bank’s Tier 1 capital, the appropriate
23 A ‘‘binding written commitment’’ means a
commensurate with the level and nature of percentage of such amounts (as set forth in
the risks to which they are exposed. The risk the table in section II.B.6(c)(i)) must be legally binding written agreement that requires the
bank to acquire shares or other equity of the
to a bank from nonfinancial equity deducted from the bank’s common
company, or make a capital contribution to the
investments increases with its concentration stockholders’ equity in determining the company, under terms and conditions set forth in
in such investments and strong capital levels the agreement. Options, warrants, and other
above the minimum requirements are 22 If a bank has an investment in a SBIC that is agreements that give a bank the right to acquire
particularly important when a bank has a consolidated for accounting purposes but that is not equity or make an investment, but do not require
high degree of concentration in nonfinancial wholly owned by the bank, the adjusted carrying the bank to take such actions, are not considered
equity investments (e.g., in excess of 50 value of the bank’s nonfinancial equity investments a binding written commitment for purposes of this
through the SBIC is equal to the bank’s section II.B.6(e).
percent of Tier 1 capital). The FDIC intends
proportionate share of the adjusted carrying value 24 For example, if a bank made an equity
to monitor banks and apply heightened
of the SBIC’s investments in nonfinancial investment in 100 shares of a nonfinancial company
supervision to equity investment activities as companies. The remainder of the SBIC’s adjusted prior to March 13, 2000, the adjusted carrying value
appropriate, including where the bank has a carrying value (i.e., the minority interest holders’ of that investment would not be subject to a
high degree of concentration in nonfinancial proportionate share) is excluded from the risk- deduction under this section II.B.6. However, if the
equity investments, to ensure that each bank weighted assets of the bank. If a bank has an bank made any additional equity investment in the
maintains capital levels that are appropriate investment in a SBIC that is not consolidated for company after March 13, 2000, such as by
in light of its equity investment activities. accounting purposes and has current information purchasing additional shares of the company
The FDIC also reserves authority to impose that identifies the percentage of the SBIC’s assets (including through the exercise of options or
that are equity investments in nonfinancial warrants acquired before or after March 13, 2000)
a higher capital charge in any case where the
companies, the bank may reduce the adjusted or by making a capital contribution to the company
circumstances, such as the level of risk of the carrying value of its investment in the SBIC and such investment was not made pursuant to a
proportionately to reflect the percentage of the binding written commitment entered into before
21 For example, if 8 percent of the adjusted adjusted carrying value of the SBIC’s assets that are March 13, 2000, the adjusted carrying value of the
carrying value of a nonfinancial equity investment not equity investments in nonfinancial companies. additional investment would be subject to a
is deducted from Tier 1 capital, the entire adjusted If a bank reduces the adjusted carrying value of its deduction under this section II.B.6. In addition, if
carrying value of the investment will be excluded investment in a non-consolidated SBIC to reflect the bank sold and repurchased, after March 13,
from both risk-weighted assets and total assets in financial investments of the SBIC, the amount of the 2000, 40 shares of the company, the adjusted
calculating the respective denominators for the risk- adjustment will be risk-weighted at 100 percent and carrying value of those 40 shares would be subject
based capital and leverage ratios. included in the bank’s risk-weighted assets. to a deduction under this section II.B.6.
received by the bank through a stock split or any equity instrument (including common the documentation governing a securitization
stock dividend on an investment made prior stock, preferred stock, partnership interests, to divert and hold excess spread in a spread
to March 13, 2000, provided the bank interests in limited liability companies, trust or reserve account, expressed as a percent.
provides no consideration for the shares or certificates and warrants and call options that (iv) Investors’ interest is the total
interests received and the transaction does give the holder the right to purchase an
securitization exposure represented by
not materially increase the bank’s equity instrument), any equity feature of a
debt instrument (such as a warrant or call securities issued by a trust or special purpose
proportional interest in the company. The
exercise on or after March 13, 2000, of option), and any debt instrument that is entity to investors.
options or warrants acquired prior to March convertible into equity where the instrument (v) Revolving Credit means a line of credit
13, 2000, is not considered to be an or feature is held under one of the legal where the borrower is permitted to vary both
investment made prior to March 13, 2000, if authorities listed in section II.B.6(b) of this the drawn amount and the amount of
the bank provides any consideration for the appendix E. An investment in any other repayment within an agreed limit.
shares or interests received upon exercise of instrument (including subordinated debt) (b) Capital charge for revolving
the options or warrants. Any nonfinancial may be treated as an equity investment if, in securitizations with an early amortizations
equity investment (or portion thereof) that is the judgment of the FDIC, the instrument is
trigger. A bank that securitizes revolving
not required to be deducted from Tier 1 the functional equivalent of equity or exposes
the bank to essentially the same risks as an credits where the securitization structure
capital under this section II.B.6(e) must be
equity instrument. contains an early amortization provision
included in determining the total amount of
nonfinancial equity investments held by the 7. Asset-backed commercial paper must maintain risk-based capital against the
bank in relation to its Tier 1 capital for programs. (a) An asset-backed commercial investors’ interest as required under this
purposes of the table in section II.B.6(c)(i). In paper (ABCP) program means a program that section.
addition, any nonfinancial equity investment primarily issues externally rated commercial (c) Calculation. Capital for securitizations
(or portion thereof) that is not required to be paper backed by assets or other exposures of revolving credit exposures that incorporate
deducted from Tier 1 capital under this held in a bankruptcy-remote, special purpose early-amortization provisions will be
section II.B.6(e) will be assigned a 100- entity.
assessed based on a comparison of the
percent risk weight and included in the (b) A bank that qualifies as a primary
beneficiary and must consolidate an ABCP securitizations’ three-month average excess
bank’s consolidated risk-weighted assets. spread against the excess spread trapping
(f) Adjusted carrying value. (i) For program that is defined as a variable interest
entity under GAAP may exclude the point.
purposes of this section II.B.6, the ‘‘adjusted
carrying value’’ of investments is the consolidated ABCP program assets from risk- (i) To calculate the securitization’s excess
aggregate value at which the investments are weighted assets provided that the bank is the spread trapping point ratio, a bank must first
carried on the balance sheet of the bank sponsor of the ABCP program. If a bank calculate the three-month average of:
reduced by any unrealized gains on those excludes such consolidated ABCP program (A) The dollar amount of excess spread
investments that are reflected in such assets, the bank must assess the appropriate divided by
carrying value but excluded from the bank’s risk-based capital charge against any
(B) The outstanding principal balance of
Tier 1 capital and associated deferred tax exposures of the bank arising in connection
with such ABCP programs, including direct the underlying pool of exposures at the end
liabilities. For example, for equity of each of the prior three months.
investments held as available-for-sale (AFS), credit substitutes, recourse obligations,
residual interests, liquidity facilities, and (ii) This annualized three-month average of
the adjusted carrying value of the
loans, in accordance with sections II.B.5, II.C, excess spread is then divided by the excess
investments would be the aggregate carrying
value of those investments (as reflected on and II.D of this appendix E. spread trapping point that is required by the
the consolidated balance sheet of the bank) (c) If a bank has multiple overlapping securitization structure.
less any unrealized gains on those exposures (such as a program-wide credit (iii) The excess spread trapping point ratio
investments that are included in other enhancement and multiple pool-specific is compared to the ratios contained in Table
comprehensive income and not reflected in liquidity facilities) to an ABCP program that E to determine the appropriate conversion
Tier 1 capital, and associated deferred tax is not consolidated for risk-based capital
factor to apply to the investors’ interest.
liabilities.25 purposes, the bank is not required to hold
capital under duplicative risk-based capital (iv) The amount of investors’ interest after
(ii) As discussed above with respect to conversion is then assigned capital based on
consolidated SBICs, some equity investments requirements under this appendix E against
the overlapping position. Instead, the bank the underlying obligor, collateral, or
may be in companies that are consolidated
for accounting purposes. For investments in should apply to the overlapping position the guarantor.
a nonfinancial company that is consolidated applicable risk-based capital treatment that (d) Default for certain securitizations. For
for accounting purposes under generally results in the highest capital charge. purposes of section II.B.8 of this appendix E,
accepted accounting principles, the bank’s 8. Securitizations of revolving credit with for securitizations that do not require excess
adjusted carrying value of the investment is early amortization provisions. spread to be trapped, or that specify the
determined under the equity method of (a) Definitions. For purposes of this section trapping points based primarily on the
accounting (net of any intangibles associated II.B.8, the following definitions will apply:
performance measures other than the three-
with the investment that are deducted from (i) Early amortization provision means a
provision in the documentation governing a month average excess spread, the excess
the bank’s core capital in accordance with spread trapping point is 4.5.
section I–2.B(a)(i) of this appendix E). Even securitization that, when triggered, causes
investors in the securitization exposures to (e) Limit. For a bank subject to the early
though the assets of the nonfinancial
company are consolidated for accounting be repaid before the original stated maturity amortization requirements in this section
purposes, these assets (as well as the credit of the securitization exposures, unless the II.B.8 of appendix E, the aggregate risk-based
equivalent amounts of the company’s off- provision is triggered solely by events not capital requirement for all of the bank’s
balance sheet items) should be excluded from directly related to the performance of the exposures to a securitization of revolving
the bank’s risk-weighted assets for regulatory underlying exposures or the originating bank credit is limited to the greater of the risk-
capital purposes. (such as material changes in tax laws or
based capital requirement for residual
(g) Equity investments. For purposes of this regulations).
(ii) Excess spread means gross finance interests (as calculated under section II.B.5 of
section II.B.6, an equity investment means this appendix E); or the risk-based capital
charge collections and other income received
by a trust or special purpose entity minus requirement for the underlying securitized
25 Unrealized gains on available-for-sale equity
interest paid to the investors in the assets calculated as if the bank continued to
investments may be included in Tier 2 capital to the
extent permitted under section I–2.A(2)(f) of this
securitization exposures, servicing fees, hold the assets on its balance sheet.
appendix E. In addition, the net unrealized losses charge-offs, and other similar trust or special
on available-for-sale equity investments are purpose entity expenses.
deducted from Tier 1 capital in accordance with (iii) Excess spread trapping point means
section I–2.A(1) of this appendix E. the point at which the bank is required by
TABLE E.—EARLY AMORTIZATION (c) This category also includes claims on, guaranteed 32 by, U.S. depository
and claims guaranteed by, qualifying institutions 33 and foreign banks; 34 portions
CREDIT CONVERSION FACTORS securities firms 31 incorporated in the United of claims collateralized by cash held in a
States or other members of the OECD-based segregated deposit account of the lending
Credit con- group of countries that are collateralized by bank; cash items in process of collection,
version fac-
Excess spread trapping point cash on deposit in the lending bank or by both foreign and domestic; and long-term
tor
ratio securities issued or guaranteed by the United claims on, and portions of long-term claims
(CCF)
(percent) States (including U.S. government Agencies) guaranteed by, U.S. depository institutions
or OECD central governments, provided that and OECD banks.35
133.33 percent of trapping a positive margin of collateral is required to (b) This category also includes claims on,
point or more ......................... 0 be maintained on such a claim on a daily or portions of claims guaranteed by U.S.
less than 133.33 percent to 100 basis, taking into account any change in a Government-sponsored agencies; 36 and
percent of trapping point ....... 5 bank’s exposure to the obligor or portions of claims (including repurchase
less than 100 percent to 75 counterparty under the claim in relation to agreements) collateralized by securities
percent of trapping point ....... 15 the market value of the collateral held in issued or guaranteed by the United States,
less than 75 percent to 50 per- support of the claim. U.S. Government agencies, or U.S.
cent of trapping point ............ 50 (d) As provided in sections II.B.3 and II.C.9 Government-sponsored agencies. Also
Less than 50 percent of trap- of this appendix E, this category also included in the 20 percent risk category are
ping point .............................. 100 includes securities issued by and other portions of claims that are conditionally
claims on a sovereign rated highest guaranteed by U.S. Government agencies or
C. Risk Weights for Balance Sheet Assets (See investment grade, e.g., AAA, by a NRSRO, in U.S. Government-sponsored agencies.37
Table J) the case of long-term ratings, or highest rating
category, e.g., A–1, P–1, in the case of short- 32 Claims guaranteed by U.S. depository
The risk-based capital framework contains term ratings; and claims guaranteed by a institutions include risk participations in both
eight risk weight categories—0 percent, 20 sovereign rated highest investment grade by bankers acceptances and standby letters of credit,
percent, 35 percent, 50 percent, 75 percent, a NRSRO. as well as participations in commitments, that are
100 percent, 150 percent, and 200 percent.26 conveyed to other U.S. depository institutions.
In general, if a particular item can be placed 2—20 Percent Risk Weight 33 U.S. depository institutions are defined to
in more than one risk category, it is assigned (a) This category includes short-term include branches (foreign and domestic) of federally
to the category that has the lowest risk claims (including demand deposits) on, and insured banks and depository institutions chartered
weight. An explanation of the components of portions of short-term claims that are and headquartered in the 50 states of the United
each category follows: States, the District of Columbia, Puerto Rico, and
U.S. territories and possessions. The definition
1—Zero Percent Risk Weight fully and explicitly guaranteed as to the timely
encompasses banks, mutual or stock savings banks,
payment of principal and interest by the full faith
(a) This category includes cash (domestic and credit of the U.S. Government. These agencies savings or building and loan associations,
and foreign) owned and held in all offices of include the Government National Mortgage cooperative banks, credit unions, international
the bank or in transit; balances due from Association (GNMA), the Veterans Administration banking facilities of domestic depository
institutions, and U.S.-chartered depository
Federal Reserve banks and central banks in (VA), the Federal Housing Administration (FHA),
the Farmers Home Administration (FHA), the institutions owned by foreigners. However, this
other OECD countries; 27 and gold bullion definition excludes branches and agencies of
held in the bank’s own vaults or in another Export-Import Bank (Exim Bank), the Overseas
Private Investment Corporation (OPIC), the foreign banks located in the U.S. and bank holding
bank’s vaults on an allocated basis, to the companies.
Commodity Credit Corporation (CCC), and the
extent it is offset by gold bullion liabilities.28 34 Foreign banks are distinguished as either OECD
Small Business Administration (SBA). U.S.
(b) The zero percent risk category also Government agencies generally do not directly issue banks or non-OECD banks. OECD banks include
includes direct claims 29 (including securities to the public; however, a number of U.S. banks and their branches (foreign and domestic)
securities, loans, and leases) on, and the Government agencies, such as GNMA, guarantee organized under the laws of countries (other than
portions of claims that are unconditionally securities that are publicly held. the U.S.) that belong to the OECD-based group of
guaranteed by the United States and U.S. 31 With regard to securities firms incorporated in countries. Non-OECD banks include banks and their
Government agencies.30 Federal Reserve the United States, qualifying securities firms are branches (foreign and domestic) organized under
the laws of countries that do not belong to the
Bank stock also is included in this category. those securities firms that are broker-dealers
registered with the Securities and Exchange OECD-based group of countries. For risk-based
Commission (SEC) and are in compliance with the capital purposes, a bank is defined as an institution
26 In addition, certain items receive a dollar-for-
SEC’s net capital rule, 17 CFR 240.15c3–1. With that engages in the business of banking; is
dollar capital treatment under section II.B.5 of this recognized as a bank by the bank supervisory or
regard to securities firms incorporated in any other
appendix E. monetary authorities of the country of its
27 A central government is defined to include
country in the OECD-based group of countries,
qualifying securities firms are those securities firms organization or principal banking operations;
departments and ministries, including the central that a bank is able to demonstrate are subject to receives deposits to a substantial extent in the
bank, of the central government. The U.S. central consolidated supervision and regulation (covering regular course of business; and has the power to
bank includes the 12 Federal Reserve banks. The their direct and indirect subsidiaries, but not accept demand deposits.
definition of central government does not include necessarily their parent organizations) comparable
35 Long-term claims on, or guaranteed by, non-
state, provincial or local governments or to that imposed on banks in OECD countries. Such OECD banks are assigned to the 100 percent risk
commercial enterprises owned by the central regulation must include risk-based capital weight category, as are holdings of bank-issued
government. In addition, it does not include local requirements comparable to those applied to banks securities that qualify as capital of the issuing banks
government entities or commercial enterprises under the Accord on International Convergence of for risk-based capital purposes.
whose obligations are guaranteed by the central Capital Measurement and Capital Standards (1988, 36 For risk-based capital purposes, U.S.
government. OECD central governments are defined as amended in 1998) (Basel Accord). Claims on a Government-sponsored agencies are defined as
as central governments of the OECD-based group of qualifying securities firm that are instruments the agencies originally established or chartered by the
countries. Non-OECD central governments are firm, or its parent company, uses to satisfy its U.S. Government to serve public purposes specified
defined as central governments of countries that do applicable capital requirements are not eligible for by the U.S. Congress but whose debt obligations are
not belong to the OECD-based group of countries. this risk weight and are generally assigned to at not explicitly guaranteed by the full faith and credit
28 All other bullion holdings are to be assigned to
least a 100 percent risk weight. In addition, certain of the U.S. Government. These agencies include the
the 100 percent risk weight category. claims on qualifying securities firms are eligible for Federal Home Loan Mortgage Corporation
29 For purposes of determining the appropriate (FHLMC), the Federal National Mortgage
a zero percent risk weight if the claims are
risk weights for this risk-based capital framework, collateralized by cash on deposit in the lending Association (FNMA), the Farm Credit System, the
the terms ‘‘claims’’ and ‘‘securities’’ refer to loans bank or by securities issued or guaranteed by the Federal Home Loan Bank System, and the Student
or other debt obligations of the entity on whom the United States (including U.S. government agencies), Loan Marketing Association (SLMA). For risk-based
claim is held. Investments in the form of stock or provided that a positive margin of collateral is capital purposes, claims on U.S. Government-
equity holdings in commercial or financial firms are required to be maintained on such a claim on a sponsored agencies also include capital stock in a
generally assigned to the 100 percent risk category. daily basis, taking into account any change in a Federal Home Loan Bank that is held as a condition
30 For risk-based capital purposes U.S. bank’s exposure to the obligor or counterparty of membership in that bank.
Government agency is defined as an instrumentality under the claim in relation to the market value of 37 For risk-based capital purposes, a conditional
of the U.S. Government whose debt obligations are the collateral held in support of the claim. guarantee is deemed to exist if the validity of the
(c) General obligation claims on, or mortgage-backed securities rated third- costs of the land, labor, and material) before
portions of claims guaranteed by, the full highest investment grade, e.g., A, in the case any drawdown is made under the
faith and credit of states or other political of long-term ratings, and second-highest construction loan and the construction loan
subdivisions of the United States or other investment grade, e.g. A–2, P–2, in the case may not exceed 80 percent of the sales price
countries of the OECD-based group are also of short-term ratings. of the presold home;
assigned to this 20 percent risk category, as (b) As provided in sections II.B.2, II.B.3, (iii) The purchaser has made a substantial
well as portions of claims guaranteed by such and II.C.9 of this appendix E, this category ‘‘earnest money deposit’’ of no less than three
organizations or collateralized by their also includes securities issued by and other percent of the sales price of the home and the
securities.38 claims on a sovereign rated lowest- deposit must be subject to forfeiture if the
(d) As provided in sections II.B.2 and II.B.5 investment grade plus by a NRSRO, e.g. purchaser terminates the sales contract; and
of this appendix E, this category also BBB+, in the case of long-term ratings; claims (iv) The earnest money deposit must be
includes recourse obligations, direct credit guaranteed by a sovereign rated lowest- held in escrow by the bank financing the
substitutes, residual interests (other than a investment grade plus by a NRSRO; and builder or by an independent party in a
credit-enhancing interest-only strip) and claims and portions of claims collateralized fiduciary capacity and the escrow agreement
asset- or mortgage-backed securities rated in by securities issued by a sovereign rated must provide that, in the event of default
the highest or second highest investment lowest-investment grade plus by a NRSRO, in arising from the cancellation of the sales
grade category, e.g., AAA, AA, in the case of the case of long-term ratings. contract by the buyer, the escrow funds must
long-term ratings, or the highest rating (c) As provided in sections II.B.2, II.B.3, first be used to defray any costs incurred by
category, e.g., A–1, P–1, in the case of short- and II.C.9 of this appendix E, this category the bank.
term ratings. also includes securities issued by and other (b) This category also includes loans fully
(e) As provided in sections II.B.2, II.B.3, claims on a non-sovereign rated third-highest secured by first liens on multifamily
investment grade by a NRSRO, e.g. A, in the residential properties, 40 provided that:
and II.C.9 of this appendix E, this category
case of long-term ratings, or second-highest (i) The loan amount does not exceed 80
also includes securities issued by and other
investment grade, e.g. A–2, P–2, in the case percent of the value 41 of the property
claims on a sovereign rated second-highest or
of short-term ratings; claims guaranteed by a securing the loan as determined by the most
third-highest investment grade by a NRSRO,
non-sovereign whose long-term senior debt is current appraisal or evaluation, whichever
e.g. AA or A, in the case of long-term ratings, rated third-highest investment grade by a may be appropriate (75 percent if the interest
or second-highest investment grade, e.g. A– NRSRO; and claims and portions of claims rate on the loan changes over the term of the
2, P–2, in the case of short-term ratings; collateralized by securities issued by a non- loan);
claims guaranteed by a sovereign rated sovereign rated third-highest investment (ii) For the property’s most recent fiscal
second-highest or third-highest investment grade by a NRSRO, in the case of long-term year, the ratio of annual net operating income
grade by a NRSRO; and claims and portions ratings, or second-highest investment grade generated by the property (before payment of
of claims collateralized by securities issued in the case of short-term ratings. any debt service on the loan) to annual debt
by a sovereign rated second-highest or third- (d) As provided in section II.C.9(b) of this service on the loan is not less than 120
highest investment grade by a NRSRO, in the appendix E, the 35 percent risk-weight percent (115 percent if the interest rate on the
case of long-term ratings, or second-highest category also includes certain one-to-four loan changes over the term of the loan) or in
investment grade, in the case of short-term family residential mortgages. the case of a property owned by a cooperative
ratings. housing corporation or nonprofit
(f) As provided in sections II.B.2, II.B.3, 4—50 Percent Risk Weight
organization, the property generates
and II.C.9 of this appendix E, this category (a) This category includes loans, secured sufficient cash flow to provide comparable
also includes securities issued by and other by one-to-four family residential properties, protection to the bank;
claims on a non-sovereign rated highest or to builders with substantial project equity for (iii) Amortization of principal and interest
second-highest investment grade by a the construction of one-to-four family on the loan occurs over a period of not more
NRSRO, e.g. AAA or AA, in the case of long- residences that have been presold under firm than 30 years;
term ratings, or highest investment grade, e.g. contracts to purchasers who have obtained (iv) The minimum original maturity for
A–1, P–1, in the case of short-term ratings; firm commitments for permanent qualifying repayment of principal on the loan is not less
claims guaranteed by a non-sovereign whose mortgage loans and have made substantial than seven years;
long-term senior debt is rated highest or earnest money deposits.39 Such loans to (v) All principal and interest payments
second-highest investment grade by a builders will be considered prudently
have been made on a timely basis in
NRSRO; and claims and portions of claims underwritten only if the bank has obtained
accordance with the terms of the loan for at
collateralized by securities issued by a non- sufficient documentation that the buyer of
least one year before the loan is placed in this
sovereign rated highest or second-highest the home intends to purchase the home (i.e.,
category; 42
investment grade by a NRSRO, in the case of has a legally binding written sales contract)
long-term ratings, or highest-investment and has the ability to obtain a mortgage loan 40 The types of loans that qualify as loans secured
grade, in the case of short-term ratings. sufficient to purchase the home (i.e., has a
by multifamily residential properties are listed in
(g) As provided in section II.C.9(b) of this firm written commitment for permanent the instructions for preparation of the Consolidated
appendix E, this category also includes financing of the home upon completion), Reports of Condition and Income. In addition, from
certain one-to-four family residential provided the following criteria are met: the stand point of the selling bank, when a
mortgages. (i) The purchaser is an individual(s) who multifamily residential property loan is sold subject
intends to occupy the residence and is not a to a pro rata loss sharing arrangement which
3—35 Percent Risk Weight partnership, joint venture, trust, corporation, provides for the purchaser of the loan to share in
(a) As provided in sections II.B.2 and II.B.5 or any other entity (including an entity acting any loss incurred on the loan on a pro rata basis
of this appendix E, this category includes as a sole proprietorship) that is purchasing with the selling bank when that portion of the loan
is not subject to the risk-based capital standards. In
recourse obligations, direct credit substitutes, one or more of the homes for speculative
connection with sales of multifamily residential
residual interests (other than a credit- purposes; property loans in which the purchaser of a loan
enhancing interest-only strip) and asset- or (ii) The builder must incur at least the first shares in any loss incurred on the loan with the
ten percent of the direct costs (i.e., actual selling bank on other than a pro rata basis, the
guarantee by the U.S. Government agency is selling bank must treat these other loss sharing
dependent upon some affirmative action (e.g., 39 In addition, such loans must have been arrangements in accordance with section II.B.5 of
servicing requirements on the part of the approved in accordance with prudent underwriting this appendix E.
beneficiary of the guarantee). Portions of claims that standards, including standards relating to the loan 41 At the origination of a loan to purchase an
are unconditionally guaranteed by U.S. Government amount as a percent of the appraised value of the existing property, the term ‘‘value’’ means the lesser
agencies are assigned to the zero percent risk property, and the loans must not be past due 90 of the actual acquisition cost or the estimate of
category. days or more or carried in nonaccrual status. The value set forth in an appraisal or evaluation,
38 Claims on, or guaranteed by, states or other types of loans that qualify as loans secured by one- whichever may be appropriate.
political subdivisions of countries that do not to-four family residential properties are listed in the 42 In the case where the existing owner of a
belong to the OECD-based group of countries are to instructions for preparation of the Consolidated multifamily residential property refinances a loan
be placed in the 100 percent risk weight category. Reports of Condition and Income. Continued
(vi) The loan is not 90 days or more past investment grade negative or one category assigned to lower risk categories due to
due or carried in nonaccrual status; and below investment grade plus and naught by recognized guarantees or collateral)45;
(vii) The loan has been made in accordance a NRSRO, e.g. BBB-, BB+, or BB, in the case (vii) As provided in sections II.B.2 and
with prudent underwriting standards. of long-term ratings; claims guaranteed by a II.B.5 of this appendix E, recourse
(c) This category also includes revenue sovereign rated lowest investment grade obligations, direct credit substitutes, residual
(non-general obligation) bonds or similar negative by a NRSRO, in the case of long- interests (other than a credit-enhancing
obligations, including loans and leases, that term ratings; and claims and portions of interest-only strip) and asset-or mortgage-
are obligations of states or political claims collateralized by securities issued by backed securities rated lowest investment
subdivisions of the United States or other a sovereign rated lowest investment grade grade negative, e.g., BBB-, as well as certain
OECD countries, but for which the negative by a NRSRO, in the case of long- positions (but not residual interests) which
government entity is committed to repay the term ratings. the bank rates pursuant to section II.B.5(g) of
debt with revenues from the specific projects (c) As provided in sections II.B.2, II.B.3, this appendix E;
financed, rather than from general tax funds and II.C.9 of this appendix E, this category (viii) Industrial-development bonds and
(e.g., municipal revenue bonds). also includes certain securities issued by and similar obligations issued under the auspices
(d) As provided in section II.B.2 and II.B.5 other claims on a non-sovereign rated lowest of states or political subdivisions of the
of this appendix E, this category also investment grade naught by a NRSRO, e.g. OECD-based group of countries for the
includes recourse obligations, direct credit BBB, in the case of long-term ratings, or benefit of a private party or enterprise where
substitutes, residual interests (other than a lowest investment grade, A–3, P–3, in the that party or enterprise, not the government
credit-enhancing interest-only strip) and entity, is obligated to pay the principal and
case of short-term ratings; claims guaranteed
asset- or mortgage-backed securities rated interest; and
by a non-sovereign whose long-term debt is
lowest investment grade plus, e.g., BBB+, in (ix) Stripped mortgage-backed securities
rated lowest investment grade naught by a
the case of long-term ratings. and similar instruments, such as interest-
NRSRO; and claims and portions of claims
(e) As provided in sections II.B.2, II.B.3, only strips that are not credit-enhancing and
collateralized by securities issued by a non-
and II.C.9 of this appendix E, this category principal-only strips.
sovereign rated lowest investment grade (x) Claims representing capital of a
naught by a NRSRO, in the case of long-term qualifying securities firm.
claims on a sovereign rated lowest
investment grade naught by a NRSRO, e.g. ratings, or lowest investment grade, in the (c) The following assets also are assigned
BBB, in the case of long-term ratings, or case of short-term ratings. a risk weight of 100 percent if they have not
lowest investment grade, e.g. A–3, P–3, in the (d) As provided in section II.C.9(b), the already been deducted from capital:
case of short-term ratings; claims guaranteed seventy-five percent risk-weight category also investments in unconsolidated companies,
by a sovereign rated lowest investment grade includes certain one-to-four family joint ventures, or associated companies;
naught by a NRSRO; and claims and portions residential mortgages. instruments that qualify as capital issued by
of claims collateralized by securities issued 6—100 Percent Risk Weight other banks; deferred tax assets; and
by a sovereign rated at least lowest (a) All assets not included in the above mortgage servicing assets, nonmortgage
investment grade naught by a NRSRO, in the categories in section II.C of this appendix E, servicing assets, and purchased credit card
case of long-term ratings, or lowest except the assets specifically included in the relationships.
investment grade, in the case of short-term (d) As provided in sections II.B.2, II.B.3,
150 or 200 percent categories below in
ratings. and II.C.9 of this appendix E, this category
section II.C of this appendix E and the assets
(f) As provided in sections II.B.2, II.B.3, also includes securities issued by and other
that are otherwise risk weighted in
and II.C.9 of this appendix E, this category claims on a sovereign rated at least one
accordance with section II.B or II.C.9 of this
also includes securities issued by and other category below investment grade negative by
appendix E, are assigned to this category,
claims on a non-sovereign rated lowest a NRSRO, e.g. BB-, in the case of long-term
which comprises standard risk assets.
investment grade plus by a NRSRO, e.g. ratings, or unrated, in the case of short-term
(b) This category includes:
BBB+, in the case of long-term ratings; claims ratings.
(i) Long-term claims on, and the portions
guaranteed by a non-sovereign whose long- (e) As provided in sections II.B.2, II.B.3,
of long-term claims that are guaranteed by,
term senior debt is rated lowest investment and II.C.9 of this appendix E, this category
non-OECD banks;43 also includes certain securities issued by and
grade plus by a NRSRO; and claims and (ii) Claims on commercial firms owned by
portions of claims collateralized by securities other claims on a non-sovereign rated lowest
the public sector; investment grade negative by a NRSRO, e.g.
issued by a non-sovereign rated lowest (iii) Customer liabilities to the bank on
investment grade plus by a NRSRO, in the BBB-, in the case of long-term ratings, or
acceptances outstanding involving standard unrated, in the case of short-term ratings;
case of long-term ratings. risk claims;44
(g) As provided in section II.C.9(b) of this claims guaranteed by a non-sovereign whose
(iv) Investments in fixed assets, premises, long-term debt is rated lowest investment
appendix E, the fifty percent risk-weight and other real estate owned;
category also includes certain one-to-four grade negative by a NRSRO; and claims and
(v) Common and preferred stock of portions of claims collateralized by securities
family residential mortgages. corporations, including stock acquired for issued by a non-sovereign rated lowest
5—75 Percent Risk Weight debts previously contracted; investment grade negative by a NRSRO, in
(a) As provided in section II.B.2 and II.B.5 (vi) Commercial and consumer loans the case of long-term ratings.
of this appendix E, this category also (except rated loans, loans to sovereigns, and (f) As provided in section II.C.9(b) of this
includes recourse obligations, direct credit mortgage loans as provided under section appendix E, the 100 percent risk-weight
substitutes, residual interests (other than a II.C.9 of this appendix E and those loans category also includes certain one-to-four
credit-enhancing interest-only strip) and family residential mortgages.
asset- or mortgage-backed securities rated 43 Such assets include all non-local currency
7—150 Percent Risk Weight
lowest investment grade naught, e.g., BBB, in claims on, and the portions of claims that are
the case of long-term ratings. guaranteed by, non-OECD central governments that (a) As provided in sections II.B.2, II.B.3,
(b) As provided in sections II.B.2, II.B.3, exceed the local currency liabilities held by the and II.C.9 of this appendix E, this category
and II.C.9 of this appendix E, this category bank. includes securities issued by and other
44 Customer liabilities on acceptances outstanding claims on a sovereign rated two or more
involving non-standard risk claims, such as claims categories below investment grade by a
claims on a sovereign rated lowest on U.S. depository institutions, are assigned to the NRSRO, e.g. B or CCC, in the case of long-
risk category appropriate to the identity of the term ratings.

on that property, all principal and interest obligor or, if relevant, the nature of the collateral
(b) As provided in sections II.B.2, II.B.3,
payments on the loan being refinanced must have or guarantees backing the claims. Portions of
been made on a timely basis in accordance with the acceptances conveyed as risk participations to U.S. and II.C.9 of this appendix E, this category
terms of that loan for at least the preceding year. depository institutions or foreign banks are assigned
The new loan must meet all of the other eligiblity to the 20 percent risk category appropriate to short- 45 This category includes one-to-four family
criteria in order to qualify for a 50 percent risk term claims guaranteed by U.S. depository residential pre-sold construction loans for a
weight. institutions and foreign banks. residence whose purchase contract is cancelled.
also includes certain securities issued by and by a NRSRO, e.g. BB+, BB, BB-, B, CCC, and assigned external rating to risk weight the
other claims on a non-sovereign rated one unrated, in the case of long-term ratings. claim in accordance with Tables F1 and F2
category below investment grade plus and (d) A position (but not a residual interest) of this appendix E, and that external rating
naught by a NRSRO, e.g. BB+ or BB, in the in a securitization or structured finance must apply to the claim or exposure in its
case of long-term ratings. program that is not rated by an NRSRO for entirety. Thus, for banks that hold split or
(c) As provided in section II.C.9(b) of this which the bank determines that the credit partially-rated instruments, the risk weight
appendix E, the 150 percent risk-weight risk is equivalent to one category below that corresponds to the lowest component
category also includes certain one-to-four investment grade, e.g., BB, to the extent rating will apply to the entire exposure. For
family residential mortgages. permitted in section II.B.5(g) of this appendix example, a purchased subordinated security
8—200 Percent Risk Weight E. where the principal component is rated BBB,
This category includes: 9—Risk Weights for Certain Externally Rated but the interest component is rated B, will be
(a) As provided in sections II.B.2 and II.B.5 Exposures and Certain Residential Mortgages subject to the gross-up treatment accorded to
of this appendix E, recourse obligations, (a) Externally Rated Exposures. (i) Banks residual interests rated B or lower. Similarly,
direct credit substitutes, residual interests must assign an exposure to a sovereign or if a portion of an instrument is unrated, the
(other than a credit-enhancing interest-only non-sovereign to the appropriate risk weight entire exposure will be treated as if it were
strip) and asset-or mortgage-backed securities category in accordance with Tables F1 and unrated.
rated one category below investment grade F2 of this appendix E. Such exposures (iii) For exposures to sovereigns, the bank
plus, naught, and negative, e.g. BB+, BB, or include but are not limited to: sovereign must first look to the rating (if any) on the
BB-, in the case of long-term ratings. bonds (which may be based on the external issue to risk weight the claim. If the issue is
(b) As provided in sections II.B.2, II.B.3, rating of the issuing country or of the issued unrated, the bank must use the issuer rating
and II.C.9 of this appendix E, this category bond); all loans to sovereigns, including to determine the appropriate risk weight.
also includes securities issued by and other unrated loans; securities issued by (iv) The FDIC reserves the authority to
claims on an unrated sovereign. multilateral lending institutions or regional override the use of certain external ratings or
(c) As provided in sections II.B.2, II.B.3, development banks; corporate debt the external ratings on certain instruments,
and II.C.9 of this appendix E, this category obligations (senior and subordinated); rated either on a case-by-case basis or through
also includes certain securities issued by and loans 46; and commercial paper. broader supervisory policy, if necessary or
other claims on a non-sovereign rated one (ii) If a claim or exposure has two or more appropriate to address the risk that an
category below investment grade and below external ratings, the bank must use the lowest instrument or issuer poses to banks.
TABLE F1.—RISK WEIGHTS BASED ON LONG-TERM EXTERNAL RATINGS

Non-sovereign Sovereign risk
Long-term rating category Examples risk weight weight
(percent) (percent)
Highest investment grade rating 1 ............................................................................................. AAA .................. 20 0

Second-highest investment grade rating .................................................................................. AA ..................... 20 20
Third-highest investment grade rating ...................................................................................... A ....................... 35 20
Lowest-investment grade rating—plus ..................................................................................... BBB+ ................ 50 35
Lowest-investment grade rating—naught ................................................................................. BBB .................. 75 50
Lowest-investment grade rating—negative .............................................................................. BBB¥ ............... 100 75
One category below investment grade—plus & naught ........................................................... BB+, BB ............ 150 75
One category below investment grade—negative ................................................................... BB¥ ................. 200 100
Two or more categories below investment grade .................................................................... B, CCC ............. 200 150
Unrated (excludes unrated loans to non-sovereigns) 2 ............................................................ n/a .................... 200 200
1 Long-term claims collateralized by AAA-rated sovereign debt would be assigned to the 20 percent risk weight category.
2 Unrated loans to non-sovereigns are risk weighted in accordance with section II.C of appendix A to part 325.
TABLE F2.—RISK WEIGHTS BASED ON SHORT-TERM EXTERNAL RATINGS

Non-sovereign Sovereign risk
Short-term rating category Examples risk weight weight
(percent) (percent)
Highest investment grade rating 1 ............................................................................................. A–1, P–1 .......... 20 0

Second-highest investment grade rating .................................................................................. A–2, P–2 ........... 35 20
Lowest investment grade rating ............................................................................................... A–3, P–3 ........... 75 50
Unrated ..................................................................................................................................... n/a.
1 Short-term claims collateralized by A1/P1 rated sovereign debt would be assigned to the 20 percent risk weight category.
(b) Residential Mortgages. (i) This section family residential pre-sold construction Tables G1 and G2 of this section II.C.9(b) are
II.C.9(b) (including Tables G1, G2, and G3) loans, and certain one-to-four family minimum risk weights. For a mortgage to
applies to all residential mortgages secured residential pre-sold construction loans for qualify for these risk weights, it must meet
by a lien on a one-to-four family residential residences for which the purchase contract is certain minimum criteria: Be fully secured by
property, except for certain one-to-four cancelled.47 The risk weights described in a lien on a one-to four-family residential
46 Except for loans to sovereigns, loans that are 100% under section II.C.6 of this appendix E. Loans been taken as collateral solely through an
not externally rated are risk weighted under section that qualify as mortgages, including junior lien abundance of caution and where, as a consequence,
II.C to appendix A to part 325. mortgages, that are secured by 1- to 4-family the terms have not been made more favorable than
47 Qualifying one-to-four family residential pre- residential properties are listed in the instructions they would have been in the absence of the lien.
sold construction loans are risk weighted at 50% to the commercial bank Call Report. This section In such as case, the loan would not be considered
under section II.C.4, unless the purchase contract is II.C.9(b) does not apply to transactions where a lien
to be secured by real estate in the Call Reports.
cancelled, in which case, they are risk weighted at on a one-to-four family residential property has
property, either owner-occupied or rented, be all senior liens in accordance with Table G2 E must be risk weighted under this appendix
prudently underwritten, and not be 90 days of this appendix E. The CLTV of the stand- E. A bank may only rely on this subsection
or more past due or carried in nonaccrual alone junior and all senior liens, where any II.C.9(b)(iii) the first time it elects to use this
status. Mortgages that do not meet these of the senior liens has a negative appendix E.
criteria will be risk weighted in accordance amortization feature, must reflect the D. Conversion Factors for Off-Balance Sheet
with Table G3 of this appendix E. maximum contractual loan amount under the Items (see Table H)
(ii) Mortgages subject to this section are terms of these liens if they were to fully
risk weighted based on their loan-to-value negatively amortize under the applicable The face amount of an off-balance sheet
(LTV) ratio 48 or combined loan-to-value contract. item is generally incorporated into the risk-
(CLTV) ratio 49 and in accordance with Table weighted assets in two steps. The face
G1, Table G2, or Table G3 of this appendix amount is first multiplied by a credit
TABLE G2.—RISK WEIGHTS FOR conversion factor, except as otherwise
E, as applicable, after consideration of any
loan level private mortgage insurance (loan STAND-ALONE JUNIOR LIEN 1–4 specified in section II.B.5 of this appendix E
level PMI). To calculate the CLTV on a junior FAMILY RESIDENTIAL MORTGAGES for direct credit substitutes and recourse
lien mortgage, a bank must divide the obligations. The resultant credit equivalent
aggregate principle amount outstanding for Combined loan to value ratio Risk weight amount is assigned to the appropriate risk
the first and junior lien(s) by the appraised (percent) (percent) category according to the obligor or, if
value of the property at origination of the relevant, the guarantor, the nature of any
first lien. LTV ratios can only be adjusted Up to 60 .................................... 75 collateral, or external credit ratings. 53
through loan amortization, except for a loan >60 and up to 90 ...................... 100 1. Items With a 100 Percent Conversion
refinancing where the bank extends >90 ............................................ 150 Factor. (a) Except as otherwise provided in
additional funds. However, for purposes of section II.B.5 of this appendix E, the full
calculating the CLTV, banks may adjust the amount of an asset or transaction supported,
appraised value of the property, as TABLE G3.—RISK WEIGHTS FOR in whole or in part, by a direct credit
determined at the time of origination of the MORTGAGES NOT MEETING MINIMUM substitute or a recourse obligation. Direct
first lien, based on a new appraisal or CRITERIA credit substitutes and recourse obligations
evaluation in accordance with the FDIC’s are defined in section II.B.5 of this appendix
appraisal regulations and real estate lending Risk weight under Table G1 or Risk weight E.
guidelines.50 G2 1 (percent) (b) Sale and repurchase agreements, if not
(A) Mortgage loans secured by first liens on already included on the balance sheet, and
one-to four-family residential properties. 20%, 35%, 50%, 75%, or 100% 100 forward agreements. Forward agreements are
Mortgage loans secured by first liens on one- 150% ......................................... 150 legally binding contractual obligations to
to four-family residential properties (first lien purchase assets with drawdown which is
1This column represents the risk weight a
mortgages) must be risk-weighted in certain at a specified future date. Such
accordance with Table G1 of this appendix mortgage would have received under Table
G1 or G2 if it had met the minimum criteria re- obligations include forward purchases,
E. If a bank holds both the first and junior forward forward deposits placed,54 and
quired by this section II.C.9(b).
lien(s) on a residential property and no other partly-paid shares and securities; they do not
party holds an intervening lien, the (C) One- to Four-Family Residential include commitments to make residential
transaction is treated as a first lien mortgage Mortgages With Negative Amortization mortgage loans or forward foreign exchange
for purposes of determining the loan-to-value Features. First lien mortgages with negative contracts.
ratio and assigning a risk weight. amortization features are risk weighted in (c) Securities lent by a bank are treated in
accordance with Table G1 of this appendix one of two ways, depending upon whether
TABLE G1.—RISK WEIGHTS FOR FIRST E. For loans with negative amortization the lender is exposed to risk of loss. If a bank,
LIEN ONE- TO FOUR-FAMILY RESI- features, the LTV of the loans must be
adjusted quarterly to include the amount of
as agent for a customer, lends the customer’s
DENTIAL MORTGAGES securities and does not indemnify the
any negative amortization. Any remaining customer against loss, then the securities
potential increase in the mortgage’s principal
Loan-to-Value ratio Risk weight balance permitted through negative transaction is excluded from the risk-based
(percent) (percent) capital calculation. On the other hand, if a
amortization is to be treated as a long-term
bank lends its own securities or, acting as
commitment and converted to an on-balance
Up to 60 .................................... 20 sheet equivalent amount as set forth in agent for customer, lends the customer’s
>60 and up to 80 ...................... 35 section II.D. of this Appendix E. The credit securities and indemnifies the customer
>80 and up to 85 ...................... 50 equivalent amount of the commitment is then against loss, the transaction is converted at
>85 and up to 90 ...................... 75 risk-weighted according to Table G1 based on 100 percent and assigned to the risk weight
>90 and up to 95 ...................... 100 the loan’s ‘‘highest contractual LTV ratio.’’ category appropriate to the obligor or, if
>95 ............................................ 150 The highest contractual LTV ratio of a first applicable, to the collateral delivered to the
lien mortgage equals the current outstanding lending bank or the independent custodian
(B) Stand-Alone Junior Liens. Stand-alone principal balance of the loan, 51 plus the acting on the lending bank’s behalf.
junior liens on one- to four-family residential credit equivalent amount of the remaining 2. Items With a 50 Percent Conversion
mortgages, including structured mortgages negative amortization commitment, minus Factor. (a) Transaction-related contingencies
and the on-balance sheet portion of home the amount covered by any loan-level PMI are to be converted at 50 percent. Such
equity lines of credit, must be risk weighted divided by the value of the property.52 contingencies include bid bonds,
using the CLTV of the stand-alone junior and (iii) Transitional Rule for Residential performance bonds, warranties, and
Mortgage Exposures. A bank may continue to performance standby letters of credit related
48 For purposes of this section II.C.9(b), the value use appendix A to risk weight those mortgage to particular transactions, as well as
of the property equals the lower of the purchase loans that it owns before it elects to use this acquisitions of risk participations in
price for the property or the value at origination. appendix E. However, the bank must use
The value of the property must be based on an appendix A to risk weight all such mortgage 53 The sufficiency of collateral and guarantees for
appraisal or evaluation of the property in off-balance-sheet items is determined by the market
loans. Mortgage loans approved, acquired, or
conformance with the FDIC’s appraisal regulations value of the collateral or the amount of the
originated after a bank elects to use appendix
and real estate lending guidelines. See 12 CFR part guarantee in relation to the face amount of the item,
323, 12 CFR part 365. except for derivative contracts, for which this
49 The CLTV represents the aggregate principle 51 As the loan balance increases through negative determination is generally made in relation to the
outstanding on a first lien mortgage and all amortization, the bank must recalculate the credit equivalent amount. Collateral and guarantees
applicable junior lien mortgages divided by the outstanding loan amount using the original loan are subject to the same provisions noted under
appraised value of the property at origination of the amount plus any increases to the loan amount due section II.B of this appendix E.
first lien. to negative amortization. 54 Forward forward deposits accepted are treated
50 See 12 CFR part 323, 12 CFR part 365. 52 See footnote 48. as interest rate contracts.
performance standby letters of credits. appropriate credit equivalent amount even characterized as derivatives or other trading
Performance standby letters of credit though those facilities are structured or book assets. Liquidity facilities that provide
(performance bonds) are irrevocable characterized as derivatives or other trading liquidity support to ABCP, in form or in
obligations of the bank to pay a third-party book assets. Liquidity facilities that support substance, (including those positions to
beneficiary when a customer (account party) ABCP, in form or in substance, (including which the market risk rules may not be
fails to perform on some contractual those positions to which the market risk rules applied as set forth in section 2(a) of
nonfinancial obligation. Thus, performance may not be applied as set forth in section 2(a) appendix C of this part) that are not eligible
standby letters of credit represent obligations of appendix C of this part) that are not ABCP liquidity facilities are to be considered
backing the performance of nonfinancial or eligible ABCP liquidity facilities are to be recourse obligations or direct credit
commercial contracts or undertakings. To the considered recourse obligations or direct substitutes and assessed the appropriate risk-
extent permitted by law or regulation, credit substitutes, and assessed the based capital requirement in accordance with
performance standby letters of credit include appropriate risk-based capital treatment in section II.B.5 of this appendix.
arrangements backing, among other things, accordance with section II.B.5 of this 5. Items with a Zero Percent Conversion
subcontractors’ and suppliers’ performance, appendix E. Factor. These include unused portions of
labor and materials contracts, and (d) In the case of commitments structured retail credit card lines and related plans are
construction bids. as syndications where the bank is obligated deemed to be short-term commitments if the
(b) The unused portion of commitments only for its pro rata share, the risk-based bank, in accordance with applicable law, has
with an original maturity exceeding one year. capital framework includes only the bank’s the unconditional option to cancel the credit
including underwriting commitments and proportional share of such commitments. line at any time.
commercial and consumer credit Thus, after a commitment has been converted 6. Derivative Contracts. The credit-
commitments, also are to be converted at 50 at 50 percent, portions of commitments that equivalent amount for a derivative contract,
percent. Original maturity is defined as the have been conveyed to other U.S. depository or group of derivative contracts subject to a
length of time between the date the institutions or OECD banks, but for which the qualifying bilateral netting contract, is
commitment is issued and the earliest date originating bank retains the full obligation to assigned to the risk weight category
on which: The bank can at its option, the borrower if the participating bank fails to appropriate to the underlying obligor
unconditionally (without cause) cancel the pay when the commitment is drawn upon, regardless of the type of transaction.
commitment,55 and the bank is scheduled to will be assigned to the 20 percent risk E. Derivative Contracts (Interest Rate,
(and as a normal practice actually does) category. The acquisition of such a Exchange Rate, Commodity (Including
review the facility to determine whether or participation in a commitment would be Precious Metal) and Equity Derivative
not it should be extended and, on at least an converted at 50 percent and the credit Contracts)
annual basis, continues to regularly review equivalent amount would be assigned to the
the facility. Facilities that are risk category that is appropriate for the 1. Credit equivalent amounts are computed
unconditionally cancelable (without cause) at account party obligor or, if relevant, to the for each of the following off-balance-sheet
any time by the bank are not deemed to be nature of the collateral or guarantees. derivative contracts:
commitments, provided the bank makes a (e) Revolving underwriting facilities (a) Interest Rate Contracts
separate credit decision before each drawing (RUFs), note issuance facilities (NIFs), and (i) Single currency interest rate swaps.
under the facility. other similar arrangements also are converted (ii) Basis swaps.
(c)(i) Commitments are defined as any at 50 percent. These are facilities under (iii) Forward rate agreements.
legally binding arrangements that obligate a which a borrower can issue on a revolving (iv) Interest rate options purchased
bank to extend credit in the form of loans or basis short-term notes in its own name, but (including caps, collars, and floors
lease financing receivables; to purchase for which the underwriting banks have a purchased).
loans, securities, or other assets; or to legally binding commitment either to (v) Any other instrument linked to interest
participate in loans and leases. Commitments purchase any notes the borrower is unable to rates that gives rise to similar credit risks
also include overdraft facilities, revolving sell by the rollover date or to advance funds (including when-issued securities and
credit, home equity and mortgage lines of to the borrower. forward deposits accepted).
credit, eligible ABCP liquidity facilities, and 3. Items With a 20 Percent Conversion (b) Exchange Rate Contracts
similar transactions. Normally, commitments Factor. Short-term, self-liquidating, trade- (i) Cross-currency interest rate swaps.
involve a written contract or agreement and related contingencies which arise from the (ii) Forward foreign exchange contracts.
a commitment fee, or some other form of movement of goods are converted at 20 (iii) Currency options purchased.
consideration. Commitments are included in percent. Such contingencies include (iv) Any other instrument linked to
weighted-risk assets regardless of whether commercial letters of credit and other exchange rates that gives rise to similar credit
they contain material adverse change clauses documentary letters of credit collateralized risks.
or other provisions that are intended to by the underlying shipments. (c) Commodity (including precious metal)
relieve the issuer of its funding obligation 4. Items With a 10 Percent Conversion or Equity Derivative Contracts
under certain conditions. In the case of Factor. (a) Unused portions of commitments (i) Commodity-or equity-linked swaps.
commitments structured as syndications, with an original maturity of one year or less (ii) Commodity-or equity-linked options
where the bank is obligated solely for its pro are converted using the 10 percent purchased.
rata share, only the bank’s proportional share conversion factor.56 Unused portions of (iii) Forward commodity-or equity-linked
of the syndicated commitment is taken into eligible ABCP liquidity facilities with an contracts.
account in calculating the risk-based capital original maturity of one year or less that (iv) Any other instrument linked to
ratio. provide liquidity support to ABCP also are commodities or equities that gives rise to
(ii) Banks that are subject to the market risk converted at 10 percent. similar credit risks.
(b) Banks that are subject to the market risk 2. Exchange rate contracts with an original
rules in appendix C to part 325 are required
rules in appendix C to part 325 are required maturity of 14 calendar days or less and
to convert the notional amount of eligible
to convert the notional amount of eligible derivative contracts traded on exchanges that
ABCP liquidity facilities, in form or in
ABCP liquidity facilities, in form or in require daily receipt and payment of cash
substance, with an original maturity of over
substance, with an original maturity of one variation margin may be excluded from the
one year that are carried in the trading
year or less that are carried in the trading risk-based ratio calculation. Gold contracts
account at 50 percent to determine the
account at 10 percent to determine the are accorded the same treatment as exchange
appropriate credit equivalent amount even rate contracts except gold contracts with an
55 In the case of home equity or mortgage lines of

through those facilities are structured or original maturity of 14 calendar days or less
credit secured by liens on one- to four-family
are included in the risk-based calculation.
residential properties, a bank is deemed able to
unconditionally cancel the commitment if, at its 56 Short-term commitments to originate one- to Over-the-counter options purchased are
option, it can prohibit additional extensions of four-family residential mortgage loans, other than a included and treated in the same way as
credit, reduce the credit line, and terminate the derivative contract, will continue to be converted to other derivative contracts.
commitment to the full extent permitted by relevant an on-balance-sheet credit equivalent amount using 3. Credit Equivalent Amounts for
federal law. the zero percent conversion factor. Derivative Contracts. (a) The credit
equivalent amount of a derivative contract (ii) An estimate of the potential future (c) The potential future credit exposure of
that is not subject to a qualifying bilateral credit exposure. a contract, including a contract with a
netting contract in accordance with section (b) The current exposure is determined by negative mark-to-market value, is estimated
II.E.5 of this appendix E is equal to the sum the mark-to-market value of the contract. If by multiplying the notional principal amount
of: the mark-to-market value is positive, then the of the contract by a credit conversion factor.
(i) The current exposure (which is equal to current exposure is equal to that mark-to- Banks should, subject to examiner review,
the mark-to-market value, 57 if positive, and market value. If the mark-to-market value is use the effective rather than the apparent or
is sometimes referred to as the replacement zero or negative, then the current exposure is stated notional amount in this calculation.
cost) of the contract; and zero. The credit conversion factors are:
TABLE H.—CONVERSION FACTOR MATRIX

Precious met-
Exchange rate Other com-
Interest rate Equity als, except
Remaining maturity and gold modities
(percent) (percent) gold
(percent) (percent)
(percent)
One year or less .................................................................. 0.0 1.0 6.0 7.0 10.0

More than one year to five years ........................................ 0.5 5.0 8.0 7.0 12.0
More than five years ............................................................ 1.5 7.5 10.0 8.0 15.0
(d) For contracts that are structured to assets in calculating a bank’s risk-based counterparty is involved, then also under the
settle outstanding exposure on specified capital ratio. law of the jurisdiction in which the branch
dates and where the terms are reset such that (c) The FDIC notes that the conversion is located;
the market value of the contract is zero on factors set forth in section II.E.3 of appendix (B) The law that governs the individual
these specified dates, the remaining maturity E, which are based on observed volatilities of contracts covered by the netting contract; and
is equal to the time until the next reset date. the particular types of instruments, are (C) The law that governs the netting
For interest rate contracts with remaining subject to review and modification in light of contract.
maturities of more than one year and that changing volatilities or market conditions. (iii) The bank establishes and maintains
meet these criteria, the conversion factor is (d) Examples of the calculation of credit procedures to ensure that the legal
subject to a minimum value of 0.5 percent. equivalent amounts for these types of characteristics of netting contracts are kept
(e) For contracts with multiple exchanges contracts are contained in Table H of this under review in the light of possible changes
of principal, the conversion factors are to be appendix E. in relevant law; and
multiplied by the number of remaining 5. Netting. (a) For purposes of this (iv) The bank maintains in its file
payments in the contract. Derivative appendix E, netting refers to the offsetting of documentation adequate to support the
contracts not explicitly covered by any of the positive and negative mark-to-market values netting of derivative contracts, including a
columns of the conversion factor matrix are when determining a current exposure to be copy of the bilateral netting contract and
to be treated as ‘‘other commodities.’’ used in the calculation of a credit equivalent necessary legal opinions.
(f) No potential future exposure is amount. Any legally enforceable form of (b) A contract containing a walkaway
calculated for single currency interest rate bilateral netting (that is, netting with a single
clause is not eligible for netting for purposes
swaps in which payments are made based counterparty) of derivative contracts is
of calculating the credit equivalent
upon two floating rate indices (so called recognized for purposes of calculating the
amount.58
floating/floating or basis swaps); the credit credit equivalent amount provided that:
(c) By netting individual contracts for the
exposure on these contracts is evaluated (i) The netting is accomplished under a
solely on the basis of their mark-to-market written netting contract that creates a single purpose of calculating its credit equivalent
values. legal obligation, covering all included amount, a bank represents that it has met the
4. Risk Weights and Avoidance of Double individual contracts, with the effect that the requirements of this appendix E and all the
Counting. (a) Once the credit equivalent bank would have a claim or obligation to appropriate documents are in the bank’s files
amount for a derivative contract, or a group receive or pay, respectively, only the net and available for inspection by the FDIC.
of derivative contracts subject to a qualifying amount of the sum of the positive and Upon determination by the FDIC that a
bilateral netting agreement, has been negative mark-to-market values on included bank’s files are inadequate or that a netting
determined, that amount is assigned to the individual contracts in the event that a contract may not be legally enforceable under
risk category appropriate to the counterparty, counterparty, or a counterparty to whom the any one of the bodies of law described in
or, if relevant, the guarantor or the nature of contract has been validly assigned, fails to paragraphs (ii)(1) through (3) of section
any collateral. However, the maximum perform due to default, bankruptcy, II.E.5(a) of this appendix E, underlying
weight that will be applied to the credit liquidation, or similar circumstances; individual contracts may be treated as though
equivalent amount of such contracts is 50 (ii) The bank obtains a written and they were not subject to the netting contract.
percent. reasoned legal opinion(s) representing that in (d) The credit equivalent amount of
(b) In certain cases, credit exposures the event of a legal challenge, including one derivative contracts that are subject to a
arising from the derivative contracts covered resulting from default, insolvency, qualifying bilateral netting contract is
by these guidelines may already be reflected, bankruptcy or similar circumstances, the calculated by adding:
in part, on the balance sheet. To avoid double relevant court and administrative authorities (i) The net current exposure of the netting
counting such exposures in the assessment of would find the bank’s exposure to be such a contract; and
capital adequacy and, perhaps, assigning net amount under: (ii) The sum of the estimates of potential
inappropriate risk weights, counterparty (A) The law of the jurisdiction in which future exposure for all individual contractors
credit exposures arising from the types of the counterparty is chartered or the subject to the netting contract, adjusted to
instruments covered by these guidelines may equivalent location in the case of take into account the effects of the netting
need to be excluded from balance sheet noncorporate entities and, if a branch of the contract.59
57 Mark-to-market values are measured in dollars, a non-defaulting counterparty to make lower 59 For purposes of calculating potential future
regardless of the currency or currencies specified in payments than it would make otherwise under the credit exposure for foreign exchange contracts and
the contract and should reflect changes in both contract, or no payment at all, to a defaulter or to other similar contracts in which notional principal
underlying rates, prices and indices, and the estate of a defaulter, even if a defaulter or the is equivalent to cash flows, total notional principal
counterparty credit quality.
58 For purposes of this section, a walkaway clause
estate of a defaulter is a net creditor under the is defined as the net receipts to each party falling
contract. due on each value date in each currency.
means a provision in a netting contract that permits
(e) The net current exposure is the sum of (i) Under the counterparty-by-counterparty NGR should be applied individually to each
all positive and negative mark-to-market approach, the NGR is the ratio of the net qualifying bilateral netting contract to
values of the individual contracts subject to current exposure of the netting contract to determine the adjusted add-on for that
the netting contract. If the net sum of the the gross current exposure of the netting netting contract.
mark-to-market values is positive, then the contract. The gross current exposure is the
net current exposure is equal to that sum. If sum of the current exposure of all individual III. Minimum Risk-Based Capital Ratio
the net sum of the mark-to-market values is contracts subject to the netting contract Subject to section II.B.5 of this appendix E,
zero or negative, then the net current calculated in accordance with section II.E of banks generally will be expected to meet a
exposure is zero. this appendix E. minimum ratio of qualifying total capital to
(f) The effects of the bilateral netting (ii) Under the aggregate approach, the NGR risk-weighted assets of 8 percent, of which at
contract on the gross potential future is the ratio of the sum of all of the net current
exposure are recognized through application least 4 percentage points should be in the
exposures for qualifying bilateral netting
of a formula, resulting in an adjusted add-on form of core capital (Tier 1). Any bank that
contracts to the sum of all of the gross current
amount (Anet). The formula, which employs does not meet the minimum risk-based
exposures for those netting contracts (each
the ratio of net current exposure to gross gross current exposure is calculated in the capital ratio, or whose capital is otherwise
current exposure (NGR) is expressed as: same manner as in section II.E.5(g)(i) of this considered inadequate, generally will be
Anet = (0.4 × Agross) + 0.6(NGR × Agross) appendix E). Net negative mark-to-market expected to develop and implement a capital
The effect of this formula is that Anet is the values to individual counterparties cannot be plan for achieving an adequate level of
weighted average of Agross, and Agross adjusted used to offset net positive current exposures capital, consistent with the provisions of this
by the NGR. to other counterparties. risk-based capital framework and § 325.104,
(g) The NGR may be calculated in either (iii) A bank must use consistently either the specific circumstances affecting the
one of two ways—referred to as the the counterparty-by-counterparty approach individual bank, and the requirements of any
counterparty-by-counterparty approach and or the aggregate approach to calculate the related agreements between the bank and the
the aggregate approach. NGR. Regardless of the approach used, the FDIC.
TABLE I.—DEFINITION OF QUALIFYING CAPITAL

Components Minimum requirements
(1) Core Capital (Tier 1) ........................................................................... Must equal or exceed 4% of risk-weighted assets.
(a) Common stockholders’ equity ............................................................. No limit.1
(b) Noncumulative perpetual preferred stock and any related surplus .... No limit.1
(c) Minority interest in equity accounts of consolidated ........................... No limit.1
(d) Less: All intangible assets other than certain mortgage servicing as- (2)
sets, nonmortgage servicing assets and purchased credit card rela-
tionships.
(e) Less: Certain credit-enhancing interest only strips and nonfinancial (3)
equity investments required to be deducted from capital.
(f) Less: Certain deferred tax assets. ....................................................... (4)
(2) Supplementary Capital (Tier 2) ........................................................... Total of tier 2 is limited to 100% of tier 1.5
(a) Allowance for loan and lease losses .................................................. Limited to 1.25% of weighted-risk assets.5
(b) Unrealized gains on certain equity securities 6 ................................... Limited to 45% of pretax net unrealized gains.6
(c) Cumulative perpetual and long-term preferred stock (original matu- No limit within tier 2; long-term preferred is amortized for capital pur-
rity of 20 years or more) and any related surplus.. poses as it approaches maturity.
(d) Auction rate and similar preferred stock (both cumulative and non- No limit within tier 2.
cumulative)..
(e) Hybrid capital instruments (including mandatory convertible debt se- No limit within tier 2.
curities)..
(f) Term subordinated debt and intermediate-term preferred stock (origi- Term subordinated debt and intermediate-term preferred stock are lim-
nal weighted average maturity of five years or more).. ited to 50% of Tier 1 5 and amortized for capital purposes as they
approach maturity.
(3) Deductions (from the sum of tier 1 and tier 2).
(a) Investments in banking and finance subsidiaries that are not con-
solidated for regulatory capital purposes..
(b) Intentional, reciprocal cross-holdings of capital securities issued by
banks..
(c) Other deductions (such as investment in other subsidiaries or joint On a case-by-case basis or as a matter of policy after formal consider-
ventures) as determined by supervisory authority.. ation of relevant issues.
(4) Total Capital ........................................................................................ Must equal or exceed 8% of weighted-risk assets.
1 No express limits are placed on the amounts of nonvoting common, noncumulative perpetual preferred stock, and minority interests that may
be recognized as part of Tier 1 capital. However, voting common stockholders’ equity capital generally will be expected to be the dominant form
of Tier 1 capital and banks should avoid undue reliance on other Tier 1 capital elements.
2 The amounts of mortgage servicing assets, nonmortgage servicing assets and purchased credit card relationships that can be recognized for
purposes of calculating Tier 1 capital are subject to the limitations set forth in § 325.5(f). All deductions are for capital purposes only; deductions
would not affect accounting treatment.
3 The amounts of credit-enhancing interest-only strips that can be recognized for purposes of calculating Tier 1 capital are subject to the limita-
tions set forth in § 325.5(f). The amounts of nonfinancial equity investments that must be deducted for purposes of calculating Tier 1 capital are
set forth in section II.B.6 of appendix E to part 325.
4 Deferred tax assets are subject to the capital limitations set forth in § 325.5(g).
5 Amounts in excess of limitations are permitted but do not qualify as capital.

6 Unrealized gains on equity securities are subject to the capital limitations set forth in paragraph I–2.A.2.(f) of appendix E to part 325.
IV. Calculation of the Risk-Based Capital guaranteed by, U.S. depository institutions Category 4—50 Percent Risk Weight
Ratio and OECD banks. (1) Certain presold residential construction
1. When calculating the risk-based capital (3) Short-term (remaining maturity of one loans, provided that the loans were approved
ratio under the framework set forth in this year or less) claims on, and portions of short- in accordance with prudent underwriting
statement of policy, qualifying total capital term claims guaranteed by, non-OECD banks. standards and are not past due 90 days or
(the numerator) is divided by risk-weighted (4) Portions of loans and other claims more or carried on a nonaccrual status.
assets (the denominator). The process of conditionally guaranteed by the U.S. (2) Loans fully secured by first liens on
determining the numerator for the ratio is Treasury or U.S. Government agencies.61 multifamily residential properties that have
summarized in Table I. The calculation of the (5) Securities and other claims on, and been prudently underwritten and meet
denominator is based on the risk weights and portions of claims guaranteed by, U.S. specified requirements with respect to loan-
conversion factors that are summarized in Government-sponsored agencies.62 to-value ration, level of annual net operating
Tables II and III. (6) Portions of loans and other claims income to required debt service, maximum
2. When determining the amount of risk- (including repurchase agreements) amortization period, minimum original
weighted assets, balance sheet assets are collateralized by securities issued or maturity, and demonstrated timely
assigned an appropriate risk weight (see guaranteed by the U.S. Treasury, U.S. repayment performance.
Table J) and off-balance sheet items are first Government agencies, or U.S. Government- (3) Recourse obligations, direct credit
converted to a credit equivalent amount (see sponsored agencies. substitutes, residual interests (other than
Table H) and then assigned to one of the risk (7) Portions of loans and other claims credit-enhancing interest-only strips) and
weight categories set forth in Table J. collateralized 63 by cash on deposit in the asset-or mortgage-backed securities rated in
3. The balance sheet assets and the credit lending bank. the lowest-highest investment grade category
equivalent amount of off-balance sheet items (8) General obligation claims on, and plus, e.g., BBB+, in the case of long-term
are then multiplied by the appropriate risk portions of claims guaranteed by, the full ratings.
weight percentages and the sum of these risk- (4) Revenue bonds or similar obligations,
faith and credit of states or other political
weighted amounts is the gross risk-weighted including loans and leases, that are
subdivisions of OECD countries, including
asset figure used in determining the obligations of U.S. state or political
U.S. state and local governments.
denominator of the risk-based capital ratio. subdivisions of the United States or other
(9) Investments in shares of mutual funds OECD countries but for which the
Any items deducted from capital when whose portfolios are permitted to hold only
computing the amount of qualifying capital government entity is committed to repay the
assets that qualify for the zero or 20 percent debt only out of revenues from the specific
may also be excluded from risk-weighted risk categories.
assets when calculating the denominator for projects financed.
(10) Recourse obligations, direct credit (5) Certain externally rated exposures as
the risk-based capital ratio. substitutes, residual interests (other than provided under section II.C.9 of this
Table J—Summary of Risk Weights and Risk credit-enhancing interest-only strips) and appendix E.
Categories asset-or mortgage-backed securities rated in (6) Certain one-to-four family residential
either of the two highest investment grade mortgages as provided under section II.C.9 of
Category 1—Zero Percent Risk Weight
categories, e.g., AAA or AA, in the case of this appendix E.
(1) Cash (domestic and foreign). long-term ratings, or the highest rating
(2) Balances due from Federal Reserve Category 5—75 Percent Risk Weight
category, e.g., A–1, P–1, in the case of short-
banks. term ratings. (1) Recourse obligations, direct credit
(3) Direct claims on, and portions of claims (11) Certain externally rated exposures as substitutes, residual interests (other than
unconditionally guaranteed by, the U.S. provided under section II.C.9 of this credit-enhancing interest-only strips) and
Treasury and U.S. Government agencies.60 appendix E. asset-or mortgage-backed securities rated in
(4) Gold bullion held in the bank’s own (12) Certain one-to-four family residential the lowest highest investment grade category
vaults or in another bank’s vaults on an naught, e.g., BBB, in the case of long-term
mortgages as provided under section II.C.9 of
allocated basis, to the extent that it is offset ratings, or the lowest highest rating category,
this appendix E.
by gold bullion liabilities. e.g., A–3, P–3, in the case of short-term
(5) Federal Reserve Bank stock. Category 3—35 Percent Risk Weight ratings.
(6) Claims on, or guaranteed by, qualifying (1) Recourse obligations, direct credit (2) Certain externally rated exposures as
securities firms incorporated in the United substitutes, residual interests (other than provided under section II.C.9 of this
States or other members of the OECD-based credit-enhancing interest-only strips) and appendix E.
group of countries that are collateralized by asset-or mortgage-backed securities rated in (3) Certain one-to-four family residential
cash on deposit in the lending bank or by the third-highest investment grade category, mortgages as provided under section II.C.9 of
securities issued or guaranteed by the United e.g., A, in the case of long-term ratings, or the this appendix E.
States (including U.S. government agencies) second highest rating category, e.g., A–2, P– Category 6—100 Percent Risk Weight
or OECD central governments, provided that 2, in the case of short-term ratings. (1) All other claims on private obligors.
a positive margin of collateral is required to (2) Certain externally rated exposures as (2) Obligations issued by U.S. state or local
be maintained on such a claim on a daily provided under section II.C.9 of this governments or other OECD local
basis, taking into account any change in a appendix E. governments (including industrial
bank’s exposure to the obligor or (3) Certain one-to-four family residential development authorities and similar entities)
counterparty under the claim in relation to mortgages as provided under section II.C.9 of that are repayable solely by a private party
the market value of the collateral held in this appendix E. or enterprise.
support of the claim. (3) Premises, plant, and equipment; other
(7) Certain externally rated exposures as 61 For the purpose of calculating the risk-based fixed assets; and other real estate owned.
provided under section II.C.9 of this capital ratio, a U.S. Government agency is defined (4) Investments in any unconsolidated
appendix E. as an instrumentality of the U.S. Government whose subsidiaries, joint ventures, or associated
Category 2—20 Percent Risk Weight obligations are fully and explicitly guaranteed as to companies—if not deducted from capital.
the timely repayment of principal and interest by (5) Instruments issued by other banking
(1) Cash items in the process of collection. the full faith and credit of the U.S. Government.
(2) All claims (long- and short-term) on, organizations that qualify as capital.
62 For the purpose of calculating the risk-based
and portions of claims (long- and short-term) (6) Claims on commercial firms owned by
capital ratio, a U.S. Government-sponsored agency

the U.S. Government or foreign governments.
is defined as an agency originally established or
60 For the purpose of calculating the risk-based chartered to serve public purposes specified by the (7) Recourse obligations, direct credit
capital ratio, a U.S. Government agency is defined U.S. Congress but whose obligations are not substitutes, residual interests (other than
as an instrumentality of the U.S. Government whose explicitly guaranteed by the full faith and credit of credit-enhancing interest-only strips) and
obligations are fully and explicitly guaranteed as to the U.S. Government. asset-or mortgage-backed securities rated in
the timely repayment of principal and interest by 63 Degree of collateralization is determined by the lowest investment grade category
the full faith and credit of the U.S. Government. current market value. negative, e.g., BBB¥, as well as certain
positions (but not residual interests) which 3. Revise paragraph (a)(1)(i) of § 567.2 assigned different external ratings, the
the bank rates pursuant to section II.B.5(g) of to read as follows: savings association must assign the
this appendix E. lowest component rating to the entire
(8) Other assets, including any intangible § 567.2 Minimum regulatory capital exposure. If an exposure has a
assets that are not deducted from capital, and requirement.
the credit equivalent amounts 64 of off- component that is not externally rated,
(a) * * * the exposure is not externally rated.
balance sheet items not assigned to a
(1) * * * (2) Non-sovereign. A non-sovereign
different risk category, except for certain
externally rated exposures and certain one-
(i) Risk-based capital requirement. A includes a securities firm, insurance
to-four family residential mortgages as savings association’s minimum risk- company, bank holding company,
provided under section II.C.9 of this based capital requirement shall be an savings and loan holding company,
appendix E. amount equal to 8 percent of its risk- multi-lateral lending and regional
Category 7—150 Percent Risk Weight weighted assets. development institution, partnership,
(1) Certain externally rated exposures as * * * * * limited liability company, business
provided under section II.C.9 of this 4. Revise the section heading and add trust, special purpose entity,
appendix E. a new introductory paragraph to § 567.6 association, and similar organization.
(2) Certain one-to-four family residential to read as follows: (3) Public-sector entity. A public-
mortgages as provided under section II.C.9 of sector entity means a state, local
this appendix E. § 567.6 Risk-weighted assets. authority or governmental subdivision
Category 8—200 Percent Risk Weight Unless the savings association uses 12 below the central government level in
(1) Externally rated recourse obligations, CFR part 566, Appendix A or elects to an OECD country. In the United States,
direct credit substitutes, residual interests use § 567.7 of this part, a savings this definition encompasses a state,
(other than credit-enhancing interest-only association must compute risk-weighted county, city, town, or other municipal
strips), and asset- and mortgage-backed assets as described in this section. corporation, a public authority, and
securities that are rated one category below * * * * * generally any publicly-owned entity
the lowest investment grade category— 5. Add a new § 567.7 to read as that is an instrumentality of a state or
negative, e.g., BB, to the extent permitted in
follows: municipal corporation. This definition
section II.B.5(d) of this appendix E.
(2) A position (but not a residual interest) does not include commercial companies
§ 567.7 Alternate computation of risk-
extended in connection with a securitization owned by a public-sector entity.
weighted assets.
or structured financing program that is not (4) Sovereign. Sovereign means a
rated by an NRSRO for which the bank
(a) Opt-in. (1) Any savings central government or an agency,
determines that the credit risk is equivalent association, other than a savings department, ministry, or central bank of
to one category below investment grade, e.g., association that uses 12 CFR part 566, a central government. It does not
BB, to the extent permitted in section Appendix A, may elect to compute risk- include state, provincial or local
II.B.5(g) of this appendix E. weighted assets under this section governments, or commercial enterprises
(3) Certain externally rated exposures as rather than § 567.6 of this part. If a owned by a central government.
provided under section II.C.9 of this savings association elects to apply this (c) Computation. Under this section,
appendix E. section, it must apply all of the risk-weighted assets equal risk-weighted
Department of the Treasury requirements of this section. on-balance sheet assets computed under
(2) To elect to apply this section, a paragraph (d) of this section, plus risk-
Office of Thrift Supervision
savings association must notify OTS. weighted off-balance sheet items
12 CFR Chapter V. The election will remain in effect until computed under paragraph (e) of this
Authority and Issuance the savings association withdraws the section, plus risk-weighted recourse
For the reasons stated in the common election by notifying OTS. obligations, direct credit substitutes and
preamble, the Office of Thrift Supervision (b) Definitions. The following certain other positions computed under
proposes to amend part 567 of chapter V of definitions apply to this section: paragraph (f) of this section. Assets not
title 12 of the Code of Federal Regulations as (1) External rating. (i) An external included (i.e., deducted from capital) for
follows: rating is a credit rating assigned by a the purposes of calculating capital
NRSRO that: under § 567.5 are not included in
PART 567—CAPITAL (A) Fully reflects the entire amount of calculating risk-weighted assets.
1. The authority citation for part 567 the credit risk with regard to all (d) On-balance sheet assets. Except as
continues to read as follows: payments owed on the claim (that is, the provided in paragraph (f) of this section,
rating must fully reflect the credit risk risk-weighted on-balance sheet assets
Authority: 12 U.S.C. 1462, 1462a, 1463, associated with timely repayment of
1464, 1467a, 1828 (note). are computed by multiplying the on-
principal and interest); balance sheet asset amounts times the
2. In § 567.1, revise the definition of (B) Is published in an accessible appropriate risk weight categories
risk-weighted assets to read as follows: public form; described in this section.
(C) Is monitored by the issuing (1) The risk weight categories are:
§ 567.1. Definitions.
NRSRO; and (i) Zero percent risk weight.
* * * * * (D) Is, or will be, included in the (A) Cash, including domestic and
Risk-weighted assets. Risk-weighted issuing NRSRO’s publicly available foreign currency owned and held in all
assets means risk-weighted assets transition matrix, which tracks the offices of a savings association or in
computed under § 567.6 or § 567.7 of performance and stability (or rating transit. Any foreign currency held by a
this part. migration) of an NRSRO’s issued savings association must be converted
* * * * * external ratings for the specific type of into U.S. dollar equivalents;
claim (for example, corporate debt). (B) Securities issued by and other
64 In general for each off-balance sheet item, a
(ii) If an exposure has two or more direct claims on the United States
conversion factor (see Table H) must be applied to
determine the ‘‘credit equivalent amount’’ prior to
external ratings, the external rating is Government or its agencies (to the
assigning the off-balance sheet item to a risk weight the lowest assigned rating. If an extent such securities or claims are
category. exposure has components that are unconditionally backed by the full faith
and credit of the United States value of securities issued or guaranteed requirements, the claim is not eligible
Government); by United States Government-sponsored for a risk weight under this paragraph
(C) Notes and obligations issued by agencies; (d)(1)(ii)(H);
either the Federal Savings and Loan (H) Loans that are not externally rated (I) Claims representing general
Insurance Corporation or the Federal that are issued to a qualifying securities obligations of any public-sector entity in
Deposit Insurance Corporation and firm, subject to the conditions set forth an OECD country, and that portion of
backed by the full faith and credit of the below. Externally rated loans to, debt any claims guaranteed by any such
United States Government; securities of, claims collateralized by public-sector entity;
(D) Deposit reserves at, claims on, and claims on, and guarantees by a (J) Bonds issued by the Financing
balances due from Federal Reserve qualifying securities firm are subject to Corporation or the Resolution Funding
Banks; paragraphs (d)(1)(i)(H), and (d)(3) Corporation;
(E) The book value of paid-in Federal through (5) of this section. (K) Balances due from and all claims
Reserve Bank stock; (1) A qualifying securities firm must on domestic depository institutions.
(F) That portion of assets that is fully have a long-term issuer credit rating, or This includes demand deposits and
covered against capital loss or yield a rating on at least one issue of long- other transaction accounts, savings
maintenance agreements by the Federal term unsecured debt, from a NRSRO. deposits and time certificates of deposit,
Savings and Loan Insurance Corporation The rating must be in one of the three federal funds sold, loans to other
or any successor agency; highest investment grade categories depository institutions, including
(G) That portion of assets directly and used by the NRSRO. If two or more overdrafts and term federal funds,
unconditionally guaranteed by the NRSROs assign ratings to the qualifying holdings of the savings association’s
United States Government or its securities firm, the savings association own discounted acceptances for which
agencies; must use the lowest rating to determine the account party is a depository
(H) Claims on, and claims guaranteed whether the rating requirement of this institution, holdings of bankers
by, a qualifying securities firm that are paragraph is met. A qualifying securities acceptances of other institutions and
collateralized by cash on deposit in the firm may rely on the rating of its parent securities issued by depository
savings association or by securities consolidated company, if the parent institutions, except those that qualify as
issued or guaranteed by the United consolidated company guarantees the capital;
States Government or its agencies or the claim. (L) The book value of paid-in Federal
central government of an OECD country. (2) A collateralized claim on a Home Loan Bank stock;
To be eligible for this risk weight, the qualifying securities firm does not have (M) Deposit reserves at, claims on and
savings association must maintain a to comply with the rating requirements balances due from the Federal Home
positive margin of collateral on the under paragraph (d)(1)(ii)(H)(1) of this Loan Banks;
claim on a daily basis, taking into section if the claim arises under a (N) Assets collateralized by cash held
account any change in a savings contract that: in a segregated deposit account by the
association’s exposure to the obligor or (i) Is a reverse repurchase/repurchase reporting savings association;
counterparty under the claim in relation agreement or securities lending/ (O) Loans that are not externally rated
to the market value of the collateral held borrowing transaction executed using that are issued to official multilateral
in support of the claim; standard industry documentation; lending institutions or regional
(I) Debt securities issued by, other (ii) Is collateralized by debt or equity development institutions in which the
claims on, and that portion of assets securities that are liquid and readily United States Government is a
backed by an eligible guarantee of, a marketable; shareholder or contributing member.
sovereign that receive a zero percent (iii) Is marked-to-market daily; Externally rated loans to, debt securities
risk weight, as provided in paragraphs (iv) Is subject to a daily margin of, claims collateralized by claims on,
(d)(3) and (5) of this section. maintenance requirement under the and guarantees by such official
(ii) 20 percent risk weight. standard industry documentation; and multilateral lending institutions, or
(A) Cash items in the process of (v) Can be liquidated, terminated or regional development institutions are
collection; accelerated immediately in bankruptcy subject to paragraph (d)(3) through (5) of
(B) That portion of assets or similar proceeding, and the security this section;
collateralized by the current market or collateral agreement will not be (P) All claims on depository
value of securities issued or guaranteed stayed or avoided under applicable law institutions incorporated in an OECD
by the United States Government or its of the relevant jurisdiction. For country, and all assets backed by the
agencies; example, a claim is exempt from the full faith and credit of depository
(C) That portion of assets automatic stay in bankruptcy in the institutions incorporated in an OECD
conditionally guaranteed by the United United States if it arises under a country. This includes the credit
States Government or its agencies; securities contract or a repurchase equivalent amount of participations in
(D) Securities (not including equity agreement subject to section 555 or 559 commitments and standby letters of
securities) issued by and other claims of the Bankruptcy Code (11 U.S.C. 555 credit sold to other depository
on the U.S. Government or its agencies or 559), a qualified financial contract institutions incorporated in an OECD
that are not backed by the full faith and under section 11(e)(8) of the Federal country, but only if the originating bank
credit of the United States Government; Deposit Insurance Act (12 U.S.C. remains liable to the customer or
(E) Securities (not including equity 1821(e)(8)), or a netting contract beneficiary for the full amount of the
securities) issued by, or other direct between or among financial institutions commitment or standby letter of credit.
claims on, United States Government- under sections 401–407 of the Federal Also included in this category are the
sponsored agencies; Deposit Insurance Corporation credit equivalent amounts of risk

(F) That portion of assets guaranteed Improvement Act of 1991 (12 U.S.C. participations in bankers’ acceptances
by United States Government-sponsored 4401–4407), or Regulation EE (12 CFR conveyed to other depository
agencies; part 231). institutions incorporated in an OECD
(G) That portion of assets (3) If the securities firm uses the claim country. However, bank-issued
collateralized by the current market to satisfy its applicable capital securities that qualify as capital of the
issuing bank are not included in this weight under paragraph (d)(2) of this eligible guarantee of, a non-sovereign
risk category; section. that receive a 75 percent risk weight
(Q) Claims on, or guaranteed by (iv) 50 percent risk weight. under paragraphs (d)(3) and (5) of this
depository institutions other than the (A) Revenue bonds issued by any section;
central bank, incorporated in a non- public-sector entity in an OECD (C) Recourse obligations, direct credit
OECD country, with a remaining country, for which the underlying substitutes, residual interests (other
maturity of one year or less; obligor is a public-sector entity, but than credit-enhancing interest-only
(R) Debt securities issued by, other which are repayable solely from the strips), and asset-or mortgage-backed
claims on, and that portion of assets revenues generated from the project securities with long-term external
backed by an eligible guarantee of, a financed through the issuance of the ratings in the lowest investment grade ‘‘
sovereign that receive a 20 percent risk obligations; naught category or short-term external
weight under paragraphs (d)(3) and (5) (B) Qualifying multifamily mortgage ratings in the lowest investment rating
of this section; loans; category, as provided under paragraph
(S) Debt securities issued by, certain (C) Privately-issued mortgage-backed (f) of this section;
other externally rated claims on, and securities (i.e., those that do not carry (D) Assets collateralized by exposures
that portion of assets backed by an the guarantee of a government or that receive a 75 percent risk weight
eligible guarantee of, a non-sovereign government-sponsored agency) under paragraph (d)(4) of this section;
that receive a 20 percent risk weight representing an interest in qualifying (E) Certain mortgage loans secured by
under paragraphs (d)(3) and (5) of this mortgage loans or qualifying liens on one-to four-family residential
section; multifamily mortgage loans. If the properties that receive a 75 percent risk
(T) Recourse obligations, direct credit security is backed by qualifying weight under paragraph (d)(2) of this
substitutes, residual interests (other multifamily mortgage loans, the savings section.
than credit-enhancing interest-only association must receive timely (vi) 100 percent risk weight. All assets
strips), and asset-or mortgage-backed payments of principal and interest in not otherwise specified in this section
securities with long-term external accordance with the terms of the or deducted from calculations of capital
ratings in the highest or second highest security. Payments will generally be under to § 567.5 of this part, including,
investment grade category or short-term considered timely if they are not 30 but not limited to:
external ratings in the highest days past due; (A) Consumer loans;
investment rating category, as provided (D) Qualifying residential (B) Commercial loans that are not
under paragraph (f) of this section; construction loans; externally rated;
(E) Debt securities issued by, other (C) Non-qualifying multifamily
(U) Assets collateralized by exposures
claims on, and that portion of assets mortgage loans;
that receive a 20 percent risk weight
backed by an eligible guarantee of, a (D) Residential construction loans;
under paragraph (d)(4) of this section;
sovereign that receive a 50 percent risk (E) Land loans;
(V) Certain mortgage loans secured by (F) Nonresidential construction loans;
weight under paragraphs (d)(3) and (5)
liens on one-to four-family residential (G) Obligations issued by any public-
of this section;
properties that receive a 20 percent risk (F) Debt securities issued by, certain sector entity in an OECD country, for
weight under paragraph (d)(2) of this other externally rated claims on, and the benefit of a private party or
section. that portion of assets backed by an enterprise provided that the party or
(iii) 35 percent risk weight. eligible guarantee of, a non-sovereign enterprise, rather than the issuing
(A) Debt securities issued by, other that receive a 50 percent risk weight public-sector entity, is responsible for
claims on, and that portion of assets under paragraphs (d)(3) and (5) of this the timely payment of principal and
backed by an eligible guarantee of, a section; interest on the obligations, e.g.,
sovereign that receive a 35 percent risk (G) Recourse obligations, direct credit industrial development bonds;
weight under paragraphs (d)(3) and (5) substitutes, residual interests (other (H) Investments in fixed assets and
of this section; than credit-enhancing interest-only premises;
(B) Debt securities issued by, certain strips), and asset-or mortgage-backed (I) Certain nonsecurity financial
other externally rated claims on, and securities with long-term external instruments including servicing assets
that portion of assets backed by an ratings in the lowest investment ‘‘ plus and intangible assets includable in core
eligible guarantee of, a non-sovereign grade category, as provided under capital under § 567.12 of this part;
that receive a 35 percent risk weight paragraph (f) of this section; (J) That portion of equity investments
under paragraphs (d)(3) and (5) of this (H) Assets collateralized by exposures not deducted pursuant to § 567.5 of this
section; that receive a 50 percent risk weight part;
(C) Recourse obligations, direct credit under paragraph (d)(4) of this section; (K) The prorated assets of subsidiaries
substitutes, residual interests (other (I) Certain mortgage loans secured by (except for the assets of includable, fully
than credit-enhancing interest-only liens on one-to four-family residential consolidated subsidiaries) to the extent
strips), and asset-or mortgage-backed properties that receive a 50 percent risk such assets are included in adjusted
securities with long-term external weight under paragraph (d)(2) of this total assets;
ratings in the third highest investment section. (L) All repossessed assets or assets
grade category or short-term external (v) 75 percent risk weight. (other than mortgage loans secured by
ratings in the second highest investment (A) Debt securities issued by, other liens on one-to four-family residential
rating category, as provided under claims on, and that portion of assets properties) that are more than 90 days
paragraph (f) of this section; backed by an eligible guarantee of, a past due;
(D) Assets collateralized by exposures sovereign that receive a 75 percent risk (M) Equity investments that the Office
that receive a 35 percent risk weight weight under paragraphs (d)(3) and (5) determines have the same risk
under paragraph (d)(4) of this section; of this section; characteristics as foreclosed real estate
(E) Certain mortgage loans secured by (B) Debt securities issued by, certain by the savings association;
liens on one-to four-family residential other externally rated claims on, and (N) Equity investments permissible
properties that receive a 35 percent risk that portion of assets backed by an for a national bank;
(O) Debt securities issued by, other property. A savings association must (iii) LTV computation. To compute
claims on, and that portion of assets risk-weight mortgage loans secured by the LTV ratio under this paragraph
backed by an eligible guarantee of, a liens on one-to four-family residential (d)(2):
sovereign that receive a 100 percent risk properties under this paragraph (d)(2). (A) The loan amount is the original
weight under paragraphs (d)(3) and (5) (i) First liens. A savings association principal amount of the loan and of all
of this section; must apply the risk weight in Table 1 senior loans, subject to the following
(P) Debt securities issued by, certain that corresponds to the loan-to-value adjustments:
other rated claims on, and that portion (LTV) ratio of a mortgage loan secured (1) If a loan has positively amortized,
of assets backed by an eligible guarantee by a first lien on one-to four-family the savings association may adjust the
of, non-sovereign that receive a 100 residential property. If a loan is not original principal amount of the loan
percent risk weight under paragraphs prudently underwritten, is not quarterly to reflect the positive
(d)(3) and (5) of this section; performing, or is more than 90 days past amortization.
(Q) Recourse obligations, direct credit due, the savings association must apply (2) If a loan has a negative
substitutes, residual interests (other a risk weight of 150 percent if the loan amortization feature, the savings
than credit-enhancing interest-only has an LTV that is greater than 95 association must adjust the original
strips), and asset- or mortgage-backed percent, and must apply a risk weight of principal amount of the loan quarterly
securities with long-term external 100 percent to all other loans. to include amount of the negative
ratings in the lowest investment grade— amortization. If a third party holds a
negative category, as provided under TABLE 1.—RISK WEIGHTS FOR MORT- senior or intervening lien with a
paragraph (f) of this section; GAGE LOANS SECURED BY FIRST negative amortization feature, the
(R) Assets collateralized by exposures LIENS ON ONE-TO FOUR-FAMILY savings association must adjust the
that receive a 100 percent risk weight original principal amount of the senior
RESIDENTIAL PROPERTIES
under paragraph (d)(4) of this section; or intervening loan to reflect the amount
(S) Certain mortgage loans secured by Risk weight of that loan if it were to fully negatively
Loan-to-Value ratio amortize under the applicable contract.
liens on one-to four-family residential (percent)
properties that receive a 100 percent (3) If a loan is a home equity line of
risk weight under paragraph (d)(2) of 60% or less ............................... 20 credit, the savings association must
Greater than 60% and less adjust the original principal amount of
this section.
than or equal to 80% ............ 35 the loan quarterly to reflect the current
(vii) 150 percent risk weight. Greater than 80% and less
(A) Debt securities issued by, certain funded amount of the line of credit.
than or equal to 85% ............ 50 (B) At the origination of the loan, the
other rated claims on, and that portion Greater than 85% and less
of assets backed by an eligible guarantee than or equal to 90% ............ 75
value of the property is the lower of the
of a non-sovereign that receive a 150 Greater than 90% and less purchase price or the estimate of the
percent risk weight under paragraphs than or equal to 95% ............ 100 property’s value. The savings
(d)(3) and (5) of this section; Greater than 95% ..................... 150 association may update the value of the
(B) Assets collateralized by exposures property only when it extends
that receive a 150 percent risk weight (ii) Junior liens. additional funds in connection with
under paragraph (d)(4) of this section; (A) If a savings association holds the refinancing the loan or originating
(C) Certain mortgage loans secured by first lien and a junior lien on a one-to another loan secured by a junior lien
liens on one-to four-family residential four family residential property and no that is treated as a single loan under
properties that receive a 150 percent other party holds an intervening lien, paragraph (d)(2)(ii)(A) of this section,
risk weight under paragraph (d)(2) of the savings association must treat the and it obtains a new appraisal or
this section. two loans as a single loan secured by a evaluation of the value of the property
(viii) 200 percent risk weight. first lien and risk-weight the loans as a part of that transaction. All
(A) Debt securities issued by, other under paragraph (d)(2)(i) of this section. estimates of the property’s value must
claims on, and that portion of assets (B) If a third party holds a senior or be based on an appraisal or evaluation
backed by an eligible guarantee of, a intervening lien, the savings association of the property in conformance with 12
sovereign that receive a 200 percent risk must apply the risk weight in Table 2 CFR part 564 and 12 CFR 560.100–
weight under paragraphs (d)(3) and (5) that corresponds the LTV ratio of the 560.101.
of this section; loan. If a loan is not prudently (C) The savings association may
(B) Debt securities issued by, certain underwritten, is not performing, or is compute the LTV ratio after
other rated claims on, and that portion more than 90 days past due, the savings consideration of loan level private
of assets backed by an eligible guarantee association must apply a risk weight of mortgage insurance (PMI) provided by
of, a non-sovereign that receive a 200 150 percent if the loan has an LTV that non-affiliated insurer with long-term
percent risk weight under paragraphs is greater than 90 percent, and must senior debt (without credit
(d)(3) and (5) of this section; apply a risk weight of 100 percent to all enhancement) that is externally-rated at
(C) Recourse obligations, direct credit other loans. least the third highest investment grade.
substitutes, residual interests (other Loan level PMI is insurance that
than credit-enhancing interest-only TABLE 2.—RISK WEIGHTS FOR MORT- protects a mortgage lender in the event
strips), and asset-or mortgage-backed GAGE LOANS SECURED BY JUNIOR of borrower default up to a
securities with long-term external LIENS ON ONE-TO FOUR-FAMILY predetermined portion of the value of a
ratings one category below investment RESIDENTIAL PROPERTIES one-to four-family residential property
grade, as provided under paragraph (f) and that has no pool-level cap that
of this section; Loan-to-Value ratio Risk weight would effectively reduce coverage
(D) Assets collateralized by exposures below the predetermined portion of the
that receive a 200 percent risk weight 60% or less ............................... 75 value of the property. An affiliated
Greater than 60% and less
under paragraph (d)(4) of this section. company is any company that controls,
than or equal to 90% ............ 100
(2) Mortgage loans secured by a lien Greater than 90% ..................... 150 is controlled by, or is in common
on one-to four-family residential control with the savings association. A
company or person controls a company elects to opt-in under paragraph (a) of (ii)(A) This paragraph (d)(3) applies to
if it owns, controls, or holds with power this section, it may apply a 50 percent claims on sovereigns, other than the
to vote 25 percent or more of a class of risk weight if the mortgage loan is a United States Government and its
voting securities of the company, or ‘‘qualifying mortgage loan’’ as defined agencies. Claims on the United States
consolidates the company for financial in § 567.1, and apply a 100 percent risk Government and its agencies are risk-
reporting purposes. weight if the mortgage loan is not a weighted under paragraph (d)(1) of this
(iv) Negatively amortizing loans and qualifying mortgage loan. If the savings section.
home equity lines of credit. This association elects to apply this (B) This paragraph (d)(3) also applies
paragraph (d)(2) applies to the funded paragraph (d)(2)(vi), it must apply this to all claims on non-sovereigns, other
portions of negatively amortizing loans transitional risk-weight treatment to all than loans that are not externally rated
and home equity lines of credit that are mortgage loans that it owns on the date and claims on United States
secured by a first or junior lien on one- that it elects to opt-in under paragraph Government-sponsored agencies,
to four-family residential property. The (a). A savings association may only rely public-sector entities in OECD
unfunded portions of these loans are on this transitional provision the first countries, and depository institutions.
addressed at paragraph (e)(2) of this time it elects to compute risk-weights Loans to non-sovereigns that are not
section. under this § 567.7. externally rated and claims on United
(v) Construction loans. This paragraph (3) Direct claims—ratings-based
States Government-sponsored agencies,
(d)(2) applies to a mortgage loan to an approach. (i) A savings association must
public sector entities in OECD countries
individual borrower that is secured by risk-weight claims described in
and depository institutions are risk-
a lien on land to be used for the paragraph (d)(3)(ii) of this section using
weighted under paragraph (d)(1) of this
construction of the borrower’s home. It the risk weights indicated on Table 3
section.
does not apply to ‘‘qualifying residential (claims with an original maturity of one
construction loans,’’ as defined in year or more) or Table 4 (claims with an (C) This paragraph (d)(3) does not
§ 567.1, which are addressed under original maturity of less than one year). apply to recourse obligations, direct
paragraph (d)(1)(iv)(D) of this section or To determine the applicable risk weight credit substitutes, and other positions
other residential construction loans, for a claim, the savings association must that are subject to paragraph (f) of this
which are addressed under paragraph use the external rating for the claim. If section.
(d)(1)(vi)(D) of this section. a sovereign exposure has no external (D) This paragraph (d)(3) also does not
(vi) Transition provision. If a savings rating, the exposure is deemed to have apply to OTC derivative counter-party
association owns a mortgage loan an external rating equal to the risk. OTC derivative counter-party risk
secured by a lien on one-to four-family sovereign’s issuer rating assigned by an is addressed in paragraph (e) of this
residential property on the date that it NRSRO. section.
TABLE 3.—RISK WEIGHTS BASED ON RATINGS FOR LONG-TERM EXPOSURES

Sovereign risk Non-Sovereign
Long-term rating category Example weight risk weight
(percent) (percent)
Highest investment grade rating ............................................................................................... AAA 0 20

Second-highest investment grade rating .................................................................................. AA 20 20
Third-highest investment grade rating ...................................................................................... A 20 35
Lowest-investment grade rating—plus ..................................................................................... BBB+ 35 50
Lowest-investment grade rating ............................................................................................... BBB 50 75
Lowest-investment grade rating—minus .................................................................................. BBB¥ 75 100
One category below investment grade ..................................................................................... BB+, BB 75 150
One category below investment grade—minus ....................................................................... BB¥ 100 200
Two or more categories below investment grade .................................................................... B, CCC 150 200
Unrated ..................................................................................................................................... n/a 200 2001
TABLE 4.—RISK WEIGHTS BASED ON RATINGS FOR SHORT-TERM EXPOSURES

Sovereign risk Non-Sovereign
Short-term rating category Example weight risk weight
Highest investment grade rating ............................................................................................... A–1, P–1 0 20

Second-highest investment grade rating .................................................................................. A–2, P–2 20 35
Lowest investment grade rating ............................................................................................... A–3, P–3 50 75
Unrated ..................................................................................................................................... n/a 100 1001
1Unrated debt securities issued by non-sovereigns receive the risk-weight indicated. Unrated loans to non-sovereigns are risk-weighted under
paragraph (d)(1) of this section.
(4) Claims collateralized by certain (A) A debt security that may be risk- debt security that is issued by a
debt securities or asset-backed or weighted under paragraph (d)(3) of this sovereign is 20 percent;
mortgage-backed securities. (i) In section, by applying the risk-weight that (B) A debt security backed by a
addition to collateralized claims would be assigned directly to the debt guarantee of a sovereign (other than the
addressed in paragraph (d)(1) of this security under that paragraph. The United States and its agencies) that may
section, a savings association may risk- minimum risk-weight that may be be risk-weighted under paragraph (d)(5)
weight a claim that is collateralized by: assigned to an asset collateralized by a of this section, by applying the risk-
weight that would be assigned directly that is guaranteed may be assigned a the use of hedging instruments by a
to the debt security under that risk-weight under this paragraph (d)(5); mutual fund to reduce the interest rate
paragraph. The minimum risk-weight (C) Give the beneficiary a direct claim risk of its government bond portfolio
that may be assigned to an asset against the protection provider; will not increase the risk weight of that
collateralized by a debt security that is (D) Be non-cancelable by the fund above the 20 percent category.
guaranteed by a sovereign is 20 percent; protection provider for reasons other Nonetheless, if the fund engages in any
or than the breach of the contract by the activities that appear speculative in
(C) A security that may be risk- beneficiary; nature or has any other characteristics
weighted under Table A or B of (E) Be legally enforceable against the that are inconsistent with the
paragraph (f) of this section, by applying protection provider in a jurisdiction preferential risk-weighting assigned to
the risk-weight that would be assigned where the protection provider has the fund’s assets, holdings in the fund
directly to the security under paragraph sufficient assets against which a will be assigned to the 100 percent risk-
(f). judgment may be attached and enforced; weight category.
(ii) To be eligible for risk-weighting and (e) Off balance sheet items. A savings
under this paragraph (d)(4), the (F) Require the protection provider to association must calculate the risk-
collateral must be liquid and readily make payment to the beneficiary on the weighted off-balance sheet items as
marketable and must have an external occurrence of a default of the obligor on described at § 567.6 of this part, with
rating (or, if applicable, a sovereign the reference asset or claim without first the following modifications:
issuer rating assigned by an NRSRO) of requiring the beneficiary to demand (1) Short-term commitments. A
at least investment grade. payment from the obligor. savings association must apply the
(iii) If an asset is partially (6) Indirect ownership interests in following credit conversion factors to
collateralized, only that portion of the pools of assets. Assets representing an the unused portion of commitments
asset that is collateralized by the market indirect holding of a pool of assets, e.g., with an original maturity of one year or
value of the collateral may be risk- mutual funds, are assigned to risk- less:
weighted under this paragraph (d)(4). weight categories based upon the risk (i) Zero percent for commitments that
(5) Guaranteed assets or claims. (i) A weight that would be assigned to the are unconditionally cancelable and
savings association may risk-weight a assets in the portfolio of the pool. An commitments to originate a loan secured
claim that is backed by an eligible investment in shares of a mutual fund by a lien on one- to four-family
guarantee by applying the risk-weight whose portfolio consists primarily of residential property; and
indicated in Table 3 of this section. To various securities or money market (ii) 10 percent for all other short-term
determine the applicable risk weight for instruments that, if held separately, commitments.
an exposure, the savings association would be assigned to different risk- (2) Unfunded amount of negatively
must use the external rating assigned to weight categories, generally is assigned amortizing mortgage loans and home
the guarantor’s long-term senior debt to the risk-weight category appropriate equity lines of credit. If a mortgage loan
(without credit enhancement) or, if the to the highest risk-weighted asset that secured by a lien on one- to four-family
guarantor is a sovereign, an external the fund is permitted to hold in residential property may negatively
rating that is equal to the sovereign’s accordance with the investment amortize or is a home equity line of
issuer rating assigned by an NRSRO. objectives set forth in its prospectus. credit, a savings association must
The applicable external rating must be The savings association may, at its calculate the risk-weighted asset amount
at least investment grade. option, assign the investment on a pro for the unfunded amount of the loan by
(ii) This paragraph (d)(5) applies to rata basis to different risk-weight multiplying the amount of the off-
eligible guarantees of: categories according to the investment balance sheet exposure times the
(A) Sovereigns, other than the United limits in its prospectus. In no case will applicable credit conversion factor
States Government and its agencies. an investment in shares in any such times the applicable risk weight. For the
Guarantees of the United States fund be assigned to a total risk weight purposes of this paragraph (e)(2):
Government and its agencies are risk- less than 20 percent. If the savings (i) The amount of the off-balance
weighted under paragraph (d)(1) of this association chooses to assign sheet exposure is the unfunded amount
section; and investments on a pro rata basis, and the of the loan if it were to fully negatively
(B) Non-sovereigns, other than United sum of the investment limits of assets in amortize under the applicable contract
States Government-sponsored agencies, the fund’s prospectus exceeds 100 or the maximum unfunded amount of
public-sector entities in OECD percent, the savings association must the home equity line of credit; and
countries, and depository institutions. assign the highest pro rata amounts of (ii) The applicable risk weight is the
Guarantees of United States its total investment to the higher risk risk weight prescribed in paragraph
Government-sponsored agencies, categories. If, in order to maintain a (d)(2) of this section using an LTV
public-sector entities in OECD necessary degree of short-term liquidity, computed under that paragraph, except
countries, and depository institutions a fund is permitted to hold an that the loan amount must include an
are risk-weighted under paragraph (d)(1) insignificant amount of its assets in additional amount equal to the
of this section. short-term, highly liquid securities of unfunded amount of the loan if it were
(iii) To be an eligible guarantee, the superior credit quality that do not to fully negative amortize under the
guarantee must be issued by a third qualify for a preferential risk weight, applicable contract or equal to the
party guarantor and must: such securities will generally be maximum unfunded amount of the
(A) Be written and unconditional and, disregarded in determining the risk- home equity line of credit.
for a sovereign guarantee, be backed by weight category into which the savings (3) Risk weight for derivatives. A
the full faith and credit of the sovereign; association’s holding in the overall fund savings association must calculate the
(B) Cover all or a pro rata portion of should be assigned. The prudent use of risk-weighted asset amount for off-
contractual payments of the obligor on hedging instruments by a mutual fund balance sheet derivative contracts
the reference asset or claim. If an asset to reduce the risk of its assets will not without reference to the 50 percent
or claim is partially guaranteed, only the increase the risk-weighting of the maximum risk-weight cap described at
pro rata portion of the asset or claim mutual fund investment. For example, 12 CFR 567.6(a)(2).
(f) Ratings-based approach for obligations, direct credit substitutes, interest-on strips) described in
recourse obligations, direct credit and other described positions, except § 567.6(b)(3) by referring to the
substitutes and certain other positions. the savings association must calculate exposure’s external rating and using the
(1) General. A savings association must risk-weights for recourse obligations, following tables:
apply § 567.6(b) of this part to direct credit substitutes, residual
determine the risk weights for recourse interests (other than credit enhancing
TABLE 5
Risk weight
Long-term external rating category Example (percent)
Highest investment grade rating ........................................................................................................................... AAA 20

Second-highest investment grade rating .............................................................................................................. AA 20
Third-highest investment grade rating .................................................................................................................. A 35
Lowest-investment grade rating—plus ................................................................................................................. BBB+ 50
Lowest-investment grade rating—naught ............................................................................................................. BBB 75
Lowest-investment grade rating—negative .......................................................................................................... BBB¥ 100
One category below investment grade—plus & naught ....................................................................................... BB+, BB 200
One category below investment grade—negative ............................................................................................... BB¥ 200
TABLE 6
Risk weight
Short-term external rating category Example (percent)
Highest investment grade rating ........................................................................................................................... A–1, P–1 20

Second-highest investment grade rating .............................................................................................................. A–2, P–2 35
Lowest investment grade rating ........................................................................................................................... A–3, P–3 75
(2) Securitizations of revolving credit (A) The off-balance sheet investors’ securitizations that do not require
with early amortization provisions. interest is the total amount of the excess spread to be trapped or that
(i) A savings association must risk- securitization exposures issued by a specify a trapping point that is based
weight the off-balance sheet amount of trust or a special purpose entity to primarily on performance features other
the investor’s interest in a securitization investors. than the three-month average excess
if: (B) The applicable credit conversion spread.
(A) The savings association factor is determined by reference to (iii) If the aggregate risk-based capital
securitizes revolving credits in the Table 5, which is based upon a requirement for all of a savings
securitization. A revolving credit is a comparison of the securitization’s association’s exposures to a
line of credit where the borrower is annualized three month average excess securitization (including the risk-based
permitted to vary the drawn amount and spread against the excess spread capital requirements for residual
the amount of repayment within an trapping point. This excess spread interests, recourse obligations, direct
agreed limit; and trapping ratio is computed as follows: credit substitutes, the investor’s interest
(B) The securitization structure (1) The savings association must computed under this paragraph (f)(2),
includes an early amortization calculate the three-month average of the and other securitization exposures)
provision. An early amortization dollar amount of excess spread divided
exceeds the risk-based capital
provision is a provision in the by the outstanding principal balance of
requirement for the underlying
documentation governing a the underlying pool of exposures at the
securitized assets, the aggregate risk-
securitization that, when triggered, end of each month. Excess spread is
based capital for all of the exposures is
causes investors in the securitization equal to the gross finance charge
the greater of the risk-based capital
exposures to be repaid before the collections (including market
requirement for:
original stated maturity of the interchange fees) and other income
securitization exposures. An early received by a trust or special purpose (A) The residual interest; or
amortization provision does not include entity minus interest paid to the (B) The underlying securitized assets
a provision that is triggered solely by investors in the securitization calculated as if the savings association
events that are not directly related to the exposures, servicing fees, charge-offs, continued to hold the assets on its
performance of the underlying and other trust or special purpose entity balance sheet.
exposures or the originating savings expenses.
association (such as material changes in (2) The three-month average excess TABLE 7.—EARLY AMORTIZATION
tax laws or regulations). spread is converted to a compound CREDIT CONVERSION FACTORS
(ii) The risk-based asset amount for annual rate and is then divided by the
the investors’ interest in a securitization excess spread trapping point. The Excess spread trapping point CCF
described in this paragraph (f)(2) is excess spread trapping point is the point ratio (percent)
equal to the off-balance sheet investors’ at which the savings association is

133.33 percent of trapping
interest times the applicable credit required by the documentation for the point or more ......................... 0
conversion factor times the risk-weight securitization to divert and hold excess Less than 133.33 percent to
applicable to the underlying obligor, spread in spread or reserve account, 100 percent of trapping point 5
collateral or guarantor. For the purposes expressed as a percentage. The excess Less than 100 percent to 75
of this paragraph (f)(2): spread trapping point is 4.5 percent for percent of trapping point ....... 15
TABLE 7.—EARLY AMORTIZATION Federal Deposit Insurance Corporation. require some and permit other
CREDIT CONVERSION FACTORS— Valerie J. Best, qualifying banks 1 to use an internal
Continued Assistant Executive Secretary. ratings-based approach to calculate
regulatory credit risk capital
Dated: December, 11, 2006. requirements and advanced
Excess spread trapping point CCF
ratio (percent) By the Office of Thrift Supervision measurement approaches to calculate
John Reich, regulatory operational risk capital
Less than 75 percent to 50 per- Director. requirements. The Basel II NPR
cent of trapping point ............ 50 describes the qualifying criteria for
[FR Doc. 06–9738 Filed 12–22–06; 8:45 am]
Less than 50 percent of trap- banks required or seeking to operate
ping point .............................. 100 BILLING CODE 4810–33–P(25%); 6210–01–P(25%); 6714–
01–P(25%); 6720–01–P(25%) under the proposed framework and the
applicable risk-based capital
6. In § 567.11, revise paragraph (c)(2), requirements for banks that operate
redesignate paragraph (c)(3) as DEPARTMENT OF THE TREASURY under the framework. The Basel II NPR
paragraph (c)(4) and add new paragraph comment period will end on January 23,
(c)(3) to read as follows: Office of the Comptroller of the 2007.
Currency In today’s issue of the Federal
§ 567.11 Reservation of authority. Register, the agencies are proposing
* * * * * 12 CFR Part 3 revisions to the existing risk-based
(c) * * * [Docket No. 06–09] capital framework that would apply to
banks that do not use the Basel II NPR
(2) Notwithstanding §§ 567.6 and RIN 1557–AC91 (Basel IA NPR). The agencies have
567.7 of this part, OTS will look to the determined that an extension of the
substance of a transaction and may find FEDERAL RESERVE SYSTEM Basel II NPR comment period is
that the assigned risk-weight for any appropriate to allow interested parties
asset, or credit equivalent amount or 12 CFR Parts 208 and 225 additional time to compare the risk-
credit conversion factor for any off- [Regulations H and Y; Docket No. R–1261] based capital requirements as proposed
balance sheet item does not in the Basel II NPR with the risk-based
appropriately reflect the risks imposed FEDERAL DEPOSIT INSURANCE capital requirements as proposed in the
on the savings association. OTS may CORPORATION Basel IA NPR.
require the savings association to apply DATES: The comment period for the
another risk weight, credit equivalent 12 CFR Part 325 proposed rule published at 71 FR 55830
amount, or credit conversion factor that (Sept. 25, 2006) is extended until March
RIN 3064–AC73
the OTS deems appropriate. Similarly, 26, 2007.
OTS may override the use of certain DEPARTMENT OF THE TREASURY ADDRESSES: You may submit comments
ratings or ratings on certain instruments, by any of the methods identified in the
if necessary or appropriate to reflect the Office of Thrift Supervision Basel II NPR (See 71 FR 55830,
risk that that an instrument poses to a September 25, 2006.)
savings association. 12 CFR Part 566 FOR FURTHER INFORMATION CONTACT:
(3) OTS may require a savings OCC: Roger Tufts, Senior Economic
[Docket No. 2006–33]
association to use § 567.6 or § 567.7 of Advisor, Capital Policy (202–874–4925)
this part to compute risk-weighted RIN 1550–AB56 or Ron Shimabukuro, Special Counsel,
assets, if OTS determines that the risk- Legislative and Regulatory Activities
weighted capital requirement computed Risk-Based Capital Standards: Division (202–874–5090). Office of the
under that section is more appropriate Advanced Capital Adequacy Comptroller of the Currency, 250 E
for the risk profile of the savings Framework Street, SW., Washington, DC 20219.
association or would otherwise enhance Board: Barbara Bouchard, Deputy
AGENCIES: Office of the Comptroller of
the safety and soundness of the savings Associate Director (202–452–3072 or
the Currency, Treasury; Board of
association. In making a determination barbara.bouchard@frb.gov) or Anna Lee
Governors of the Federal Reserve
under this paragraph (c)(3), OTS will Hewko, Senior Supervisory Financial
System; Federal Deposit Insurance
apply notice and response procedures in Analyst (202–530–6260 or
Corporation; and Office of Thrift
the same manner and to the same extent anna.hewko@frb.gov), Division of
Supervision, Treasury.
as the notice procedures in 12 CFR Banking Supervision and Regulation; or
ACTION: Joint notice of proposed Mark E. Van Der Weide, Senior Counsel
567.3(d). rulemaking; extension of comment (202–452–2263 or
* * * * * period. mark.vanderweide@frb.gov), Legal
Dated: December 12, 2006. Division. For users of
SUMMARY: On September 25, 2006, the
John C. Dugan, Telecommunications Device for the Deaf
Office of the Comptroller of the
(‘‘TDD’’) only, contact 202–263–4869.
Comptroller of the Currency. Currency (OCC), the Board of Governors FDIC: Jason C. Cave, Associate
of the Federal Reserve System (Board), Director, Capital Markets Branch, (202)
By order of the Board of Governors of the the Federal Deposit Insurance
Federal Reserve System, December 8, 2006.
898–3548, Bobby R. Bean, Chief, Policy
Corporation (FDIC), and the Office of
Section, Capital Markets Branch, (202)

Jennifer J. Johnson, Thrift Supervision (OTS) (collectively, 898–3575, Kenton Fox, Senior Capital
Secretary of the Board. the agencies) issued a joint notice of Markets Specialist, Capital Markets
proposed rulemaking for public
Dated at Washington, D.C., this 5th Day of comment that proposed a new risk- 1 As used in this notice, the term ‘‘bank’’ includes
December, 2006. based capital adequacy framework banks, savings associations, and bank holding
By order of the Board of Directors. (Basel II NPR). The Basel II NPR would companies.

Proposed Rule: Risk-Based Capital: Domestic Capital Modifications Capital Maintenance and Capital Adequacy Guidelines

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Proposed Rule: Risk-Based Capital: Domestic Capital Modifications Capital Maintenance and Capital Adequacy Guidelines

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Tuesday,

December 26, 2006

Federal Reserve System

Risk-Based Capital Guidelines; Capital

risk-based capital rules generally do not apply to

5 71 FR 55380 (September 25, 2006). The Basel II

certain credit-linked notes issued from a synthetic

Highest investment grade rating ............................................................................ AAA ......... 0 20 20

Unrated 2 ................................................................................................................ n/a ........... 200 200 1

Highest investment grade rating ............................................................................ A–1, P–1 .. 0 20 20

of a particular exposure. expanding the list of recognized

LIENS to that shown in Table 3A below. Table

First lien mortgages Illustrative risk weight ranges

Credit history Credit history Credit history

60 or less ..................................................................................................................................... 20–35 20–35 20–35

Credit history Credit history Credit history

60 or less ..................................................................................................................................... 20–50 75–150 150–200

one that can be canceled for any reason at any time

44912–44913 (July 28, 2004).

section 3(f). A ‘‘regulatory action’’ is ‘‘any

are more heavily concentrated in mortgage-backed

have already harmonized their own borrowers generally.

additional funds. On a quarterly basis, a bank ratio on a quarterly basis.

TABLE 3.—RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR LONG-TERM EXPOSURES

Highest investment grade rating .................................................................................................... AAA ............. 0 20

TABLE 4.—RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR SHORT-TERM EXPOSURES

Highest investment grade rating ........................................................................................................ A–1, P–1 .. 0 20

TABLE 4.—RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR SHORT-TERM EXPOSURES—Continued

TABLE 5.—CONVERSION FACTOR MATRIX 1

One year or less .................................................................. 0.0 1.0 6.0 7.0 10.0

TABLE 6.—RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR LONG-TERM EXPOSURES

Highest investment grade ............................................................................................................................ AAA ........................... 20

TABLE 7.—RISK WEIGHTS BASED ON EXTERNAL RATINGS FOR SHORT-TERM EXPOSURES

Highest investment grade ............................................................................................................................ A–1, P–1 ................... 20

TABLE 8.—RISK WEIGHTS BASED ON INTERNAL RATINGS

Rating category Examples (in percent)

Investment grade ......................................................................................................................................... BBB or better ............ 100

TABLE 9.—EARLY AMORTIZATION CREDIT CONVERSION FACTORS

133.33 percent of trapping point or more ............................................................................................................................................ 0

TABLE 1.—RISK WEIGHTS BASED ON LONG-TERM EXTERNAL RATINGS

Highest investment grade rating ........................................................................ AAA ............. 0 20 20

TABLE 1.—RISK WEIGHTS BASED ON LONG-TERM EXTERNAL RATINGS—Continued

Lowest investment grade rating—naught .......................................................... BBB ............. 50 75 75

Unrated ............................................................................................................... n/a ............... 200 200 2

TABLE 2.—RISK WEIGHTS BASED ON SHORT-TERM EXTERNAL RATINGS

Highest investment grade rating 1 ...................................................................... A–1, P–1 ..... 0 20 20

to utilize period-end amounts in calculating their

TABLE 1.—RISK WEIGHTS BASED ON LONG-TERM EXTERNAL RATINGS

Highest investment grade rating ........................................................................ AAA ............. 0 20 20

Unrated ............................................................................................................... n/a ............... 200 200 2

TABLE 2.—RISK WEIGHTS BASED ON SHORT-TERM EXTERNAL RATINGS

Highest investment grade rating * ....................................................................... A–1, P–1 ..... 0 20 20

2 A nationally recognized statistical rating

TABLE A.—RISK WEIGHTS FOR LONG-TERM EXTERNAL RATINGS OF SECURITIZATION EXPOSURES

Highest investment grade rating ................................................................................................................................ AAA ............. 20

TABLE B.—RISK WEIGHTS FOR SHORT-TERM EXTERNAL RATINGS OF SECURITIZATION EXPOSURES

Highest investment grade rating ................................................................................................................................ A–1, P–1 ..... 20

Investment grade .................................................................................................................................................. BBB or other ..... 100

TABLE D.—DEDUCTION FOR NONFINANCIAL EQUITY INVESTMENTS

Less than 15 percent ........................................................................................................................................................................... 8

risk category appropriate to the identity of the term ratings.

TABLE F1.—RISK WEIGHTS BASED ON LONG-TERM EXTERNAL RATINGS

Highest investment grade rating 1 ............................................................................................. AAA .................. 20 0