FIL-87-2004 Attachment

[Federal Register: July 28, 2004 (Volume 69, Number 144)]
[Rules and Regulations]
[Page 44908-44925]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jy04-4]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 04-19]
RIN 1557-AC76

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1162]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC75

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[No. 2004-36]
RIN 1550-AB79

Risk-Based Capital Guidelines; Capital Adequacy Guidelines;
Capital Maintenance: Consolidation of Asset-Backed Commercial Paper
Programs and Other Related Issues

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation; and Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), Federal Deposit
Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS)
(collectively, the agencies) are amending their risk-based capital
standards by removing a sunset provision that would preclude a certain
capital treatment for asset-backed commercial paper (ABCP) programs
after a certain date. The final rule will permanently permit sponsoring
banks, bank holding companies, and thrifts (collectively, sponsoring
banking organizations) to exclude from their risk-weighted asset base
those assets in ABCP programs that are consolidated onto sponsoring
banking organizations' balance sheets as a result of Financial
Accounting Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities, as revised (FIN 46-R).
The agencies also are implementing more risk-sensitive risk-based
capital standards for credit exposures arising from involvement with
ABCP. This final rule generally requires banking organizations to hold
risk-based capital against eligible ABCP liquidity facilities with an
original maturity of one year or less that provide liquidity support to
ABCP by imposing a 10 percent credit conversion factor on such
facilities.
The agencies have decided not to implement the proposed risk-based
capital charge for securitizations of revolving retail credit
facilities (for example, credit card receivables) that incorporate
early amortization provisions. In addition, the agencies are making
technical amendments to their risk-based capital standards by deleting
tables and attachments that summarize risk categories, credit
conversion factors, and transitional arrangements.

DATES: This final rule is effective September 30, 2004. However, any
banking organization may elect to adopt, as of July 28, 2004, the
capital treatment described in this final rule for assets in ABCP
programs that are consolidated onto the balance sheets of sponsoring
banking organizations as a result of FIN 46-R. All liquidity facilities
that provide support to ABCP will be treated as "eligible ABCP
liquidity facilities," regardless of their compliance with the
definition of "eligible ABCP liquidity facilities" in the final rule,
until September 30, 2005. On that date and thereafter, liquidity
facilities that do not meet the final rule's definition of "eligible
ABCP liquidity facility" will be treated as recourse obligations or
direct credit substitutes.

FOR FURTHER INFORMATION CONTACT: OCC: Amrit Sekhon, Risk Expert,
Capital Policy Division, (202) 874-5211; Laura Goldman, Counsel, or Ron
Shimabukuro, Special Counsel, Legislative and Regulatory Activities
Division, (202) 874-5090, Office of the Comptroller of the Currency,
250 E Street, SW., Washington, DC 20219.
Board: Thomas R. Boemio, Senior Project Manager, Policy, (202) 452-
2982, David Kerns, Supervisory Financial Analyst, (202) 452-2428,
Barbara Bouchard, Deputy Associate Director, (202) 452-3072, Division
of Banking Supervision and Regulation; or Mark E. Van Der Weide, Senior
Counsel, (202) 452-2263, Legal Division. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: Jason C. Cave, Chief, Policy Section, Capital Markets Branch,
(202) 898-3548, Robert F. Storch, Chief Accountant, (202) 898-8906,
Division of Supervision and Consumer Protection; Michael B. Phillips,
Counsel, (202) 898-3581, Supervision and Legislation Branch, Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
OTS: Christine A. Smith, Project Manager, (202) 906-5740; or Karen
Osterloh, Special Counsel, Regulation and Legislation Division, Chief
Counsel's Office, (202) 906-6639, Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

A. Asset-Backed Commercial Paper Programs

An asset-backed commercial paper (ABCP) program typically is a
program through which a banking organization provides funding to its
corporate customers by sponsoring and administering a bankruptcy-remote
special purpose entity that purchases asset pools from, or extends
loans to, those customers.\1\ The asset pools in an ABCP program might
include, for example, trade receivables, consumer loans, or asset-
backed securities. The ABCP program raises cash to provide funding to
the banking organization's customers through the issuance of externally
rated commercial paper into the market. Typically, the sponsoring
banking organization provides liquidity

[[Page 44909]]

and credit enhancements to the ABCP program, which aid the program in
obtaining high credit ratings that facilitate the issuance of the
commercial paper.\2\
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\1\ ABCP programs generally also include structured investment
vehicles, which are entities that earn a spread by issuing
commercial paper and medium-term notes and using the proceeds to
purchase highly-rated debt securities.
\2\ For the purposes of this final rule, a banking organization
is considered the sponsor of an ABCP program if it establishes the
program; approves the sellers permitted to participate in the
program; approves the asset pools to be purchased by the program; or
administers the program by monitoring the assets, arranging for debt
placement, compiling monthly reports, or ensuring compliance with
the program documents and with the program's credit and investment
policy.
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B. ABCP Programs and FIN 46-R

In January 2003, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" (FIN 46). FIN 46 required the consolidation of variable
interest entities (VIEs) onto the balance sheets of companies deemed to
be the primary beneficiaries of those entities by no later than the end
of the first annual reporting period beginning after June 15, 2003. FIN
46 was then revised by FASB in December 2003 (that is, FIN 46-R) and
generally was effective for public banking organizations by March 31,
2004. FIN 46-R clarified several issues relating to the consolidation
of VIEs and provided multiple and delayed effective dates, but did not
directly affect issues relevant to this rulemaking.
FIN 46-R requires the consolidation of many ABCP programs onto the
balance sheets of banking organizations.\3\ In contrast, under pre-FIN
46 accounting standards, the sponsors of ABCP programs normally were
not required to consolidate the assets of these programs. Banking
organizations that are required to consolidate ABCP program assets must
include all of the program assets (mostly receivables and securities)
and liabilities (mainly commercial paper) on their balance sheets for
purposes of the bank Reports of Condition and Income (Call Report), the
Thrift Financial Report (TFR), and the bank holding company financial
statements (FR Y-9C Report). If no changes were made to regulatory
capital standards, the resulting increase in the asset base would lower
the tier 1 leverage and risk-based capital ratios of banking
organizations that must consolidate the assets held in ABCP programs.
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\3\ Under FIN 46-R, the FASB broadened the criteria for
determining when one entity is deemed to have a controlling
financial interest in another entity and, therefore, when an entity
must consolidate another entity in its financial statements. An
entity generally does not need to be analyzed under FIN 46-R if it
is designed to have adequate capital, as described in FIN 46-R, and
its shareholders control the entity with their voting or similar
rights and are proportionally allocated its profits and losses. If
the entity fails these criteria, it typically is deemed a VIE and
each stakeholder in the entity (a group that can include, but is not
limited to, legal-form equity holders, creditors, sponsors,
guarantors, and servicers) must assess whether it is the entity's
"primary beneficiary" using the FIN 46-R criteria. This analysis
considers whether effective control exists by evaluating the
entity's risks and rewards. In the end, the stakeholder who holds
the majority of the entity's risks or rewards (or both) is the
primary beneficiary and must consolidate the VIE.
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C. Interim Final and Proposed Rules

The agencies believe that the consolidation of ABCP program assets
generally would result in risk-based capital requirements that do not
appropriately reflect the risks faced by banking organizations involved
with the programs. Sponsoring banking organizations generally face
limited risk exposure to ABCP programs. This risk usually is confined
to the credit enhancements and liquidity facility arrangements that
sponsoring banking organizations provide to these programs. In
addition, operational controls and structural provisions, along with
overcollateralization or other credit enhancements provided by the
companies that sell assets into ABCP programs, mitigate the risks to
which sponsoring banking organizations are exposed.
Because of the limited risks, the agencies adopted an interim final
rule with a request for comment that permitted sponsoring banking
organizations, through the end of the first quarter of 2004, to exclude
from risk-weighted assets (for purposes of calculating the risk-based
capital ratios) ABCP program assets that require consolidation under
FIN 46-R (October 2003 interim final rule). See 68 FR 56530 (October 1,
2003). The agencies also amended their risk-based capital rules to
exclude from tier 1 and total capital any minority interest in
sponsored ABCP programs that are consolidated under FIN 46-R. Exclusion
of minority interests associated with consolidated ABCP programs is
appropriate when such programs' assets are not included in a sponsoring
organization's risk-weighted asset base and, thus, are not assessed a
risk-based capital charge. This interim risk-based capital treatment
was initially scheduled to expire on April 1, 2004. However, the
agencies subsequently issued another interim final rule to extend to
July 1, 2004 the time during which the interim risk-based capital
treatment would be in effect. See 69 FR 22382 (April 26, 2004).
Concurrent with the publication of the October 2003 interim final
rule, the agencies also published a notice of proposed rulemaking (NPR)
that would make permanent the interim risk-based capital treatment for
consolidated ABCP program assets. See 68 FR 56568 (October 1, 2003).
The NPR also proposed to establish risk-based capital requirements for
(1) short-term liquidity facilities extended to ABCP programs and (2)
securitizations of revolving credit exposures (for example, credit card
receivables) that incorporate early amortization provisions. The period
during which the interim final rules have been in effect has provided
the agencies with additional time to develop appropriate risk-based
capital requirements for banking organizations' sponsorship of ABCP
programs and their provision of liquidity support to ABCP, and to
receive and analyze comments from the industry on the NPR.
Collectively, the agencies received 13 comment letters on the
October 2003 interim final rule and the NPR. Commenters uniformly
supported the exclusion of ABCP program assets from the risk-based
capital calculations. Commenters expressed concern, however, with
certain other aspects of the NPR, notably the credit conversion factor
for eligible, short-term liquidity facilities and the NPR's
relationship to the Basel Accord revision process.\4\
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\4\ The risk-based capital standards of the agencies are based
on the July 1988 Accord on International Convergence of Capital
Measurements and Capital Standards adopted by the Basel Committee on
Banking Supervision. The Basel Committee, however, is currently in
the process of revising the 1988 Accord. See the proposed revision
of the Basel Capital Accord, dated June 2004, issued by the Basel
Committee.
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II. Final Rule

A. Exclusion of ABCP Program Assets and Related Minority Interests

In this final rule, the agencies are amending their risk-based
capital standards by removing the interim final rule's July 1, 2004
sunset provision. Thus, the final rule will make permanent the
exclusion of ABCP program assets consolidated under FIN 46-R and any
associated minority interests from risk-weighted assets and tier 1
capital, respectively, when sponsoring banking organizations calculate
their tier 1 and total risk-based capital ratios.
The risk-based capital treatment does not alter generally accepted
accounting principles (GAAP) or the manner in which banking
organizations must report consolidated on-balance sheet assets pursuant
to FIN 46-R. In addition, the risk-based capital treatment does not
affect the denominator of the tier 1 leverage capital ratio, which is
based primarily

[[Page 44910]]

on on-balance sheet assets as reported under GAAP. Thus, as a result of
FIN 46-R, banking organizations must include all assets of consolidated
ABCP programs as part of on-balance sheet assets for purposes of
calculating the tier 1 leverage capital ratio. One commenter objected
to this treatment, arguing that ABCP program assets should also be
excluded from on-balance sheet assets when calculating the tier 1
leverage ratio. However, the agencies typically do not remove on-
balance sheet assets from the total asset base for purposes of
calculating the leverage ratio because the leverage ratio is intended
to work in conjunction with the risk-based capital standards by
providing a simple, GAAP-based measure of capital adequacy. There was
not, in the agencies' judgment, sufficient reason to revise the
leverage ratio in the manner suggested.
As a general matter, minority interests in consolidated
subsidiaries are included as a component of tier 1 capital and, hence,
are incorporated into the tier 1 leverage capital ratio calculation.
However, under this final rule, minority interests related to
sponsoring banking organizations' ABCP program assets consolidated as a
result of FIN 46-R are not to be included in tier 1 capital. Because
the program's assets would not be consolidated for risk-based capital
purposes, the agencies believe that the minority interest that supports
those assets should not be included in the banking organization's
consolidated regulatory capital. Thus, the reported tier 1 leverage
capital ratio for a sponsoring banking organization would likely be
lower than it would be if the ABCP program assets were consolidated and
related minority interest were permitted to remain in the capital
calculation. The agencies do not anticipate that the exclusion of
minority interests related to consolidated ABCP program assets would
significantly affect the tier 1 leverage capital ratio of sponsoring
banking organizations because the amount of equity in ABCP programs
generally is small relative to the capital levels of the sponsoring
organizations.
In addition, commenters noted that the definitions of an "ABCP
program" proposed in the NPR were not consistent among the agencies,
and requested that the definitions be harmonized. Two commenters asked
that the definition be broadened to explicitly include structured
investment vehicles.\5\ The agencies believe that it is important that
the definition of an ABCP program be both clear and consistent among
the agencies. Therefore, the final rule for each agency defines an
"ABCP program" to be a program that primarily issues (that is, more
than 50 percent) externally rated commercial paper backed by assets or
other exposures held in a bankruptcy-remote, special purpose entity. As
a result, the definition of "ABCP program" generally includes
structured investment vehicles and securities arbitrage programs. The
agencies believe that the "primarily issues" requirement ensures that
programs covered by this final rule retain their ABCP character by
requiring that such programs generally issue no less than 50 percent
ABCP.
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\5\ Structured investment vehicles are ABCP programs that issue
commercial paper and medium-term notes and use the proceeds to
purchase highly-rated debt securities.
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Under the final rule, a banking organization will be able to
exclude FIN 46-R related assets from its risk-weighted asset base only
with respect to programs that meet the rule's definition of an "ABCP
program." Thus, a banking organization sponsoring a program issuing
ABCP that does not meet the rule's definition of an "ABCP program"
must continue to include the program's assets in the institution's
risk-weighted asset base.

B. Liquidity Facilities Supporting ABCP

In addition to the exclusion of consolidated ABCP program assets
from risk-weighted assets and related minority interests from tier 1
capital, the agencies are amending their risk-based capital
requirements with respect to liquidity facilities that support ABCP.
Liquidity facilities supporting ABCP often take the form of commitments
to lend to, or purchase assets from, the ABCP programs in the event
that funds are needed to repay maturing commercial paper. Typically,
this need for liquidity is due to a timing mismatch between cash
collections on the underlying assets in the program and scheduled
repayments of the commercial paper issued by the program. Under the
current risk-based capital standards, liquidity facilities with an
original maturity of over one year (that is, long-term liquidity
facilities) are converted to an on-balance sheet credit equivalent
amount using the 50 percent credit conversion factor. Prior to this
final rule, liquidity facilities with an original maturity of one year
or less (that is, short-term liquidity facilities) were converted to an
on-balance sheet credit equivalent amount utilizing the zero percent
credit conversion factor. As a result, such short-term liquidity
facilities were not subject to any risk-based capital charge prior to
this rule.
In the agencies' view, a banking organization that provides
liquidity facilities to ABCP is exposed to credit risk regardless of
the term of the liquidity facilities. For example, an ABCP program may
require a liquidity facility to purchase assets from the program at the
first sign of deterioration in the credit quality of an asset pool,
thereby removing such assets from the program. In such an event, a draw
on the liquidity facility exposes the banking organization to credit
risk. The agencies believe that the existing risk-based capital rules
do not adequately reflect the risks associated with liquidity
facilities supporting ABCP.
Although the agencies believe that liquidity facilities expose
banking organizations to credit risk, the agencies also believe that
the short term of commitments with an original maturity of one year or
less exposes banking organizations to a lower degree of credit risk
than longer term commitments, provided the liquidity facility meets
certain asset quality requirements discussed below. This difference in
degree of credit risk should be reflected in the risk-based capital
requirement for the exposure. For this reason, in the NPR the agencies
proposed a 20 percent credit conversion factor on eligible short-term
liquidity facilities providing liquidity support to ABCP.
Two commenters explicitly agreed with the agencies' position that
regulatory capital should be held against liquidity facilities that
provide liquidity support to ABCP and that have an original maturity of
one year or less. Seven commenters stated that the proposed 20 percent
credit conversion factor for short-term liquidity facilities was too
high given the low historical losses and the overall strength of the
credit risk profiles of such liquidity facilities. Six of these seven
commenters instead suggested that a conversion factor in the range of
5-10 percent would be more appropriate given banking organizations'
credit loss experience with short-term liquidity facilities. One
commenter noted that the proposed capital charge would put U.S. banks
at a competitive disadvantage relative to foreign banks and non-bank
funding sources. The agencies generally agree with these commenters. In
addition, recent examination experience suggests that application of a
10 percent credit conversion factor would result in an effective
capital charge that is more reflective of the amount of economic
capital that banking organizations maintain internally for short-term
liquidity facilities supporting ABCP.

[[Page 44911]]

After consideration of the comments, the agencies have decided to
impose a 10 percent credit conversion factor on eligible short-term
liquidity facilities supporting ABCP, as opposed to the 20 percent
credit conversion factor set forth in the NPR. A 50 percent credit
conversion factor will continue to apply to eligible long-term ABCP
liquidity facilities. These credit conversion factors will apply
regardless of whether the structure issuing the ABCP meets the
definition of an "ABCP program" under the final rule. For example, a
capital charge would apply to an eligible short-term liquidity facility
that provides liquidity support to ABCP where the ABCP constitutes less
than 50 percent of the securities issued causing the issuing structure
not to meet this final rule's definition of an "ABCP program."
However, if a banking organization (1) does not meet this final rule's
definition of an "ABCP program" and must include the program's assets
in its risk-weighted asset base, or (2) otherwise chooses to include
the program's assets in risk-weighted assets, then there will be no
risk-based capital requirement assessed against any liquidity
facilities that support that program's ABCP. In addition, ineligible
liquidity facilities will be treated as recourse obligations or direct
credit substitutes.
The resulting credit equivalent amount would then be risk-weighted
according to the underlying assets or the obligor, after considering
any collateral or guarantees, or external credit ratings, if
applicable. For example, if an eligible short-term liquidity facility
providing liquidity support to ABCP covered an asset-backed security
(ABS) externally rated AAA, then the notional amount of the liquidity
facility would be converted at 10 percent to an on-balance sheet credit
equivalent amount and assigned to the 20 percent risk weight category
appropriate for AAA-rated ABS.\6\
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\6\ See 12 CFR part 3, appendix A, Section 4(d) (OCC); 12 CFR
parts 208 and 225, appendix A, III.B.3.c. (FRB); 12 CFR part 325,
appendix A, II.B.5.d. (FDIC); 12 CFR 567.6(b) (OTS).
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C. Overlapping Exposures to an ABCP Program

In many cases, a banking organization may have multiple exposures
to a single ABCP program (for example, both a credit enhancement and a
liquidity facility). The agencies do not intend to subject a banking
organization to duplicative risk-based capital requirements against
these multiple exposures where they overlap and cover the same
underlying asset pool. Accordingly, the final rule requires that a
banking organization must hold risk-based capital only once against the
assets covered by the overlapping exposures. Where the overlapping
exposures are subject to different risk-based capital requirements, the
banking organization must apply the risk-based capital treatment that
results in the highest capital charge to the overlapping portion of the
exposures.
For example, assume a banking organization provides a program-wide
credit enhancement that would absorb 10 percent of the losses in all of
the underlying asset pools in an ABCP program and pool-specific
liquidity facilities that cover 100 percent of each of the underlying
asset pools.\7\ The banking organization would be required to hold
capital against 10 percent of the underlying asset pools because it is
providing the program-wide credit enhancement. The banking organization
also would be required to hold capital against 90 percent of the
liquidity facilities it is providing to each of the underlying asset
pools. However, if a banking organization chooses to consolidate ABCP
program assets onto its balance sheet for risk-based capital purposes
the organization would not be required also to hold risk-based capital
against any credit enhancements or liquidity facilities that cover
those same program assets.
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\7\ This example assumes that a banking organization is able to
use the internal ratings that it has assigned to liquidity
facilities providing support to ABCP and also assumes that such
facilities would be assigned to the 100 percent risk category.
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If different banking organizations have overlapping exposures to an
ABCP program, however, each organization must hold capital against the
entire maximum amount of its exposure. As a result, while duplication
of capital charges will not occur for individual banking organizations,
some systemic duplication may occur where multiple banking
organizations have overlapping exposures to the same ABCP program.

D. Asset Quality Test

In order for a liquidity facility, either short-or long-term, that
supports ABCP not to be considered a recourse obligation or a direct
credit substitute, it must meet the rule's definition of an "eligible
ABCP liquidity facility." The NPR proposed that the liquidity
facility, in order to be an eligible liquidity facility, meet a
reasonable asset quality test that, among other things, precluded
funding assets that are 60 days or more past due or in default. The
funding of assets past due 60 days or more using a liquidity facility
exposes the institution to a greater degree of credit risk than the
funding of assets of a more current nature.
Five commenters objected to the uniform 60 days past due asset
quality test, noting that although it may be appropriate for trade
receivables, it is not appropriate for many other asset classes. These
commenters believed that a reasonable asset quality test could be
defined to include assets that are 90 to 180 days or more past due,
depending upon the type of asset (for example, residential mortgages or
credit cards). Furthermore, one commenter stated that the 60-day
delinquency standard would significantly overstate the risk of default
in the case of credit cards since the amount of credit card receivables
that is ultimately charged-off between 120 days and 180 days usually is
far less than the amount that is 60-days delinquent. Five commenters
suggested that the definition of an eligible liquidity facility should
be more flexible and incorporate asset quality tests that vary based on
the specific transaction structures or underlying asset types.
Specifically, these commenters proposed that each banking
organization should be allowed to develop its own asset quality tests,
subject to supervisory oversight. Although the agencies considered the
possibility of developing separate past due requirements for different
asset categories, and the possibility of permitting each banking
organization to develop its own asset quality test, the agencies
believe that these approaches would be complex to develop and
burdensome to administer, and would lack uniform application among
banking organizations.
The agencies believe that it is important to ensure that the
primary function of an eligible liquidity facility is to provide
liquidity and, accordingly, such a facility should not be used to fund
assets with the higher degree of credit risk typically associated with
seriously delinquent assets. However, the agencies agree that a
limitation of 60 days or more past due might be too constraining for
some asset types held in an ABCP program.
This final rule increases the number of days in the past due
requirement to 90 days or more past due. The agencies believe that when
assets are 90 days or more past due, they typically have deteriorated
to the point where there is an extremely high probability of default.
Assets that are 90 days past due, for example, often must be placed on
non-accrual status in accordance with the agencies' Uniform Retail
Credit Classification and Account Management Policy. See 65 FR 36904
(June 12, 2000). Further, they generally must also be

[[Page 44912]]

classified "substandard" under that Policy.
Commenters also suggested that the asset quality test should be
modified to reflect guarantees providing credit protection to the bank
providing the liquidity facility. The agencies agree that in the case
of a government guarantee, the past due limitation is not a relevant
asset quality test. As a result, this final rule does not apply the
"days past due" limitation in the asset quality test with respect to
assets that are either conditionally or unconditionally guaranteed by
the United States government or its agencies, or another OECD central
government subsequent to a draw on a liquidity facility.
In addition, to qualify as an eligible liquidity facility, the
agencies proposed in the NPR that, if the assets covered by the
liquidity facility are initially externally rated (at the time the
facility is provided), the facility may be used to fund only those
assets that are externally rated investment grade at the time of
funding. If the asset quality tests are not met (that is, if a banking
organization actually funds through the liquidity facility assets that
do not satisfy the facility's asset quality tests), the liquidity
facility will be considered a recourse obligation or a direct credit
substitute and generally will be converted at 100 percent as opposed to
10 or 50 percent.\8\
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\8\ In the NPR, the agencies proposed an additional requirement
that ABCP liquidity facilities only fund against assets that met the
funding criteria under the asset quality test. The agencies believe
that this criterion is unnecessary and, as a result, have deleted it
from the final rule.
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Three commenters asserted that the asset quality test proposed for
transactions with externally rated assets was inappropriate, noting
that the test is irrelevant for transactions without a ratings-based
trigger where asset quality is determined using cash flow or other
benchmarks. These commenters also noted that, in some cases, the price
of assets purchased under the liquidity facility is adjusted for the
assets' credit quality, mitigating the need for a ratings-based asset
quality test. Moreover, one commenter asserted that the increase in
regulatory capital that occurs when the rating on an asset-backed
security underlying a liquidity facility declines makes the additional
limitation on non-investment grade assets unnecessary.
While the agencies acknowledge that some liquidity facility
agreements adjust the purchase price of assets for credit quality, the
agencies believe that most purchases of rated assets through liquidity
facilities are conducted at a price that exceeds the assets' market
value, which in the agencies' view is equivalent to credit enhancement.
Even in cases where the purchase price is adjusted, it is not
necessarily adjusted to market value.
For these reasons, the final rule considers the practice of
purchasing assets that are externally rated below investment grade out
of an ABCP program as the equivalent of providing credit protection to
the commercial paper investors. Thus, liquidity facilities permitting
purchases of below investment grade securities will be considered
either recourse or direct credit substitutes. However, for the same
reason mentioned previously, this final rule does not apply the
"investment grade" limitation in the asset quality test with respect
to assets that are conditionally or unconditionally guaranteed by the
United States government or its agencies, or another OECD central
government subsequent to a draw on a liquidity facility.

E. Applicability of the Market Risk Capital Requirements

The amendments to the risk-based capital standards with respect to
liquidity facilities reflect the efforts of the agencies to ensure that
banking organizations maintain adequate capital with respect to
exposures represented by liquidity facilities supporting ABCP. Under
the current risk-based capital standards, liquidity facilities held in
the trading book may be subject to the market risk capital requirements
instead of the banking book capital requirements. Consequently, in the
NPR, the agencies proposed that banking organizations subject to the
market risk capital rules would not be permitted to apply those rules
to any liquidity facility supporting ABCP held in the trading book.
This final rule adopts the proposed market risk exception to preclude
banking organizations that are subject to the market risk capital rules
from applying those rules to positions held in a bank's trading book
that act, in form or in substance, as liquidity facilities supporting
ABCP.
Under this final rule, any facility held in the trading book whose
primary function, in form or in substance, is to provide liquidity to
ABCP--even if the facility does not qualify as an eligible ABCP
liquidity facility under the rule--will be subject to the banking book
risk-based capital requirements. Specifically, organizations will be
required to convert the notional amount of all trading book positions
that provide liquidity to ABCP to credit equivalent amounts by applying
the appropriate banking book credit conversion factors. For example,
the full amount of all eligible ABCP liquidity facilities with an
original maturity of one year or less will be subject to a 10 percent
conversion factor, as described previously, regardless of whether the
facility is carried in the trading account or the banking book.
Two commenters objected to this provision, noting that it ignores
GAAP accounting decisions with respect to the trading book
classification of individual transactions, and that a well-defined
mechanism for assessing capital in the trading book already exists. In
addition, these commenters stated that the mark-to-market accounting
discipline applied to trading book positions, combined with individual
banking organizations' market value adjustments for illiquidity or
pricing uncertainty, assures that adequate capital is held on a "real-
time" basis. These commenters also suggested that banking
organizations be permitted to apply the trading book capital rules to
liquidity facilities or arrangements that satisfy certain criteria.
While the agencies understand the benefit of consistent classification
under GAAP and appreciate the value of the market risk capital
framework, the agencies believe that a market risk exception for ABCP-
related liquidity facilities is necessary to ensure an adequate risk-
based capital charge for such exposures and to mitigate regulatory
capital arbitrage opportunities.

III. Early Amortization Capital Charge

In the NPR, the agencies also proposed the assessment of a risk-
based capital charge against the risks associated with early
amortization, a common feature in securitizations of revolving retail
credit exposures (for example, credit card receivables). When assets
are securitized, the extent to which the selling or sponsoring entity
transfers the risks associated with the assets depends on the structure
of the securitization and the nature of the underlying assets. The
early amortization provision often present in securitizations of
revolving retail credit facilities increases the likelihood that
investors will be repaid before being subject to risk of significant
credit losses.
The NPR was not the first time that the agencies have raised the
issue of whether to impose a capital charge on securitizations of
revolving credit exposures that incorporate early amortization
provisions. On March 8, 2000, the agencies published a notice of
proposed rulemaking on recourse obligations and direct credit
substitutes (March 2000 NPR). See 65 FR 12320. In

[[Page 44913]]

the March 2000 NPR, the agencies proposed a fixed conversion factor of
20 percent to be applied to the amount of assets under management in
all revolving securitizations that contained early amortization
features, in recognition of the risks associated with these structures.
The agencies acknowledge that the March 2000 NPR was not particularly
risk sensitive and would have required the same amount of capital for
all securitizations of revolving credit exposures that contained early
amortization features, regardless of the risk present in a particular
securitization transaction. In the subsequent November 2001 final rule
(66 FR 59614) (November 2001 final rule), which implemented many of the
provisions in the March 2000 NPR, the agencies reiterated their
concerns with early amortization, indicating that the risks associated
with securitization, including those posed by an early amortization
feature, were not fully captured in the then current capital rules. In
the November 2001 final rule, however, the agencies did not impose a
special capital charge on securitizations with early amortization
features.
In the interim, the Basel Committee on Banking Supervision (Basel
Committee) set forth a more risk-sensitive proposal that would assess
capital against securitizations of revolving exposures with early
amortization features based on key indicators of risk, such as excess
spread levels. The risk-based capital charge for early amortization
proposed in the NPR was based on the proposal set forth by the Basel
Committee in its third consultative paper issued in April 2003.\9\
---------------------------------------------------------------------------

\9\ The credit conversion factors used in the October 2003 NPR
mirror those in the agencies' August 2003 Advance Notice of Proposed
Rulemaking for non-controlled early amortization of uncommitted
retail credit lines. See 68 FR 45899 (August 4, 2003).
---------------------------------------------------------------------------

Three commenters stated that the proposal as set forth in the NPR
was, in their view, a significant improvement over previous proposed
capital charges for early amortization. Five commenters, however,
recommended that any changes to the regulatory capital guidelines in
this area be made through the Basel process. Coordinating both the
timing and the substance of an early amortization capital charge
internationally would help maintain a level playing field across
countries and would avoid requiring U.S. banking organizations to
implement new capital rules, only to require them to implement slightly
different rules in the future when the agencies implement the Basel
changes. Moreover, three commenters requested that the agencies
establish an alternative approach for controlled early amortization
transactions similar to that proposed by the Basel Committee in the
third Consultative Paper (dated April 2003).
At this time, the capital treatment of retail credit, including
securitizations of revolving credits, may change as the revised Basel
framework proceeds through the U.S. rulemaking process. Therefore, the
ultimate treatment of securitizations of revolving credit exposures
incorporating early amortization provisions is still uncertain. As a
result, the agencies have decided that, at this time, it would not be
appropriate to implement a risk-based capital charge for
securitizations of revolving credits when the treatment may be revised
with the implementation of the new Basel Accord. However, the agencies
intend to revisit this issue in the near future for possible domestic
implementation for all U.S. banking organizations.

IV. Elimination of Summary Sections of Rules Text

The final rule also removes tables and attachments in the risk-
based capital standards that summarize the risk categories, credit
conversion factors, and transitional arrangements. These tables and
attachments are outdated and unnecessary because the substance of these
summaries is included in the main text of the risk-based capital
standards. Furthermore, these summary tables and attachments were
originally provided to assist banking organizations unfamiliar with the
new framework during the transition period when the agencies' risk-
based capital requirements were initially implemented in 1989. No
comments were received on this issue. The agencies consider this change
to be technical in nature and do not intend any substantive impact on
the risk-based capital standards.

V. Effective Dates

This final rule is effective September 30, 2004. However, any
banking organization may elect to adopt, as of July 28, 2004, the
capital treatment described in this final rule for assets in ABCP
programs that are consolidated onto the balance sheets of sponsoring
banking organizations as a result of FIN 46-R. All liquidity facilities
providing liquidity support to ABCP will be treated as "eligible ABCP
liquidity facilities" until September 30, 2005. On that date, all
ABCP-related liquidity facilities that do not meet this final rule's
definition of an eligible ABCP liquidity facility will be treated as
direct credit substitutes or recourse obligations. This transition
period for ABCP-related liquidity facilities existing prior to this
final rule's effective date should provide banking organizations with
sufficient time to revise their liquidity facilities over the next year
to ensure that the facilities meet the eligibility criteria set forth
in this final rule.

VI. Regulatory Analysis

Riegle Community Development and Regulatory Improvement Act

Section 302 of Riegle Community Development and Regulatory
Improvement Act (12 U.S.C. 4802) generally requires that regulations
take effect on the first day of a calendar quarter unless an agency
finds good cause that the regulations should become effective sooner
and publishes its finding with the rule. The agencies believe that it
is important to make this final rule effective before banking
organizations must calculate their regulatory risk-based capital ratios
at the end of the third quarter 2004. If ABCP program assets are
consolidated onto the balance sheets of sponsoring banking
organizations under FIN 46-R, then the agencies believe that the
resulting capital requirements could be excessive in light of the risks
incurred by those organizations as related to those assets. In
addition, with respect to liquidity facilities that support ABCP, the
current risk-based capital charges may not sufficiently reflect the
risks associated with such liquidity facilities. The issuance of this
final rule with a September 30, 2004, effective date will ensure that
banking organizations maintain appropriate risk-based capital levels
with respect to ABCP program assets and ABCP liquidity facilities in
calculating their regulatory capital ratios for the third quarter 2004.

Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Agencies have determined that this final rule will not have a
significant impact on a substantial number of small entities in
accordance with the spirit and purposes of the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.). For purposes of the Regulatory Flexibility
Act, "small entities" are banking organizations having assets of $150
million or less. There are approximately 18 banking organizations that
will be affected by this final rule. All are well over that size
threshold. Accordingly, a regulatory flexibility analysis is not
required.

[[Page 44914]]

Paperwork Reduction Act

The Agencies have determined that this final rule does not involve
a collection of information pursuant to the provisions of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. The OCC and OTS believe that
exclusion of consolidated ABCP program assets from risk-weighted assets
for risk-based capital purposes will not result in any expenditures by
national banks or savings associations. The exclusion of consolidated
ABCP program assets is designed to offset the effect of FIN 46-R on
risk-based capital. With respect to the risk-based capital treatment of
liquidity facilities, because all national banks and savings
associations that provide liquidity facilities to ABCP programs
currently exceed regulatory minimum capital requirements, the OCC and
OTS do not believe these banks will be required to raise additional
capital.

Executive Order 12866

The OCC and OTS have determined that this final rule is not a
significant regulatory action under Executive Order 12866.

List of Subjects

12 CFR Part 3

Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.

12 CFR Part 208

Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Mortgages, Reporting and recordkeeping
requirements, Securities.

12 CFR Part 225

Administrative practice and procedure, Banks, banking, Holding
companies, Reporting and recordkeeping requirements, Securities.

12 CFR Part 325

Administrative practice and procedure, Bank deposit insurance,
Banks, banking, Capital adequacy, Reporting and recordkeeping
requirements, Savings associations, State non-member banks.

12 CFR Part 567

Capital, Reporting and recordkeeping requirements, Savings
associations.

DEPARTMENT OF TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter 1

Authority and Issuance

0
For the reasons set out in the joint preamble, part 3 of chapter I of
title 12 of the Code of Federal Regulations is amended as follows:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

0
1. The authority citation for part 3 continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, and 3909.

0
2. In appendix A to part 3, section 1 is amended as follows:
0
a. Paragraphs (c)(31) to (c)(37) are redesignated as paragraphs (c)(32)
to (c)(38);
0
b. Paragraph (c)(30) is removed;
0
c. Paragraphs (c)(19) to (c)(29) are redesignated as paragraphs (c)(21)
to (c)(31);
0
d. New paragraph (c)(20) is added;
0
e. Paragraphs (c)(9) to (c)(18) are redesignated as paragraphs (c)(10)
to (c)(19);
0
f. Paragraph (c)(8) is redesignated as paragraph (c)(9) and revised;
0
g. Paragraphs (c)(4) to (c)(7) are redesignated as paragraphs (c)(5) to
(c)(8);
0
h. New paragraph (c)(4) is added; and
0
i. Paragraph (c)(3) is revised.

0
3. In appendix A to part 3, section 2, paragraph (a)(3) is revised.

0
4. In appendix A to part 3, section 3 is amended as follows:
0
a. Paragraph (a)(4)(iii) is revised;
0
b. New paragraphs (a)(5) and (a)(6) are added;
0
c. Paragraph (b) introductory text is revised by amending the fourth
sentence;
0
d. Paragraphs (b)(2)(ii) is revised;
0
e. Paragraphs (b)(4) and (b)(5) are redesignated as paragraphs (b)(5)
and (b)(7), respectively;
0
f. New paragraph (b)(4) is added;
0
g. Newly redesignated paragraph (b)(5)(i) is revised; and
0
h. New paragraph (b)(6) is added.

0
5. In appendix A to part 3, section 4 is amended as follows:
0
a. Paragraphs (a)(4)(vi) and (a)(4)(vii) are revised;
0
b. New paragraph (a)(4)(viii) is added;
0
c. Paragraphs (a)(11)(vi) and (a)(11)(vii) are revised;
0
d. New paragraph (a)(11)(viii) is added; and
0
e. Paragraphs (j) and (k) are removed.

0
6. In appendix A to part 3, section 5, Tables 1 through 4 are removed.

Appendix A to Part 3--Risk-Based Capital Guidelines

Section 1. Purpose, Applicability of Guidelines and Definitions

* * * * *
(c) * * *
* * * * *
(3) Asset-backed commercial paper program means a program that
primarily issues externally rated commercial paper backed by assets or
other exposures held in a bankruptcy-remote, special-purpose entity.
(4) Asset-backed commercial paper sponsor means a bank that:
(i) Establishes an asset-backed commercial paper program;
(ii) Approves the sellers permitted to participate in an asset-
backed commercial paper program;
(iii) Approves the asset pools to be purchased by an asset-backed
commercial paper program; or
(iv) Administers the asset-backed commercial paper program by
monitoring the assets, arranging for debt placement, compiling monthly
reports, or ensuring compliance with the program documents and with the
program's credit and investment policy.
* * * * *
(9) Commitment means any arrangement that obligates a national bank
to: (i) Purchase loans or securities; or (ii) extend credit in the form
of loans or leases, participations in loans or leases, overdraft
facilities, revolving credit facilities, home equity lines of credit,
liquidity facilities, or similar transactions.
* * * * *
(20) Liquidity facility means a legally binding commitment to
provide liquidity to various types of transactions, structures or
programs. A liquidity facility that supports asset-backed commercial
paper, in any amount, by lending to, or purchasing assets from any
structure, program, or conduit constitutes an asset-backed commercial
paper liquidity facility.
* * * * *

[[Page 44915]]

Section 2. Components of Capital

* * * * *
(a) * * *
* * * * *
(3) Minority interests in the equity accounts of consolidated
subsidiaries, except that the following are not included in Tier 1
capital or total capital:
(i) Minority interests in a small business investment company or
investment fund that holds nonfinancial equity investments and minority
interests in a subsidiary that is engaged in a nonfinancial activities
and is held under one of the legal authorities listed in section
1(c)(23) of this appendix A.
(ii) Minority interests in consolidated asset-backed commercial
paper programs sponsored by a bank if the consolidated assets are
excluded from risk-weighted assets pursuant to section 3(a)(5)(i) of
this appendix A.
* * * * *

Section 3. Risk Categories/Weights for On-Balance Sheet Assets and Off-
Balance Sheet Items

* * * * *
(a) * * *
* * * * *
(4) * * *
* * * * *
(iii) Asset-or mortgage backed securities that are externally rated
are risk weighted in accordance with section 4(d) of this appendix A.
* * * * *
(5) Asset-backed commercial paper programs subject to
consolidation. (i) A bank that qualifies as a primary beneficiary and
must consolidate an asset-backed commercial paper program as a variable
interest entity under generally accepted accounting principles may
exclude the consolidated asset-backed commercial paper program assets
from risk-weighted assets if the bank is the sponsor of the
consolidated asset-backed commercial paper program.
(ii) If a bank excludes such consolidated asset-backed commercial
paper program assets from risk-weighted assets, the bank must assess
the appropriate risk-based capital charge against any risk exposures of
the bank arising in connection with such asset-backed commercial paper
program, including direct credit substitutes, recourse obligations,
residual interests, asset-backed commercial paper liquidity facilities,
and loans, in accordance with section 3 and section 4 of this appendix
A.
(iii) If a bank either is not permitted to exclude consolidated
asset-backed commercial paper program assets or elects not to exclude
consolidated asset-backed commercial paper program assets from its
risk-weighted assets, the bank must assess a risk-based capital charge
based on the appropriate risk weight of the consolidated asset-backed
commercial paper program assets in accordance with sections 3(a) and 4
of this appendix A. Any direct credit substitutes and recourse
obligations (including residual interests and asset-backed commercial
paper liquidity facilities), and loans that sponsoring banks provide to
such asset-backed commercial paper programs are not subject to a
capital charge under this section 4 of this appendix A.
(iv) If a bank has multiple overlapping exposures (such as a
program-wide credit enhancement and an asset-backed commercial paper
liquidity facility) to an asset-backed commercial paper program that is
not consolidated for risk-based capital purposes, the bank must apply
the highest capital charge applicable to the exposures but is not
required to hold capital multiple times for the overlapping exposures
under section 4 of this appendix A.
(6) Other variable interest entities subject to consolidation. If a
bank is required to consolidate the assets of a variable interest
entity other than an asset-backed commercial paper program under
generally accepted accounting principles, the bank must assess a risk-
based capital charge based on the appropriate risk weight of the
consolidated assets in accordance with sections 3(a) and 4 of this
appendix A. Any direct credit substitutes and recourse obligations
(including residual interests), and loans that a bank may provide to
such a variable interest entity are not subject to any capital charge
under section 4 of this appendix A.
(b) * * * Second, the resulting credit equivalent amount is then
assigned to the proper risk category using the criteria regarding
obligors, guarantors, and collateral listed in section 3(a) of this
appendix A, or external credit rating in accordance with section 4(d),
if applicable. * * *
* * * * *
(2) * * *
(i) * * *
(ii) Unused portion of commitments with an original maturity
exceeding one-year; \17\ however, commitments that are asset-backed
commercial paper liquidity facilities must satisfy the eligibility
requirements under section 3(b)(6)(ii) of this appendix A;
---------------------------------------------------------------------------

\17\ Participations in commitments are treated in accordance
with section 4 of this Appendix A.
---------------------------------------------------------------------------

* * * * *
(4) 10 percent credit conversion factor. Unused portion of asset-
backed commercial paper liquidity facilities with an original maturity
of one year or less that satisfy the eligibility requirements under
section 3(b)(6)(ii) of this appendix A.
(5) * * * (i) Unused portion of commitments with an original
maturity of one year or less, but excluding any asset-backed commercial
paper liquidity facilities;
* * * * *
(6) Liquidity facility provided to asset-backed commercial paper.
(i) Noneligible asset-backed commercial paper liquidity facilities
treated as recourse or direct credit substitute. Unused portion of
asset-backed commercial paper liquidity facilities that do not meet the
criteria for an eligible liquidity facility provided to asset-backed
commercial paper in accordance with section 3(b)(6)(ii) of this
appendix A must be treated as recourse or as a direct credit
substitute, and assessed the appropriate risk-based capital charge in
accordance with section 4 of this appendix A.
(ii) Eligible asset-backed commercial paper liquidity facility.
Except as provided in section 3(b)(6)(iii) of this appendix A, in order
for the unused portion of an asset-backed commercial paper liquidity
facility to be eligible for either the 50 percent or 10 percent credit
conversion factors under section 3(b)(2)(ii) or 3(b)(4) of this
appendix A, the asset-backed commercial paper liquidity facility must
satisfy the following criteria:
(A) At the time of draw, the asset-backed commercial paper
liquidity facility must be subject to a asset quality test that:
(1) Precludes funding of assets that are 90 days or more past due
or in default; and
(2) If the assets that an asset-backed commercial paper liquidity
facility is required to fund are externally rated securities at the
time they are transferred into the program, the asset-backed commercial
paper liquidity facility must be used to fund only securities that are
externally rated investment grade at the time of funding. If the assets
are not externally rated at the time they are transferred into the
program, then they are not subject to this investment grade
requirement.
(B) The asset-backed commercial paper liquidity facility must
provide that, prior to any draws, the bank's funding obligation is
reduced to cover only those assets that satisfy the funding criteria
under the asset quality test as provided in section 3(b)(6)(ii)(A) of
this appendix A.

[[Page 44916]]

(iii) Exception to eligibility requirements for assets guaranteed
by the United States Government or its agencies, or the central
government of an OECD country. Notwithstanding the eligibility
requirements for asset-backed commercial paper program liquidity
facilities in section 3(b)(6)(ii), the unused portion of an asset-
backed commercial paper liquidity facility may still qualify for either
the 50 percent or 10 percent credit conversion factors under section
3(b)(2)(ii) or 3(b)(4) of this appendix A, if the assets required to be
funded by the asset-back commercial paper liquidity facility are
guaranteed, either conditionally or unconditionally, by the United
States Government or its agencies, or the central government of an OECD
country.
(iv) Transition period for asset-backed commercial paper liquidity
facilities. Notwithstanding the eligibility requirements for asset-
backed commercial paper program liquidity facilities in section
3(b)(6)(i) of this appendix A, the unused portion of an asset-backed
commercial paper liquidity will be treated as eligible liquidity
facilities pursuant to section 3(b)(6)(ii) of this appendix A
regardless of their compliance with the definition of eligible
liquidity facilities until September 30, 2005. On that date and
thereafter, the unused portions of asset-backed commercial paper
liquidity facilities that do not meet the eligibility requirements in
section 3(b)(6)(i) of this appendix A will be treated as recourse
obligations or direct credit substitutes.
* * * * *

Section 4. Recourse, Direct Credit Substitutes and Positions in
Securitizations

(a) * * *
* * * * *
(4) * * *
* * * * *
(vi) Purchased loan servicing assets if the servicer is responsible
for credit losses or if the servicer makes or assumes credit-enhancing
representations and warranties with respect to the loans serviced.
Mortgage servicer case advances that meet the conditions of section
4(a)(8)(i) and (ii) of this appendix A, are not direct credit
substitutes;
(vii) Clean-up calls on third-party assets. Clean-up calls that are
10% or less of the original pool balance and that are exercisable at
the option of the bank are not direct credit substitutes; and (viii)
Unused portion of noneligible asset-backed commercial paper liquidity
facilities.
* * * * *
(11) * * *
* * * * *
(vi) Credit derivatives issued that absorb more than the bank's pro
rata share of losses from the transferred assets;
(vii) Clean-up calls. Clean-up calls that are 10% or less of the
original pool balance and that are exercisable at the option of the
bank are not recourse arrangements; and
(viii) Noneligible asset-backed commercial paper liquidity
facilities.
* * * * *

0
7. Appendix B to part 3 is amended by adding a new sentence at the end
of section 2, paragraph (a) to read as follows:

Appendix B to Part 3--Risk-Based Capital Guidelines; Market Risk
Adjustment

* * * * *

Section 2. Definitions

* * * * *
(a) * * * Asset backed commercial paper liquidity facilities, in
form or in substance, in a bank's trading account are excluded from
covered positions, and instead, are subject to the risk-based
capital requirements as provided in appendix A of this part.
* * * * *

Dated: July 13, 2004.
John D. Hawke, Jr.,
Comptroller of the Currency.

FEDERAL RESERVE SYSTEM

12 CFR Chapter II

Authority and Issuance

0
For the reasons set forth in the joint preamble, the Board of Governors
of the Federal Reserve System amends parts 208 and 225 of chapter II of
title 12 of the Code of Federal Regulations as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)

0
1. The authority citation for part 208 continues to read as follows:

Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j),
1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 1835a, 1882,
2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b,
78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C.
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

0
2. In Appendix A to part 208, the following amendments are made:
0
a. Section II.A.1.c. is revised.
0
b. Section III.B.3.a., Definitions, is revised.
0
c. Section III.B.6. is revised.
0
d. In section III.D--
0
i. The third sentence of the introductory paragraph is revised and the
last sentence is removed.
0
ii. In paragraph 2., Items with a 50 percent conversion factor, the
fourth undesignated paragraph is removed, the five remaining
undesignated paragraphs are designated as 2.a. through 2.e., and the
newly designated paragraph 2.c. is revised.
0
iii. Paragraph 4., Items with a zero percent conversion factor, is
redesignated as paragraph 5. and a new paragraph 4., Items with a 10
percent conversion factor, is added.
0
iv. The first sentence in redesignated paragraph 5., Items with a zero
percent conversion factor, is revised.
0
v. Footnote 54 is removed and reserved.
0
e. Attachments IV, V, and VI are removed.

Appendix A To Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure

[[Page 44917]]

"protection purchaser") to transfer the credit risk of an asset or
off-balance sheet credit exposure to another party (the "protection
provider"). The value of a credit derivative is dependent, at least
in part, on the credit performance of the "reference asset."
ii. Credit-enhancing representations and warranties means
representations and warranties that are made or assumed in
connection with a transfer of assets (including loan servicing
assets) and that obligate the bank to protect investors from losses
arising from credit risk in the assets transferred or the loans
serviced. Credit-enhancing representations and warranties include
promises to protect a party from losses resulting from the default
or nonperformance of another party or from an insufficiency in the
value of the collateral. Credit-enhancing representations and
warranties do not include:
1. Early default clauses and similar warranties that permit the
return of, or premium refund clauses covering, 1-4 family
residential first mortgage loans that qualify for a 50 percent risk
weight for a period not to exceed 120 days from the date of
transfer. These warranties may cover only those loans that were
originated within 1 year of the date of transfer;
2. Premium refund clauses that cover assets guaranteed, in whole
or in part, by the U.S. Government, a U.S. Government agency or a
government-sponsored enterprise, provided the premium refund clauses
are for a period not to exceed 120 days from the date of transfer;
or
3. Warranties that permit the return of assets in instances of
misrepresentation, fraud or incomplete documentation.
iii. Direct credit substitute means an arrangement in which a
bank assumes, in form or in substance, credit risk associated with
an on- or off-balance sheet credit exposure that was not previously
owned by the bank (third-party asset) and the risk assumed by the
bank exceeds the pro rata share of the bank's interest in the third-
party asset. If the bank has no claim on the third-party asset, then
the bank's assumption of any credit risk with respect to the third
party asset is a direct credit substitute. Direct credit substitutes
include, but are not limited to:
1. Financial standby letters of credit that support financial
claims on a third party that exceed a bank's pro rata share of
losses in the financial claim;
2. Guarantees, surety arrangements, credit derivatives, and
similar instruments backing financial claims that exceed a bank's
pro rata share in the financial claim;
3. Purchased subordinated interests or securities that absorb
more than their pro rata share of losses from the underlying assets;
4. Credit derivative contracts under which the bank assumes more
than its pro rata share of credit risk on a third party exposure;
5. Loans or lines of credit that provide credit enhancement for
the financial obligations of an account party;
6. Purchased loan servicing assets if the servicer is
responsible for credit losses or if the servicer makes or assumes
credit-enhancing representations and warranties with respect to the
loans serviced. Mortgage servicer cash advances that meet the
conditions of section III.B.3.a.viii. of this appendix are not
direct credit substitutes;
7. Clean-up calls on third party assets. Clean-up calls that are
10 percent or less of the original pool balance that are exercisable
at the option of the bank are not direct credit substitutes; and
8. Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
iv. Eligible ABCP liquidity facility means a liquidity facility
supporting ABCP, in form or in substance, that is subject to an
asset quality test at the time of draw that precludes funding
against assets that are 90 days or more past due or in default. In
addition, if the assets that an eligible ABCP liquidity facility is
required to fund against are externally rated assets or exposures at
the inception of the facility, the facility can be used to fund only
those assets or exposures that are externally rated investment grade
at the time of funding. Notwithstanding the eligibility requirements
set forth in the two preceding sentences, a liquidity facility will
be considered an eligible ABCP liquidity facility if the assets that
are funded under the liquidity facility and which do not meet the
eligibility requirements are guaranteed, either conditionally or
unconditionally, by the U.S. government or its agencies, or by the
central government of an OECD country.
v. Externally rated means that an instrument or obligation has
received a credit rating from a nationally recognized statistical
rating organization.
vi. Face amount means the notional principal, or face value,
amount of an off-balance sheet item; the amortized cost of an asset
not held for trading purposes; and the fair value of a trading
asset.
vii. Financial asset means cash or other monetary instrument,
evidence of debt, evidence of an ownership interest in an entity, or
a contract that conveys a right to receive or exchange cash or
another financial instrument from another party.
viii. Financial standby letter of credit means a letter of
credit or similar arrangement that represents an irrevocable
obligation to a third-party beneficiary:
1. To repay money borrowed by, or advanced to, or for the
account of, a second party (the account party), or
2. To make payment on behalf of the account party, in the event
that the account party fails to fulfill its obligation to the
beneficiary.
ix. Liquidity Facility means a legally binding commitment to
provide liquidity support to ABCP by lending to, or purchasing
assets from, any structure, program, or conduit in the event that
funds are required to repay maturing ABCP.
x. Mortgage servicer cash advance means funds that a residential
mortgage loan servicer advances to ensure an uninterrupted flow of
payments, including advances made to cover foreclosure costs or
other expenses to facilitate the timely collection of the loan. A
mortgage servicer cash advance is not a recourse obligation or a
direct credit substitute if:
1. The servicer is entitled to full reimbursement and this right
is not subordinated to other claims on the cash flows from the
underlying asset pool; or
2. For any one loan, the servicer's obligation to make
nonreimbursable advances is contractually limited to an
insignificant amount of the outstanding principal balance of that
loan.
xi. Nationally recognized statistical rating organization
(NRSRO) means an entity recognized by the Division of Market
Regulation of the Securities and Exchange Commission (or any
successor Division) (Commission) as a nationally recognized
statistical rating organization for various purposes, including the
Commission's uniform net capital requirements for brokers and
dealers.
xii. Recourse means the retention, by a bank, in form or in
substance, of any credit risk directly or indirectly associated with
an asset it has transferred and sold that exceeds a pro rata share
of the bank's claim on the asset. If a bank has no claim on a
transferred asset, then the retention of any risk of credit loss is
recourse. A recourse obligation typically arises when a bank
transfers assets and retains an explicit obligation to repurchase
the assets or absorb losses due to a default on the payment of
principal or interest or any other deficiency in the performance of
the underlying obligor or some other party. Recourse may also exist
implicitly if a bank provides credit enhancement beyond any
contractual obligation to support assets it has sold. The following
are examples of recourse arrangements:
1. Credit-enhancing representations and warranties made on the
transferred assets;
2. Loan servicing assets retained pursuant to an agreement under
which the bank will be responsible for credit losses associated with
the loans being serviced. Mortgage servicer cash advances that meet
the conditions of section III.B.3.a.x. of this appendix are not
recourse arrangements;
3. Retained subordinated interests that absorb more than their
pro rata share of losses from the underlying assets;
4. Assets sold under an agreement to repurchase, if the assets
are not already included on the balance sheet;
5. Loan strips sold without contractual recourse where the
maturity of the transferred loan is shorter than the maturity of the
commitment under which the loan is drawn;
6. Credit derivatives issued that absorb more than the bank's
pro rata share of losses from the transferred assets;
7. Clean-up calls at inception that are greater than 10 percent
of the balance of the original pool of transferred loans. Clean-up
calls that are 10 percent or less of the original pool balance that
are exercisable at the option of the bank are not recourse
arrangements; and
8. Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
xiii. Residual interest means any on-balance sheet asset that
represents an interest (including a beneficial interest) created by
a transfer that qualifies as a sale (in accordance with generally
accepted accounting principles) of financial assets, whether through
a securitization or otherwise, and that exposes the bank to credit
risk directly

[[Page 44918]]

or indirectly associated with the transferred assets that exceeds a
pro rata share of the bank's claim on the assets, whether through
subordination provisions or other credit enhancement techniques.
Residual interests generally include credit-enhancing I/Os, spread
accounts, cash collateral accounts, retained subordinated interests,
other forms of over-collateralization, and similar assets that
function as a credit enhancement. Residual interests further include
those exposures that, in substance, cause the bank to retain the
credit risk of an asset or exposure that had qualified as a residual
interest before it was sold. Residual interests generally do not
include interests purchased from a third party, except that
purchased credit-enhancing I/Os are residual interests for purposes
of this appendix.
xiv. Risk participation means a participation in which the
originating party remains liable to the beneficiary for the full
amount of an obligation (e.g., a direct credit substitute)
notwithstanding that another party has acquired a participation in
that obligation.
xv. Securitization means the pooling and repackaging by a
special purpose entity of assets or other credit exposures into
securities that can be sold to investors. Securitization includes
transactions that create stratified credit risk positions whose
performance is dependent upon an underlying pool of credit
exposures, including loans and commitments.
xvi. Sponsor means a bank that establishes an ABCP program;
approves the sellers permitted to participate in the program;
approves the asset pools to be purchased by the program; or
administers the program by monitoring the assets, arranging for debt
placement, compiling monthly reports, or ensuring compliance with
the program documents and with the program's credit and investment
policy.
xvii. Structured finance program means a program where
receivable interests and asset-backed securities issued by multiple
participants are purchased by a special purpose entity that
repackages those exposures into securities that can be sold to
investors. Structured finance programs allocate credit risks,
generally, between the participants and credit enhancement provided
to the program.
xviii. Traded position means a position that is externally rated
and is retained, assumed, or issued in connection with an asset
securitization, where there is a reasonable expectation that, in the
near future, the rating will be relied upon by unaffiliated
investors to purchase the position; or an unaffiliated third party
to enter into a transaction involving the position, such as a
purchase, loan, or repurchase agreement.
* * * * *
6. Asset-backed commercial paper programs. a. An asset-backed
commercial paper (ABCP) program means a program that primarily
issues externally rated commercial paper backed by assets or other
exposures held in a bankruptcy-remote, special purpose entity.
b. A bank that qualifies as a primary beneficiary and must
consolidate an ABCP program that is defined as a variable interest
entity under GAAP may exclude the consolidated ABCP program assets
from risk-weighted assets provided that the bank is the sponsor of
the ABCP program. If a bank excludes such consolidated ABCP program
assets, the bank must assess the appropriate risk-based capital
charge against any exposures of the bank arising in connection with
such ABCP programs, including direct credit substitutes, recourse
obligations, residual interests, liquidity facilities, and loans, in
accordance with sections III.B.3., III.C., and III.D. of this
appendix.
c. If a bank has multiple overlapping exposures (such as a
program-wide credit enhancement and multiple pool-specific liquidity
facilities) to an ABCP program that is not consolidated for risk-
based capital purposes, the bank is not required to hold duplicative
risk-based capital under this appendix against the overlapping
position. Instead, the bank should apply to the overlapping position
the applicable risk-based capital treatment that results in the
highest capital charge.
* * * * *
III. * * *
D. * * * The resultant credit equivalent amount is assigned to
the appropriate risk category according to the obligor or, if
relevant, the guarantor, the nature of any collateral, or external
credit ratings.\47\
---------------------------------------------------------------------------

\47\ The sufficiency of collateral and guarantees for off-
balance-sheet items is determined by the market value of the
collateral or the amount of the guarantee in relation to the face
amount of the item, except for derivative contracts, for which this
determination is generally made in relation to the credit equivalent
amount. Collateral and guarantees are subject to the same provisions
noted under section III.B of this appendix A.
---------------------------------------------------------------------------

* * * * *
2. Items with a 50 percent conversion factor. * * *
c.i. Commitments are defined as any legally binding arrangements
that obligate a bank to extend credit in the form of loans or
leases; to purchase loans, securities, or other assets; or to
participate in loans and leases. They also include overdraft
facilities, revolving credit, home equity and mortgage lines of
credit, eligible ABCP liquidity facilities, and similar
transactions. Normally, commitments involve a written contract or
agreement and a commitment fee, or some other form of consideration.
Commitments are included in weighted-risk assets regardless of
whether they contain "material adverse change" clauses or other
provisions that are intended to relieve the issuer of its funding
obligation under certain conditions. In the case of commitments
structured as syndications, where the bank is obligated solely for
its pro rata share, only the bank's proportional share of the
syndicated commitment is taken into account in calculating the risk-
based capital ratio.
ii Banks that are subject to the market risk rules are required
to convert the notional amount of eligible ABCP liquidity
facilities, in form or in substance, with an original maturity of
over one year that are carried in the trading account at 50 percent
to determine the appropriate credit equivalent amount even though
those facilities are structured or characterized as derivatives or
other trading book assets. Liquidity facilities that support ABCP,
in form or in substance, (including those positions to which the
market risk rules may not be applied as set forth in section 2(a) of
appendix E to part 208) that are not eligible ABCP liquidity
facilities are to be considered recourse obligations or direct
credit substitutes, and assessed the appropriate risk-based capital
treatment in accordance with section III.B.3. of this appendix.
* * * * *
4. Items with a 10 percent conversion factor. a. Unused portions
of eligible ABCP liquidity facilities with an original maturity of
one year or less are converted at 10 percent.
b. Banks that are subject to the market risk rules are required
to convert the notional amount of eligible ABCP liquidity
facilities, in form or in substance, with an original maturity of
one year or less that are carried in the trading account at 10
percent to determine the appropriate credit equivalent amount even
though those facilities are structured or characterized as
derivatives or other trading book assets. Liquidity facilities that
support ABCP, in form or in substance, (including those positions to
which the market risk rules may not be applied as set forth in
section 2(a) of appendix E of this part) that are not eligible ABCP
liquidity facilities are to be considered recourse obligations or
direct credit substitutes and assessed the appropriate risk-based
capital requirement in accordance with section III.B.3. of this
appendix.
5. * * * These include unused portions of commitments (with the
exception of eligible ABCP liquidity facilities) with an original
maturity of one year or less,\54\ or which are unconditionally
cancelable at any time, provided a separate credit decision is made
before each drawing under the facility. * * *
---------------------------------------------------------------------------

\54\ [Reserved].
---------------------------------------------------------------------------

* * * * *

0
3. Amend Appendix E to part 208 by adding two new sentences at the end
of section 2(a) to read as follows:

Appendix E to Part 208--Capital Adequacy Guidelines for State Member
Banks; Market Risk Measure

* * * * *

Section 2. Definitions * * *

(a) * * * Covered positions exclude all positions in a bank's
trading account that, in form or in substance, act as liquidity
facilities that provide liquidity support to asset-backed commercial
paper. Such excluded positions are subject to the risk-based capital
requirements set forth in appendix A of this part.
* * * * *

[[Page 44919]]

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)

0
1. The authority citation for part 225 continues to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843( c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907,
and 3909; 15 U.S.C. 6801 and 6805.

0
2. In Appendix A to part 225, the following amendments are made:
0
a. Section II.A.1.c. is revised.
0
b. Section III.B.3.a., Definitions, is revised.
0
c. Section III.B.6. is revised.
0
d. In section III.D--
0
i. The third sentence of the introductory paragraph is revised and the
last sentence is removed.
0
ii. In paragraph 2., Items with a 50 percent conversion factor, the
fourth undesignated paragraph is removed, the five remaining
undesignated paragraphs are designated as 2.a. through 2.e., and the
newly designated paragraph 2.c. is revised.
0
iii. Paragraph 4, Items with a zero percent conversion factor, is
redesignated as paragraph 5. and a new paragraph 4. is added.
0
iv. The first sentence is redesignated paragraph 5., Items with a zero
percent conversion factor, is revised.
d. Attachments IV, V, and VI are removed.

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure

* * * * *
II. * * *
A. * * *
1. * * *
c. Minority interest in equity accounts of consolidated
subsidiaries. This element is included in tier 1 capital because, as
a general rule, it represents equity that is freely available to
absorb losses in operating subsidiaries whose assets are included in
a banking organization's risk-weighted asset base. While not subject
to an explicit sublimit within tier 1, banking organizations are
expected to avoid using minority interest in the equity accounts of
consolidated subsidiaries as an avenue for introducing into their
capital structures elements that might not otherwise qualify as tier
1 capital or that would, in effect, result in an excessive reliance
on preferred stock within tier 1. Minority interests in small
business investment companies, investment funds that hold
nonfinancial equity investments (as defined in section II.B.5.b. of
this appendix A), and subsidiaries engaged in nonfinancial
activities are not included in the banking organization's tier 1 or
total capital base if the organization's interest in the company or
fund is held under one of the legal authorities listed in section
II.B.5.b. In addition, minority interests in consolidated asset-
backed commercial paper programs (ABCP) (as defined in section
III.B.6. of this appendix A) that are sponsored by a banking
organization are not to be included in the organization's tier 1 or
total capital base if the bank holding company excludes the
consolidated assets of such programs from risk-weighted assets
pursuant to section III.B.6. of this appendix.
* * * * *
III. * * *
B. * * *
3. * * *
a. Definitions--i. Credit derivative means a contract that
allows one party (the "protection purchaser") to transfer the
credit risk of an asset or off-balance sheet credit exposure to
another party (the "protection provider"). The value of a credit
derivative is dependent, at least in part, on the credit performance
of the "reference asset."
ii. Credit-enhancing representations and warranties means
representations and warranties that are made or assumed in
connection with a transfer of assets (including loan servicing
assets) and that obligate the bank holding company to protect
investors from losses arising from credit risk in the assets
transferred or the loans serviced. Credit-enhancing representations
and warranties include promises to protect a party from losses
resulting from the default or nonperformance of another party or
from an insufficiency in the value of the collateral. Credit-
enhancing representations and warranties do not include:
1. Early default clauses and similar warranties that permit the
return of, or premium refund clauses covering, 1-4 family
residential first mortgage loans that qualify for a 50 percent risk
weight for a period not to exceed 120 days from the date of
transfer. These warranties may cover only those loans that were
originated within 1 year of the date of transfer;
2. Premium refund clauses that cover assets guaranteed, in whole
or in part, by the U.S. Government, a U.S. Government agency or a
government-sponsored enterprise, provided the premium refund clauses
are for a period not to exceed 120 days from the date of transfer;
or
3. Warranties that permit the return of assets in instances of
misrepresentation, fraud or incomplete documentation.
iii. Direct credit substitute means an arrangement in which a
bank holding company assumes, in form or in substance, credit risk
associated with an on- or off-balance sheet credit exposure that was
not previously owned by the bank holding company (third-party asset)
and the risk assumed by the bank holding company exceeds the pro
rata share of the bank holding company's interest in the third-party
asset. If the bank holding company has no claim on the third-party
asset, then the bank holding company's assumption of any credit risk
with respect to the third party asset is a direct credit substitute.
Direct credit substitutes include, but are not limited to:
1. Financial standby letters of credit that support financial
claims on a third party that exceed a bank holding company's pro
rata share of losses in the financial claim;
2. Guarantees, surety arrangements, credit derivatives, and
similar instruments backing financial claims that exceed a bank
holding company's pro rata share in the financial claim;
3. Purchased subordinated interests or securities that absorb
more than their pro rata share of losses from the underlying assets;
4. Credit derivative contracts under which the bank holding
company assumes more than its pro rata share of credit risk on a
third party exposure;
5. Loans or lines of credit that provide credit enhancement for
the financial obligations of an account party;
6. Purchased loan servicing assets if the servicer is
responsible for credit losses or if the servicer makes or assumes
credit-enhancing representations and warranties with respect to the
loans serviced. Mortgage servicer cash advances that meet the
conditions of section III.B.3.a.viii. of this appendix are not
direct credit substitutes;
7. Clean-up calls on third party assets. Clean-up calls that are
10 percent or less of the original pool balance that are exercisable
at the option of the bank holding company are not direct credit
substitutes; and
8. Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
iv. Eligible ABCP liquidity facility means a liquidity facility
supporting ABCP, in form or in substance, that is subject to an
asset quality test at the time of draw that precludes funding
against assets that are 90 days or more past due or in default. In
addition, if the assets that an eligible ABCP liquidity facility is
required to fund against are externally rated assets or exposures at
the inception of the facility, the facility can be used to fund only
those assets or exposures that are externally rated investment grade
at the time of funding. Notwithstanding the eligibility requirements
set forth in the two preceding sentences, a liquidity facility will
be considered an eligible ABCP liquidity facility if the assets that
are funded under the liquidity facility and which do not meet the
eligibility requirements are guaranteed, either conditionally or
unconditionally, by the U.S. government or its agencies, or by the
central government of an OECD country.
v. Externally rated means that an instrument or obligation has
received a credit rating from a nationally recognized statistical
rating organization.
vi. Face amount means the notional principal, or face value,
amount of an off-balance sheet item; the amortized cost of an asset
not held for trading purposes; and the fair value of a trading
asset.
vii. Financial asset means cash or other monetary instrument,
evidence of debt, evidence of an ownership interest in an entity, or
a contract that conveys a right to receive or exchange cash or
another financial instrument from another party.
viii. Financial standby letter of credit means a letter of
credit or similar arrangement that represents an irrevocable
obligation to a third-party beneficiary:
1. To repay money borrowed by, or advanced to, or for the
account of, a second party (the account party), or
2. To make payment on behalf of the account party, in the event
that the account party fails to fulfill its obligation to the
beneficiary.

[[Page 44920]]

ix. Liquidity Facility means a legally binding commitment to
provide liquidity support to ABCP by lending to, or purchasing
assets from, any structure, program, or conduit in the event that
funds are required to repay maturing ABCP.
x. Mortgage servicer cash advance means funds that a residential
mortgage loan servicer advances to ensure an uninterrupted flow of
payments, including advances made to cover foreclosure costs or
other expenses to facilitate the timely collection of the loan. A
mortgage servicer cash advance is not a recourse obligation or a
direct credit substitute if:
1. The servicer is entitled to full reimbursement and this right
is not subordinated to other claims on the cash flows from the
underlying asset pool; or
2. For any one loan, the servicer's obligation to make
nonreimbursable advances is contractually limited to an
insignificant amount of the outstanding principal balance of that
loan.
xi. Nationally recognized statistical rating organization
(NRSRO) means an entity recognized by the Division of Market
Regulation of the Securities and Exchange Commission (or any
successor Division) (Commission) as a nationally recognized
statistical rating organization for various purposes, including the
Commission's uniform net capital requirements for brokers and
dealers.
xii. Recourse means the retention, by a bank holding company, in
form or in substance, of any credit risk directly or indirectly
associated with an asset it has transferred and sold that exceeds a
pro rata share of the banking organization's claim on the asset. If
a banking organization has no claim on a transferred asset, then the
retention of any risk of credit loss is recourse. A recourse
obligation typically arises when a bank holding company transfers
assets and retains an explicit obligation to repurchase the assets
or absorb losses due to a default on the payment of principal or
interest or any other deficiency in the performance of the
underlying obligor or some other party. Recourse may also exist
implicitly if a bank holding company provides credit enhancement
beyond any contractual obligation to support assets it has sold. The
following are examples of recourse arrangements:
1. Credit-enhancing representations and warranties made on the
transferred assets;
2. Loan servicing assets retained pursuant to an agreement under
which the bank holding company will be responsible for credit losses
associated with the loans being serviced. Mortgage servicer cash
advances that meet the conditions of section III.B.3.a.x. of this
appendix are not recourse arrangements;
3. Retained subordinated interests that absorb more than their
pro rata share of losses from the underlying assets;
4. Assets sold under an agreement to repurchase, if the assets
are not already included on the balance sheet;
5. Loan strips sold without contractual recourse where the
maturity of the transferred loan is shorter than the maturity of the
commitment under which the loan is drawn;
6. Credit derivatives issued that absorb more than the bank
holding company's pro rata share of losses from the transferred
assets;
7. Clean-up calls at inception that are greater than 10 percent
of the balance of the original pool of transferred loans. Clean-up
calls that are 10 percent or less of the original pool balance that
are exercisable at the option of the bank holding company are not
recourse arrangements; and
8. Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
xiii. Residual interest means any on-balance sheet asset that
represents an interest (including a beneficial interest) created by
a transfer that qualifies as a sale (in accordance with generally
accepted accounting principles) of financial assets, whether through
a securitization or otherwise, and that exposes the bank holding
company to credit risk directly or indirectly associated with the
transferred assets that exceeds a pro rata share of the bank holding
company's claim on the assets, whether through subordination
provisions or other credit enhancement techniques. Residual
interests generally include credit-enhancing I/Os, spread accounts,
cash collateral accounts, retained subordinated interests, other
forms of over-collateralization, and similar assets that function as
a credit enhancement. Residual interests further include those
exposures that, in substance, cause the bank holding company to
retain the credit risk of an asset or exposure that had qualified as
a residual interest before it was sold. Residual interests generally
do not include interests purchased from a third party, except that
purchased credit-enhancing I/Os are residual interests for purposes
of this appendix.
xiv. Risk participation means a participation in which the
originating party remains liable to the beneficiary for the full
amount of an obligation (e.g., a direct credit substitute)
notwithstanding that another party has acquired a participation in
that obligation.
xv. Securitization means the pooling and repackaging by a
special purpose entity of assets or other credit exposures into
securities that can be sold to investors. Securitization includes
transactions that create stratified credit risk positions whose
performance is dependent upon an underlying pool of credit
exposures, including loans and commitments.
xvi. Sponsor means a bank holding company that establishes an
ABCP program; approves the sellers permitted to participate in the
program; approves the asset pools to be purchased by the program; or
administers the program by monitoring the assets, arranging for debt
placement, compiling monthly reports, or ensuring compliance with
the program documents and with the program's credit and investment
policy.
xvii. Structured finance program means a program where
receivable interests and asset-backed securities issued by multiple
participants are purchased by a special purpose entity that
repackages those exposures into securities that can be sold to
investors. Structured finance programs allocate credit risks,
generally, between the participants and credit enhancement provided
to the program.
xviii. Traded position means a position that is externally rated
and is retained, assumed, or issued in connection with an asset
securitization, where there is a reasonable expectation that, in the
near future, the rating will be relied upon by unaffiliated
investors to purchase the position; or an unaffiliated third party
to enter into a transaction involving the position, such as a
purchase, loan, or repurchase agreement.
* * * * *
6. Asset-backed commercial paper programs. a. An asset-backed
commercial paper (ABCP) program means a program that primarily
issues externally rated commercial paper backed by assets or
exposures held in a bankruptcy-remote, special purpose entity.
b. A bank holding company that qualifies as a primary
beneficiary and must consolidate an ABCP program that is defined as
a variable interest entity under GAAP may exclude the consolidated
ABCP program assets from risk-weighted assets provided that the bank
holding company is the sponsor of the ABCP program. If a bank
holding company excludes such consolidated ABCP program assets, the
bank holding company must assess the appropriate risk-based capital
charge against any exposures of the organization arising in
connection with such ABCP programs, including direct credit
substitutes, recourse obligations, residual interests, liquidity
facilities, and loans, in accordance with sections III.B.3., III.C.,
and III.D. of this appendix.
c. If a bank holding company has multiple overlapping exposures
(such as a program-wide credit enhancement and multiple pool-
specific liquidity facilities) to an ABCP program that is not
consolidated for risk-based capital purposes, the bank holding
company is not required to hold duplicative risk-based capital under
this appendix against the overlapping position. Instead, the bank
holding company should apply to the overlapping position the
applicable risk-based capital treatment that results in the highest
capital charge.
* * * * *
III. * * *
D. * * * The resultant credit equivalent amount is assigned to
the appropriate risk category according to the obligor or, if
relevant, the guarantor, the nature of any collateral, or external
credit ratings.\51\
---------------------------------------------------------------------------

\51\ The sufficiency of collateral and guarantees for off-
balance-sheet items is determined by the market value of the
collateral or the amount of the guarantee in relation to the face
amount of the item, except for derivative contracts, for which this
determination is generally made in relation to the credit equivalent
amount. Collateral and guarantees are subject to the same provisions
noted under section III.B of this appendix A.
---------------------------------------------------------------------------

* * * * *
2. Items with a 50 percent conversion factor. * * *
c.i. Commitments are defined as any legally binding arrangements
that obligate a banking organization to extend credit in the form of
loans or leases; to purchase loans, securities, or other assets; or
to participate in

[[Page 44921]]

loans and leases. They also include overdraft facilities, revolving
credit, home equity and mortgage lines of credit, eligible ABCP
liquidity facilities, and similar transactions. Normally,
commitments involve a written contract or agreement and a commitment
fee, or some other form of consideration. Commitments are included
in weighted-risk assets regardless of whether they contain
"material adverse change" clauses or other provisions that are
intended to relieve the issuer of its funding obligation under
certain conditions. In the case of commitments structured as
syndications, where the banking organization is obligated solely for
its pro rata share, only the organization's proportional share of
the syndicated commitment is taken into account in calculating the
risk-based capital ratio.
ii. Banking organizations that are subject to the market risk
rules are required to convert the notional amount of eligible ABCP
liquidity facilities, in form or in substance, with an original
maturity of over one year that are carried in the trading account at
50 percent to determine the appropriate credit equivalent amount
even though those facilities are structured or characterized as
derivatives or other trading book assets. Liquidity facilities that
support ABCP, in form or in substance, (including those positions to
which the market risk rules may not be applied as set forth in
section 2(a) of appendix E of this part) that are not eligible ABCP
liquidity facilities are to be considered recourse obligations or
direct credit substitutes, and assessed the appropriate risk-based
capital treatment in accordance with section III.B.3. of this
appendix.
* * * * *
4. Items with a 10 percent conversion factor. a. Unused portions
of eligible ABCP liquidity facilities with an original maturity of
one year or less also are converted at 10 percent.
b. Banking organizations that are subject to the market risk
rules are required to convert the notional amount of eligible ABCP
liquidity facilities, in form or in substance, with an original
maturity of one year or less that are carried in the trading account
at 10 percent to determine the appropriate credit equivalent amount
even though those facilities are structured or characterized as
derivatives or other trading book assets. Liquidity facilities that
support ABCP, in form or in substance, (including those positions to
which the market risk rules may not be applied as set forth in
section 2(a) of appendix E of this part) that are not eligible ABCP
liquidity facilities are to be considered recourse obligations or
direct credit substitutes and assessed the appropriate risk-based
capital requirement in accordance with section III.B.3. of this
appendix.
5. * * * These include unused portions of commitments (with the
exception of eligible ABCP liquidity facilities) with an original
maturity of one year or less, or which are unconditionally
cancelable at any time, provided a separate credit decision is made
before each drawing under the facility. * * *
* * * * *

0
3. Amend Appendix E to part 225 by adding two new sentences at the end
of section 2(a) to read as follows:

Appendix E To Part 225--Capital Adequacy Guidelines for Bank Holding
Companies; Market Risk Measure

* * * * *

Section 2. Definitions * * *

(a) * * * Covered positions exclude all positions in a banking
organization's trading account that, in form or in substance, act as
liquidity facilities that provide liquidity support to asset-backed
commercial paper. Such excluded positions are subject to the risk-based
capital requirements set forth in appendix A of this part.
* * * * *

By order of the Board of Governors of the Federal Reserve
System, July 19, 2004.
Jennifer J. Johnson,
Secretary of the Board.

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

0
For the reasons set forth in the joint preamble, the Board of Directors
of the Federal Deposit Insurance Corporation amends part 325 of chapter
III of title 12 of the Code of Federal Regulations as follows:

PART 325--CAPITAL MAINTENANCE

0
1. The authority citation for part 325 continues to read as follows:

Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.
2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended
by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note).

0
2. In Appendix A to part 325, the following amendments are made:
0
a. Section I.A.1. is revised.
0
b. Section II.B.5(a), Definitions, is revised.
0
c. Section II.B.6. is revised.
0
d. In section II.D--
0
i. The third sentence of the introductory paragraph is revised and the
last sentence is removed;
0
ii. In paragraph 2., Items With a 50 Percent Conversion Factor, the
five undesignated paragraphs are designated as 2.a. through 2.e., the
newly designated paragraph 2.c. is revised, and the second sentence of
the newly designated paragraph 2.d. is revised;
0
iii. Paragraph 4., Items With a Zero Percent Conversion Factor, is
redesignated as paragraph 5. and a new paragraph 4., Items With a 10
Percent Conversion Factor, is added; and
0
iv. The first sentence in redesignated paragraph 5., Items With a Zero
Percent Conversion Factor, is revised.
0
e. Tables III and IV are removed.

Appendix A To Part 325--Statement of Policy on Risk-Based Capital

* * * * *
I. * * *
A.* * *
1. Core capital elements (Tier 1) consists of:
i. Common stockholders' equity capital (includes common stock
and related surplus, undivided profits, disclosed capital reserves
that represent a segregation of undivided profits, and foreign
currency translation adjustments, less net unrealized holding losses
on available-for-sale equity securities with readily determinable
fair values);
ii. Noncumulative perpetual preferred stock,\2\ including any
related surplus; and
---------------------------------------------------------------------------

\2\ Preferred stock issues where the dividend is reset
periodically based, in whole or in part, upon the bank's current
credit standing, including but not limited to, auction rate, money
market or remarketable preferred stock, are assigned to Tier 2
capital, regardless of whether the dividends are cumulative or
noncumulative.
---------------------------------------------------------------------------

iii. Minority interests in the equity capital accounts of
consolidated subsidiaries.
(a) At least 50 percent of the qualifying total capital base
should consist of Tier 1 capital. Core (Tier 1) capital is defined
as the sum of core capital elements minus all intangible assets
(other than mortgage servicing assets, nonmortgage servicing assets
and purchased credit card relationships eligible for inclusion in
core capital pursuant to Sec. 325.5(f)),\3\ minus credit-enhancing
interest-only strips that are not eligible for inclusion in core
capital pursuant to Sec. 325.5(f), minus any disallowed deferred
tax assets, and minus any amount of nonfinancial equity investments
required to be deducted pursuant to section II.B.(6) of this
Appendix.
---------------------------------------------------------------------------

\3\ An exception is allowed for intangible assets that are
explicitly approved by the FDIC as part of the bank's regulatory
capital on a specific case basis. These intangibles will be included
in capital for risk-based capital purposes under the terms and
conditions that are specifically approved by the FDIC.
---------------------------------------------------------------------------

(b) Although nonvoting common stock, noncumulative perpetual
preferred stock, and minority interests in the equity capital
accounts of consolidated subsidiaries are normally included in Tier
1 capital, voting common stockholders' equity generally will be
expected to be the dominant form of Tier 1 capital. Thus, banks
should avoid undue reliance on nonvoting equity, preferred stock and
minority interests.
(c) Although minority interests in consolidated subsidiaries are
generally included in regulatory capital, exceptions to this general
rule will be made if the minority interests fail to provide
meaningful capital support to the consolidated bank. Such a
situation could arise if the minority interests are entitled to a
preferred claim on essentially low risk assets of the subsidiary.
Similarly, although credit-enhancing interest-only strips and
intangible assets in the form of mortgage servicing assets,
nonmortgage

[[Page 44922]]

servicing assets and purchased credit card relationships are
generally recognized for risk-based capital purposes, the deduction
of part or all of the credit-enhancing interest-only strips,
mortgage servicing assets, nonmortgage servicing assets and
purchased credit card relationships may be required if the carrying
amounts of these assets are excessive in relation to their market
value or the level of the bank's capital accounts. Credit-enhancing
interest-only strips, mortgage servicing assets, nonmortgage
servicing assets, purchased credit card relationships and deferred
tax assets that do not meet the conditions, limitations and
restrictions described in Sec. 325.5(f) and (g) of this part will
not be recognized for risk-based capital purposes.
(d) Minority interests in small business investment companies,
investment funds that hold nonfinancial equity investments (as
defined in section II.B.(6)(ii) of this appendix A), and
subsidiaries that are engaged in nonfinancial activities are not
included in the bank's Tier 1 or total capital base if the bank's
interest in the company or fund is held under one of the legal
authorities listed in section II.B.(6)(ii) of this appendix A. In
addition, minority interests in consolidated asset-backed commercial
paper programs (ABCP) that are sponsored by a bank are not to be
included in the bank's Tier 1 or total capital base if the bank
excludes the consolidated assets of such programs from risk-weighted
assets pursuant to section II.B.6. of this appendix.
* * * * *
II. * * *
B. * * *
5. * * *
a. Definitions--(1) Credit derivative means a contract that
allows one party (the "protection purchaser") to transfer the
credit risk of an asset or off-balance sheet credit exposure to
another party (the "protection provider"). The value of a credit
derivative is dependent, at least in part, on the credit performance
of the "reference asset."
(2) Credit-enhancing interest only strip is defined in Sec.
325.2(g).
(3) Credit-enhancing representations and warranties means
representations and warranties that are made or assumed in
connection with a transfer of assets (including loan servicing
assets) and that obligate the bank to protect investors from losses
arising from credit risk in the assets transferred or the loans
serviced. Credit-enhancing representations and warranties include
promises to protect a party from losses resulting from the default
or nonperformance of another party or from an insufficiency in the
value of the collateral. Credit-enhancing representations and
warranties do not include:
(i) Early default clauses and similar warranties that permit the
return of, or premium refund clauses covering, 1-4 family
residential first mortgage loans that qualify for a 50 percent risk
weight for a period not to exceed 120 days from the date of
transfer. These warranties may cover only those loans that were
originated within 1 year of the date of transfer;
(ii) Premium refund clauses that cover assets guaranteed, in
whole or in part, by the U.S. Government, a U.S. Government agency
or a government-sponsored enterprise, provided the premium refund
clauses are for a period not to exceed 120 days from the date of
transfer; or
(iii) Warranties that permit the return of assets in instances
of misrepresentation, fraud or incomplete documentation.
(4) Direct credit substitute means an arrangement in which a
bank assumes, in form or in substance, credit risk associated with
an on-or off-balance sheet credit exposure that was not previously
owned by the bank (third-party asset) and the risk assumed by the
bank exceeds the pro rata share of the bank's interest in the third-
party asset. If the bank has no claim on the third-party asset, then
the bank's assumption of any credit risk with respect to the third
party asset is a direct credit substitute. Direct credit substitutes
include, but are not limited to:
(i) Financial standby letters of credit, which includes any
letter of credit or similar arrangement, however named or described,
that support financial claims on a third party that exceed a bank's
pro rata share of losses in the financial claim;
(ii) Guarantees, surety arrangements, credit derivatives, and
similar instruments backing financial claims;
(iii) Purchased subordinated interests or securities that absorb
more than their pro rata share of credit losses from the underlying
assets;
(iv) Credit derivative contracts under which the bank assumes
more than its pro rata share of credit risk on a third party asset
or exposure;
(v) Loans or lines of credit that provide credit enhancement for
the financial obligations of an account party;
(vi) Purchased loan servicing assets if the servicer:
(A) Is responsible for credit losses with the loans being
serviced,
(B) Is responsible for making servicer cash advances (unless the
advances are not direct credit substitutes because they meet the
conditions specified in section II.B.5(a)(9) of this Appendix A), or
(C) Makes or assumes credit-enhancing representations and
warranties with respect to the loans serviced;
(vii) Clean-up calls on third party assets. Clean-up calls that
are exercisable at the option of the bank (as servicer or as an
affiliate of the servicer) when the pool balance is 10 percent or
less of the original pool balance are not direct credit substitutes;
and
(viii) Liquidity facilities that provide liquidity support to
ABCP (other than eligible ABCP liquidity facilities).
(5) Eligible ABCP liquidity facility means a liquidity facility
supporting ABCP, in form or in substance, that is subject to an
asset quality test at the time of draw that precludes funding
against assets that are 90 days or more past due or in default. In
addition, if the assets that an eligible ABCP liquidity facility is
required to fund against are externally rated assets or exposures at
the inception of the facility, the facility can be used to fund only
those assets or exposures that are externally rated investment grade
at the time of funding. Notwithstanding the eligibility requirements
set forth in the two preceding sentences, a liquidity facility will
be considered an eligible ABCP liquidity facility if the assets that
are funded under the liquidity facility and which do not meet the
eligibility requirements are guaranteed, either conditionally or
unconditionally, by the U.S. government or its agencies, or by the
central government of an OECD country.
(6) Externally rated means that an instrument or obligation has
received a credit rating from a nationally recognized statistical
rating organization.
(7) Face amount means the notional principal, or face value,
amount of an off-balance sheet item; the amortized cost of an asset
not held for trading purposes; and the fair value of a trading
asset.
(8) Financial asset means cash or other monetary instrument,
evidence of debt, evidence of an ownership interest in an entity, or
a contract that conveys a right to receive or exchange cash or
another financial instrument from another party.
(9) Financial standby letter of credit means a letter of credit
or similar arrangement that represents an irrevocable obligation to
a third-party beneficiary:
(i) To receive money borrowed by, or advanced to, or advanced
to, or for the account of, a second party (the account party), or
(ii) To make payment on behalf of the account party, in the
event that the account party fails to fulfill its obligation to the
beneficiary.
(10) Liquidity facility means a legally binding commitment to
provide liquidity support to ABCP by lending to, or purchasing
assets from, any structure, program, or conduit in the event that
funds are required to repay maturing ABCP.
(11) Mortgage servicer cash advance means funds that a
residential mortgage servicer advances to ensure an uninterrupted
flow of payments, including advances made to cover foreclosure costs
or other expenses to facilitate the timely collection of the loan. A
mortgage servicer cash advance is not a recourse obligation or a
direct credit substitute if:
(i) The mortgage servicer is entitled to full reimbursement and
this right is not subordinated to other claims on the cash flows
from the underlying asset pool; or
(ii) For any one loan, the servicer's obligation to make
nonreimbursable advances is contractually limited to an
insignificant amount of the outstanding principal of that loan.
(12) Nationally recognized statistical rating organization
(NRSRO) means an entity recognized by the Division of Market
Regulation of the Securities and Exchange Commission (or any
successor Division) (Commission) as a nationally recognized
statistical rating organization for various purposes, including the
Commission's uniform net capital requirements for brokers and
dealers (17 CFR 240.15c3-1).
(13) Recourse means an arrangement in which a bank retains, in
form or in substance, of any credit risk directly or indirectly
associated with an asset it has sold (in accordance with generally
accepted accounting principles) that exceeds a pro rata

[[Page 44923]]

share of the bank's claim on the asset. If a bank has no claim on an
asset it has sold, then the retention of any credit risk is
recourse. A recourse obligation typically arises when an institution
transfers assets in a sale and retains an obligation to repurchase
the assets or absorb losses due to a default of principal or
interest or any other deficiency in the performance of the
underlying obligor or some other party. Recourse may exist
implicitly where a bank provides credit enhancement beyond any
contractual obligation to support assets it has sold. The following
are examples of recourse arrangements:
(i) Credit-enhancing representations and warranties made on the
transferred assets;
(ii) Loan servicing assets retained pursuant to an agreement
under which the bank:
(A) Is responsible for losses associated with the loans being
serviced, or
(B) Is responsible for making mortgage servicer cash advances
(unless the advances are not a recourse obligation because they meet
the conditions specified in section II.B.5(a)(11) of this Appendix
A).
(iii) Retained subordinated interests that absorb more than
their pro rata share of losses from the underlying assets;
(iv) Assets sold under an agreement to repurchase, if the assets
are not already included on the balance sheet;
(v) Loan strips sold without contractual recourse where the
maturity of the transferred portion of the loan is shorter than the
maturity of the commitment under which the loan is drawn;
(vi) Credit derivative contracts under which the bank retains
more than its pro rata share of credit risk on transferred assets;
(vii) Clean-up calls at inception that are greater than 10
percent of the balance of the original pool of transferred loans.
Clean-up calls that are 10 percent or less of the original pool
balance that are exercisable at the option of the bank are not
recourse arrangements; and
(viii.) Liquidity facilities that provide liquidity support to
ABCP (other than eligible ABCP liquidity facilities).
(14) Residual interest means any on-balance sheet asset that
represents an interest (including a beneficial interest) created by
a transfer that qualifies as a sale (in accordance with generally
accepted accounting principles (GAAP)) of financial assets, whether
through a securitization or otherwise, and that exposes a bank to
credit risk directly or indirectly associated with the transferred
assets that exceeds a pro rata share of the bank's claim on the
assets, whether through subordination provisions or other credit
enhancement techniques. Residual interests generally include credit-
enhancing I/Os, spread accounts, cash collateral accounts, retained
subordinated interests, other forms of over-collateralization, and
similar assets that function as a credit enhancement. Residual
interests further include those exposures that, in substance, cause
the bank to retain the credit risk of an asset or exposure that had
qualified as a residual interest before it was sold. Residual
interests generally do not include interests purchased from a third
party, except that purchased credit-enhancing I/Os are residual
interests for purposes of the risk-based capital treatment in this
appendix.
(15) Risk participation means a participation in which the
originating party remains liable to the beneficiary for the full
amount of an obligation (e.g., a direct credit substitute)
notwithstanding that another party has acquired a participation in
that obligation.
(16) Securitization means the pooling and repackaging by a
special purpose entity of assets or other credit exposures into
securities that can be sold to investors. Securitization includes
transactions that create stratified credit risk positions whose
performance is dependent upon an underlying pool of credit
exposures, including loans and commitments.
(17) Sponsor means a bank that establishes an ABCP program;
approves the sellers permitted to participate in the program;
approves the asset pools to be purchased by the program; or
administers the ABCP program by monitoring the assets, arranging for
debt placement, compiling monthly reports, or ensuring compliance
with the program documents and with the program's credit and
investment policy.
(18) Structured finance program means a program where receivable
interests and asset-backed securities issued by multiple
participants are purchased by a special purpose entity that
repackages those exposures into securities that can be sold to
investors. Structured finance programs allocate credit risks,
generally, between the participants and credit enhancement provided
to the program.
(19) Traded position means a position that is externally rated
and is retained, assumed or issued in connection with an asset
securitization, where there is a reasonable expectation that, in the
near future, the rating will be relied upon by unaffiliated
investors to purchase the position; or an unaffiliated third party
to enter into a transaction involving the position, such as a
purchase, loan, or repurchase agreement.
* * * * *
6. Asset-backed commercial paper programs. a. An asset-backed
commercial paper (ABCP) program means a program that primarily
issues externally rated commercial paper backed by assets or other
exposures held in a bankruptcy-remote, special purpose entity.
b. A bank that qualifies as a primary beneficiary and must
consolidate an ABCP program that is defined as a variable interest
entity under GAAP may exclude the consolidated ABCP program assets
from risk-weighted assets provided that the bank is the sponsor of
the ABCP program. If a bank excludes such consolidated ABCP program
assets, the bank must assess the appropriate risk-based capital
charge against any exposures of the bank arising in connection with
such ABCP programs, including direct credit substitutes, recourse
obligations, residual interests, liquidity facilities, and loans, in
accordance with sections II.B.5., II.C. and II.D. of this appendix.
c. If a bank has multiple overlapping exposures (such as a
program-wide credit enhancement and multiple pool-specific liquidity
facilities) to an ABCP program that is not consolidated for risk-
based capital purposes, the bank is not required to hold capital
under duplicative risk-based capital requirements under this
appendix against the overlapping position. Instead, the bank should
apply to the overlapping position the applicable risk-based capital
treatment that results in the highest capital charge.
* * * * *

II. * * *

D. * * * The resultant credit equivalent amount is assigned to
the appropriate risk category according to the obligor or, if
relevant, the guarantor, the nature of any collateral, or external
credit ratings.\45\
---------------------------------------------------------------------------

\45\ The sufficiency of collateral and guarantees for off-
balance-sheet items is determined by the market value of the
collateral or the amount of the guarantee in relation to the face
amount of the item, except for derivative contracts, for which this
determination is generally made in relation to the credit equivalent
amount. Collateral and guarantees are subject to the same provisions
noted under section II.B of this appendix A.
---------------------------------------------------------------------------

* * * * *
2. Items With a 50 Percent Conversion Factor. * * *
* * * * *
c.i. Commitments are defined as any legally binding arrangements
that obligate a bank to extend credit in the form of loans or lease
financing receivables; to purchase loans, securities, or other
assets; or to participate in loans and leases. Commitments also
include overdraft facilities, revolving credit, home equity and
mortgage lines of credit, eligible ABCP liquidity facilities, and
similar transactions. Normally, commitments involve a written
contract or agreement and a commitment fee, or some other form of
consideration. Commitments are included in weighted-risk assets
regardless of whether they contain material adverse change clauses
or other provisions that are intended to relieve the issuer of its
funding obligation under certain conditions. In the case of
commitments structured as syndications, where the bank is obligated
solely for its pro rata share, only the bank's proportional share of
the syndicated commitment is taken into account in calculating the
risk-based capital ratio.
ii. Banks that are subject to the market risk rules in appendix
C to part 325 are required to convert the notional amount of
eligible ABCP liquidity facilities, in form or in substance, with an
original maturity of over one year that are carried in the trading
account at 50 percent to determine the appropriate credit equivalent
amount even though those facilities are structured or characterized
as derivatives or other trading book assets. Liquidity facilities
that support ABCP, in form or in substance, (including those
positions to which the market risk rules may not be applied as set
forth in section 2(a) of appendix C of this part) that are not
eligible ABCP liquidity facilities are to be considered recourse
obligations or direct credit substitutes, and assessed the
appropriate risk-based capital treatment in accordance with section
II.B.5. of this appendix.

[[Page 44924]]

d. * * *
Thus, after a commitment has been converted at 50 percent,
portions of commitments that have been conveyed to other U.S.
depository institutions or OECD banks, but for which the originating
bank retains the full obligation to the borrower if the
participating bank fails to pay when the commitment is drawn upon,
will be assigned to the 20 percent risk category.
* * * * *
4. Items With a 10 Percent Conversion Factor. a. Unused portions
of eligible ABCP liquidity facilities with an original maturity of
one year or less that provide liquidity support to ABCP also are
converted at 10 percent.
b. Banks that are subject to the market risk rules in appendix C
to part 325 are required to convert the notional amount of eligible
ABCP liquidity facilities, in form or in substance, with an original
maturity of one year or less that are carried in the trading account
at 10 percent to determine the appropriate credit equivalent amount
even though those facilities are structured or characterized as
derivatives or other trading book assets. Liquidity facilities that
provide liquidity support to ABCP, in form or in substance,
(including those positions to which the market risk rules may not be
applied as set forth in section 2(a) of appendix C of this part)
that are not eligible ABCP liquidity facilities are to be considered
recourse obligations or direct credit substitutes and assessed the
appropriate risk-based capital requirement in accordance with
section II.B.5. of this appendix.
5. Items with a Zero Percent Conversion Factor. These include
unused portions of commitments, with the exception of eligible ABCP
liquidity facilities, with an original maturity of one year or less,
or which are unconditionally cancelable at any time, provided a
separate credit decision is made before each drawing under the
facility. * * *
* * * * *

0
3. In Appendix C to part 325, add two new sentences to the end of
section 2(a) to read as follows:

Appendix C To Part 325--Risk-Based Capital for State Non-Member Banks;
Market Risk

* * * * *

Section 2. Definitions

* * * * *
(a) * * * Covered positions exclude all positions in a bank's
trading account that, in form or in substance, act as liquidity
facilities that provide liquidity support to asset-backed commercial
paper. Such excluded positions are subject to the risk-based capital
requirements set forth in appendix A of this part.
* * * * *

By order of the Board of Directors.

Dated at Washington, DC, this 28th day of June, 2004.

Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Chapter V

Authority and Issuance

0
For the reasons set out in the preamble, part 567 of chapter V of title
12 of the Code of Federal Regulations is amended as follows:

PART 567--CAPITAL

0
1. The authority citation for part 567 continues to read as follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828
(note).

0
2. Amend Sec. 567.1 by:
0
A. Revising the definition of an "asset-backed commercial paper
program;"
0
B. Revising the definition of "commitment;"
0
C. Revising paragraphs (6) and (7) and adding a new paragraph (8) to
the definition of "direct credit substitute;"
0
D. Adding a definition of "eligible ABCP liquidity facility;"
0
E. Adding a definition of "liquidity facility;" and
0
F. Revising paragraphs (6) and (7) and adding a new paragraph (8) to
the definition of "recourse:"

Sec. 567.1 Definitions

* * * * *
Asset-backed commercial paper program. The term asset-backed
commercial paper program (ABCP program) means a program that primarily
issues commercial paper that has received a credit rating from an NRSRO
and that is backed by assets or other exposures held in a bankruptcy-
remote special purpose entity. The term sponsor of an ABCP program
means a savings association that:
(1) Establishes an ABCP program;
(2) Approves the sellers permitted to participate in an ABCP
program;
(3) Approves the asset pools to be purchased by an ABCP program; or
(4) Administers the ABCP program by monitoring the assets,
arranging for debt placement, compiling monthly reports, or ensuring
compliance with the program documents and with the program's credit and
investment policy.
* * * * *
Commitment. The term commitment means any arrangement that
obligates a savings association to:
(1) Purchase loans or securities;
(2) Extend credit in the form of loans or leases, participations in
loans or leases, overdraft facilities, revolving credit facilities,
home equity lines of credit, eligible ABCP liquidity facilities, or
similar transactions.
* * * * *
Direct credit substitute. * * *
* * * * *
(6) Purchased loan servicing assets if the servicer is responsible
for credit losses or if the servicer makes or assumes credit-enhancing
representations and warranties with respect to the loans serviced.
Servicer cash advances as defined in this section are not direct credit
substitutes;
(7) Clean-up calls on third party assets. However, clean-up calls
that are 10 percent or less of the original pool balance and that are
exercisable at the option of the savings association are not direct
credit substitutes; and
(8) Liquidity facilities that provide support to asset-backed
commercial paper (other than eligible ABCP liquidity facilities).
Eligible ABCP liquidity facility. The term eligible ABCP liquidity
facility means a liquidity facility that supports asset-backed
commercial paper, in form or in substance, and that meets the following
criteria:
(1)(i) At the time of the draw, the liquidity facility must be
subject to an asset quality test that precludes funding against assets
that are 90 days or more past due or in default; and
(ii) If the assets that the liquidity facility is required to fund
against are assets or exposures that have received a credit rating by a
NRSRO at the time the inception of the facility, the facility can be
used to fund only those assets or exposures that are rated investment
grade by an NRSRO at the time of funding; or
(2) If the assets that are funded under the liquidity facility do
not meet the criteria described in paragraph (1) of this definition,
the assets must be guaranteed, conditionally or unconditionally, by the
United States Government, its agencies, or the central government of an
OECD country.
* * * * *
Liquidity facility. The term liquidity facility means a legally
binding commitment to provide liquidity support to asset-backed
commercial paper by lending to, or purchasing assets from any
structure, program or conduit in the event that funds are required to
repay maturing asset-backed commercial paper.
* * * * *
Recourse. * * *
* * * * *
(6) Credit derivatives that absorb more than the savings
association's pro rata

[[Page 44925]]

share of losses from the transferred assets;
(7) Clean-up calls on assets the savings association has sold.
However, clean-up calls that are 10 percent or less of the original
pool balance and that are exercisable at the option of the savings
association are not recourse arrangements; and
(8) Liquidity facilities that provide support to asset-backed
commercial paper (other than eligible ABCP liquidity facilities).
* * * * *

0
3. Amend Sec. 567.5 by revising paragraph (a)(1)(iii) to read as
follows:

Sec. 567.5 Components of Capital

(a) * * *
(1) * * *
(iii) Minority interests in the equity accounts of subsidiaries
that are fully consolidated. However, minority interests in
consolidated ABCP programs sponsored by a savings association are
excluded from the association's core capital or total capital base if
the savings association excludes the consolidated assets of such
programs from risk-weighted assets pursuant to Sec. 567.6(a)(3);
* * * * *

0
4. Amend Sec. 567.6 by:
0
A. Revising paragraph (a)(2)(ii)(B);
0
B. Redesignating paragraphs (a)(2)(iv) and (a)(2)(v) as paragraphs
(a)(2)(v) and (vi), respectively;
0
C. Adding paragraph (a)(2)(iv);
0
D. Revising redesignated paragraph (a)(2)(v)(A);
0
E. Revising the heading to redesignated paragraph (a)(2)(vi), and
revising the references to paragraph (a)(2)(v) in that redesignated
paragraph to refer to paragraph (a)(2)(vi);
0
F. Revising paragraph (a)(3); and
0
G. Removing paragraph (a)(4).

Sec. 567.6 Risk-based capital credit risk-weight categories.

(a) * * *
(2) * * *
(ii) * * *
(B) Unused portions of commitments (including home equity lines of
credit and eligible ABCP liquidity facilities) with an original
maturity exceeding one year except those listed in paragraph (a)(2)(v)
of this section. For eligible ABCP liquidity facilities, the resulting
credit equivalent amount is assigned to the risk category appropriate
to the assets to be funded by the liquidity facility based on the
assets or the obligor, after considering any collateral or guarantees,
or external credit ratings under paragraph (b)(3) of this section, if
applicable; and
* * * * *
(iv) 10 percent credit conversion factor (Group D). Unused portions
of eligible ABCP liquidity facilities with an original maturity of one
year or less. The resulting credit equivalent amount is assigned to the
risk category appropriate to the assets to be funded by the liquidity
facility based on the assets or the obligor, after considering any
collateral or guarantees, or external credit ratings under paragraph
(b)(3) of this section, if applicable;
(v) Zero percent credit conversion factor (Group E). (A) Unused
portions of commitments with an original maturity of one year or less,
except for eligible ABCP liquidity facilities.
(vi) Off-balance sheet contracts; interest rate and foreign
exchange rate contracts (Group F). * * *
* * * * *
(3) Asset-backed commercial paper programs. (i) A savings
association that qualifies as a primary beneficiary and must
consolidate an ABCP program that is a variable interest entity under
generally accepted accounting principles may exclude the consolidated
ABCP program assets from risk-weighted assets if the savings
association is the sponsor of the ABCP program.
(ii) If a savings association excludes such consolidated ABCP
program assets from risk-weighted assets, the savings association must
assess the appropriate risk-based capital requirement against any
exposures of the savings association arising in connection with such
ABCP programs, including direct credit substitutes, recourse
obligations, residual interests, liquidity facilities, and loans, in
accordance with paragraphs (a)(1) and (2) and (b) of this section.
(iii) If a savings association bank has multiple overlapping
exposures (such as a program-wide credit enhancement and a liquidity
facility) to an ABCP program that is not consolidated for risk-based
capital purposes, the savings association is not required to hold
duplicative risk-based capital under this part against the overlapping
position. Instead, the savings association should apply to the
overlapping position the applicable risk-based capital treatment that
results in the highest capital charge.
* * * * *

Dated: June 24, 2004.

By the Office of Thrift Supervision.
James T. Gilleran,
Director.
[FR Doc. 04-16818 Filed 7-27-04; 8:45 am]

BILLING CODE 4801-01-P

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