[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2008 Edition]
[From the U.S. Government Printing Office]



[[Page i]]

          

          12


          Parts 1 to 199

                         Revised as of January 1, 2008


          Banks and Banking
          



________________________

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2008
          With Ancillaries
                    Published by
                    Office of the Federal Register
                    National Archives and Records
                    Administration
                    A Special Edition of the Federal Register

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                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 12:
          Chapter I--Comptroller of the Currency, Department 
          of the Treasury                                            3
  Finding Aids:
      Table of CFR Titles and Chapters........................     469
      Alphabetical List of Agencies Appearing in the CFR......     487
      List of CFR Sections Affected...........................     497

[[Page iv]]





                     ----------------------------

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 12 CFR 1.1 refers to 
                       title 12, part 1, section 
                       1.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

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noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

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    To determine whether a Code volume has been amended since its 
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EFFECTIVE AND EXPIRATION DATES

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OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
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OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
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of provisions in effect on a given date in the past by using the 
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INCORPORATION BY REFERENCE

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This material, like any other properly issued regulation, has the force 
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    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
approval is based are:
    (a) The incorporation will substantially reduce the volume of 
material published in the Federal Register.
    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
process.
    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
    Properly approved incorporations by reference in this volume are 
listed in the Finding Aids at the end of this volume.
    What if the material incorporated by reference cannot be found? If 
you have any problem locating or obtaining a copy of material listed in 
the Finding Aids of this volume as an approved incorporation by 
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the revision dates of the 50 CFR titles.

[[Page vii]]


REPUBLICATION OF MATERIAL

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    Raymond A. Mosley,
    Director,
    Office of the Federal Register.
    January 1, 2008.







[[Page ix]]



                               THIS TITLE

    Title 12--Banks and Banking is composed of seven volumes. The parts 
in these volumes are arranged in the following order: parts 1-199, 200-
219, 220-299, 300-499, 500-599, part 600-899, and 900-end. The first 
volume containing parts 1-199 is comprised of chapter I--Comptroller of 
the Currency, Department of the Treasury. The second and third volumes 
containing parts 200-299 are comprised of chapter II--Federal Reserve 
System. The fourth volume containing parts 300-499 is comprised of 
chapter III--Federal Deposit Insurance Corporation and chapter IV--
Export-Import Bank of the United States. The fifth volume containing 
parts 500-599 is comprised of chapter V--Office of Thrift Supervision, 
Department of the Treasury. The sixth volume containing parts 600-899 is 
comprised of chapter VI--Farm Credit Administration, chapter VII--
National Credit Union Administration, chapter VIII--Federal Financing 
Bank. The seventh volume containing part 900-end is comprised of chapter 
IX--Federal Housing Finance Board, chapter XI--Federal Financial 
Institutions Examination Council, chapter XIV--Farm Credit System 
Insurance Corporation, chapter XV--Department of the Treasury, chapter 
XVII--Office of Federal Housing Enterprise Oversight, Department of 
Housing and Urban Development and chapter XVIII--Community Development 
Financial Institutions Fund, Department of the Treasury. The contents of 
these volumes represent all of the current regulations codified under 
this title of the CFR as of January 1, 2008.

    For this volume, Jonn V. Lilyea was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of 
Michael L. White, assisted by Ann Worley.


[[Page 1]]



                       TITLE 12--BANKS AND BANKING




                   (This book contains parts 1 to 199)

  --------------------------------------------------------------------
                                                                    Part

chapter i--Comptroller of the Currency, Department of the 
  Treasury..................................................           1

[[Page 3]]



   CHAPTER I--COMPTROLLER OF THE CURRENCY, DEPARTMENT OF THE TREASURY




  --------------------------------------------------------------------
Part                                                                Page
1               Investment securities.......................           5
2               Sales of credit life insurance..............          12
3               Minimum capital ratios; issuance of 
                    directives..............................          13
4               Organization and functions, availability and 
                    release of information, contracting 
                    outreach program, post-employment 
                    restrictions for senior examiners.......         102
5               Rules, policies, and procedures for 
                    corporate activities....................         124
6               Prompt corrective action....................         175
7               Bank activities and operations..............         182
8               Assessment of fees..........................         204
9               Fiduciary activities of national banks......         209
10              Municipal securities dealers................         220
11              Securities Exchange Act disclosure rules....         220
12              Recordkeeping and confirmation requirements 
                    for securities transactions.............         221
13              Government securities sales practices.......         229
14              Consumer protection in sales of insurance...         232
15

[Reserved]

16              Securities offering disclosure rules........         236
18              Disclosure of financial and other 
                    information by national banks...........         242
19              Rules of practice and procedure.............         244
21              Minimum security devices and procedures, 
                    reports of suspicious activities, and 
                    Bank Secrecy Act Compliance Program.....         284
22              Loans in areas having special flood hazards.         288
23              Leasing.....................................         292
24              Community and economic development entities, 
                    community development projects, and 
                    other public welfare investments........         296
25              Community Reinvestment Act and Interstate 
                    Deposit Production regulations..........         306
26              Management official interlocks..............         328

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27              Fair housing home loan data system..........         332
28              International banking activities............         343
29

[Reserved]

30              Safety and soundness standards..............         357
31              Extensions of credit to insiders and 
                    transactions with affiliates............         371
32              Lending limits..............................         375
33

[Reserved]

34              Real estate lending and appraisals..........         387
35              Disclosure and reporting of CRA-related 
                    agreements..............................         401
36

[Reserved]

37              Debt cancellation contracts and debt 
                    suspension agreements...................         414
38-39

[Reserved]

40              Privacy of consumer financial information...         418
41              Fair Credit Reporting.......................         436
42-199

[Reserved]

[[Page 5]]



PART 1_INVESTMENT SECURITIES--Table of Contents




Sec.
1.1 Authority, purpose, and scope.
1.2 Definitions.
1.3 Limitations on dealing in, underwriting, and purchase and sale of 
          securities.
1.4 Calculation of limits.
1.5 Safe and sound banking practices; credit information required.
1.6 Convertible securities.
1.7 Securities held in satisfaction of debts previously contracted; 
          holding period; disposal; accounting treatment; non-
          speculative purpose.
1.8 Nonconforming investments.

                             Interpretations

1.100 Indirect general obligations.
1.110 Taxing powers of a State or political subdivision.
1.120 Prerefunded or escrowed bonds and obligations secured by Type I 
          securities.
1.130 Type II securities; guidelines for obligations issued for 
          university and housing purposes.

    Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a.

    Source: 61 FR 63982, Dec. 2, 1996, unless otherwise noted.



Sec. 1.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq., 
12 U.S.C. 24 (Seventh), and 12 U.S.C. 93a.
    (b) Purpose This part prescribes standards under which national 
banks may purchase, sell, deal in, underwrite, and hold securities, 
consistent with the authority contained in 12 U.S.C. 24 (Seventh) and 
safe and sound banking practices.
    (c) Scope. The standards set forth in this part apply to national 
banks, District of Columbia banks, and federal branches of foreign 
banks. Further, pursuant to 12 U.S.C. 335, State banks that are members 
of the Federal Reserve System are subject to the same limitations and 
conditions that apply to national banks in connection with purchasing, 
selling, dealing in, and underwriting securities and stock. In addition 
to activities authorized under this part, foreign branches of national 
banks are authorized to conduct international activities and invest in 
securities pursuant to 12 CFR part 211.



Sec. 1.2  Definitions.

    (a) Capital and surplus means:
    (1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's 
risk-based capital standards set forth in appendix A to 12 CFR part 3 
(or comparable capital guidelines of the appropriate Federal banking 
agency) as reported in the bank's Consolidated Report of Condition and 
Income filed under 12 U.S.C. 161 (or under 12 U.S.C. 1817 in the case of 
a state member bank); plus
    (2) The balance of a bank's allowance for loan and lease losses not 
included in the bank's Tier 2 capital, for purposes of the calculation 
of risk-based capital described in paragraph (a)(1) of this section, as 
reported in the bank's Consolidated Report of Condition and Income filed 
under 12 U.S.C. 161 (or under 12 U.S.C. 1817 in the case of a state 
member bank).
    (b) General obligation of a State or political subdivision means:
    (1) An obligation supported by the full faith and credit of an 
obligor possessing general powers of taxation, including property 
taxation; or
    (2) An obligation payable from a special fund or by an obligor not 
possessing general powers of taxation, when an obligor possessing 
general powers of taxation, including property taxation, has 
unconditionally promised to make payments into the fund or otherwise 
provide funds to cover all required payments on the obligation.
    (c) Investment company means an investment company, including a 
mutual fund, registered under section 8 of the Investment Company Act of 
1940, 15 U.S.C. 80a-8.
    (d) Investment grade means a security that is rated in one of the 
four highest rating categories by:
    (1) Two or more NRSROs; or
    (2) One NRSRO if the security has been rated by only one NRSRO.
    (e) Investment security means a marketable debt obligation that is 
not predominantly speculative in nature. A security is not predominantly 
speculative in nature if it is rated investment grade. When a security 
is not rated, the security must be the credit equivalent of a security 
rated investment grade.
    (f) Marketable means that the security:

[[Page 6]]

    (1) Is registered under the Securities Act of 1933, 15 U.S.C. 77a et 
seq.;
    (2) Is a municipal revenue bond exempt from registration under the 
Securities Act of 1933, 15 U.S.C. 77c(a)(2);
    (3) Is offered and sold pursuant to Securities and Exchange 
Commission Rule 144A, 17 CFR 230.144A, and rated investment grade or is 
the credit equivalent of investment grade; or
    (4) Can be sold with reasonable promptness at a price that 
corresponds reasonably to its fair value.
    (g) Municipal bonds means obligations of a State or political 
subdivision other than general obligations, and includes limited 
obligation bonds, revenue bonds, and obligations that satisfy the 
requirements of section 142(b)(1) of the Internal Revenue Code of 1986 
issued by or on behalf of any State or political subdivision of a State, 
including any municipal corporate instrumentality of 1 or more States, 
or any public agency or authority of any State or political subdivision 
of a State.
    (h) NRSRO means a nationally recognized statistical rating 
organization.
    (i) Political subdivision means a county, city, town, or other 
municipal corporation, a public authority, and generally any publicly-
owned entity that is an instrumentality of a State or of a municipal 
corporation.
    (j) Type I security means:
    (1) Obligations of the United States;
    (2) Obligations issued, insured, or guaranteed by a department or an 
agency of the United States Government, if the obligation, insurance, or 
guarantee commits the full faith and credit of the United States for the 
repayment of the obligation;
    (3) Obligations issued by a department or agency of the United 
States, or an agency or political subdivision of a State of the United 
States, that represent an interest in a loan or a pool of loans made to 
third parties, if the full faith and credit of the United States has 
been validly pledged for the full and timely payment of interest on, and 
principal of, the loans in the event of non-payment by the third party 
obligor(s);
    (4) General obligations of a State of the United States or any 
political subdivision thereof; and municipal bonds if the national bank 
is well capitalized as defined in 12 CFR 6.4(b)(1);
    (5) Obligations authorized under 12 U.S.C. 24 (Seventh) as 
permissible for a national bank to deal in, underwrite, purchase, and 
sell for the bank's own account, including qualified Canadian government 
obligations; and
    (6) Other securities the OCC determines to be eligible as Type I 
securities under 12 U.S.C. 24 (Seventh).
    (k) Type II security means an investment security that represents:
    (1) Obligations issued by a State, or a political subdivision or 
agency of a State, for housing, university, or dormitory purposes that 
would not satisfy the definition of Type I securities pursuant to 
paragraph (j) of Sec. 1.2;
    (2) Obligations of international and multilateral development banks 
and organizations listed in 12 U.S.C. 24 (Seventh);
    (3) Other obligations listed in 12 U.S.C. 24 (Seventh) as 
permissible for a bank to deal in, underwrite, purchase, and sell for 
the bank's own account, subject to a limitation per obligor of 10 
percent of the bank's capital and surplus; and
    (4) Other securities the OCC determines to be eligible as Type II 
securities under 12 U.S.C. 24 (Seventh).
    (l) Type III security means an investment security that does not 
qualify as a Type I, II, IV, or V security. Examples of Type III 
securities include corporate bonds and municipal bonds that do not 
satisfy the definition of Type I securities pursuant to paragraph (j) of 
Sec. 1.2 or the definition of Type II securities pursuant to paragraph 
(k) of Sec. 1.2.
    (m) Type IV security means:
    (1) A small business-related security as defined in section 
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C. 
78c(a)(53)(A), that is rated investment grade or is the credit 
equivalent thereof, that is fully secured by interests in a pool of 
loans to numerous obligors.
    (2) A commercial mortgage-related security that is offered or sold 
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 
77d(5), that is rated investment grade or is the credit equivalent 
thereof, or a commercial mortgage-related security as described in

[[Page 7]]

section 3(a)(41) of the Securities Exchange Act of 1934, 15 U.S.C. 
78c(a)(41), that is rated investment grade in one of the two highest 
investment grade rating categories, and that represents ownership of a 
promissory note or certificate of interest or participation that is 
directly secured by a first lien on one or more parcels of real estate 
upon which one or more commercial structures are located and that is 
fully secured by interests in a pool of loans to numerous obligors.
    (3) A residential mortgage-related security that is offered and sold 
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 
77d(5), that is rated investment grade or is the credit equivalent 
thereof, or a residential mortgage-related security as described in 
section 3(a)(41) of the Securities Exchange Act of 1934, 15 U.S.C. 
78c(a)(41)), that is rated investment grade in one of the two highest 
investment grade rating categories, and that does not otherwise qualify 
as a Type I security.
    (n) Type V security means a security that is:
    (1) Rated investment grade;
    (2) Marketable;
    (3) Not a Type IV security; and
    (4) Fully secured by interests in a pool of loans to numerous 
obligors and in which a national bank could invest directly.

[61 FR 63982, Dec. 2, 1996, as amended at 66 FR 34791, July 2, 2001]



Sec. 1.3  Limitations on dealing in, underwriting, and purchase and sale of securities.

    (a) Type I securities. A national bank may deal in, underwrite, 
purchase, and sell Type I securities for its own account. The amount of 
Type I securities that the bank may deal in, underwrite, purchase, and 
sell is not limited to a specified percentage of the bank's capital and 
surplus.
    (b) Type II securities. A national bank may deal in, underwrite, 
purchase, and sell Type II securities for its own account, provided the 
aggregate par value of Type II securities issued by any one obligor held 
by the bank does not exceed 10 percent of the bank's capital and 
surplus. In applying this limitation, a national bank shall take account 
of Type II securities that the bank is legally committed to purchase or 
to sell in addition to the bank's existing holdings.
    (c) Type III securities. A national bank may purchase and sell Type 
III securities for its own account, provided the aggregate par value of 
Type III securities issued by any one obligor held by the bank does not 
exceed 10 percent of the bank's capital and surplus. In applying this 
limitation, a national bank shall take account of Type III securities 
that the bank is legally committed to purchase or to sell in addition to 
the bank's existing holdings.
    (d) Type II and III securities; other investment securities 
limitations. A national bank may not hold Type II and III securities 
issued by any one obligor with an aggregate par value exceeding 10 
percent of the bank's capital and surplus. However, if the proceeds of 
each issue are to be used to acquire and lease real estate and related 
facilities to economically and legally separate industrial tenants, and 
if each issue is payable solely from and secured by a first lien on the 
revenues to be derived from rentals paid by the lessee under net 
noncancellable leases, the bank may apply the 10 percent investment 
limitation separately to each issue of a single obligor.
    (e) Type IV securities--(1) General. A national bank may purchase 
and sell Type IV securities for its own account. Except as described in 
paragraph (e)(2) of this section, the amount of the Type IV securities 
that a bank may purchase and sell is not limited to a specified 
percentage of the bank's capital and surplus.
    (2) Limitation on small business-related securities rated in the 
third and fourth highest rating categories by an NRSRO. A national bank 
may hold small business-related securities, as defined in section 
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C. 
78c(a)(53)(A), of any one issuer with an aggregate par value not 
exceeding 25 percent of the bank's capital and surplus if those 
securities are rated investment grade in the third or fourth highest 
investment grade rating categories. In applying this limitation, a

[[Page 8]]

national bank shall take account of securities that the bank is legally 
committed to purchase or to sell in addition to the bank's existing 
holdings. No percentage of capital and surplus limit applies to small 
business related securities rated investment grade in the highest two 
investment grade rating categories.
    (f) Type V securities. A national bank may purchase and sell Type V 
securities for its own account provided that the aggregate par value of 
Type V securities issued by any one issuer held by the bank does not 
exceed 25 percent of the bank's capital and surplus. In applying this 
limitation, a national bank shall take account of Type V securities that 
the bank is legally committed to purchase or to sell in addition to the 
bank's existing holdings.
    (g) Securitization. A national bank may securitize and sell assets 
that it holds, as a part of its banking business. The amount of 
securitized loans and obligations that a bank may sell is not limited to 
a specified percentage of the bank's capital and surplus.
    (h) Investment company shares--(1) General. A national bank may 
purchase and sell for its own account investment company shares provided 
that:
    (i) The portfolio of the investment company consists exclusively of 
assets that the national bank may purchase and sell for its own account 
under this part; and
    (ii) The bank's holdings of investment company shares do not exceed 
the limitations in Sec. 1.4(e).
    (2) Other issuers. The OCC may determine that a national bank may 
invest in an entity that is exempt from registration as an investment 
company under section 3(c)(1) of the Investment Company Act of 1940, 
provided that the portfolio of the entity consists exclusively of assets 
that a national bank may purchase and sell for its own account under 
this part.
    (i) Securities held based on estimates of obligor's performance. (1) 
Notwithstanding Sec. Sec. 1.2(d) and (e), a national bank may treat a 
debt security as an investment security for purposes of this part if the 
bank concludes, on the basis of estimates that the bank reasonably 
believes are reliable, that the obligor will be able to satisfy its 
obligations under that security, and the bank believes that the security 
may be sold with reasonable promptness at a price that corresponds 
reasonably to its fair value.
    (2) The aggregate par value of securities treated as investment 
securities under paragraph (i)(1) of this section may not exceed 5 
percent of the bank's capital and surplus.

[61 FR 63982, Dec. 2, 1996, as amended at 64 FR 60098, Nov. 4, 1999]



Sec. 1.4  Calculation of limits.

    (a) Calculation date. For purposes of determining compliance with 12 
U.S.C. 24 (Seventh) and this part, a bank shall determine its investment 
limitations as of the most recent of the following dates:
    (1) The last day of the preceding calendar quarter; or
    (2) The date on which there is a change in the bank's capital 
category for purposes of 12 U.S.C. 1831o and 12 CFR 6.3.
    (b) Effective date. (1) A bank's investment limit calculated in 
accordance with paragraph (a)(1) of this section will be effective on 
the earlier of the following dates:
    (i) The date on which the bank's Consolidated Report of Condition 
and Income (Call Report) is submitted; or
    (ii) The date on which the bank's Consolidated Report of Condition 
and Income is required to be submitted.
    (2) A bank's investment limit calculated in accordance with 
paragraph (a)(2) of this section will be effective on the date that the 
limit is to be calculated.
    (c) Authority of OCC to require more frequent calculations. If the 
OCC determines for safety and soundness reasons that a bank should 
calculate its investment limits more frequently than required by 
paragraph (a) of this section, the OCC may provide written notice to the 
bank directing the bank to calculate its investment limitations at a 
more frequent interval. The bank shall thereafter calculate its 
investment limits at that interval until further notice.
    (d) Calculation of Type III and Type V securities holdings--(1) 
General. In calculating the amount of its investment in Type III or Type 
V securities issued by

[[Page 9]]

any one obligor, a bank shall aggregate:
    (i) Obligations issued by obligors that are related directly or 
indirectly through common control; and
    (ii) Securities that are credit enhanced by the same entity.
    (2) Aggregation by type. The aggregation requirement in paragraph 
(d)(1) of this section applies separately to the Type III and Type V 
securities held by a bank.
    (e) Limit on investment company holdings--(1) General. In 
calculating the amount of its investment in investment company shares 
under this part, a bank shall use reasonable efforts to calculate and 
combine its pro rata share of a particular security in the portfolio of 
each investment company with the bank's direct holdings of that 
security. The bank's direct holdings of the particular security and the 
bank's pro rata interest in the same security in the investment 
company's portfolio may not, in the aggregate, exceed the investment 
limitation that would apply to that security.
    (2) Alternate limit for diversified investment companies. A national 
bank may elect not to combine its pro rata interest in a particular 
security in an investment company with the bank's direct holdings of 
that security if:
    (i) The investment company's holdings of the securities of any one 
issuer do not exceed 5 percent of its total portfolio; and
    (ii) The bank's total holdings of the investment company's shares do 
not exceed the most stringent investment limitation that would apply to 
any of the securities in the company's portfolio if those securities 
were purchased directly by the bank.



Sec. 1.5  Safe and sound banking practices; credit information required.

    (a) A national bank shall adhere to safe and sound banking practices 
and the specific requirements of this part in conducting the activities 
described in Sec. 1.3. The bank shall consider, as appropriate, the 
interest rate, credit, liquidity, price, foreign exchange, transaction, 
compliance, strategic, and reputation risks presented by a proposed 
activity, and the particular activities undertaken by the bank must be 
appropriate for that bank.
    (b) In conducting these activities, the bank shall determine that 
there is adequate evidence that an obligor possesses resources 
sufficient to provide for all required payments on its obligations, or, 
in the case of securities deemed to be investment securities on the 
basis of reliable estimates of an obligor's performance, that the bank 
reasonably believes that the obligor will be able to satisfy the 
obligation.
    (c) Each bank shall maintain records available for examination 
purposes adequate to demonstrate that it meets the requirements of this 
part. The bank may store the information in any manner that can be 
readily retrieved and reproduced in a readable form.



Sec. 1.6  Convertible securities.

    A national bank may not purchase securities convertible into stock 
at the option of the issuer.



Sec. 1.7  Securities held in satisfaction of debts previously contracted; holding period; disposal; accounting treatment; non-speculative purpose.

    (a) Securities held in satisfaction of debts previously contracted. 
The restrictions and limitations of this part, other than those set 
forth in paragraphs (b),(c), and (d) of this section, do not apply to 
securities acquired:
    (1) Through foreclosure on collateral;
    (2) In good faith by way of compromise of a doubtful claim; or
    (3) To avoid loss in connection with a debt previously contracted.
    (b) Holding period. A national bank holding securities pursuant to 
paragraph (a) of this section may do so for a period not to exceed five 
years from the date that ownership of the securities was originally 
transferred to the bank. The OCC may extend the holding period for up to 
an additional five years if a bank provides a clearly convincing 
demonstration as to why an additional holding period is needed.
    (c) Accounting treatment. A bank shall account for securities held 
pursuant to paragraph (a) of this section in accordance with Generally 
Accepted Accounting Principles.
    (d) Non-speculative purpose. A bank may not hold securities pursuant 
to

[[Page 10]]

paragraph (a) of this section for speculative purposes.



Sec. 1.8  Nonconforming investments.

    (a) A national bank's investment in securities that no longer 
conform to this part but conformed when made will not be deemed in 
violation but instead will be treated as nonconforming if the reason why 
the investment no longer conforms to this part is because:
    (1) The bank's capital declines;
    (2) Issuers, obligors, or credit-enhancers merge;
    (3) Issuers become related directly or indirectly through common 
control;
    (4) The investment securities rules change;
    (5) The security no longer qualifies as an investment security; or
    (6) Other events identified by the OCC occur.
    (b) A bank shall exercise reasonable efforts to bring an investment 
that is nonconforming as a result of events described in paragraph (a) 
of this section into conformity with this part unless to do so would be 
inconsistent with safe and sound banking practices.

                             Interpretations



Sec. 1.100  Indirect general obligations.

    (a) Obligation issued by an obligor not possessing general powers of 
taxation. Pursuant to Sec. 1.2(b), an obligation issued by an obligor 
not possessing general powers of taxation qualifies as a general 
obligation of a State or political subdivision for the purposes of 12 
U.S.C. 24 (Seventh), if a party possessing general powers of taxation 
unconditionally promises to make sufficient funds available for all 
required payments in connection with the obligation.
    (b) Indirect commitment of full faith and credit. The indirect 
commitment of the full faith and credit of a State or political 
subdivision (that possesses general powers of taxation) in support of an 
obligation may be demonstrated by any of the following methods, alone or 
in combination, when the State or political subdivision pledges its full 
faith and credit in support of the obligation.
    (1) Lease/rental agreement. The lease agreement must be valid and 
binding on the State or the political subdivision, and the State or 
political subdivision must unconditionally promise to pay rentals that, 
together with any other available funds, are sufficient for the timely 
payment of interest on, and principal of, the obligation. These lease/
rental agreement may, for instance, provide support for obligations 
financing the acquisition or operation of public projects in the areas 
of education, medical care, transportation, recreation, public 
buildings, and facilities.
    (2) Service/purchase agreement. The agreement must be valid and 
binding on the State or the political subdivision, and the State or 
political subdivision must unconditionally promise in the agreement to 
make payments for services or resources provided through or by the 
issuer of the obligation. These payments, together with any other 
available funds, must be sufficient for the timely payment of interest 
on, and principal of, the obligation. An agreement to purchase municipal 
sewer, water, waste disposal, or electric services may, for instance, 
provide support for obligations financing the construction or 
acquisition of facilities supplying those services.
    (3) Refillable debt service reserve fund. The reserve fund must at 
least equal the amount necessary to meet the annual payment of interest 
on, and principal of, the obligation as required by applicable law. The 
maintenance of a refillable reserve fund may be provided, for instance, 
by statutory direction for an appropriation, or by statutory automatic 
apportionment and payment from the State funds of amounts necessary to 
restore the fund to the required level.
    (4) Other grants or support. A statutory provision or agreement must 
unconditionally commit the State or the political subdivision to provide 
funds which, together with other available funds, are sufficient for the 
timely payment of interest on, and principal of, the obligation. Those 
funds may, for instance, be supplied in the form of annual grants or may 
be advanced whenever the other available revenues are not sufficient for 
the payment of principal and interest.

[[Page 11]]



Sec. 1.110  Taxing powers of a State or political subdivision.

    (a) An obligation is considered supported by the full faith and 
credit of a State or political subdivision possessing general powers of 
taxation when the promise or other commitment of the State or the 
political subdivision will produce funds, which (together with any other 
funds available for the purpose) will be sufficient to provide for all 
required payments on the obligation. In order to evaluate whether a 
commitment of a State or political subdivision is likely to generate 
sufficient funds, a bank shall consider the impact of any possible 
limitations regarding the State's or political subdivision's taxing 
powers, as well as the availability of funds in view of the projected 
revenues and expenditures. Quantitative restrictions on the general 
powers of taxation of the State or political subdivision do not 
necessarily mean that an obligation is not supported by the full faith 
and credit of the State or political subdivision. In such case, the bank 
shall determine the eligibility of obligations by reviewing, on a case-
by-case basis, whether tax revenues available under the limited taxing 
powers are sufficient for the full and timely payment of interest on, 
and principal of, the obligation. The bank shall use current and 
reasonable financial projections in calculating the availability of the 
revenues. An obligation expressly or implicitly dependent upon voter or 
legislative authorization of appropriations may be considered supported 
by the full faith and credit of a State or political subdivision if the 
bank determines, on the basis of past actions by the voters or 
legislative body in similar situations involving similar types of 
projects, that it is reasonably probable that the obligor will obtain 
all necessary appropriations.
    (b) An obligation supported exclusively by excise taxes or license 
fees is not a general obligation for the purposes of 12 U.S.C. 24 
(Seventh). Nevertheless, an obligation that is primarily payable from a 
fund consisting of excise taxes or other pledged revenues qualifies as a 
``general obligation,'' if, in the event of a deficiency of those 
revenues, the obligation is also supported by the general revenues of a 
State or a political subdivision possessing general powers of taxation.



Sec. 1.120  Prerefunded or escrowed bonds and obligations secured by Type I securities.

    (a) An obligation qualifies as a Type I security if it is secured by 
an escrow fund consisting of obligations of the United States or general 
obligations of a State or a political subdivision, and the escrowed 
obligations produce interest earnings sufficient for the full and timely 
payment of interest on, and principal of, the obligation.
    (b) If the interest earnings from the escrowed Type I securities 
alone are not sufficient to guarantee the full repayment of an 
obligation, a promise of a State or a political subdivision possessing 
general powers of taxation to maintain a reserve fund for the timely 
payment of interest on, and principal of, the obligation may further 
support a guarantee of the full repayment of an obligation.
    (c) An obligation issued to refund an indirect general obligation 
may be supported in a number of ways that, in combination, are 
sufficient at all times to support the obligation with the full faith 
and credit of the United States or a State or a political subdivision 
possessing general powers of taxation. During the period following its 
issuance, the proceeds of the refunding obligation may be invested in 
U.S. obligations or municipal general obligations that will produce 
sufficient interest income for payment of principal and interest. Upon 
the retirement of the outstanding indirect general obligation bonds, the 
same indirect commitment, such as a lease agreement or a reserve fund, 
that supported the prior issue, may support the refunding obligation.



Sec. 1.130  Type II securities; guidelines for obligations issued for university and housing purposes.

    (a) Investment quality. An obligation issued for housing, 
university, or dormitory purposes is a Type II security only if it:
    (1) Qualifies as an investment security, as defined in Sec. 1.2(e); 
and
    (2) Is issued for the appropriate purpose and by a qualifying 
issuer.

[[Page 12]]

    (b) Obligation issued for university purposes. (1) An obligation 
issued by a State or political subdivision or agency of a State or 
political subdivision for the purpose of financing the construction or 
improvement of facilities at or used by a university or a degree-
granting college-level institution, or financing loans for studies at 
such institutions, qualifies as a Type II security. Facilities financed 
in this manner may include student buildings, classrooms, university 
utility buildings, cafeterias, stadiums, and university parking lots.
    (2) An obligation that finances the construction or improvement of 
facilities used by a hospital may be eligible as a Type II security, if 
the hospital is a department or a division of a university, or otherwise 
provides a nexus with university purposes, such as an affiliation 
agreement between the university and the hospital, faculty positions of 
the hospital staff, and training of medical students, interns, 
residents, and nurses (e.g., a ``teaching hospital'').
    (c) Obligation issued for housing purposes. An obligation issued for 
housing purposes may qualify as a Type II security if the security 
otherwise meets the criteria for a Type II security.



PART 2_SALES OF CREDIT LIFE INSURANCE--Table of Contents




Sec.
2.1 Authority, purpose, and scope.
2.2 Definitions.
2.3 Distribution of credit life insurance income.
2.4 Bonus and incentive plans.
2.5 Bank compensation.

    Authority: 12 U.S.C. 24 (Seventh), 93a, and 1818(n).

    Source: 61 FR 51781, Oct. 4, 1996, unless otherwise noted.



Sec. 2.1  Authority, purpose, and scope.

    (a) Authority. A national bank may provide credit life insurance to 
loan customers pursuant to 12 U.S.C. 24 (Seventh).
    (b) Purpose. The purpose of this part is to set forth the principles 
and standards that apply to a national bank's provision of credit life 
insurance and the limitations that apply to the receipt of income from 
those sales by certain individuals and entities associated with the 
bank.
    (c) Scope. This part applies to the provision of credit life 
insurance by any national bank employee, officer, director, or principal 
shareholder, and certain entities in which such persons own an interest 
of more than ten percent.



Sec. 2.2  Definitions.

    (a) Bank means a national banking association or a bank located in 
the District of Columbia and subject to the supervision of the 
Comptroller of the Currency.
    (b) Credit life insurance means credit life, health, and accident 
insurance, sometimes referred to as credit life and disability 
insurance, and mortgage life and disability insurance.
    (c) Owning an interest includes:
    (1) Ownership through a spouse or minor child;
    (2) Ownership through a broker, nominee, or other agent; or
    (3) Ownership through any corporation, partnership, association, 
joint venture, or proprietorship, that is controlled by the director, 
officer, employee, or principal shareholder of the bank.
    (d) Officer, director, employee, or principal shareholder includes 
the spouse and minor children of an officer, director, employee, or 
principal shareholder.
    (e) Principal shareholder means any shareholder who directly or 
indirectly owns or controls an interest of more than ten percent of the 
bank's outstanding voting securities.



Sec. 2.3  Distribution of credit life insurance income.

    (a) Distribution of credit life insurance income by a national bank 
must be consistent with the requirements and principles of this section.
    (b) It is an unsafe and unsound practice for any director, officer, 
employee, or principal shareholder of a national bank (including any 
entity in which this person owns an interest of more than ten percent), 
who is involved in the sale of credit life insurance to loan customers 
of the national bank, to

[[Page 13]]

take advantage of that business opportunity for personal profit. 
Recommendations to customers to buy insurance should be based on the 
benefits of the policy, not the commissions received from the sale.
    (c) Except as provided in Sec. Sec. 2.4 and 2.5(b), and paragraph 
(d) of this section, a director, officer, employee, or principal 
shareholder of a national bank, or an entity in which such person owns 
an interest of more than ten percent, may not retain commissions or 
other income from the sale of credit life insurance in connection with 
any loan made by that bank, and income from credit life insurance sales 
to loan customers must be credited to the income accounts of the bank.
    (d) The requirements of paragraph (c) of this section do not apply 
to a director, officer, employee, or principal shareholder if:
    (1) The person is employed by a third party that has contracted with 
the bank on an arm's-length basis to sell financial products on bank 
premises; and
    (2) The person is not involved in the bank's credit decision 
process.



Sec. 2.4  Bonus and incentive plans.

    A bank employee or officer may participate in a bonus or incentive 
plan based on the sale of credit life insurance if payments to the 
employee or officer in any one year do not exceed the greater of:
    (a) Five percent of the recipient's annual salary; or
    (b) Five percent of the average salary of all loan officers 
participating in the plan.



Sec. 2.5  Bank compensation.

    (a) Nothing contained in this part prohibits a bank employee, 
officer, director, or principal shareholder who holds an insurance 
agent's license from agreeing to compensate the bank for the use of its 
premises, employees, or good will. However, the employee, officer, 
director, or principal shareholder shall turn over to the bank as 
compensation all income received from the sale of the credit life 
insurance to the bank's loan customers.
    (b) Income derived from credit life insurance sales to loan 
customers may be credited to an affiliate operating under the Bank 
Holding Company Act of 1956, 12 U.S.C. 1841 et seq., or to a trust for 
the benefit of all shareholders, provided that the bank receives 
reasonable compensation in recognition of the role played by its 
personnel, premises, and good will in credit life insurance sales. 
Reasonable compensation generally means an amount equivalent to at least 
20 percent of the affiliate's net income attributable to the bank's 
credit life insurance sales.



PART 3_MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES--Table of Contents




                   Subpart A_Authority and Definitions

Sec.
3.1 Authority.
3.2 Definitions.
3.3 Transitional rules.
3.4 Reservation of authority.

                    Subpart B_Minimum Capital Ratios

3.5 Applicability.
3.6 Minimum capital ratios.
3.7 Plan to achieve minimum capital ratios.
3.8 Reservation of authority.

Subpart C_Establishment of Minimum Capital Ratios for an Individual Bank

3.9 Purpose and scope.
3.10 Applicability.
3.11 Standards for determination of appropriate individual minimum 
          capital ratios.
3.12 Procedures.
3.13 Relation to other actions.

                          Subpart D_Enforcement

3.14 Remedies.

                    Subpart E_Issuance of a Directive

3.15 Purpose and scope.
3.16 Notice of intent to issue a directive.
3.17 Response to notice.
3.18 Decision.
3.19 Issuance of a directive.
3.20 Change in circumstances.
3.21 Relation to other administrative actions.

                             Interpretations

3.100 Capital and surplus.

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

[[Page 14]]

Appendix C to Part 3--Capital Adequacy Guidelines for [Banks]: Internal-
          Ratings-Based and Advanced Measurement Approaches

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

    Source: 50 FR 10216, Mar. 14, 1985, unless otherwise noted.



                   Subpart A_Authority and Definitions



Sec. 3.1  Authority.

    This part is issued under the authority of 12 U.S.C. 1 et seq., 93a, 
161, 1818, 3907 and 3909.

[59 FR 64563, Dec. 15, 1994]



Sec. 3.2  Definitions.

    For the purposes of this part:
    (a) Adjusted total assets means the average total assets figure 
required to be computed for and stated in a bank's most recent quarterly 
Consolidated Report of Condition and Income (Call Report) minus end-of-
quarter intangible assets, deferred tax assets, and credit-enhancing 
interest-only strips, that are deducted from Tier 1 capital, and minus 
nonfinancial equity investments for which a Tier 1 capital deduction is 
required pursuant to section 2(c)(5) of appendix A of this part 3. The 
OCC reserves the right to require a bank to compute and maintain its 
capital ratios on the basis of actual, rather than average, total assets 
when necessary to carry out the purposes of this part.
    (b) Bank means a national banking association or District of 
Columbia Bank.
    (c) Tier 1 capital means Tier 1 capital as determined according to 
section 2 of appendix A of this part, including the deductions described 
therein.
    (d) Tier 2 capital means Tier 2 capital as determined according to 
section 2 of appendix A of this part, including the limitations 
described therein.
    (e) Total capital means Total capital as determined according to 
section 1(25) and section 2 of appendix A of this part, including the 
deductions described therein.

[55 FR 38800, Sept. 21, 1990, as amended at 60 FR 7907, Feb. 10, 1995; 
67 FR 3795, Jan. 25, 2002]



Sec. 3.3  Transitional rules.

    Intangible assets, other than mortgage servicing rights, purchased 
prior to April 15, 1985, and accounted for in accordance with the 
instruction of the OCC, need not be deducted from Tier 1 capital until 
December 31, 1992. However, when combined with other qualifying 
intangible assets, these intangibles may not exceed 25 percent of Tier 1 
capital. After December 31, 1992, only those intangible assets that meet 
the criteria contained in section 2(c)(2) of appendix A will not be 
deducted from Tier 1 capital.

[55 FR 38800, Sept. 21, 1990]



Sec. 3.4  Reservation of authority.

    (a) Deductions from capital. Notwithstanding the definitions of Tier 
1 capital and Tier 2 capital in Sec. 3.2 (c) and (d), the OCC may find 
that a newly developed or modified capital instrument constitutes Tier 1 
capital or Tier 2 capital, and may permit one or more banks to include 
all or a portion of funds obtained through such capital instruments as 
Tier 1 or Tier 2 capital, permanently or on a temporary basis, for the 
purposes of compliance with this part or for other purposes. Similarly, 
the OCC may find that a particular intangible asset, deferred tax asset 
or credit-enhancing interest-only strip need not be deducted from Tier 1 
or Tier 2 capital. Conversely, the OCC may find that a particular 
intangible asset, deferred tax asset, credit-enhancing interest-only 
strip or other Tier 1 or Tier 2 capital component has characteristics or 
terms that diminish its contribution to a bank's ability to absorb 
losses, and may require the deduction from Tier 1 or Tier 2 capital of 
all of the component or of a greater portion of the component than is 
otherwise required.
    (b) Risk weight categories. Notwithstanding the risk categories in 
sections 3 and 4 of appendix A to this part, the OCC will look to the 
substance of the transaction and may find that the assigned risk weight 
for any asset or the credit equivalent amount or credit conversion 
factor for any off-balance sheet item does not appropriately reflect the

[[Page 15]]

risks imposed on a bank and may require another risk weight, credit 
equivalent amount, or credit conversion factor that the OCC deems 
appropriate. Similarly, if no risk weight, credit equivalent amount, or 
credit conversion factor is specifically assigned, the OCC may assign 
any risk weight, credit equivalent amount, or credit conversion factor 
that the OCC deems appropriate. In making its determination, the OCC 
considers risks associated with the asset or off-balance sheet item as 
well as other relevant factors.

[55 FR 38800, Sept. 21, 1990, as amended at 66 FR 59630, Nov. 29, 2001]



                    Subpart B_Minimum Capital Ratios



Sec. 3.5  Applicability.

    This subpart is applicable to all banks unless the Office 
determines, pursuant to the procedures set forth in subpart C, that 
different minimum capital ratios are appropriate for an individual bank 
based upon its particular circumstances, or unless different minimum 
capital ratios have been established or are established for an 
individual bank in a written agreement or a temporary or final order 
pursuant to 12 U.S.C. 1818 (b) or (c), or as a condition for approval of 
an application.



Sec. 3.6  Minimum capital ratios.

    (a) Risk-based capital ratio. All national banks must have and 
maintain the minimum risk-based capital ratio as set forth in appendix A 
(and, for certain banks, in appendix B).
    (b) Total assets leverage ratio. All national banks must have and 
maintain Tier 1 capital in an amount equal to at least 3.0 percent of 
adjusted total assets.
    (c) Additional leverage ratio requirement. An institution operating 
at or near the level in paragraph (b) of this section should have well-
diversified risks, including no undue interest rate risk exposure; 
excellent control systems; good earnings; high asset quality; high 
liquidity; and well managed on-and off-balance sheet activities; and in 
general be considered a strong banking organization, rated composite 1 
under the Uniform Financial Institutions Rating System (CAMELS) rating 
system of banks. For all but the most highly-rated banks meeting the 
conditions set forth in this paragraph (c), the minimum Tier 1 leverage 
ratio is 4 percent. In all cases, banking institutions should hold 
capital commensurate with the level and nature of all risks.

[55 FR 38800, Sept. 21, 1990, as amended at 61 FR 47367, Sept. 6, 1996; 
64 FR 10199, Mar. 2, 1999]



Sec. 3.7  Plan to achieve minimum capital ratios.

    Effective December 31, 1990, any bank having capital ratios less 
than the minimums required under Sec. 3.6 (a) and (b) shall, within 60 
days, submit to the OCC a plan describing the means and schedule by 
which the bank shall achieve the applicable minimum capital ratios. The 
plan may be considered acceptable unless the bank is notified to the 
contrary by the OCC. A bank in compliance with an acceptable plan to 
achieve the applicable minimum capital ratios will not be deemed to be 
in violation of Sec. 3.6.

[55 FR 38800, Sept. 21, 1990]



Sec. 3.8  Reservation of authority.

    When, in the opinion of the Office the circumstances so require, a 
bank may be authorized to have less than the minimum capital ratios in 
Sec. 3.6 during a time period specified by the Office.



Subpart C_Establishment of Minimum Capital Ratios for an Individual Bank



Sec. 3.9  Purpose and scope.

    The rules and procedures specified in this subpart are applicable to 
a proceeding to establish required minimum capital ratios that would 
otherwise be applicable to a bank under Sec. 3.6. The OCC is authorized 
under 12 U.S.C. 3907 (a)(2) to establish such minimum capital 
requirements for a bank as the OCC, in its discretion, deems appropriate 
in light of the particular circumstances at that bank. Proceedings under 
this subpart also may be initiated to require a bank having capital 
ratios above those set forth in Sec. 3.6, or

[[Page 16]]

other legal authority to continue to maintain those higher ratios.

[55 FR 38800, Sept. 21, 1990]



Sec. 3.10  Applicability.

    The OCC may require higher minimum capital ratios for an individual 
bank in view of its circumstances. For example, higher capital ratios 
may be appropriate for:
    (a) A newly chartered bank;
    (b) A bank receiving special supervisory attention;
    (c) A bank that has, or is expected to have, losses resulting in 
capital inadequacy;
    (d) A bank with significant exposure due to the risks from 
concentrations of credit, certain risks arising from nontraditional 
activities, or management's overall inability to monitor and control 
financial and operating risks presented by concentrations of credit and 
nontraditional activities;
    (e) A bank with significant exposure to declines in the economic 
value of its capital due to changes in interest rates;
    (f) A bank with significant exposure due to fiduciary or operational 
risk;
    (g) A bank exposed to a high degree of asset depreciation, or a low 
level of liquid assets in relation to short term liabilities;
    (h) A bank exposed to a high volume or, or particularly severe, 
problem loans;
    (i) A bank that is growing rapidly, either internally or through 
acquisitions; or
    (j) A bank that may be adversely affected by the activities or 
condition of its holding company, affiliate(s), or other persons or 
institutions including chain banking organizations, with which it has 
significant business relationships.

[60 FR 39493, Aug. 2, 1995]



Sec. 3.11  Standards for determination of appropriate individual minimum capital ratios.

    The appropriate minimum capital ratios for an individual bank cannot 
be determined solely through the application of a rigid mathematical 
formula or wholly objective criteria. The decision is necessarily based 
in part on subjective judgment grounded in agency expertise. The factors 
to be considered in the determination will vary in each case and may 
include, for example:
    (a) The conditions or circumstances leading to the Office's 
determination that higher minimum capital ratios are appropriate or 
necessary for the bank;
    (b) The exigency of those circumstances or potential problems;
    (c) The overall condition, management strength, and future prospects 
of the bank and, if applicable, its holding company and/or affiliate(s);
    (d) The bank's liquidity, capital, risk asset and other ratios 
compared to the ratios of its peer group; and
    (e) The views of the bank's directors and senior management.



Sec. 3.12  Procedures.

    (a) Notice. When the OCC determines that minimum capital ratios 
above those set forth in Sec. 3.6 or other legal authority are 
necessary or appropriate for a particular bank, the OCC will notify the 
bank in writing of the proposed minimum capital ratios and the date by 
which they should be reached (if applicable) and will provide an 
explanation of why the ratios proposed are considered necessary or 
appropriate for the bank.
    (b) Response. (1) The bank may respond to any or all of the items in 
the notice. The response should include any matters which the bank would 
have the Office consider in deciding whether individual minimum capital 
ratios should be established for the bank, what those capital ratios 
should be, and, if applicable, when they should be achieved. The 
response must be in writing and delivered to the designated OCC official 
within 30 days after the date on which the bank received the notice. The 
Office may shorten the time period when, in the opinion of the Office, 
the condition of the bank so requires, provided that the bank is 
informed promptly of the new time period, or with the consent of the 
bank. In its discretion, the Office may extend the time period for good 
cause.
    (2) Failure to respond within 30 days or such other time period as 
may be specified by the Office shall constitute

[[Page 17]]

a waiver of any objections to the proposed minimum capital ratios or the 
deadline for their achievement.
    (c) Decision. After the close of the bank's response period, the 
Office will decide, based on a review of the bank's response and other 
information concerning the bank, whether individual minimum capital 
ratios should be established for the bank and, if so, the ratios and the 
date the requirements will become effective. The bank will be notified 
of the decision in writing. The notice will include an explanation of 
the decision, except for a decision not to establish individual minimum 
capital requirements for the bank.
    (d) Submission of plan. The decision may require the bank to develop 
and submit to the Office, within a time period specified, an acceptable 
plan to reach the minimum capital ratios established for the bank by the 
date required.
    (e) Change in circumstances. If, after the Office's decision in 
paragraph (c) of this section, there is a change in the circumstances 
affecting the bank's capital adequacy or its ability to reach the 
required minimum capital ratios by the specified date, either the bank 
or the Office may propose to the other a change in the minimum capital 
ratios for the bank, the date when the minimums must be achieved, or the 
bank's plan (if applicable). The Office may decline to consider 
proposals that are not based on a significant change in circumstances or 
are repetitive or frivolous. Pending a decision on reconsideration, the 
Office's original decision and any plan required under that decision 
shall continue in full force and effect.

[50 FR 10216, Mar. 14, 1985, as amended at 55 FR 38800, Sept. 21, 1990]



Sec. 3.13  Relation to other actions.

    In lieu of, or in addition to, the procedures in this subpart, the 
required minimum capital ratios for a bank may be established or revised 
through a written agreement or cease and desist proceedings under 12 
U.S.C. 1818 (b) or (c) (12 CFR 19.0 through 19.21), or as a condition 
for approval of an application.



                          Subpart D_Enforcement



Sec. 3.14  Remedies.

    A bank that does not have or maintain the minimum capital ratios 
applicable to it, whether required in subpart B of this part, in a 
decision pursuant to subpart C of this part, in a written agreement or 
temporary or final order under 12 U.S.C. 1818 (b) or (c), or in a 
condition for approval of an application, or a bank that has failed to 
submit or comply with an acceptable plan to attain those ratios, will be 
subject to such administrative action or sanctions as the OCC considers 
appropriate. These sanctions may include the issuance of a Directive 
pursuant to subpart E of this part or other enforcement action, 
assessment of civil money penalties, and/or the denial, conditioning, or 
revocation of applications. A national bank's failure to achieve or 
maintain minimum capital ratios in Sec. 3.6 (a) or (b) may also be the 
basis for an action by the Federal Deposit Insurance Corporation to 
terminate federal deposit insurance. See 12 CFR 325.4.

[55 FR 38801, Sept. 21, 1990]



                    Subpart E_Issuance of a Directive



Sec. 3.15  Purpose and scope.

    This subpart is applicable to proceedings by the Office to issue a 
directive under 12 U.S.C. 3907(b)(2). A directive is an order issued to 
a bank that does not have or maintain capital at or above the minimum 
ratios set forth in Sec. 3.6, or established for the bank under subpart 
C, by a written agreement under 12 U.S.C. 1818(b), or as a condition for 
approval of an application. A directive may order the bank to:
    (a) Achieve the minimum capital ratios applicable to it by a 
specified date;
    (b) Adhere to a previously submitted plan to achieve the applicable 
capital ratios;
    (c) Submit and adhere to a plan acceptable to the Office describing 
the means and time schedule by which the bank shall achieve the 
applicable capital ratios;
    (d) Take other action, such as reduction of assets or the rate of 
growth of assets, or restrictions on the payment

[[Page 18]]

of dividends, to achieve the applicable capital ratios; or
    (e) A combination of any of these or similar actions.

A directive issued under this rule, including a plan submitted under a 
directive, is enforceable in the same manner and to the same extent as 
an effective and outstanding cease and desist order which has become 
final as defined in 12 U.S.C. 1818(k). Violation of a directive may 
result in assessment of civil money penalties in accordance with 12 
U.S.C. 3909(d).



Sec. 3.16  Notice of intent to issue a directive.

    The Office will notify a bank in writing of its intention to issue a 
directive. The notice will state:
    (a) Reasons for issuance of the directive; and
    (b) The proposed contents of the directive.



Sec. 3.17  Response to notice.

    (a) A bank may respond to the notice by stating why a directive 
should not be issued and/or by proposing alternative contents for the 
directive. The response should include any matters which the bank would 
have the Office consider in deciding whether to issue a directive and/or 
what the contents of the directive should be. The response may include a 
plan for achieving the minimum capital ratios applicable to the bank. 
The response must be in writing and delivered to the designated OCC 
official within 30 days after the date on which the bank received the 
notice. The Office may shorten the 30-day time period:
    (1) When, in the opinion of the Office, the condition of the bank so 
requires, provided that the bank shall be informed promptly of the new 
time period;
    (2) With the consent of the bank; or
    (3) When the bank already has advised the Office that it cannot or 
will not achieve its applicable minimum capital ratios. In its 
discretion, the Office may extend the time period for good cause.
    (b) Failure to respond within 30 days or such other time period as 
may be specified by the Office shall constitute a waiver of any 
objections to the proposed directive.



Sec. 3.18  Decision.

    After the closing date of the bank's response period, or receipt of 
the bank's response, if earlier, the Office will consider the bank's 
response, and may seek additional information or clarification of the 
response. Thereafter, the Office will determine whether or not to issue 
a directive, and if one is to be issued, whether it should be as 
originally proposed or in modified form.



Sec. 3.19  Issuance of a directive.

    (a) A directive will be served by delivery to the bank. It will 
include or be accompanied by a statement of reasons for its issuance.
    (b) A directive is effective immediately upon its receipt by the 
bank, or upon such later date as may be specified therein, and shall 
remain effective and enforceable until it is stayed, modified, or 
terminated by the Office.



Sec. 3.20  Change in circumstances.

    Upon a change in circumstances, a bank may request the Office to 
reconsider the terms of its directive or may propose changes in the plan 
to achieve the bank's applicable minimum capital ratios. The Office also 
may take such action on its own motion. The Office may decline to 
consider requests or proposals that are not based on a significant 
change in circumstances or are repetitive or frivolous. Pending a 
decision on reconsideration, the directive and plan shall continue in 
full force and effect.



Sec. 3.21  Relation to other administrative actions.

    A directive may be issued in addition to, or in lieu of, any other 
action authorized by law, including cease and desist proceedings, civil 
money penalties, or the conditioning or denial of applications. The 
Office also may, in its discretion, take any action authorized by law, 
in lieu of a directive, in response to a bank's failure to achieve or 
maintain the applicable minimum capital ratios.

[[Page 19]]

                             Interpretations



Sec. 3.100  Capital and surplus.

    For purposes of determining statutory limits that are based on the 
amount of bank's capital and/or surplus, the provisions of this section 
are to be used, rather than the definitions of capital contained in 
Sec. 3.2.
    (a) Capital. The term capital as used in provisions of law relating 
to the capital of national banking associations shall include the amount 
of common stock outstanding and unimpaired plus the amount of perpetual 
preferred stock outstanding and unimpaired.
    (b) Capital Stock. The term capital stock as used in provisions of 
law relating to the capital stock of national banking associations, 
other than 12 U.S.C. 101, 177 and 178, shall have the same meaning as 
the term capital set forth in paragraph (a) of this section.
    (c) Surplus. The term surplus as used in provisions of law relating 
to the surplus of national banking associations means the sum of 
paragraphs (c) (1), (2), (3) and (4) of this section:
    (1) Capital surplus; undivided profits; reserves for contingencies 
and other capital reserves (excluding accrued dividends on perpetual and 
limited life preferred stock); net worth certificates issued pursuant to 
12 U.S.C. 1823(i); minority interests in consolidated subsidiaries; and 
allowances for loan and lease losses; minus intangible assets;
    (2) Mortgage servicing assets;
    (3) Mandatory convertible debt to the extent of 20% of the sum of 
paragraphs (a) and (c) (1) and (2) of this section;
    (4) Other mandatory convertible debt, limited life preferred stock 
and subordinated notes and debentures to the extent set forth in 
paragraph (f)(2) of this section.
    (d) Unimpaired Surplus Fund. The term unimpaired surplus fund as 
used in provisions of law relating to the unimpaired surplus fund of 
national banking associations shall have the same meaning as the term 
surplus set forth in paragraph (c) of this section.
    (e) Definitions. (1) Allowance for loan and lease losses means the 
balance of the valuation reserve on December 31, 1968, plus additions to 
the reserve charged to operations since that date, less losses charged 
against the allowance net of recoveries.
    (2) Capital surplus means the total of those accounts reflecting:
    (i) Amounts paid in in excess of the par or stated value of capital 
stock;
    (ii) Amounts contributed to the bank other than for capital stock;
    (iii) amounts transferred from undivided profits pursuant to 12 
U.S.C. 60; and
    (iv) Other amounts transferred from undivided profits.
    (3) Intangible assets means those purchased assets that are to be 
reported as intangible assets in accordance with the Instructions--
Consolidated Reports of Condition and Income (Call Report).
    (4) Limited Life preferred stock means preferred stock which has a 
maturity or which may be redeemed at the option of the holder.
    (5) Mandatory convertible debt means subordinated debt instruments 
which unqualifiedly require the issuer to exchange either common or 
perpetual preferred stock for such instruments by a date at or before 
the maturity of the instrument. The maturity of these instruments must 
be 12 years or less. In addition, the instrument must meet the 
requirements of paragraphs (f)(1)(i) through (v) of this section for 
subordinated notes and debentures or other requirements published by the 
OCC.
    (6) Minority interest in consolidated subsidiaries means the portion 
of equity capital accounts of all consolidated subsidiaries of the bank 
that is allocated to minority shareholders of such subsidiaries.
    (7) Mortgage servicing assets means the bank-owned rights to service 
for a fee mortgage loans that are owned by others.
    (8) Perpetual preferred stock means preferred stock that does not 
have a stated maturity date and cannot be redeemed at the option of the 
holder.
    (f) Requirements and restrictions: Limited life preferred stock, 
mandatory convertible debt, and other subordinated debt--(1) 
Requirements. Issues of limited life preferred stock and subordinated 
notes and debentures (except mandatory convertible debt) shall have 
original weighted average maturities of at least five years to be 
included in the

[[Page 20]]

definition of surplus. In addition, a subordinated note or debenture 
must also:
    (i) Be subordinated to the claims of depositors;
    (ii) State on the instrument that it is not a deposit and is not 
insured by the FDIC;
    (iii) Be unsecured;
    (iv) Be ineligible as collateral for a loan by the issuing bank;
    (v) Provide that once any scheduled payments of principal begin, all 
scheduled payments shall be made at least annually and the amount repaid 
in each year shall be no less than in the prior year; and
    (vi) Provide that no prepayment (including payment pursuant to an 
acceleration clause or redemption prior to maturity) shall be made 
without prior OCC approval unless the bank remains an eligible bank, as 
defined in 12 CFR 5.3(g), after the prepayment.
    (2) Restrictions. The total amount of mandatory convertible debt not 
included in paragraph (c)(3) of this section, limited life preferred 
stock, and subordinated notes and debentures considered as surplus is 
limited to 50 percent of the sum of paragraphs (a) and (c) (1), (2) and 
(3) of this section.
    (3) Reservation of authority. The OCC expressly reserves the 
authority to waive the requirements and restrictions set forth in 
paragraphs (f) (1) and (2) of this section, in order to allow the 
inclusion of other limited life preferred stock, mandatory convertible 
notes and subordinated notes and debentures in the capital base of any 
national bank for capital adequacy purposes or for purposes of 
determining statutory limits. The OCC further expressly reserves the 
authority to impose more stringent conditions than those set forth in 
paragraphs (f) (1) and (2) of this section to exclude any component of 
Tier 1 or Tier 2 capital, in whole or in part, as part of a national 
bank's capital and surplus for any purpose.
    (g) Transitional rules. (1) Equity commitment notes approved by the 
OCC as capital and issued prior to April 15, 1985, may continue to be 
included in paragraph (c)(3) of this section. All other instruments 
approved by the OCC as capital and issued prior to April 15, 1985, are 
to be included in paragraph (c)(4) of this section.
    (2) Intangible assets (other than mortgage servicing assets) 
purchased prior to April 15, 1985, and accounted for in accordance with 
OCC instructions, may continue to be included as surplus up to 25% of 
the sum of paragraphs (a) and (c)(1) of this section.

(Approved by the Office of Management and Budget under control number 
1557-0166)

[50 FR 10216, Mar. 14, 1985, as amended at 55 FR 38801, Sept. 21, 1990; 
60 FR 39229, Aug. 1, 1995; 61 FR 60363, Nov. 27, 1996; 63 FR 42674, Aug. 
10, 1998]



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

    Section 1. Purpose, Applicability of Guidelines, and Definitions.

    (a) Purpose. (1) An important function of the Office of the 
Comptroller of the Currency (OCC) is to evaluate the adequacy of capital 
maintained by each national bank. Such an evaluation involves the 
consideration of numerous factors, including the riskiness of a bank's 
assets and off-balance sheet items. This appendix A implements the OCC's 
risk-based capital guidelines. The risk-based capital ratio derived from 
those guidelines is more systematically sensitive to the credit risk 
associated with various bank activities than is a capital ratio based 
strictly on a bank's total balance sheet assets. A bank's risk-based 
capital ratio is obtained by dividing its capital base (as defined in 
section 2 of this appendix A) by its risk-weighted assets (as calculated 
pursuant to section 3 of this appendix A). These guidelines were created 
within the framework established by the report issued by the Committee 
on Banking Regulations and Supervisory Practices in July 1988. The OCC 
believes that the risk-based capital ratio is a useful tool in 
evaluating the capital adequacy of all national banks, not just those 
that are active in the international banking system.
    (2) The purpose of this appendix A is to explain precisely (i) how a 
national bank's risk-based capital ratio is determined and (ii) how 
these risk-based capital guidelines are applied to national banks. The 
OCC will review these guidelines periodically for possible adjustments 
commensurate with its experience with the risk-based capital ratio and 
with changes in the economy, financial markets and domestic and 
international banking practices.
    (b) Applicability. (1) The risk-based capital ratio derived from 
these guidelines is an important factor in the OCC's evaluation of a 
bank's capital adequacy. However, since this measure addresses only 
credit risk, the 8% minimum ratio should not be viewed as the level to 
be targeted, but rather as a floor.

[[Page 21]]

The final supervisory judgment on a bank's capital adequacy is based on 
an individualized assessment of numerous factors, including those listed 
in 12 CFR 3.10. With respect to the consideration of these factors, the 
OCC will give particular attention to any bank with significant exposure 
to declines in the economic value of its capital due to changes in 
interest rates. As a result, it may differ from the conclusion drawn 
from an isolated comparison of a bank's risk-based capital ration to the 
8% minimum specified in these guidelines. In addition to the standards 
established by these risk-based capital guidelines, all national banks 
must maintain a minimum capital-to-total assets ratio in accordance with 
the provisions of 12 CFR part 3.
    (2) Effective December 31, 1990, these risk-based capital guidelines 
will apply to all national banks. In the interim, banks must maintain 
minimum capital-to-total assets ratios as required by 12 CFR part 3, and 
should begin preparing for the implementation of these risk-based 
capital guidelines. In this regard, each national bank that does not 
currently meet the final minimum ratio established in section 4(b)(1) of 
this appendix A should begin planning for achieving that standard.
    (3) These risk-based capital guidelines will not be applied to 
federal branches and agencies of foreign banks.
    (c) Definitions. For purposes of this appendix A, the following 
definitions apply:
    (1) Adjusted carrying value means, for purposes of section 2(c)(5) 
of this appendix A, the aggregate value that investments are carried on 
the balance sheet of the bank reduced by any unrealized gains on the 
investments that are reflected in such carrying value but excluded from 
the bank's Tier 1 capital and reduced by any associated deferred tax 
liabilities. For example, for investments held as available-for-sale 
(AFS), the adjusted carrying value of the investments would be the 
aggregate carrying value of the investments (as reflected on the 
consolidated balance sheet of the bank) less any unrealized gains on 
those investments that are included in other comprehensive income and 
that are not reflected in Tier 1 capital, and less any associated 
deferred tax liabilities. Unrealized losses on AFS nonfinancial equity 
investments must be deducted from Tier 1 capital in accordance with 
section 1(c)(8) of this appendix A. The treatment of small business 
investment companies that are consolidated for accounting purposes under 
generally accepted accounting principles is discussed in section 
2(c)(5)(ii) of this appendix A. For investments in a nonfinancial 
company that is consolidated for accounting purposes, the bank's 
adjusted carrying value of the investment is determined under the equity 
method of accounting (net of any intangibles associated with the 
investment that are deducted from the bank's Tier 1 capital in 
accordance with section 2(c)(2) of this appendix A). Even though the 
assets of the nonfinancial company are consolidated for accounting 
purposes, these assets (as well as the credit equivalent amounts of the 
company's off-balance sheet items) are excluded from the bank's risk-
weighted assets.
    (2) Allowances for loan and lease losses means the balance of the 
valuation reserve on December 31, 1968, plus additions to the reserve 
charged to operations since that date, less losses charged against the 
allowance net of recoveries.
    (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.
    (5) Associated company means any corporation, partnership, business 
trust, joint venture, association or similar organization in which a 
national bank directly or indirectly holds a 20 to 50 percent ownership 
interest.
    (6) Banking and finance subsidiary means any subsidiary of a 
national bank that engages in banking- and finance-related activities.
    (7) Cash items in the process of collection means checks or drafts 
in the process of collection that are drawn on another depository 
institution, including a central bank, and that are payable immediately 
upon presentation in the country in which the reporting bank's office 
that is clearing or collecting the check or draft is located; U.S. 
Government checks that are drawn on the United States Treasury or any 
other U.S. Government or Government-sponsored agency and that are 
payable immediately upon presentation; broker's security drafts and 
commodity or bill-of-lading drafts payable immediately upon presentation 
in the United States or the country in which the reporting bank's office 
that is handling the drafts is located; and unposted debits.
    (8) Central government means the national governing authority of a 
country; it includes the departments, ministries and agencies of the 
central government and the central

[[Page 22]]

bank. The U.S. Central Bank includes the 12 Federal Reserve Banks. The 
definition of central government does not include the following: State, 
provincial, or local governments; commercial enterprises owned by the 
central government, which are entities engaged in activities involving 
trade, commerce, or profit that are generally conducted or performed in 
the private sector of the United States economy; and non-central 
government entities whose obligations are guaranteed by the central 
government.
    (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.
    (10) Common stockholders' equity means common stock, common stock 
surplus, undivided profits, capital reserves, and adjustments for the 
cumulative effect of foreign currency translation, less net unrealized 
holding losses on available-for-sale equity securities with readily 
determinable fair values.
    (11) Conditional guarantee means a contingent obligation of the 
United States Government or its agencies, or the central government of 
an OECD country, the validity of which to the beneficiary is dependent 
upon some affirmative action--e.g., servicing requirements--on the part 
of the beneficiary of the guarantee or a third party.
    (12) Deferred tax assets means the tax consequences attributable to 
tax carryforwards and deductible temporary differences. Tax 
carryforwards are deductions or credits that cannot be used for tax 
purposes during the current period, but can be carried forward to reduce 
taxable income or taxes payable in a future period or periods. Temporary 
differences are financial events or transactions that are recognized in 
one period for financial statement purposes, but are recognized in 
another period or periods for income tax purposes. Deductible temporary 
differences are temporary differences that result in a reduction of 
taxable income in a future period or periods.
    (13) Derivative contract means generally a financial contract whose 
value is derived from the values of one or more underlying assets, 
reference rates or indexes of asset values. Derivative contracts include 
interest rate, foreign exchange rate, equity, precious metals and 
commodity contracts, or any other instrument that poses similar credit 
risks.
    (14) Depository institution means a financial institution that 
engages in the business of banking; that is recognized as a bank by the 
bank supervisory or monetary authorities of the country of its 
incorporation and the country of its principal banking operations; that 
receives deposits to a substantial extent in the regular course of 
business; and that has the power to accept demand deposits. In the U.S., 
this definition encompasses all federally insured offices of commercial 
banks, mutual and stock savings banks, savings or building and loan 
associations (stock and mutual), cooperative banks, credit unions, and 
international banking facilities of domestic depository institution. 
Bank holding companies are excluded from this definition. For the 
purposes of assigning risk weights, the differentiation between OECD 
depository institutions and non-OECD depository institutions is based on 
the country of incorporation. Claims on branches and agencies of foreign 
banks located in the United States are to be categorized on the basis of 
the parent bank's country of incorporation.
    (15) Equity investment means, for purposes of section 1(c)(19) and 
section 2(c)(5) of this appendix A, any equity instrument including 
warrants and call options that give the holder the right to purchase an 
equity instrument, any equity feature of a debt instrument (such as a 
warrant or call option), and any debt instrument that is convertible 
into equity. An investment in any other instrument, including 
subordinated debt or other types of debt instruments, may be treated as 
an equity investment if the OCC determines that the instrument is the 
functional equivalent of equity or exposes the bank to essentially the 
same risks as an equity instrument.
    (16) Exchange rate contracts include: Cross-currency interest rate 
swaps; forward foreign exchange rate contracts; currency options 
purchased; and any similar instrument that, in the opinion of the OCC, 
gives rise to similar risks.
    (17) Goodwill means an intangible asset that represents the excess 
of the purchase price over the fair market value of tangible and 
identifiable intangible assets acquired in purchases accounted for under 
the purchase method of accounting.
    (18) Intangible assets include mortgage and non-mortgage servicing 
assets (but exclude any interest only (IO) strips receivable related to 
these mortgage and nonmortgage servicing assets), purchased credit card 
relationships, goodwill, favorable leaseholds, and core deposit value.
    (19) Interest rate contracts include: Single currency interest rate 
swaps; basis swaps; forward rate agreements; interest rate options 
purchased; forward forward deposits accepted; and any similar instrument 
that, in the opinion of the OCC, gives rise to similar risks, including 
when-issued securities.
    (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

[[Page 23]]

from any structure, program, or conduit constitutes an asset-backed 
commercial paper liquidity facility.
    (21) Multifamily residential property means any residential property 
consisting of five or more dwelling units including apartment buildings, 
condominiums, cooperatives, and other similar structures primarily for 
residential use, but not including hospitals, nursing homes, or other 
similar facilities.
    (22) 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 or SEC) as a nationally recognized statistical rating 
organization for various purposes, including the Commission's uniform 
net capital requirements for brokers and dealers.
    (23) Nonfinancial equity investment means any equity investment held 
by a bank in a nonfinancial company through a small business investment 
company (SBIC) under section 302(b) of the Small Business Investment Act 
of 1958 (15 U.S.C. 682(b)) or under the portfolio investment provisions 
of Regulation K (12 CFR 211.8(c)(3)). An equity investment made under 
section 302(b) of the Small Business Investment Act of 1958 in a SBIC 
that is not consolidated with the bank is treated as a nonfinancial 
equity investment in the manner provided in section 2(c)(5)(ii)(C) of 
this appendix A. A nonfinancial company is an entity that engages in any 
activity that has not been determined to be permissible for a bank to 
conduct directly or to be financial in nature or incidental to financial 
activities under section 4(k) of the Bank Holding Company Act (12 U.S.C. 
1843(k)).
    (24) The OECD-based group of countries comprises all full members of 
the Organization for Economic Cooperation and Development (OECD) 
regardless of entry date, as well as countries that have concluded 
special lending arrangements with the International Monetary Fund (IMF) 
associated with the IMF's General Arrangements to Borrow,\1\ but 
excludes any country that has rescheduled its external sovereign debt 
within the previous five years. These countries are hereinafter referred 
to as OECD countries. A rescheduling of external sovereign debt 
generally would include any renegotiation of terms arising from a 
country's inability or unwillingness to meet its external debt service 
obligations, but generally would not include renegotiations of debt in 
the normal course of business, such as a renegotiation to allow the 
borrower to take advantage of a decline in interest rates or other 
change in market conditions.
---------------------------------------------------------------------------

    \1\ As of November 1995, the OECD included the following countries: 
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, 
Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the 
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, 
Turkey, the United Kingdom, and the United States; and Saudi Arabia had 
concluded special lending arrangements with the IMF associated with the 
IMF's General Arrangements to Borrow.
---------------------------------------------------------------------------

    (25) Original maturity means, with respect to a commitment, the 
earliest possible date after a commitment is made on which the 
commitment is scheduled to expire (i.e., it will reach its stated 
maturity and cease to be binding on either party), provided that either:
    (i) The commitment is not subject to extension or renewal and will 
actually expire on its stated expiration date; or
    (ii) If the commitment is subject to extension or renewal beyond its 
stated expiration date, the stated expiration date will be deemed the 
original maturity only if the extension or renewal must be based upon 
terms and conditions independently negotiated in good faith with the 
customer at the time of the extension or renewal and upon a new, bona 
fide credit analysis utilizing current information on financial 
condition and trends.
    (26) Preferred stock includes the following instruments: (i) 
Convertible preferred stock, which means preferred stock that is 
mandatorily convertible into either common or perpetual preferred stock; 
(ii) Intermediate-term preferred stock, which means preferred stock with 
an original maturity of at least five years, but less than 20 years; 
(iii) Long-term preferred stock, which means preferred stock with an 
original maturity of 20 years or more; and (iv) Perpetual preferred 
stock, which means preferred stock without a fixed maturity date that 
cannot be redeemed at the option of the holder, and that has no other 
provisions that will require future redemption of the issue. For 
purposes of these instruments, preferred stock that can be redeemed at 
the option of the holder is deemed to have an original maturity of the 
earliest possible date on which it may be so redeemed.
    (27) Public-sector entities include states, local authorities and 
governmental subdivisions below the central government level in an OECD 
country. In the United States, this definition encompasses a state, 
county, city, town, or other municipal corporation, a public authority, 
and generally any publicly-owned entity that is an instrumentality of a 
state or municipal corporation. This definition does not include 
commercial companies owned by the public sector.\1a\
---------------------------------------------------------------------------

    \1a\ See Definition (5), Central government, for further explanation 
of commercial companies owned by the public sector.

---------------------------------------------------------------------------

[[Page 24]]

    (28) Reciprocal holdings of bank capital instruments means cross-
holdings or other formal or informal arrangements in which two or more 
banking organizations swap, exchange, or otherwise agree to hold each 
other's capital instruments. This definition does not include holdings 
of capital instruments issued by other banking organizations that were 
taken in satisfaction of debts previously contracted, provided that the 
reporting national bank has not held such instruments for more than five 
years or a longer period approved by the OCC.
    (29) Replacement cost means, with respect to interest rate and 
exchange rate contracts, the loss that would be incurred in the event of 
a counterparty default, as measured by the net cost of replacing the 
contract at the current market value. If default would result in a 
theoretical profit, the replacement value is considered to be zero. The 
mark-to-market process should incorporate changes in both interest rates 
and counterparty credit quality.
    (30) Residential properties means houses, condominiums, cooperative 
units, and manufactured homes. This definition does not include boats or 
motor homes, even if used as a primary residence.
    (31) Risk-weighted assets means the sum of total risk-weighted 
balance sheet assets and the total of risk-weighted off-balance sheet 
credit equivalent amounts. Risk-weighted balance sheet and off-balance 
sheet assets are calculated in accordance with section 3 of this 
appendix A.
    (32) State means any one of the several states of the United States 
of America, the District of Columbia, Puerto Rico, and the territories 
and possessions of the United States.
    (33) Subsidiary means any corporation, partnership, business trust, 
joint venture, association or similar organization in which a national 
bank directly or indirectly holds more than a 50% ownership interest. 
This definition does not include ownership interests that were taken in 
satisfaction of debts previously contracted, provided that the reporting 
bank has not held the interest for more than five years or a longer 
period approved by the OCC.
    (34) Total capital means the sum of a national bank's core (Tier 1) 
and qualifying supplementary (Tier 2) capital elements.
    (35) Unconditionally cancelable means, with respect to a commitment-
type lending arrangement, that the bank may, at any time, with or 
without cause, refuse to advance funds or extend credit under the 
facility. In the case of home equity lines of credit, the bank is deemed 
able to unconditionally cancel the commitment if it can, at its option, 
prohibit additional extensions of credit, reduce the line, and terminate 
the commitment to the full extent permitted by relevant Federal law.
    (36) United States Government or its agencies means an 
instrumentality of the U.S. Government whose debt obligations are fully 
and explicitly guaranteed as to the timely payment of principal and 
interest by the full faith and credit of the United States Government.
    (37) United States Government-sponsored agency means an agency 
originally established or chartered to serve public purposes specified 
by the United States Congress, but whose obligations are not explicitly 
guaranteed by the full faith and credit of the United States Government.
    (38) Walkaway clause means a provision in a bilateral netting 
contract that permits a nondefaulting counterparty to make a lower 
payment than it would make otherwise under the bilateral netting 
contract, or no payment at all, to a defaulter or the estate of a 
defaulter, even if the defaulter or the estate of the defaulter is a net 
creditor under the bilateral netting contract.

                    Section 2. Components of Capital.

    A national bank's qualifying capital base consists of two types of 
capital--core (Tier 1) and supplementary (Tier 2).
    (a) Tier 1 Capital. The following elements comprise a national 
bank's Tier 1 capital:
    (1) Common stockholders' equity;
    (2) Noncumulative perpetual preferred stock and related surplus; and 
\2\
---------------------------------------------------------------------------

    \2\ Preferred stock issues where the dividend is reset periodically 
based upon current market conditions and the bank's current credit 
rating, 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.
---------------------------------------------------------------------------

    (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.
    (b) Tier 2 Capital. The following elements comprise a national 
bank's Tier 2 capital:

[[Page 25]]

    (1) Allowance for loan and lease losses, up to a maximum of 1.25% of 
risk-weighted assets,\3\ subject to the transition rules in section 
4(a)(2) of this appendix A;
---------------------------------------------------------------------------

    \3\ The amount of the allowance for loan and lease losses that may 
be included in capital is based on a percentage of risk-weighted assets. 
The gross sum of risk-weighted assets used in this calculation includes 
all risk-weighted assets, with the exception of the assets required to 
be deducted under section 3 in establishing risk-weighted assets (i.e., 
the assets required to be deducted from capital under section 2(c)) of 
this appendix. A banking organization may deduct reserves for loan and 
lease losses in excess of the amount permitted to be included as 
capital, as well as allocated transfer risk reserves and reserves held 
against other real estate owned, from the gross sum of risk-weighted 
assets in computing the denominator of the risk-based capital ratio.
---------------------------------------------------------------------------

    (2) Cumulative perpetual preferred stock, long-term preferred stock, 
convertible preferred stock, and any related surplus, without limit, if 
the issuing national bank has the option to defer payment of dividends 
on these instruments. For long-term preferred stock, the amount that is 
eligible to be included as Tier 2 capital is reduced by 20% of the 
original amount of the instrument (net of redemptions) at the beginning 
of each of the last five years of the life of the instrument;
    (3) Hybrid capital instruments, without limit. Hybrid capital 
instruments are those instruments that combine certain characteristics 
of debt and equity, such as perpetual debt. To be included as Tier 2 
capital, these instruments must meet the following criteria: \4\
---------------------------------------------------------------------------

    \4\ Mandatory convertible debt instruments that meet the 
requirements of 12 CFR 3.100(e)(5), or that have been previously 
approved as capital by the OCC, are treated as qualifying hybrid capital 
instruments.
---------------------------------------------------------------------------

    (i) The instrument must be unsecured, subordinated to the claims of 
depositors and general creditors, and fully paid-up;
    (ii) The instrument must not be redeemable at the option of the 
holder prior to maturity, except with the prior approval of the OCC;
    (iii) The instrument must be available to participate in losses 
while the issuer is operating as a going concern (in this regard, the 
instrument must automatically convert to common stock or perpetual 
preferred stock, if the sum of the retained earnings and capital surplus 
accounts of the issuer shows a negative balance); and
    (iv) The instrument must provide the option for the issuer to defer 
principal and interest payments, if
    (A) The issuer does not report a net profit for the most recent 
combined four quarters, and
    (B) The issuer eliminates cash dividends on its common and preferred 
stock.
    (4) Term subordinated debt instruments, and intermediate-term 
preferred stock and related surplus are included in Tier 2 capital, but 
only to a maximum of 50% of Tier 1 capital as calculated after 
deductions pursuant to section 2(c) of this appendix. To be considered 
capital, term subordinated debt instruments shall meet the requirements 
of Sec. 3.100(f)(1). However, pursuant to 12 CFR 5.47, the OCC may, in 
some cases, require that the subordinated debt be approved by the OCC 
before the subordinated debt may qualify as Tier 2 capital or may 
require prior approval for any prepayment (including payment pursuant to 
an acceleration clause or redemption prior to maturity) of the 
subordinated debt. Also, at the beginning of each of the last five years 
for the life of either type of instrument, the amount that is eligible 
to be included as Tier 2 capital is reduced by 20% of the original 
amount of that instrument (net of redemptions).
    (5) Up to 45 percent of the pretax net unrealized holding gains 
(that is, the excess, if any, of the fair value over historical cost) on 
available-for-sale equity securities with readily determinable fair 
values.\5\ Unrealized gains (losses) on other types of assets, such as 
bank premises and available-for-sale debt securities, are not included 
in Tier 2 capital, but the OCC may take these unrealized gains (losses) 
into account as additional factors when assessing a bank's overall 
capital adequacy.
---------------------------------------------------------------------------

    \5\ The OCC reserves the authority to exclude all or a portion of 
unrealized gains from Tier 2 capital if the OCC determines that the 
equity securities are not prudently valued.
---------------------------------------------------------------------------

    (c) Deductions from Capital. The following items are deducted from 
the appropriate portion of a national bank's capital base when 
calculating its risk-based capital ratio:
    (1) Deductions from Tier 1 Capital. The following items are deducted 
from Tier 1 capital before the Tier 2 portion of the calculation is 
made:
    (i) Goodwill;
    (ii) Other intangible assets, except as provided in section 2(c)(2) 
of this appendix A;
    (iii) Deferred tax assets, except as provided in section 2(c)(3) of 
this appendix A, that are dependent upon future taxable income, which 
exceed the lesser of either:
    (A) The amount of deferred tax assets that the bank could reasonably 
expect to realize within one year of the quarter-end Call Report, based 
on its estimate of future taxable income for that year; or

[[Page 26]]

    (B) 10% of Tier 1 capital, net of goodwill and all intangible assets 
other than purchased credit card relationships, mortgage servicing 
assets and non-mortgage servicing assets; and
    (iv) Credit-enhancing interest-only strips (as defined in section 
4(a)(3) of this appendix A), as provided in section 2(c)(4).
    (v) Nonfinancial equity investments as provided by section 2(c)(5) 
of this appendix A.
    (2) Qualifying intangible assets. Subject to the following 
conditions, mortgage servicing assets, nonmortgage servicing assets \6\ 
and purchased credit card relationships need not be deducted from Tier 1 
capital:
---------------------------------------------------------------------------

    \6\ Intangible assets are defined to exclude IO strips receivable 
related to these mortgage and non-mortgage servicing assets. See section 
1(c)(14) of this appendix A. Consequently, IO strips receivable related 
to mortgage and non-mortgage servicing assets are not required to be 
deducted under section 2(c)(2) of this appendix A. However, credit-
enhancing interest-only strips as defined in section 4(a)(3) are 
deducted from Tier 1 capital in accordance with section 2(c)(4) of this 
appendix A. Any non credit-enhancing IO strips receivable are subject to 
a 100% risk weight under section 3(a)(4) of this appendix A.
---------------------------------------------------------------------------

    (i) The total of all intangible assets that are included in Tier 1 
capital is limited to 100 percent of Tier 1 capital, of which no more 
than 25 percent of Tier 1 capital can consist of purchased credit card 
relationships and non-mortgage servicing assets in the aggregate. 
Calculation of these limitations must be based on Tier 1 capital net of 
goodwill and all other identifiable intangibles, other than purchased 
credit card relationships, mortgage servicing assets and non-mortgage 
servicing assets.
    (ii) Banks must value each intangible asset included in Tier 1 
capital at least quarterly at the lesser of:
    (A) 90 percent of the fair value of each intangible asset, 
determined in accordance with section 2(c)(2)(iii) of this appendix A; 
or
    (B) 100 percent of the remaining unamortized book value.
    (iii) The quarterly determination of the current fair value of the 
intangible asset must include adjustments for any significant changes in 
original valuation assumptions, including changes in prepayment 
estimates.
    (iv) Banks may elect to deduct disallowed servicing assets on a 
basis that is net of any associated deferred tax liability. Deferred tax 
liabilities netted in this manner cannot also be netted against deferred 
tax assets when determining the amount of deferred tax assets that are 
dependent upon future taxable income.
    (3) Deferred tax assets--(i) Net unrealized gains and losses on 
available-for-sale securities. Before calculating the amount of deferred 
tax assets subject to the limit in section 2(c)(1)(iii) of this appendix 
A, a bank may eliminate the deferred tax effects of any net unrealized 
holding gains and losses on available-for-sale debt securities. Banks 
report these net unrealized holding gains and losses in their Call 
Reports as a separate component of equity capital, but exclude them from 
the definition of common stockholders' equity for regulatory capital 
purposes. A bank that adopts a policy to deduct these amounts must apply 
that approach consistently in all future calculations of the amount of 
disallowed deferred tax assets under section 2(c)(1)(iii) of this 
appendix A.
    (ii) Consolidated groups. The amount of deferred tax assets that a 
bank can realize from taxes paid in prior carryback years and from 
reversals of existing taxable temporary differences generally would not 
be deducted from capital. However, for a bank that is a member of a 
consolidated group (for tax purposes), the amount of carryback potential 
a bank may consider in calculating the limit on deferred tax assets 
under section 2(c)(1)(iii) of this appendix A, may not exceed the amount 
that the bank could reasonably expect to have refunded by its parent 
holding company.
    (iii) Nontaxable Purchase Business Combination. In calculating the 
amount of net deferred tax assets under section 2(c)(1)(iii) of this 
appendix A, a deferred tax liability that is specifically associated 
with an intangible asset (other than purchased mortgage servicing rights 
and purchased credit card relationships) due to a nontaxable purchase 
business combination may be netted against that intangible asset. Only 
the net amount of the intangible asset must be deducted from Tier 1 
capital. Deferred tax liabilities netted in this manner cannot also be 
netted against deferred tax assets when determining the amount of net 
deferred tax assets that are dependent upon future taxable income.
    (iv) Estimated future taxable income. Estimated future taxable 
income does not include net operating loss carryforwards to be used 
during that year or the amount of existing temporary differences 
expected to reverse within the year. A bank may use future taxable 
income projections for their closest fiscal year, provided it adjusts 
the projections for any significant changes that occur or that it 
expects to occur. Such projections must include the estimated effect of 
tax planning strategies that the bank expects to implement to realize 
net operating losses or tax credit carryforwards that will otherwise 
expire during the year.
    (4) Credit-enhancing interest-only strips. Credit-enhancing 
interest-only strips, whether purchased or retained, that exceed 25% of 
Tier 1 capital must be deducted from Tier 1 capital. Purchased and 
retained credit-enhancing interest-only strips, on a non-tax

[[Page 27]]

adjusted basis, are included in the total amount that is used for 
purposes of determining whether a bank exceeds its Tier 1 capital.
    (i) The 25% limitation on credit-enhancing interest-only strips will 
be based on Tier 1 capital net of goodwill and all identifiable 
intangibles, other than purchased credit card relationships, mortgage 
servicing assets and non-mortgage servicing assets.
    (ii) Banks must value each credit-enhancing interest-only strip 
included in Tier 1 capital at least quarterly. The quarterly 
determination of the current fair value of the credit-enhancing 
interest-only strip must include adjustments for any significant changes 
in original valuation assumptions, including changes in prepayment 
estimates.
    (iii) Banks may elect to deduct disallowed credit-enhancing 
interest-only strips on a basis that is net of any associated deferred 
tax liability. Deferred tax liabilities netted in this manner cannot 
also be netted against deferred tax assets when determining the amount 
of deferred tax assets that are dependent upon future taxable income.
    (5) Nonfinancial equity investments--(i) General. (A) A bank must 
deduct from its Tier 1 capital the appropriate percentage, as determined 
in accordance with Table A, of the adjusted carrying value of all 
nonfinancial equity investments held by the bank and its subsidiaries.

         Table A--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
 Aggregate adjusted carrying value of all
   nonfinancial equity investments held    Deduction from Tier 1 Capital
  directly or indirectly by banks (as a       (as a percentage of the
 percentage of the Tier 1 capital of the     adjusted carrying value of
                 bank)\1\                         the investment)
------------------------------------------------------------------------
Less than 15 percent.....................  8.0 percent.
Greater than or equal to 15 percent but    12.0 percent.
 less than 25 percent.
Greater than or equal to 25 percent......  25.0 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
  nonfinancial equity investments as a percentage of Tier 1 capital,
  Tier 1 capital is defined as the sum of the Tier 1 capital elements
  net of goodwill and net of all identifiable intangible assets other
  than mortgage servicing assets, nonmortgage servicing assets and
  purchased credit card relationships, but prior to the deduction for
  disallowed mortgage servicing assets, disallowed nonmortgage servicing
  assets, disallowed purchased credit card relationships, disallowed
  credit-enhancing interest only strips (both purchased and retained),
  disallowed deferred tax assets, and nonfinancial equity investments.

    (B) Deductions for nonfinancial equity investments must be applied 
on a marginal basis to the portions of the adjusted carrying value of 
nonfinancial equity investments that fall within the specified ranges of 
the bank's Tier 1 capital. For example, if the adjusted carrying value 
of all nonfinancial equity investments held by a bank equals 20 percent 
of the Tier 1 capital of the bank, then the amount of the deduction 
would be 8 percent of the adjusted carrying value of all investments up 
to 15 percent of the bank's Tier 1 capital, and 12 percent of the 
adjusted carrying value of all investments equal to, or in excess of, 15 
percent of the bank's Tier 1 capital.
    (C) The total adjusted carrying value of any nonfinancial equity 
investment that is subject to deduction under section 2(c)(5) of this 
appendix A is excluded from the bank's weighted risk assets for purposes 
of computing the denominator of the bank's risk-based capital ratio. For 
example, if 8 percent of the adjusted carrying value of a nonfinancial 
equity investment is deducted from Tier 1 capital, the entire adjusted 
carrying value of the investment will be excluded from risk-weighted 
assets in calculating the denominator of the risk-based capital ratio.
    (D) Banks engaged in equity investment activities, including those 
banks with a high concentration in nonfinancial equity investments 
(e.g., in excess of 50 percent of Tier 1 capital), will be monitored and 
may be subject to heightened supervision, as appropriate, by the OCC to 
ensure that such banks maintain capital levels that are appropriate in 
light of their equity investment activities, and the OCC may impose a 
higher capital charge in any case where the circumstances, such as the 
level of risk of the particular investment or portfolio of investments, 
the risk management systems of the bank, or other information, indicate 
that a higher minimum capital requirement is appropriate.
    (ii) Small business investment company investments. (A) 
Notwithstanding section 2(c)(5)(i) of this appendix A, no deduction is 
required for nonfinancial equity investments that are made by a bank or 
its subsidiary through a SBIC that is consolidated with the bank, or in 
a SBIC that is not consolidated with the bank, to the extent that such 
investments, in the aggregate, do not exceed 15 percent of the Tier 1 
capital of the bank. Except as provided in paragraph (c)(5)(ii)(B) of 
this section, any nonfinancial equity investment that is held through or 
in a SBIC and not deducted from Tier 1 capital will be assigned to the 
100 percent risk-weight category and included in the bank's consolidated 
risk-weighted assets.
    (B) If a bank has an investment in a SBIC that is consolidated for 
accounting purposes but the SBIC is not wholly owned by the

[[Page 28]]

bank, the adjusted carrying value of the bank's nonfinancial equity 
investments held through the SBIC is equal to the bank's proportionate 
share of the SBIC's adjusted carrying value of its equity investments in 
nonfinancial companies. The remainder of the SBIC's adjusted carrying 
value (i.e., the minority interest holders' proportionate share) is 
excluded from the risk-weighted assets of the bank.
    (C) If a bank has an investment in a SBIC that is not consolidated 
for accounting purposes and has current information that identifies the 
percentage of the SBIC's assets that are equity investments in 
nonfinancial companies, the bank may reduce the adjusted carrying value 
of its investment in the SBIC proportionately to reflect the percentage 
of the adjusted carrying value of the SBIC's assets that are not equity 
investments in nonfinancial companies. The amount by which the adjusted 
carrying value of the bank's investment in the SBIC is reduced under 
this paragraph will be risk weighted at 100 percent and included in the 
bank's risk-weighted assets.
    (D) To the extent the adjusted carrying value of all nonfinancial 
equity investments that the bank holds through a consolidated SBIC or in 
a nonconsolidated SBIC equals or exceeds, in the aggregate, 15 percent 
of the Tier 1 capital of the bank, the appropriate percentage of such 
amounts, as set forth in Table A, must be deducted from the bank's Tier 
1 capital. In addition, the aggregate adjusted carrying value of all 
nonfinancial equity investments held through a consolidated SBIC and in 
a nonconsolidated SBIC (including any nonfinancial equity investments 
for which no deduction is required) must be included in determining, for 
purposes of Table A the total amount of nonfinancial equity investments 
held by the bank in relation to its Tier 1 capital.
    (iii) Nonfinancial equity investments excluded. (A) Notwithstanding 
section 2(c)(5)(i) and (ii) of this appendix A, no deduction from Tier 1 
capital is required for the following:
    (1) Nonfinancial equity investments (or portion of such investments) 
made by the bank prior to March 13, 2000, and continuously held by the 
bank since March 13, 2000.
    (2) Nonfinancial equity investments made on or after March 13, 2000, 
pursuant to a legally binding written commitment that was entered into 
by the bank prior to March 13, 2000, and that required the bank to make 
the investment, if the bank has continuously held the investment since 
the date the investment was acquired.
    (3) Nonfinancial equity investments received by the bank through a 
stock split or stock dividend on a nonfinancial equity investment made 
prior to March 13, 2000, provided that the bank provides no 
consideration for the shares or interests received, and the transaction 
does not materially increase the bank's proportional interest in the 
nonfinancial company.
    (4) Nonfinancial equity investments received by the bank through the 
exercise on or after March 13, 2000, of an option, warrant, or other 
agreement that provides the bank with the right, but not the obligation, 
to acquire equity or make an investment in a nonfinancial company, if 
the option, warrant, or other agreement was acquired by the bank prior 
to March 13, 2000, and the bank provides no consideration for the 
nonfinancial equity investments.
    (B) Any excluded nonfinancial equity investments described in 
section 2(c)(5)(iii)(A) of this appendix A must be included in 
determining the total amount of nonfinancial equity investments held by 
the bank in relation to its Tier 1 capital for purposes of Table A. In 
addition, any excluded nonfinancial equity investments will be risk 
weighted at 100 percent and included in the bank's risk-weighted assets.
    (6) Deductions from total capital. The following items are deducted 
from total capital:
    (i) Investments, both equity and debt, in unconsolidated banking and 
finance subsidiaries that are deemed to be capital of the subsidiary;\7\ 
and
---------------------------------------------------------------------------

    \7\ The OCC may require deduction of investments in other 
subsidiaries and associated companies, on a case-by-case basis.
---------------------------------------------------------------------------

    (ii) Reciprocal holdings of bank capital instruments.

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

    The denominator of the risk-based capital ratio, i.e., a national 
bank's risk-weighted assets,\8\ is derived by assigning that bank's 
assets and off-balance sheet items to one of the four risk categories 
detailed in section 3(a) of this appendix A. Each category has a 
specific risk weight. Before an off-balance sheet item is assigned a 
risk weight, it is converted to an on-balance sheet credit equivalent 
amount in accordance with section 3(b) of this appendix A. The risk 
weight assigned to a particular asset or on-balance sheet credit 
equivalent amount determines the percentage of that asset/credit 
equivalent that is included in the denominator of the bank's risk-based 
capital ratio. Any

[[Page 29]]

asset deducted from a bank's capital in computing the numerator of the 
risk-based capital ratio is not included as part of the bank's risk-
weighted assets.
---------------------------------------------------------------------------

    \8\ The OCC reserves the right to require a bank to compute its 
risk-based capital ratio on the basis of average, rather than period-
end, risk-weighted assets when necessary to carry out the purposes of 
these guidelines.
---------------------------------------------------------------------------

    Some of the assets on a bank's balance sheet may represent an 
indirect holding of a pool of assets, e.g., mutual funds, that 
encompasses more than one risk weight within the pool. In those 
situations, the bank may assign the asset to the risk category 
applicable to the highest risk-weighted asset that pool is permitted to 
hold pursuant to its stated investment objectives in the fund's 
prospectus. Alternatively, the bank may assign the asset on a pro rata 
basis to different risk categories according to the investment limits in 
the fund's prospectus. In either case, the minimum risk weight that may 
be assigned to such a pool is 20%. If a bank assigns the asset on a pro 
rata basis, and the sum of the investment limits in the fund's 
prospectus exceeds 100%, the bank must assign the highest pro rata 
amounts of its total investment to the higher risk category. If, in 
order to maintain a necessary degree of liquidity, the fund is permitted 
to hold an insignificant amount of its assets in short-term, highly-
liquid securities of superior credit quality (that do not qualify for a 
preferential risk weight), such securities generally will not be taken 
into account in determining the risk category into which the bank's 
holding in the overall pool should be assigned. The prudent use of 
hedging instruments by a fund to reduce the risk of its assets will not 
increase the risk weighting of the investment in that fund above the 20% 
category. However, if a fund engages in any activities that are deemed 
to be speculative in nature or has any other characteristics that are 
inconsistent with the preferential risk weighting assigned to the fund's 
assets, the bank's investment in the fund will be assigned to the 100% 
risk category. More detail on the treatment of mortgage-backed 
securities is provided in section 3(a)(3)(vi) of this appendix A.
    (a) On-Balance Sheet Assets. The following are the risk categories/
weights for on-balance sheet assets.
    (1) Zero percent risk weight. (i) Cash, including domestic and 
foreign currency owned and held in all offices of a national bank or in 
transit. Any foreign currency held by a national bank should be 
converted into U.S. dollar equivalents.
    (ii) Deposit reserves and other balances at Federal Reserve Banks.
    (iii) Securities issued by, and other direct claims on, the United 
States Government or its agencies, or the central government of an OECD 
country.
    (iv) That portion of assets directly and unconditionally guaranteed 
by the United States Government or its agencies, or the central 
government of an OECD country.\9\
---------------------------------------------------------------------------

    \9\ For the treatment of privately-issued mortgage-backed securities 
where the underlying pool is comprised solely of mortgage-related 
securities issued by GNMA, see infra note 10.
---------------------------------------------------------------------------

    (v) That portion of local currency claims on or unconditionally 
guaranteed by central governments of non-OECD countries, to the extent 
the bank has local currency liabilities in that country. Any amount of 
such claims that exceeds the amount of the bank's local currency 
liabilities is assigned to the 100% risk category of section 3(a)(4) of 
this appendix.
    (vi) Gold bullion held in the bank's own vaults or in another bank's 
vaults on an allocated basis, to the extent it is backed by gold bullion 
liabilities.
    (vii) The book value of paid-in Federal Reserve Bank stock.
    (viii) That portion of assets and off-balance sheet transactions 
\9a\ collateralized by cash or securities issued or directly and 
unconditionally guaranteed by the United States Government or its 
agencies, or the central government of an OECD country, provided that: 
\9b\
---------------------------------------------------------------------------

    \9a\ See footnote 22 in section 3(b)(5)(iii) of this appendix A 
(collateral held against derivative contracts).
    \9b\ Assets and off-balance sheet transactions collateralized by 
securities issued or guaranteed by the United States Government or its 
agencies, or the central government of an OECD country include, but are 
not limited to, securities lending transactions, repurchase agreements, 
collateralized letters of credit, such as reinsurance letters of credit, 
and other similar financial guarantees. Swaps, forwards, futures, and 
options transactions are also eligible, if they meet the collateral 
requirements. However, the OCC may at its discretion require that 
certain collateralized transactions be risk weighted at 20 percent if 
they involve more than a minimal risk.
---------------------------------------------------------------------------

    (A) The bank maintains control over the collateral:
    (1) If the collateral consists of cash, the cash must be held on 
deposit by the bank or by a third-party for the account of the bank;
    (2) If the collateral consists of OECD government securities, then 
the OECD government securities must be held by the bank or by a third-
party acting on behalf of the bank;
    (B) The bank maintains a daily positive margin of collateral fully 
taking into account any change in the market value of the collateral 
held as security;
    (C) Where the bank is acting as a customer's agent in a transaction 
involving the loan or sale of securities that is

[[Page 30]]

collateralized by cash or OECD government securities delivered to the 
bank, any obligation by the bank to indemnify the customer is limited to 
no more than the difference between the market value of the securities 
lent and the market value of the collateral received, and any 
reinvestment risk associated with the collateral is borne by the 
customer; and
    (D) The transaction involves no more than minimal risk.
    (2) 20 percent risk weight. (i) All claims on depository 
institutions incorporated in an OECD country, and all assets backed by 
the full faith and credit of depository institutions incorporated in an 
OECD country. This includes the credit equivalent amount of 
participations in commitments and standby letters of credit sold to 
other depository institutions incorporated in an OECD country, but only 
if the originating bank remains liable to the customer or beneficiary 
for the full amount of the commitment or standby letter of credit. Also 
included in this category are the credit equivalent amounts of risk 
participations in bankers' acceptances conveyed to other depository 
institutions incorporated in an OECD country. However, bank-issued 
securities that qualify as capital of the issuing bank are not included 
in this risk category, but are assigned to the 100% risk category of 
section 3(a)(4) of this appendix A.
    (ii) Claims on, or guaranteed by depository institutions, other than 
the central bank, incorporated in a non-OECD country, with a residual 
maturity of one year or less.
    (iii) Cash items in the process of collection.
    (iv) That portion of assets collateralized by cash or by securities 
issued or directly and unconditionally guaranteed by the United States 
Government or its agencies, or the central government of an OECD 
country, that does not qualify for the zero percent risk-weight 
category.
    (v) That portion of assets conditionally guaranteed by the United 
States Government or its agencies, or the central government of an OECD 
country.
    (vi) Securities issued by, or other direct claims on, United States 
Government-sponsored agencies.
    (vii) That portion of assets guaranteed by United States Government-
sponsored agencies.\10\
---------------------------------------------------------------------------

    \10\ Privately issued mortgage-backed securities, e.g., CMOs and 
REMICs, where the underlying pool is comprised solely of mortgage-
related securities issued by GNMA, FNMA and FHLMC, will be treated as an 
indirect holding of the underlying assets and assigned to the 20% risk 
category of this section 3(a)(2). If the underlying pool is comprised of 
assets which attract different risk weights, e.g., FNMA securities and 
conventional mortgages, the bank should generally assign the security to 
the highest risk category appropriate for any asset in the pool. 
However, on a case-by-case basis, the OCC may allow the bank to assign 
the security proportionately to the various risk categories based on the 
proportion in which the risk categories are represented by the 
composition cash flows of the underlying pool of assets. Before the OCC 
will consider a request to proportionately risk-weight such a security, 
the bank must have current information for the reporting date that 
details the composition and cash flows of the underlying pool of assets. 
Furthermore, before a mortgage-related security will receive a risk 
weight lower than 100%, it must meet the criteria set forth in section 
3(a)(3)(vi) of this appendix A.
---------------------------------------------------------------------------

    (viii) That portion of assets collateralized by the current market 
value of securities issued or guaranteed by United States Government-
sponsored agencies.
    (ix) Claims representing general obligations of any public-sector 
entity in an OECD country, and that portion of any claims guaranteed by 
any such public-sector entity. In the U.S., these obligations must meet 
the requirements of 12 CFR 1.2(b).
    (x) Claims on, or guaranteed by, official multilateral lending 
institutions or regional development institutions in which the United 
States Government is a shareholder or contributing member.\11\
---------------------------------------------------------------------------

    \11\ These institutions include, but are not limited to, the 
International Bank for Reconstruction and Development (World Bank), the 
Inter-American Development Bank, the Asian Development Bank, the African 
Development Bank, the European Investments Bank, the International 
Monetary Fund and the Bank for International Settlements.
---------------------------------------------------------------------------

    (xi) That portion of assets collateralized by the current market 
value of securities issued by official multilateral lending institutions 
or regional development institutions in which the United States 
Government is a shareholder or contributing member.
    (xii) That portion of local currency claims conditionally guaranteed 
by central governments of non-OECD countries, to the extent the bank has 
local currency liabilities in that country. Any amount of such claims 
that exceeds the amount of the bank's local currency liabilities is 
assigned to the 100% risk category of section 3(a)(4) of this appendix.
    (xiii) Claims on, or guaranteed by, a securities firm incorporated 
in an OECD country, that satisfies the following conditions:
    (A) If the securities firm is incorporated in the United States, 
then the firm must be a broker-dealer that is registered with the SEC

[[Page 31]]

and must be in compliance with the SEC's net capital regulation (17 CFR 
240.15c3(1)).
    (B) If the securities firm is incorporated in any other OECD 
country, then the bank must be able to demonstrate that the firm is 
subject to consolidated supervision and regulation, including its 
subsidiaries, comparable to that imposed on depository institutions in 
OECD countries; such regulation must include risk-based capital 
standards comparable to those applied to depository institutions under 
the Basel Capital Accord.\11a\
---------------------------------------------------------------------------

    \11a\ See Accord on International Convergence of Capital Measurement 
and Capital Standards as adopted by the Basle Committee on Banking 
Regulations and Supervisory Practices (renamed as the Basel Committee on 
Banking Supervision), dated July 1988 (amended 1998).
---------------------------------------------------------------------------

    (C) The securities firm, whether incorporated in the United States 
or another OECD country, must also have a long-term credit rating in 
accordance with section 3(a)(2)(xiii)(C)(1) of this appendix A; a parent 
company guarantee in accordance with section 3(a)(2)(xiii)(C)(2) of this 
appendix A; or a collateralized claim in accordance with section 
3(a)(2)(xiii)(C)(3) of this appendix A. Claims representing capital of a 
securities firm must be risk weighted at 100 percent in accordance with 
section 3(a)(4) of this Appendix A.
    (1) Credit rating. The securities firm must have either a long-term 
issuer credit rating or a credit rating on at least one issue of long-
term unsecured debt, from a NRSRO that is in one of the three highest 
investment-grade categories used by the NRSRO. If the securities firm 
has a credit rating from more than one NRSRO, the lowest credit rating 
must be used to determine the credit rating under this paragraph.
    (2) Parent company guarantee. The claim on, or guaranteed by, the 
securities firm must be guaranteed by the firm's parent company, and the 
parent company must have either a long-term issuer credit rating or a 
credit rating on at least one issue of long-term unsecured debt, from a 
NRSRO that is in one of the three highest investment-grade categories 
used by the NRSRO.
    (3) Collateralized claim. The claim on the securities firm must be 
collateralized subject to all of the following requirements:
    (i) The claim must arise from a reverse repurchase/repurchase 
agreement or securities lending/borrowing contract executed using 
standard industry documentation.
    (ii) The collateral must consist of debt or equity securities that 
are liquid and readily marketable.
    (iii) The claim and collateral must be marked-to-market daily.
    (iv) The claim must be subject to daily margin maintenance 
requirements under standard industry documentation.
    (v) The contract from which the claim arises can be liquidated, 
terminated, or accelerated immediately in bankruptcy or similar 
proceedings, and the security or collateral agreement will not be stayed 
or avoided under the applicable law of the relevant jurisdiction. To be 
exempt from the automatic stay in bankruptcy in the United States, the 
claim must arise from a securities contract or a repurchase agreement 
under section 555 or 559, respectively, of the Bankruptcy Code (11 
U.S.C. 555 or 559), a qualified financial contract under section 
11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or 
a netting contract between or among financial institutions under 
sections 401-407 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (912 U.S.C. 4407), or the Regulation EE (12 CFR 
part 231).
    (3) 50 percent risk weight. (i) Revenue obligations of any public-
sector entity in an OECD country for which the underlying obligor is the 
public-sector entity, but which are repayable solely from the revenues 
generated by the project financed through the issuance of the 
obligations.
    (ii) The credit equivalent amount of derivative contracts, 
calculated in accordance with section 3(b)(5) of this appendix A, that 
do not qualify for inclusion in a lower risk category.
    (iii) Loans secured by first mortgages on one-to-four family 
residential properties, either owner-occupied or rented, provided that 
such loans are not otherwise 90 days or more past due, or on nonaccrual 
or restructured. It is presumed that such loans will meet prudent 
underwriting standards. If a bank holds a first lien and junior lien on 
a one-to-four family residential property and no other party holds an 
intervening lien, the transaction is treated as a single loan secured by 
a first lien for the purposes of both determining the loan-to-value 
ratio and assigning a risk weight to the transaction. Furthermore, 
residential property loans made for the purpose of construction 
financing are assigned to the 100% risk category of section 3(a)(4) of 
this appendix A; however, these loans may be included in the 50% risk 
category of this section 3(a)(3) of this appendix A if they are subject 
to a legally binding sales contract and satisfy the requirements of 
section 3(a)(3)(iv) of this appendix A.
    (iv) Loans to residential real estate builders for one-to-four 
family residential property construction, if the bank obtains sufficient 
documentation demonstrating that the buyer of the home intends to 
purchase the home (i.e., a legally binding written sales contract) and 
has the ability to obtain a mortgage loan sufficient to purchase the 
home (i.e., a firm written commitment for

[[Page 32]]

permanent financing of the home upon completion), subject to the 
following additional criteria:
    (A) The builder must incur at least the first 10% of the direct 
costs (i.e., actual costs of the land, labor, and material) before any 
drawdown is made under the construction loan and the construction loan 
may not exceed 80% of the sales price of the resold home;
    (B) The individual purchaser has made a substantial ``earnest money 
deposit'' of no less than 3% of the sales price of the home that must be 
subject to forfeiture by the individual purchaser if the sales contract 
is terminated by the individual purchaser; however, the earnest money 
deposit shall not be subject to forfeiture by reason of breach or 
termination of the sales contract on the part of the builder;
    (C) The earnest money deposit must be held in escrow by the bank 
financing the builder or by an independent party in a fiduciary 
capacity; the escrow agreement must provide that in the event of default 
the escrow funds must be used to defray any cost incurred relating to 
any cancellation of the sales contract by the buyer;
    (D) If the individual purchaser terminates the contract or if the 
loan fails to satisfy any other criterion under this section, then the 
bank must immediately recategorize the loan at a 100% risk weight and 
must accurately report the loan in the bank's next quarterly 
Consolidated Reports of Condition and Income (Call Report);
    (E) The individual purchaser must intend that the home will be 
owner-occupied;
    (F) The loan is made by the bank in accordance with prudent 
underwriting standards;
    (G) The loan is not more than 90 days past due, or on nonaccrual; 
and
    (H) The purchaser is an individual(s) and not a partnership, joint 
venture, trust, corporation, or any other entity (including an entity 
acting as a sole proprietorship) that is purchasing one or more of the 
homes for speculative purposes.
    (v) Loans secured by a first mortgage on multifamily residential 
properties: \11b\
---------------------------------------------------------------------------

    \11b\ The portion of multifamily residential property loans that is 
sold subject to a pro rata loss sharing arrangement may be treated by 
the selling bank as sold to the extent that the sales agreement provides 
for the purchaser of the loan to share in any loss incurred on the loan 
on a pro rata basis with the selling bank. The portion of multifamily 
residential property loans sold subject to any loss sharing arrangement 
other than pro rata sharing of the loss shall be accorded the same 
treatment as any other asset sold under an agreement to repurchase or 
sold with recourse under section 4(b) of this appendix A.
---------------------------------------------------------------------------

    (A) The amortization of principal and interest occurs in not more 
than 30 years;
    (B) The minimum original maturity for repayment of principal is not 
less than 7 years;
    (C) All principal and interest payments have been made on a timely 
basis in accordance with the terms of the loan for at least one year 
immediately preceding the risk weighting of the loan in the 50% risk 
weight category, and the loan is not otherwise 90 days or more past due, 
or on nonaccrual status;
    (D) The loan is made in accordance with all applicable requirements 
and prudent underwriting standards;
    (E) If the rate of interest does not change over the term of the 
loan:
    (I) The current loan amount outstanding does not exceed 80% of the 
current value of the property, as measured by either the value of the 
property at origination of the loan (which is the lower of the purchase 
price or the value as determined by the initial appraisal, or if 
appropriate, the initial evaluation) or the most current appraisal, or 
if appropriate, the most current evaluation; and
    (II) In the most recent fiscal year, the ratio of annual net 
operating income generated by the property (before payment of any debt 
service on the loan) to annual debt service on the loan is not less than 
120%;\11c\
---------------------------------------------------------------------------

    \11c\ For the purposes of the debt service requirements in sections 
3(a)(3)(v)(E)(II) and 3(a)(3)(v)(F)(II) of this appendix A, other forms 
of debt service coverage that generate sufficient cash flows to provide 
comparable protection to the institution may be considered for (a) a 
loan secured by cooperative housing or (b) a multifamily residential 
property loan if the purpose of the loan is for the development or 
purchase of multifamily residential property primarily intended to 
provide low- to moderate-income housing, including special operating 
reserve accounts or special operating subsidies provided by federal, 
state, local or private sources. However, the OCC reserves the right, on 
a case-by-case basis, to review the adequacy of any other forms of 
comparable debt service coverage relied on by the bank.
---------------------------------------------------------------------------

    (F) If the rate of interest changes over the term of the loan:
    (I) The current loan amount outstanding does not exceed 75% of the 
current value of the property, as measured by either the value of the 
property at origination of the loan (which is the lower of the purchase 
price or the value as determined by the initial appraisal, or if 
appropriate, the initial evaluation) or the most current appraisal, or 
if appropriate, the most current evaluation; and

[[Page 33]]

    (II) In the most recent fiscal year, the ratio of annual net 
operating income generated by the property (before payment of any debt 
service on the loan) to annual debt service on the loan is not less than 
115%; and
    (G) If the loan was refinanced by the borrower:
    (I) All principal and interest payments on the loan being refinanced 
which were made in the preceding year prior to refinancing shall apply 
in determining the one-year timely payment requirement under paragraph 
(a)(3)(v)(C) of this section; and
    (II) The net operating income generated by the property in the 
preceding year prior to refinancing shall apply in determining the 
applicable debt service requirements under paragraphs (a)(3)(v)(E) and 
(a)(3)(v)(F) of this section.
    (vi) Privately-issued mortgage-backed securities, i.e. those that do 
not carry the guarantee of a government or government-sponsored agency, 
if the privately-issued mortgage-backed securities are at the time the 
mortgage-backed securities are originated fully secured by or otherwise 
represent a sufficiently secure interest in mortgages that qualify for 
the 50% risk weight under paragraphs (a)(3) (iii), (iv) and (v) of this 
section,\12\ provided that they meet the following criteria:
---------------------------------------------------------------------------

    \12\ If all of the underlying mortgages in the pool do not qualify 
for the 50% risk weight, the bank should generally assign the entire 
value of the security to the 100% risk category of section 3(a)(4) of 
this appendix A; however, on a case-by-case basis, the OCC may allow the 
bank to assign only the portion of the security which represents an 
interest in, and the cash flows of, nonqualifying mortgages to the 100% 
risk category, with the remainder being assigned a risk weight of 50%. 
Before the OCC will consider a request to risk weight a mortgage-backed 
security on a proportionate basis, the bank must have current 
information for the reporting date that details the composition and cash 
flows of the underlying pool of mortgages.
---------------------------------------------------------------------------

    (A) The underlying assets must be held by an independent trustee 
that has a first priority, perfected security interest in the underlying 
assets for the benefit of the holders of the security;
    (B) The holder of the security must have an undivided pro rata 
ownership interest in the underlying assets or the trust that issues the 
security must have no liabilities unrelated to the issued securities;
    (C) The trust that issues the security must be structured such that 
the cash flows from the underlying assets fully meet the cash flows 
requirements of the security without undue reliance on any reinvestment 
income; and
    (D) There must not be any material reinvestment risk associated with 
any funds awaiting distribution to the holder of the security.
    (4) 100 percent risk weight. All other assets not specified above, 
\12a\ including:
---------------------------------------------------------------------------

    \12a\ A bank subject to the market risk capital requirements 
pursuant to appendix B of this part 3 may calculate the capital 
requirement for qualifying securities borrowing transactions pursuant to 
section 3(a)(1)(ii) of appendix B of this part 3.
---------------------------------------------------------------------------

    (i) Claims on or guaranteed by depository institutions incorporated 
in a non-OECD country, as well as claims on the central bank of a non-
OECD country, with a residual maturity exceeding one year.
    (ii) All non-local currency claims on non-OECD central governments, 
as well as local currency claims on non-OECD central governments that 
are not included in section 3(a)(1)(v) of this appendix A.
    (iii) Asset-or mortgage backed securities that are externally rated 
are risk weighted in accordance with section 4(d) of this appendix A.
    (iv) All stripped mortgage-backed securities, including interest 
only portions (IOs), principal only portions (POs) and other similar 
instruments, regardless of the issuer or guarantor.
    (v) Obligations issued by any state or any political subdivision 
thereof for the benefit of a private party or enterprise where that 
party or enterprise, rather than the issuing state or political 
subdivision, is responsible for the timely payment of principal and 
interest on the obligation, e.g., industrial development bonds.
    (vi) Claims on commercial enterprises owned by non-OECD and OECD 
central governments.
    (vii) Any investment in an unconsolidated subsidiary that is not 
required to be deducted from total capital pursuant to section 2(c)(3) 
of this appendix A.
    (viii) Instruments issued by depository institutions incorporated in 
OECD and non-OECD countries that qualify as capital of the issuer.
    (ix) Investments in fixed assets, premises, and other real estate 
owned.
    (x) Claims representing capital of a securities firm notwithstanding 
section 3(a)(2)(xiii) 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.

[[Page 34]]

    (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) Off-Balance Sheet Activities. The risk weight assigned to an 
off-balance sheet item is determined by a two-step process. First, the 
face amount of the off-balance sheet item is multiplied by the 
appropriate credit conversion factor specified in this section. This 
calculation translates the face amount of an off-balance sheet item into 
an on-balance sheet credit equivalent amount. 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. Collateral and guarantees 
are applied to the face amount of an off-balance sheet item; however, 
with respect to derivative contracts under section 3(b)(5) of this 
appendix A, collateral and guarantees are applied to the credit 
equivalent amounts of such derivative contracts. The following are the 
credit conversion factors and the off-balance sheet items to which they 
apply. However, direct credit substitutes, recourse obligations, and 
securities issued in connection with asset securitizations are treated 
as described in section 4 of this appendix A.
    (1) 100 percent credit conversion factor. (i) [Reserved] \13\
---------------------------------------------------------------------------

    \13\ [Reserved]
---------------------------------------------------------------------------

    (ii) Risk participations purchased in bankers' acceptances;
    (iii) [Reserved] \14\
---------------------------------------------------------------------------

    \14\ [Reserved]
---------------------------------------------------------------------------

    (iv) Contingent obligations with a certain draw down, e.g., legally 
binding agreements to purchase assets as a specified future date.
    (v) Indemnification of customers whose securities the bank has lent 
as agent. If the customer is not indemnified against loss by the bank, 
the transaction is excluded from the risk-based capital calculation.\15\
---------------------------------------------------------------------------

    \15\ When a bank lends its own securities, the transaction is 
treated as a loan. When a bank lends its own securities or, acting as 
agent, agrees to indemnify a customer, the transaction is assigned to 
the risk weight appropriate to the obligor or collateral that is 
delivered to the lending or indemnifying institution or to an 
independent custodian acting on their behalf.
---------------------------------------------------------------------------

    (2) 50 percent credit conversion factor. (i) Transaction-related 
contingencies including, among other things, performance bonds and 
performance-based standby letters of credit related to a particular 
transaction.\16\ To the extent permitted by law or regulation, 
performance-based standby letters of credit include such things as 
arrangements backing subcontractors' and suppliers' performance, labor 
and materials contracts, and construction bids;
---------------------------------------------------------------------------

    \16\ For purposes of this section 3(b)(2)(i), a ``performance-based 
standby letter of credit'' is any letter of credit, or similar 
arrangement, however named or described, which represents an irrevocable 
obligation to the beneficiary on the part of the issuer to make payment 
on account of any default by the account party in the performance of a 
non-financial or commercial obligation. Participations in performance-
based standby letters of credit are treated in accordance with section 4 
of this appendix A.

---------------------------------------------------------------------------

[[Page 35]]

    (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.
---------------------------------------------------------------------------

    (iii) Revolving underwriting facilities, note issuance facilities, 
and similar arrangements pursuant to which the bank's customer can issue 
short-term debt obligations in its own name, but for which the bank has 
a legally binding commitment to either:
    (A) Purchase the obligations the customer is unable to sell by a 
stated date; or
    (B) Advance funds to its customer, if the obligations cannot be 
sold.
    (3) 20 percent credit conversion factor. (i) Trade-related 
contingencies. These are short-term self-liquidating instruments used to 
finance the movement of goods and are collateralized by the underlying 
shipment. A commercial letter of credit is an example of such an 
instrument.
    (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) Zero percent credit conversion factor. (i) Unused portion of 
commitments with an original maturity of one year or less, but excluding 
any asset-backed commercial paper liquidity facilities;
    (ii) Unused portion of commitments with an original maturity of 
greater than one year, if they are unconditionally cancelable \18\ at 
any time at the option of the bank and the bank has the contractual 
right to make, and in fact does make, either--
---------------------------------------------------------------------------

    \18\ See section 1(c)(26) of appendix A to this part.
---------------------------------------------------------------------------

    (A) A separate credit decision based upon the borrower's current 
financial condition, before each drawing under the lending facility; or
    (B) An annual (or more frequent) credit review based upon the 
borrower's current financial condition to determine whether or not the 
lending facility should be continued; and
    (iii) The unused portion of retail credit card lines or other 
related plans that are unconditionally cancelable by the bank in 
accordance with applicable law.
    (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 an 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.
    (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

[[Page 36]]

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.
    (7) Derivative contracts--(i) Calculation of credit equivalent 
amounts. The credit equivalent amount of a derivative contract equals 
the sum of the current credit exposure and the potential future credit 
exposure of the derivative contract. The calculation of credit 
equivalent amounts must be measured in U.S. dollars, regardless of the 
currency or currencies specified in the derivative contract.
    (A) Current credit exposure. The current credit exposure for a 
single derivative contract is determined by the mark-to-market value of 
the derivative contract. If the mark-to-market value is positive, then 
the current credit exposure equals that mark-to-market value. If the 
mark-to-market is zero or negative, then the current credit exposure is 
zero. The current credit exposure for multiple derivative contracts 
executed with a single counterparty and subject to a qualifying 
bilateral netting contract is determined as provided by section 
3(b)(5)(ii)(A) of this appendix A.
    (B) Potential future credit exposure. The potential future credit 
exposure for a single derivative contract, including a derivative 
contract with negative mark-to-market value, is calculated by 
multiplying the notional principal \19\ of the derivative contract by 
one of the credit conversion factors in Table A--Conversion Factor 
Matrix of this appendix A, for the appropriate category.\20\ The 
potential future credit exposure for gold contracts shall be calculated 
using the foreign exchange rate conversion factors. For any derivative 
contract that does not fall within one of the specified categories in 
Table A--Conversion Factor Matrix of this appendix A, the potential 
future credit exposure shall be calculated using the other commodity 
conversion factors. Subject to examiner review, banks should use the 
effective rather than the apparent or stated notional amount in 
calculating the potential future credit exposure. The potential future 
credit exposure for multiple derivatives contracts executed with a 
single counterparty and subject to a qualifying bilateral netting 
contract is determined as provided by section 3(b)(5)(ii)(A) of this 
appendix A.
---------------------------------------------------------------------------

    \19\ For purposes of calculating either the potential future credit 
exposure under section 3(b)(5)(i)(B) of this appendix A or the gross 
potential future credit exposure under section 3(b)(5)(ii)(A)(2) of this 
appendix A for foreign exchange contracts and other similar contracts in 
which the notional principal is equivalent to the cash flows, total 
notional principal is the net receipts to each party falling due on each 
value date in each currency.
    \20\ No potential future credit exposure is calculated for single 
currency interest rate swaps in which payments are made based upon two 
floating indices, so-called floating/floating or basis swaps; the credit 
equivalent amount is measured solely on the basis of the current credit 
exposure.

                                      Table B--Conversion Factor Matrix\1\
----------------------------------------------------------------------------------------------------------------
                                                                Foreign
                                                   Interest     exchange                  Precious      Other
             Remaining maturity \2\                  rate       rate and    Equity\2\      metals     commodity
                                                                  gold
----------------------------------------------------------------------------------------------------------------
One year or less...............................          0.0          1.0          6.0          7.0         10.0
Over one to five years.........................          0.5          5.0          8.0          7.0         12.0
Over five years................................          1.5          7.5         10.0          8.0        15.0
----------------------------------------------------------------------------------------------------------------
\1\ For derivative contracts with multiple exchanges of principal, the conversion factors are multiplied by the
  number of remaining payments in the derivative contract.
\2\ For derivative contracts that automatically reset to zero value following a payment, the remaining maturity
  equals the time until the next payment. However, interest rate contracts with remaining maturities of greater
  than one year shall be subject to a minimum conversion factor of 0.5 percent.

    (ii) Derivative contracts subject to a qualifying bilateral netting 
contract--(A) Netting calculation. The credit equivalent amount for 
multiple derivative contracts executed with a single counterparty and 
subject to a qualifying bilateral netting contract as provided by 
section (3)(b)(5)(ii)(B) of this appendix A is calculated by adding the 
net current credit exposure and the adjusted sum of the potential future 
credit exposure for all derivative contracts subject to the qualifying 
bilateral netting contract.
    (1) Net current credit exposure. The net current credit exposure is 
the net sum of all positive and negative mark-to-market values of the 
individual derivative contracts subject to a qualifying bilateral 
netting contract. If the net sum of the mark-to-market value is 
positive, then the net current credit exposure equals that net sum of 
the mark-to-market value. If the net sum of the mark-to-

[[Page 37]]

market value is zero or negative, then the net current credit exposure 
is zero.
    (2) Adjusted sum of the potential future credit exposure. The 
adjusted sum of the potential future credit exposure is calculated as:

Anet=0.4xAgross+(0.6xNGRxAgross)

Anet is the adjusted sum of the potential future credit 
exposure, Agross is the gross potential future credit 
exposure, and NGR is the net to gross ratio. Agross is the 
sum of the potential future credit exposure (as determined under section 
3(b)(5)(i)(B) of this appendix A) for each individual derivative 
contract subject to the qualifying bilateral netting contract. The NGR 
is the ratio of the net current credit exposure to the gross current 
credit exposure. In calculating the NGR, the gross current credit 
exposure equals the sum of the positive current credit exposures (as 
determined under section 3(b)(5)(i)(A) of this appendix A) of all 
individual derivative contracts subject to the qualifying bilateral 
netting contract.
    (B) Qualifying bilateral netting contract. In determining the 
current credit exposure for multiple derivative contracts executed with 
a single counterparty, a bank may net derivative contracts subject to a 
qualifying bilateral netting contract by offsetting positive and 
negative mark-to-market values, provided that:
    (1) The qualifying bilateral netting contract is in writing.
    (2) The qualifying bilateral netting contract is not subject to a 
walkaway clause.
    (3) The qualifying bilateral netting contract creates a single legal 
obligation for all individual derivative contracts covered by the 
qualifying bilateral netting contract. In effect, the qualifying 
bilateral netting contract must provide that the bank would have a 
single claim or obligation either to receive or to pay only the net 
amount of the sum of the positive and negative mark-to-market values on 
the individual derivative contracts covered by the qualifying bilateral 
netting contract. The single legal obligation for the net amount is 
operative in the event that a counterparty, or a counterparty to whom 
the qualifying bilateral netting contract has been assigned, fails to 
perform due to any of the following events: default, insolvency, 
bankruptcy, or other similar circumstances.
    (4) The bank obtains a written and reasoned legal opinion(s) that 
represents, with a high degree of certainty, that in the event of a 
legal challenge, including one resulting from default, insolvency, 
bankruptcy, or similar circumstances, the relevant court and 
administrative authorities would find the bank's exposure to be the net 
amount under:
    (i) The law of the jurisdiction in which the counterparty is 
chartered or the equivalent location in the case of noncorporate 
entities, and if a branch of the counterparty is involved, then also 
under the law of the jurisdiction in which the branch is located;
    (ii) The law of the jurisdiction that governs the individual 
derivative contracts covered by the bilateral netting contract; and
    (iii) The law of the jurisdiction that governs the qualifying 
bilateral netting contract.
    (5) The bank establishes and maintains procedures to monitor 
possible changes in relevant law and to ensure that the qualifying 
bilateral netting contract continues to satisfy the requirement of this 
section.
    (6) The bank maintains in its files documentation adequate to 
support the netting of a derivative contract.\21\
---------------------------------------------------------------------------

    \21\ By netting individual derivative contracts for the purpose of 
calculating its credit equivalent amount, a bank represents that 
documentation adequate to support the netting of a set of derivative 
contract is in the bank's files and available for inspection by the OCC. 
Upon determination by the OCC that a bank's files are inadequate or that 
a qualifying bilateral netting contract may not be legally enforceable 
in any one of the bodies of law described in section 
3(b)(5)(ii)(B)(3)(i) through (iii) of this appendix A, the underlying 
derivative contracts may not be netted for the purposes of this section.
---------------------------------------------------------------------------

    (iii) Risk weighting. Once the bank determines the credit equivalent 
amount for a derivative contract or a set of derivative contracts 
subject to a qualifying bilateral netting contract, the bank assigns 
that amount to the risk weight category appropriate to the counterparty, 
or, if relevant, the nature of any collateral or guarantee.\22\ However, 
the maximum weight that will be applied to the credit equivalent amount 
of such derivative contract(s) is 50 percent.
---------------------------------------------------------------------------

    \22\ Derivative contracts are an exception to the general rule of 
applying collateral and guarantees to the face value of off-balance 
sheet items. The sufficiency of collateral and guarantees is determined 
on the basis of the credit equivalent amount of derivative contracts. 
However, collateral and guarantees held against a qualifying bilateral 
netting contract is not recognized for capital purposes unless it is 
legally available for all contracts included in the qualifying bilateral 
netting contract.
---------------------------------------------------------------------------

    (iv) Exceptions. The following derivative contracts are not subject 
to the above calculation, and therefore, are not part of the denominator 
of a national bank's risk-based capital ratio:

[[Page 38]]

    (A) An exchange rate contract with an original maturity of 14 
calendar days or less;\23\ and
---------------------------------------------------------------------------

    \23\ Notwithstanding section 3(b)(5)(B) of this appendix A, gold 
contracts do not qualify for this exception.
---------------------------------------------------------------------------

    (B) A derivative contract that is traded on an exchange requiring 
the daily payment of any variations in the market value of the contract.

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

    (a) Definitions. For purposes of this section 4 of this appendix A, 
the following definitions apply:
    (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 a ``reference asset.''
    (2) Credit-enhancing interest-only strip means an on-balance sheet 
asset that, in form or in substance:
    (i) Represents the contractual right to receive some or all of the 
interest due on transferred assets; and
    (ii) Exposes the bank to credit risk directly or indirectly 
associated with the transferred assets that exceeds its pro rata claim 
on the assets whether through subordination provisions or other credit 
enhancing techniques.
    (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 a 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 (as described in section 3(a)(3)(iii) of this 
appendix A) 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 U.S. 
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 
fraud, misrepresentation 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 asset or 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 a 
bank has no claim on the third-party asset, then the bank's assumption 
of any credit risk is a direct credit substitute. Direct credit 
substitutes include:
    (i) Financial standby letters of credit that support financial 
claims on a third party that exceed a bank's pro rata share in the 
financial claim;
    (ii) Guarantees, surety arrangements, credit derivatives and similar 
instruments backing financial claims that exceed a bank's pro rata share 
in the financial claim;
    (iii) Purchased subordinated interests that absorb more than their 
pro rata share of 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 a third party;
    (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.
    (5) Externally rated means that an instrument or obligation has 
received a credit rating from at least one nationally recognized 
statistical rating organization.
    (6) 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.
    (7) 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.
    (8) Financial standby letter of credit means a letter of credit or 
similar arrangement that represents an irrevocable obligation to a 
third-party beneficiary:

[[Page 39]]

    (i) To repay money borrowed by, 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.
    (9) 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 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 amount of that loan.
    (10) 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.
    (11) Recourse means a bank's retention, in form or in substance, of 
any credit risk directly or indirectly associated with an asset it has 
sold that exceeds a pro rata share of that bank's claim on the asset. If 
a bank has no claim on a sold asset, then the retention of any credit 
risk is recourse. A recourse obligation typically arises when a bank 
transfers assets and retains an explicit obligation to repurchase assets 
or to 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:
    (i) Credit-enhancing representations and warranties made on 
transferred assets;
    (ii) Loan servicing assets retained pursuant to an agreement under 
which the bank will be responsible for losses associated with the loans 
serviced. Mortgage servicer cash advances that meet the conditions of 
section 4(a)(9)(i) and (ii) of this appendix A, are not recourse 
arrangements;
    (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 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.
    (12) 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 a bank to any credit risk 
directly or indirectly associated with the transferred asset that 
exceeds a pro rata share of that bank's claim on the asset, whether 
through subordination provisions or other credit enhancement techniques. 
Residual interests generally include credit-enhancing interest-only 
strips, spread accounts, cash collateral accounts, retained subordinated 
interests (and other forms of overcollateralization) 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.
    (13) 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.
    (14) Securitization means the pooling and repackaging by a special 
purpose entity of assets or other credit exposures 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.
    (15) 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.
    (16) Traded position means a position retained, assumed or issued in 
connection with a securitization that is externally rated, where there 
is a reasonable expectation that,

[[Page 40]]

in the near future, the rating will be relied upon by:
    (i) Unaffiliated investors to purchase the position; or
    (ii) An unaffiliated third party to enter into a transaction 
involving the position, such as a purchase, loan or repurchase 
agreement.
    (b) Credit equivalent amounts and risk weights of recourse 
obligations and direct credit substitutes--(1) Credit-equivalent amount. 
Except as otherwise provided, the credit-equivalent amount for a 
recourse obligation or direct credit substitute is the full amount of 
the credit-enhanced assets for which the bank directly or indirectly 
retains or assumes credit risk multiplied by a 100% conversion factor.
    (2) Risk-weight factor. To determine the bank's risk-weighted assets 
for off-balance sheet recourse obligations and direct credit 
substitutes, the credit equivalent amount is assigned to the risk 
category appropriate to the obligor in the underlying transaction, after 
considering any associated guarantees or collateral. For a direct credit 
substitute that is an on-balance sheet asset (e.g., a purchased 
subordinated security), a bank must calculate risk-weighted assets using 
the amount of the direct credit substitute and the full amount of the 
assets it supports, i.e., all the more senior positions in the 
structure.
    (c) Credit equivalent amount and risk weight of participations in, 
and syndications of, direct credit substitutes. The credit equivalent 
amount for a participation interest in, or syndication of, a direct 
credit substitute is calculated and risk weighted as follows:
    (1) In the case of a direct credit substitute in which a bank has 
conveyed a risk participation, the full amount of the assets that are 
supported by the direct credit substitute is converted to a credit 
equivalent amount using a 100% conversion factor. The pro rata share of 
the credit equivalent amount that has been conveyed through a risk 
participation is then assigned to whichever risk-weight category is 
lower: the risk-weight category appropriate to the obligor in the 
underlying transaction, after considering any associated guarantees or 
collateral, or the risk-weight category appropriate to the party 
acquiring the participation. The pro rata share of the credit equivalent 
amount that has not been participated out is assigned to the risk-weight 
category appropriate to the obligor after considering any associated 
guarantees or collateral.
    (2) In the case of a direct credit substitute in which the bank has 
acquired a risk participation, the acquiring bank's pro rata share of 
the direct credit substitute is multiplied by the full amount of the 
assets that are supported by the direct credit substitute and converted 
using a 100% credit conversion factor. The resulting credit equivalent 
amount is then assigned to the risk-weight category appropriate to the 
obligor in the underlying transaction, after considering any associated 
guarantees or collateral.
    (3) In the case of a direct credit substitute that takes the form of 
a syndication where each bank or participating entity is obligated only 
for its pro rata share of the risk and there is no recourse to the 
originating entity, each bank's credit equivalent amount will be 
calculated by multiplying only its pro rata share of the assets 
supported by the direct credit substitute by a 100% conversion factor. 
The resulting credit equivalent amount is then assigned to the risk-
weight category appropriate to the obligor in the underlying 
transaction, after considering any associated guarantees or collateral.
    (d) Externally rated positions: credit-equivalent amounts and risk 
weights.--(1) Traded positions. With respect to a recourse obligation, 
direct credit substitute, residual interest (other than a credit-
enhancing interest-only strip) or asset- or mortgage-backed security 
that is a ``traded position'' and that has received an external rating 
on a long-term position that is one grade below investment grade or 
better or a short-term position that is investment grade, the bank may 
multiply the face amount of the position by the appropriate risk weight, 
determined in accordance with Tables C or D of this Appendix A.\24\ If a 
traded position receives more than one external rating, the lowest 
single rating will apply.
---------------------------------------------------------------------------

    \24\ Stripped mortgage-backed securities or other similar 
instruments, such as interest-only or principal-only strips, that are 
not credit enhancing must be assigned to the 100% risk category.

                                 Table C
------------------------------------------------------------------------
                                                            Risk weight
     Long-term rating category            Examples         (In percent)
------------------------------------------------------------------------
Highest or second highest           AAA, AA.............              20
 investment grade.
Third highest investment grade....  A...................              50
Lowest investment grade...........  BBB.................             100
One category below investment       BB..................             200
 grade.
------------------------------------------------------------------------


[[Page 41]]


                                 Table D
------------------------------------------------------------------------
                                                            Risk weight
    Short-term rating category            Examples         (In percent)
------------------------------------------------------------------------
Highest investment grade..........  A-1, P-1............              20
Second highest investment grade...  A-2, P-2............              50
Lowest investment grade...........  A-3, P-3............             100
------------------------------------------------------------------------

    (2) Non-traded positions. A recourse obligation, direct credit 
substitute, residual interest (but not a credit-enhancing interest-only 
strip) or asset- or mortgage-backed security extended in connection with 
a securitization that is not a ``traded position'' may be assigned a 
risk weight in accordance with section 4(d)(1) of this appendix A if:
    (i) It has been externally rated by more than one NRSRO;
    (ii) It has received an external rating on a long-term position that 
is one category below investment grade or better or a short-term 
position that is investment grade by all NRSROs providing a rating;
    (iii) The ratings are publicly available; and
    (iv) The ratings are based on the same criteria used to rate traded 
positions.

If the ratings are different, the lowest rating will determine the risk 
category to which the recourse obligation, residual interest or direct 
credit substitute will be assigned.
    (e) Senior positions not externally rated. For a recourse 
obligation, direct credit substitute, residual interest or asset- or 
mortgage-backed security that is not externally rated but is senior or 
preferred in all features to a traded position (including 
collateralization and maturity), a bank may apply a risk weight to the 
face amount of the senior position in accordance with section 4(d)(1) of 
this appendix A, based upon the traded position, subject to any current 
or prospective supervisory guidance and the bank satisfying the OCC that 
this treatment is appropriate. This section will apply only if the 
traded position provides substantive credit support to the unrated 
position until the unrated position matures.
    (f) Residual Interests--(1) Concentration limit on credit-enhancing 
interest-only strips. In addition to the capital requirement provided by 
section 4(f)(2) of this appendix A, a bank must deduct from Tier 1 
capital all credit-enhancing interest-only strips in excess of 25 
percent of Tier 1 capital in accordance with section 2(c)(2)(iv) of this 
appendix A.
    (2) Credit-enhancing interest-only strip capital requirement. After 
applying the concentration limit to credit-enhancing interest-only 
strips in accordance with section (f)(1), a bank must maintain risk-
based capital for a credit-enhancing interest-only strip equal to the 
remaining amount of the credit-enhancing interest-only strip (net of any 
existing associated deferred tax liability), even if the amount of risk-
based capital required to be maintained exceeds the full risk-based 
capital requirement for the assets transferred. Transactions that, in 
substance, result in the retention of credit risk associated with a 
transferred credit-enhancing interest-only strip will be treated as if 
the credit-enhancing interest-only strip was retained by the bank and 
not transferred.
    (3) Other residual interests capital requirement. Except as provided 
in sections (d) or (e) of this section, a bank must maintain risk-based 
capital for a residual interest (excluding a credit-enhancing interest-
only strip) equal to the face amount of the residual interest that is 
retained on the balance sheet (net of any existing associated deferred 
tax liability), even if the amount of risk-based capital required to be 
maintained exceeds the full risk-based capital requirement for the 
assets transferred. Transactions that, in substance, result in the 
retention of credit risk associated with a transferred residual interest 
will be treated as if the residual interest was retained by the bank and 
not transferred.
    (4) Residual interests and other recourse obligations. Where the 
aggregate capital requirement for residual interests (including credit-
enhancing interest-only strips) and recourse obligations arising from 
the same transfer of assets exceed the full risk-based capital 
requirement for those assets, a bank must maintain risk-based capital 
equal to the greater of the risk-based capital requirement for the 
residual interest as calculated under sections 4(f)(1) through (3) of 
this appendix A or the full risk-based capital requirement for the 
assets transferred.
    (g) Positions that are not rated by an NRSRO. A position (but not a 
residual interest) extended in connection with a securitization and that 
is not rated by an NRSRO may be risk-weighted based on the bank's 
determination of the credit rating of the position, as specified in 
Table E of this appendix A, multiplied by the face amount of the 
position. In order to qualify for this treatment, the bank's system for 
determining the credit rating of the position must meet one of the three 
alternative standards set out in section 4(g)(1)through (3) of this 
appendix A.

[[Page 42]]



                                 Table E
------------------------------------------------------------------------
                                                            Risk weight
          Rating category                 Examples         (In percent)
------------------------------------------------------------------------
Investment grade..................  BBB, or better......             100
One category below investment       BB..................             200
 grade.
------------------------------------------------------------------------

    (1) Internal risk rating used for asset-backed programs. A direct 
credit substitute (but not a purchased credit-enhancing interest-only 
strip) is assumed by a bank in connection with an asset-backed 
commercial paper program sponsored by the bank and the bank is able to 
demonstrate to the satisfaction of the OCC, prior to relying upon its 
use, that the bank's internal credit risk rating system is adequate. 
Adequate internal credit risk rating systems usually contain the 
following criteria:
    (i) The internal credit risk system is an integral part of the 
bank's risk management system that explicitly incorporates the full 
range of risks arising from a bank's participation in securitization 
activities;
    (ii) Internal credit ratings are linked to measurable outcomes, such 
as the probability that the position will experience any loss, the 
position's expected loss given default, and the degree of variance in 
losses given default on that position;
    (iii) The bank's internal credit risk system must separately 
consider the risk associated with the underlying loans or borrowers, and 
the risk associated with the structure of a particular securitization 
transaction;
    (iv) The bank's internal credit risk system must identify gradations 
of risk among ``pass'' assets and other risk positions;
    (v) The bank must have clear, explicit criteria that are used to 
classify assets into each internal risk grade, including subjective 
factors;
    (vi) The bank must have independent credit risk management or loan 
review personnel assigning or reviewing the credit risk ratings;
    (vii) An internal audit procedure should periodically verify that 
internal risk ratings are assigned in accordance with the bank's 
established criteria.
    (viii) The bank must monitor the performance of the internal credit 
risk ratings assigned to nonrated, nontraded direct credit substitutes 
over time to determine the appropriateness of the initial credit risk 
rating assignment and adjust individual credit risk ratings, or the 
overall internal credit risk ratings system, as needed; and
    (ix) The internal credit risk system must make credit risk rating 
assumptions that are consistent with, or more conservative than, the 
credit risk rating assumptions and methodologies of NRSROs.
    (2) Program Ratings. A direct credit substitute or recourse 
obligation (but not a residual interest) is assumed or retained by a 
bank in connection with a structured finance program and a NRSRO has 
reviewed the terms of the program and stated a rating for positions 
associated with the program. If the program has options for different 
combinations of assets, standards, internal credit enhancements and 
other relevant factors, and the NRSRO specifies ranges of rating 
categories to them, the bank may apply the rating category applicable to 
the option that corresponds to the bank's position. In order to rely on 
a program rating, the bank must demonstrate to the OCC's satisfaction 
that the credit risk rating assigned to the program meets the same 
standards generally used by NRSROs for rating traded positions. The bank 
must also demonstrate to the OCC's satisfaction that the criteria 
underlying the NRSRO's assignment of ratings for the program are 
satisfied for the particular position. If a bank participates in a 
securitization sponsored by another party, the OCC may authorize the 
bank to use this approach based on a program rating obtained by the 
sponsor of the program.
    (3) Computer Program. The bank is using an acceptable credit 
assessment computer program to determine the rating of a direct credit 
substitute or recourse obligation (but not a residual interest) extended 
in connection with a structured finance program. A NRSRO must have 
developed the computer program and the bank must demonstrate to the 
OCC's satisfaction that ratings under the program correspond credibly 
and reliably with the rating of traded positions.
    (h) Limitations on risk-based capital requirements--(1) Low-level 
exposure rule. If the maximum contractual exposure to loss retained or 
assumed by a bank is less than the effective risk-based capital 
requirement, as determined in accordance with section 4(b) of this 
appendix A, for the asset supported by the bank's position, the risk 
based capital required under this appendix A is limited to the bank's 
contractual exposure, less any recourse liability account established in 
accordance with generally accepted accounting principles. This 
limitation does not apply when a bank provides credit enhancement beyond 
any contractual obligation to support assets that it has sold.
    (2) Related on-balance sheet assets. If an asset is included in the 
calculation of the risk-based capital requirement under this section 4 
of this appendix A and also appears as an asset on a bank's balance 
sheet, the

[[Page 43]]

asset is risk-weighted only under this section 4 of this appendix A, 
except in the case of loan servicing assets and similar arrangements 
with embedded recourse obligations or direct credit substitutes. In that 
case, both the on-balance sheet servicing assets and the related 
recourse obligations or direct credit substitutes must both be 
separately risk weighted and incorporated into the risk-based capital 
calculation.
    (i) Alternative Capital Calculation for Small Business Obligations--
(1) Definitions. For purposes of this section 4(i):
    (i) Qualified bank means a bank that:
    (A) Is well capitalized as defined in 12 CFR 6.4 without applying 
the capital treatment described in this section 4(i), or
    (B) Is adequately capitalized as defined in 12 CFR 6.4 without 
applying the capital treatment described in this section 4(i) and has 
received written permission from the appropriate district office of the 
OCC to apply the capital treatment described in this section 4(i).
    (ii) Recourse has the meaning given to such term under generally 
accepted accounting principles.
    (iii) Small business means a business that meets the criteria for a 
small business concern established by the Small Business Administration 
in 13 CFR part 121 pursuant to 15 U.S.C. 632.
    (2) Capital and reserve requirements. Notwithstanding the risk-based 
capital treatment outlined in section 2(c)(4) and any other subsection 
(other than subsection (i)) of this section 4, with respect to a 
transfer of a small business loan or a lease of personal property with 
recourse that is a sale under generally accepted accounting principles, 
a qualified bank may elect to apply the following treatment:
    (i) The bank establishes and maintains a non-capital reserve under 
generally accepted accounting principles sufficient to meet the 
reasonable estimated liability of the bank under the recourse 
arrangement; and
    (ii) For purposes of calculating the bank's risk-based capital 
ratio, the bank includes only the face amount of its recourse in its 
risk-weighted assets.
    (3) Limit on aggregate amount of recourse. The total outstanding 
amount of recourse retained by a qualified bank with respect to 
transfers of small business loans and leases of personal property and 
included in the risk-weighted assets of the bank as described in section 
4(i)(2) of this appendix A may not exceed 15 percent of the bank's total 
capital after adjustments and deductions, unless the OCC specifies a 
greater amount by order.
    (4) Bank that ceases to be qualified or that exceeds aggregate 
limit. If a bank ceases to be a qualified bank or exceeds the aggregate 
limit in section 4(i)(3) of this appendix A, the bank may continue to 
apply the capital treatment described in section 4(i)(2) of this 
appendix A to transfers of small business loans and leases of personal 
property that occurred when the bank was qualified and did not exceed 
the limit.
    (5) Prompt Corrective Action not affected. (i) A bank shall compute 
its capital without regard to this section 4(i) for purposes of prompt 
corrective action (12 U.S.C. 1831o and 12 CFR part 6) unless the bank is 
an adequately or well capitalized bank (without applying the capital 
treatment described in this section 4(i)) and, after applying the 
capital treatment described in this section 4(i), the bank would be well 
capitalized.
    (ii) A bank shall compute its capital without regard to this section 
4(i) for purposes of 12 U.S.C. 1831o(g) regardless of the bank's capital 
level.

     Section 5. Implementation, Transition Rules, and Target Ratios

    (a) December 31, 1990 to December 30, 1992. During this time period:
    (1) All national banks are expected to maintain a minimum ratio of 
total capital (after deductions) to risk-weighted assets of 7.25%.
    (i) Fifty percent of this 7.25% must be made up of Tier 1 capital; 
however, up to 10% of Tier 1 capital can be comprised of Tier 2 capital 
elements, before any deductions for goodwill. The amount of Tier 2 
elements included in Tier 1 will not be subject to the sublimits on the 
amount of such elements in Tier 2 capital, with the exception of the 
allowance for loan and lease losses.
    (ii) Goodwill that national banks have been allowed to count as 
capital as a result of the transition rules contained in 12 CFR 3.3 is 
grandfathered until December 31, 1992, but will be deducted from Tier 1 
capital after that date.
    (2) The allowance for loan and lease losses can be included in total 
capital up to a maximum of 1.5% of a bank's risk-weighted assets, 
including the portion that can be borrowed to make up Tier 1.
    (3) Tier 2 capital elements that are not used as part of Tier 1 
capital will qualify as part of a national bank's total capital base up 
to a maximum of 100% of the bank's Tier 1 capital.
    (4) In addition to the standards established by these risk-based 
capital guidelines, all national banks must maintain a minimum capital-
to-total assets ratio in accordance with the provisions of 12 CFR part 
3.
    (b) On December 31, 1992. (1) All national banks are expected to 
maintain a minimum ratio of total capital (after deductions) to risk-
weighted assets of 8.0%.
    (2) Tier 2 capital elements qualify as part of a national bank's 
total capital base up to a maximum of 100% of that bank's Tier 1 
capital.

[[Page 44]]

    (3) In addition to the standards established by these risk-based 
capital guidelines, all national banks must maintain a minimum capital-
to-total assets ratio in accordance with the provisions of 12 CFR part 
3.

[54 FR 4177, Jan. 27, 1989]

    Editorial Note: For Federal Register citations affecting Appendix A 
to part 3 of title 12, see the List of CFR Sections Affected, which 
appears in the Finding Aids section of the printed volume and on GPO 
Access.



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

      Section 1. Purpose, Applicability, Scope, and Effective Date

    (a) Purpose. The purpose of this appendix is to ensure that banks 
with significant exposure to market risk maintain adequate capital to 
support that exposure.\1\ This appendix supplements and adjusts the 
risk-based capital ratio calculations under appendix A of this part with 
respect to those banks.
---------------------------------------------------------------------------

    \1\ This appendix is based on a framework developed jointly by 
supervisory authorities from the countries represented on the Basle 
Committee on Banking Supervision and endorsed by the Group of Ten 
Central Bank Governors. The framework is described in a Basle Committee 
paper entitled ``Amendment to the Capital Accord to Incorporate Market 
Risk,'' January 1996.
---------------------------------------------------------------------------

    (b) Applicability. (1) This appendix applies to any national bank 
whose trading activity \2\ (on a worldwide consolidated basis) equals:
---------------------------------------------------------------------------

    \2\ Trading activity means the gross sum of trading assets and 
liabilities as reported in the bank's most recent quarterly Consolidated 
Report of Condition and Income (Call Report).
---------------------------------------------------------------------------

    (i) 10 percent or more of total assets; \3\ or
---------------------------------------------------------------------------

    \3\ Total assets means quarter-end total assets as reported in the 
bank's most recent Call Report.
---------------------------------------------------------------------------

    (ii) $1 billion or more.
    (2) The OCC may apply this appendix to any national bank if the OCC 
deems it necessary or appropriate for safe and sound banking practices.
    (3) The OCC may exclude a national bank otherwise meeting the 
criteria of paragraph (b)(1) of this section from coverage under this 
appendix if it determines the bank meets such criteria as a consequence 
of accounting, operational, or similar considerations, and the OCC deems 
it consistent with safe and sound banking practices.
    (c) Scope. The capital requirements of this appendix support market 
risk associated with a bank's covered positions.
    (d) Effective date. This appendix is effective as of January 1, 
1997. Compliance is not mandatory until January 1, 1998. Subject to 
supervisory approval, a bank may opt to comply with this appendix as 
early as January 1, 1997.\4\
---------------------------------------------------------------------------

    \4\ A bank that voluntarily complies with the final rule prior to 
January 1, 1998, must comply with all of its provisions.
---------------------------------------------------------------------------

                         Section 2. Definitions

    For purposes of this appendix, the following definitions apply:
    (a) Covered positions means all positions in a bank's trading 
account, and all foreign exchange \5\ and commodity positions, whether 
or not in the trading account.\6\ Positions include on-balance-sheet 
assets and liabilities and off-balance-sheet items. Securities subject 
to repurchase and lending agreements are included as if they are still 
owned by the lender. 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.
---------------------------------------------------------------------------

    \5\ Subject to supervisory review, a bank may exclude structural 
positions in foreign currencies from its covered positions.
    \6\ The term trading account is defined in the instructions to the 
Call Report.
---------------------------------------------------------------------------

    (b) Market risk means the risk of loss resulting from movements in 
market prices. Market risk consists of general market risk and specific 
risk components.
    (1) General market risk means changes in the market value of covered 
positions resulting from broad market movements, such as changes in the 
general level of interest rates, equity prices, foreign exchange rates, 
or commodity prices.
    (2) Specific risk means changes in the market value of specific 
positions due to factors other than broad market movements and includes 
default and event risk as well as idiosyncratic variations.
    (c) Tier 1 and Tier 2 capital are the same as defined in appendix A 
of this part.
    (d) Tier 3 capital is subordinated debt that is unsecured; is fully 
paid up; has an original maturity of at least two years; is not 
redeemable before maturity without prior approval by the OCC; includes a 
lock-in clause precluding payment of either interest or principal (even 
at maturity) if the payment would cause the issuing bank's risk-based 
capital ratio to fall or remain below the minimum required under 
appendix A of this part; and does not contain and is not covered by any 
covenants, terms, or restrictions that are inconsistent with safe and 
sound banking practices.
    (e) Value-at-risk (VAR) means the estimate of the maximum amount 
that the value of

[[Page 45]]

covered positions could decline during a fixed holding period within a 
stated confidence level, measured in accordance with section 4 of this 
appendix.

   Section 3. Adjustments to the Risk-Based Capital Ratio Calculations

    (a) Risk-based capital ratio denominator. A bank subject to this 
appendix shall calculate its risk-based capital ratio denominator as 
follows:
    (1) Adjusted risk-weighted assets. (i) Covered positions. Calculate 
adjusted risk-weighted assets, which equal risk-weighted assets (as 
determined in accordance with appendix A of this part), excluding the 
risk-weighted amount of all covered positions (except foreign exchange 
positions outside the trading account and over-the-counter derivatives 
positions).\7\
---------------------------------------------------------------------------

    \7\ Foreign exchange position outside the trading account and all 
over-the-counter derivative positions, whether or not in the trading 
account, must be included in adjusted risk-weighted assets as determined 
in appendix A of this part 3.
---------------------------------------------------------------------------

    (ii) Securities borrowing transactions. In calculating adjusted 
risk-weighted assets, a bank also may exclude a receivable that results 
from the bank's posting of cash collateral in a securities borrowing 
transaction to the extent that the receivable is collateralized by the 
market value of the borrowed securities and subject to the following 
conditions:
    (A) The borrowed securities must be includable in the trading 
account and must be liquid and readily marketable;
    (B) The borrowed securities must be marked to market daily;
    (C) The receivable must be subject to a daily margining requirement; 
and
    (D) (1) The transaction is a securities contract for the purposes of 
section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified 
financial contract for the purposes of section 11(e)(8) of the Federal 
Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract 
between or among financial institutions for the purposes of sections 
401-407 of the Federal Deposit Insurance Corporation Improvement Act of 
1991 (12 U.S.C. 4401-4407), or the Board's Regulation EE (12 CFR Part 
231); or
    (2) If the transaction does not meet the criteria set forth in 
paragraph (a)(1)(ii)(D)(1) of this section, then either:
    (i) The bank has conducted sufficient legal review to reach a well-
founded conclusion that:
    (A) The securities borrowing agreement executed in connection with 
the transaction provides the bank the right to accelerate, terminate, 
and close-out on a net basis all transactions under the agreement and to 
liquidate or set off collateral promptly upon an event of counterparty 
default, including in a bankruptcy, insolvency, or other similar 
proceeding of the counterparty; and
    (B) Under applicable law of the relevant jurisdiction, its rights 
under the agreement are legal, valid, binding, and enforceable and any 
exercise of rights under the agreement will not be stayed or avoided; or
    (ii) The transaction is either overnight or unconditionally 
cancelable at any time by the bank, and the bank has conducted 
sufficient legal review to reach a well-founded conclusion that:
    (A) The securities borrowing agreement executed in connection with 
the transaction provides the bank the right to accelerate, terminate, 
and close-out on a net basis all transactions under the agreement and to 
liquidate or set off collateral promptly upon an event of counterparty 
default; and
    (B) Under the law governing the agreement, its rights under the 
agreement are legal, valid, binding, and enforceable.
    (2) Measure for market risk. Calculate the measure for market risk, 
which equals the sum of the VAR-based capital charge, the specific risk 
add-on (if any), and the capital charge for de minimis exposure (if 
any).
    (i) VAR-based capital charge. The VAR-based capital charge equals 
the higher of:
    (A) The previous day's VAR measure; or
    (B) The average of the daily VAR measures for each of the preceding 
60 business days multiplied by three, except as provided in section 4(e) 
of this appendix;
    (ii) Specific risk add-on. The specific risk add-on is calculated in 
accordance with section 5 of this appendix; and
    (iii) Capital charge for de minimis exposure. The capital charge for 
de minimis exposure is calculated in accordance with section 4(a) of 
this appendix.
    (3) Market risk equivalent assets. Calculate market risk equivalent 
assets by multiplying the measure for market risk (as calculated in 
paragraph (a)(2) of this section) by 12.5.
    (4) Denominator calculation. Add market risk equivalent assets (as 
calculated in paragraph (a)(3) of this section) to adjusted risk-
weighted assets (as calculated in paragraph (a)(1) of this section). The 
resulting sum is the bank's risk-based capital ratio denominator.
    (b) Risk-based capital ratio numerator. A bank subject to this 
appendix shall calculate its risk-based capital ratio numerator by 
allocating capital as follows:
    (1) Credit risk allocation. Allocate Tier 1 and Tier 2 capital equal 
to 8.0 percent of adjusted risk-weighted assets (as calculated in 
paragraph (a)(1) of this section).\8\
---------------------------------------------------------------------------

    \8\ A bank may not allocate Tier 3 capital to support credit risk 
(as calculated under appendix A).

---------------------------------------------------------------------------

[[Page 46]]

    (2) Market risk allocation. Allocate Tier 1, Tier 2, and Tier 3 
capital equal to the measure for market risk as calculated in paragraph 
(a)(2) of this section. The sum of Tier 2 and Tier 3 capital allocated 
for market risk must not exceed 250 percent of Tier 1 capital allocated 
for market risk. (This requirement means that Tier 1 capital allocated 
in this paragraph (b)(2) must equal at least 28.6 percent of the measure 
for market risk.)
    (3) Restrictions. (i) The sum of Tier 2 capital (both allocated and 
excess) and Tier 3 capital (allocated in paragraph (b)(2) of this 
section) may not exceed 100 percent of Tier 1 capital (both allocated 
and excess).\9\
---------------------------------------------------------------------------

    \9\ Excess Tier 1 capital means Tier 1 capital that has not been 
allocated in paragraphs (b)(1) and (b)(2) of this section. Excess Tier 2 
capital means Tier 2 capital that has not been allocated in paragraph 
(b)(1) and (b)(2) of this section, subject to the restrictions in 
paragraph (b)(3) of this section.
---------------------------------------------------------------------------

    (ii) Term subordinated debt (and intermediate-term preferred stock 
and related surplus) included in Tier 2 capital (both allocated and 
excess) may not exceed 50 percent of Tier 1 capital (both allocated and 
excess).
    (4) Numerator calculation. Add Tier 1 capital (both allocated and 
excess), Tier 2 capital (both allocated and excess), and Tier 3 capital 
(allocated under paragraph (b)(2) of this section). The resulting sum is 
the bank's risk-based capital ratio numerator.

                       Section 4. Internal Models

    (a) General. For risk-based capital purposes, a bank subject to this 
appendix must use its internal model to measure its daily VAR, in 
accordance with the requirements of this section.\10\ The OCC may permit 
a bank to use alternative techniques to measure the market risk of de 
minimis exposures so long as the techniques adequately measure 
associated market risk.
---------------------------------------------------------------------------

    \10\ A bank's internal model may use any generally accepted 
measurement techniques, such as variance-covariance models, historical 
simulations, or Monte Carlo simulations. However, the level of 
sophistication and accuracy of a bank's internal model must be 
commensurate with the nature and size of its covered positions. A bank 
that modifies its existing modeling procedures to comply with the 
requirements of this appendix for risk-based capital purposes should, 
nonetheless, continue to use the internal model it considers most 
appropriate in evaluating risks for other purposes.
---------------------------------------------------------------------------

    (b) Qualitative requirements. A bank subject to this appendix must 
have a risk management system that meets the following minimum 
qualitative requirements:
    (1) The bank must have a risk control unit that reports directly to 
senior management and is independent from business trading units.
    (2) The bank's internal risk measurement model must be integrated 
into the daily management process.
    (3) The bank's policies and procedures must identify, and the bank 
must conduct, appropriate stress tests and backtests.\11\ The bank's 
policies and procedures must identify the procedures to follow in 
response to the results of such tests.
---------------------------------------------------------------------------

    \11\ Stress tests provide information about the impact of adverse 
market events on a bank's covered positions. Backtests provide 
information about the accuracy of an internal model by comparing a 
bank's daily VAR measures to its corresponding daily trading profits and 
losses.
---------------------------------------------------------------------------

    (4) The bank must conduct independent reviews of its risk 
measurement and risk management systems at least annually.
    (c) Market risk factors. The bank's internal model must use risk 
factors sufficient to measure the market risk inherent in all covered 
positions. The risk factors must address interest rate risk,\12\ equity 
price risk, foreign exchange rate risk, and commodity price risk.
---------------------------------------------------------------------------

    \12\ For material exposures in the major currencies and markets, 
modeling techniques must capture spread risk and must incorporate enough 
segments of the yield curve--at least six--to capture differences in 
volatility and less than perfect correlation of rates along the yield 
curve.
---------------------------------------------------------------------------

    (d) Quantitative requirements. For regulatory capital purposes, VAR 
measures must meet the following quantitative requirements:
    (1) The VAR measures must be calculated on a daily basis using a 99 
percent, one-tailed confidence level with a price shock equivalent to a 
ten-business day movement in rates and prices. In order to calculate VAR 
measures based on a ten-day price shock, the bank may either calculate 
ten-day figures directly or convert VAR figures based on holding periods 
other than ten days to the equivalent of a ten-day holding period (for 
instance, by multiplying a one-day VAR measure by the square root of 
ten).
    (2) The VAR measures must be based on an historical observation 
period (or effective observation period for a bank using a weighting 
scheme or other similar method) of at least one year. The bank must 
update data sets at least once every three months or more frequently as 
market conditions warrant.
    (3) The VAR measures must include the risks arising from the non-
linear price characteristics of options positions and the sensitivity of 
the market value of the positions to changes in the volatility of the 
underlying

[[Page 47]]

rates or prices. A bank with a large or complex options portfolio must 
measure the volatility of options positions by different maturities.
    (4) The VAR measures may incorporate empirical correlations within 
and across risk categories, provided that the bank's process for 
measuring correlations is sound. In the event that the VAR measures do 
not incorporate empirical correlations across risk categories, then the 
bank must add the separate VAR measures for the four major risk 
categories to determine its aggregate VAR measure.
    (e) Backtesting. (1) Beginning one year after a bank starts to 
comply with this appendix, a bank must conduct backtesting by comparing 
each of its most recent 250 business days' actual net trading profit or 
loss \13\ with the corresponding daily VAR measures generated for 
internal risk measurement purposes and calibrated to a one-day holding 
period and a 99 percent, one-tailed confidence level.
---------------------------------------------------------------------------

    \13\ Actual net trading profits and losses typically include such 
things as realized and unrealized gains and losses on portfolio 
positions as well as fee income and commissions associated with trading 
activities.
---------------------------------------------------------------------------

    (2) Once each quarter, the bank must identify the number of 
exceptions, that is, the number of business days for which the magnitude 
of the actual daily net trading loss, if any, exceeds the corresponding 
daily VAR measure.
    (3) A bank must use the multiplication factor indicated in Table 1 
of this appendix in determining its capital charge for market risk under 
section 3(a)(2)(i)(B) of this appendix until it obtains the next 
quarter's backtesting results, unless the OCC determines that a 
different adjustment or other action is appropriate.

     Table 1--Multiplication Factor Based on Results of Backtesting
------------------------------------------------------------------------
                                                          Multiplication
                  Number of exceptions                        factor
------------------------------------------------------------------------
4 or fewer..............................................          3.00
5.......................................................          3.40
6.......................................................          3.50
7.......................................................          3.65
8.......................................................          3.75
9.......................................................          3.85
10 or more..............................................          4.00
------------------------------------------------------------------------

                        Section 5. Specific Risk

    (a) Specific risk surcharge. For purposes of section 3(a)(2)(ii) of 
this appendix, a bank shall calculate its specific risk surcharge as 
follows:
    (1) Internal models that incorporate specific risk. (i) No specific 
risk surcharge required for qualifying internal models. A bank that 
incorporates specific risk in its internal model has no specific risk 
surcharge for purposes of section 3(a)(2)(ii) of this appendix if the 
bank demonstrates to the OCC that its internal model adequately measures 
all aspects of specific risk, including default and event risk, of 
covered debt and equity positions. In evaluating a bank's internal model 
the OCC will take into account the extent to which the internal model:
    (A) Explains the historical price variation in the trading 
portfolio; and
    (B) Captures concentrations.
    (ii) Specific risk surcharge for modeled specific risk that fails to 
adequately measure default or event risk. A bank that incorporates 
specific risk in its internal model but fails to demonstrate that its 
internal model adequately measures all aspects of specific risk, 
including default and event risk, as provided by this section 5(a)(1), 
must calculate its specific risk surcharge in accordance with one of the 
following methods:
    (A) If the bank's internal model separates the VAR measure into a 
specific risk portion and a general market risk portion, then the 
specific risk surcharge equals the previous day's specific risk portion.
    (B) If the bank's internal model does not separate the VAR measure 
into a specific risk portion and a general market risk portion, then the 
specific risk surcharge equals the sum of the previous day's VAR measure 
for subportfolios of covered debt and equity positions.
    (2) Specific risk surcharge for specific risk not modeled. If a bank 
does not model specific risk in accordance with section 5(a)(1) of this 
appendix, then the bank shall calculate its specific risk surcharge 
using the standard specific risk capital charge in accordance with 
section 5(c) of this appendix.
    (b) Covered debt and equity positions. If a model includes the 
specific risk of covered debt positions but not covered equity positions 
(or vice versa), then the bank may reduce its specific risk charge for 
the included positions under section 5(a)(1)(ii) of this appendix. The 
specific risk charge for the positions not included equals the standard 
specific risk capital charge under paragraph (c) of this section.
    (c) Standard specific risk capital charge. The standard specific 
risk capital charge equals the sum of the components for covered debt 
and equity positions as follows:
    (1) Covered debt positions. (i) For purposes of this section 5, 
covered debt positions means fixed-rate or floating-rate debt 
instruments located in the trading account and instruments located in 
the trading account with values that react primarily to changes in 
interest rates, including certain non-convertible preferred stock, 
convertible bonds, and instruments subject to repurchase and lending 
agreements. Also included are derivatives (including written and 
purchased

[[Page 48]]

options) for which the underlying instrument is a covered debt 
instrument that is subject to a non-zero specific risk capital charge.
    (A) For covered debt positions that are derivatives, a bank must 
risk-weight (as described in paragraph (c)(1)(iii) of this section) the 
market value of the effective notional amount of the underlying debt 
instrument or index portfolio. Swaps must be included as the notional 
position in the underlying debt instrument or index portfolio, with a 
receiving side treated as a long position and a paying side treated as a 
short position; and
    (B) For covered debt positions that are options, whether long or 
short, a bank must risk-weight (as described in paragraph (c)(1)(iii) of 
this section) the market value of the effective notional amount of the 
underlying debt instrument or index multiplied by the option's delta.
    (ii) A bank may net long and short covered debt positions (including 
derivatives) in identical debt issues or indices.
    (iii) A bank must multiply the absolute value of the current market 
value of each net long or short covered debt position by the appropriate 
specific risk weighting factor indicated in Table 2 of this appendix. 
The specific risk capital charge component for covered debt positions is 
the sum of the weighted values.

   Table 2--Specific Risk Weighting Factors for Covered Debt Positions
------------------------------------------------------------------------
                                                               Weighting
                                         Remaining maturity      factor
              Category                     (contractual)          (in
                                                                percent)
------------------------------------------------------------------------
Government \1\......................  N/A....................       0.00
Qualifying \2\......................  6 months or less.......       0.25
                                      Over 6 months to 24           1.00
                                       months.
                                      Over 24 months.........       1.60
Other \3\...........................  N/A....................      8.00
------------------------------------------------------------------------
\1\ The ``government'' category includes all debt instruments of central
  governments of OECD countries (as defined in appendix A of this part)
  including bonds, Treasury bills, and other short-term instruments, as
  well as local currency instruments of non-OECD central governments to
  the extent the bank has liabilities booked in that currency.
\2\ The ``qualifying'' category includes debt instruments of U.S.
  government-sponsored agencies (as defined in appendix A of this part),
  general obligation debt instruments issued by states and other
  political subdivisions of OECD countries, multilateral development
  banks (as defined in appendix A of this part), and debt instruments
  issued by U.S. depository institutions or OECD-banks (as defined in
  appendix A of this part) that do not qualify as capital of the issuing
  institution. This category also includes other debt instruments,
  including corporate debt and revenue instruments issued by states and
  other political subdivisions of OECD countries, that are: (1) Rated
  investment grade by at least two nationally recognized credit rating
  services; (2) rated investment grade by one nationally recognized
  credit rating agency and not rated less than investment grade by any
  other credit rating agency; or (3) unrated, but deemed to be of
  comparable investment quality by the reporting bank and the issuer has
  instruments listed on a recognized stock exchange, subject to review
  by the OCC.
\3\ The ``other'' category includes debt instruments that are not
  included in the government or qualifying categories.

    (2) Covered equity positions. (i) For purposes of this section 5, 
covered equity positions means equity instruments located in the trading 
account and instruments located in the trading account with values that 
react primarily to changes in equity prices, including voting or non-
voting common stock, certain convertible bonds, and commitments to buy 
or sell equity instruments. Also included are derivatives (including 
written and purchased options) for which the underlying is a covered 
equity position.
    (A) For covered equity positions that are derivatives, a bank must 
risk weight (as described in paragraph (c)(2)(iii) of this section) the 
market value of the effective notional amount of the underlying equity 
instrument or equity portfolio. Swaps must be included as the notional 
position in the underlying equity instrument or index portfolio, with a 
receiving side treated as a long position and a paying side treated as a 
short position; and
    (B) For covered equity positions that are options, whether long or 
short, a bank must risk weight (as described in paragraph (c)(2)(iii) of 
this section) the market value of the effective notional amount of the 
underlying equity instrument or index multiplied by the option's delta.
    (ii) A bank may net long and short covered equity positions 
(including derivatives) in identical equity issues or equity indices in 
the same market.\14\
---------------------------------------------------------------------------

    \14\ A bank may also net positions in depository receipts against an 
opposite position in the underlying equity or identical equity in 
different markets, provided that the bank includes the costs of 
conversion.
---------------------------------------------------------------------------

    (iii)(A) A bank must multiply the absolute value of the current 
market value of each net long or short covered equity position by a risk 
weighting factor of 8.0 percent, or by 4.0 percent if the equity is held 
in a portfolio that is both liquid and well-diversified.\15\ For covered 
equity positions that are index contracts comprising a well-diversified 
portfolio of equity instruments, the net long or short position is 
multiplied by a risk weighting factor of 2.0 percent.
---------------------------------------------------------------------------

    \15\ A portfolio is liquid and well-diversified if: (1) It is 
characterized by a limited sensitivity to price changes of any single 
equity issue or closely related group of equity issues held in the 
portfolio; (2) the volatility of the portfolio's value is not dominated 
by the volatility of any individual equity issue or by equity issues 
from any single industry or economic sector; (3) it contains a large 
number of individual equity positions, with no single position 
representing a substantial portion of the portfolio's total market 
value; and (4) it consists mainly of issues traded on organized 
exchanges or in well-established over-the-counter markets.

---------------------------------------------------------------------------

[[Page 49]]

    (B) For covered equity positions from the following futures-related 
arbitrage strategies, a bank may apply a 2.0 percent risk weighting 
factor to one side (long or short) of each position with the opposite 
side exempt from charge:
    (1) Long and short positions in exactly the same index at different 
dates or in different market centers; or
    (2) Long and short positions in index contracts at the same date in 
different but similar indices.
    (C) For futures contracts on broadly-based indices that are matched 
by offsetting positions in a basket of stocks comprising the index, a 
bank may apply a 2.0 percent risk weighting factor to the futures and 
stock basket positions (long and short), provided that such trades are 
deliberately entered into and separately controlled, and that the basket 
of stocks comprises at least 90 percent of the capitalization of the 
index.
    (iv) The specific risk capital charge component for covered equity 
positions is the sum of the weighted values.

                   Section 6. Reservation of Authority

    The OCC reserves the authority to modify the application of any of 
the provisions in this appendix to any bank, upon reasonable 
justification.

[61 FR 47367, Sept. 6, 1996, as amended at 62 FR 68067, Dec. 30, 1997; 
65 FR 75858, Dec. 5, 2000; 69 FR 44916, July 28, 2004; 71 FR 8936, Feb. 
22, 2006]



  Sec. Appendix C to Part 3--Capital Adequacy Guidelines for [Banks]: 
       Internal-Ratings-Based and Advanced Measurement Approaches

    Effective Date Notes: 1. At 72 FR 69429, Dec. 7, 2007, Part 3 was 
amended by adding Appendix C, effective Apr. 1, 2008. For the 
convenience of the user, the added text is set forth as follows:



  Sec. Appendix C to Part 3--Capital Adequacy Guidelines for [Banks]: 
       Internal-Ratings-Based and Advanced Measurement Approaches

Part I General Provisions
    Section 1 Purpose, Applicability, Reservation of Authority, and 
Principle of Conservatism
    Section 2 Definitions
    Section 3 Minimum Risk-Based Capital Requirements
Part II Qualifying Capital
    Section 11 Additional Deductions
    Section 12 Deductions and Limitations Not Required
    Section 13 Eligible Credit Reserves
Part III Qualification
    Section 21 Qualification Process
    Section 22 Qualification Requirements
    Section 23 Ongoing Qualification
    Section 24 Merger and Acquisition Transitional Arrangements
Part IV Risk-Weighted Assets for General Credit Risk
    Section 31 Mechanics for Calculating Total Wholesale and Retail 
Risk-Weighted Assets
    Section 32 Counterparty Credit Risk of Repo-Style Transactions, 
Eligible Margin Loans, and OTC Derivative Contracts
    Section 33 Guarantees and Credit Derivatives: PD Substitution and 
LGD Adjustment Approaches
    Section 34 Guarantees and Credit Derivatives: Double Default 
Treatment
    Section 35 Risk-Based Capital Requirement for Unsettled Transactions
Part V Risk-Weighted Assets for Securitization Exposures
    Section 41 Operational Criteria for Recognizing the Transfer of Risk
    Section 42 Risk-Based Capital Requirement for Securitization 
Exposures
    Section 43 Ratings-Based Approach (RBA)
    Section 44 Internal Assessment Approach (IAA)
    Section 45 Supervisory Formula Approach (SFA)
    Section 46 Recognition of Credit Risk Mitigants for Securitization 
Exposures
    Section 47 Risk-Based Capital Requirement for Early Amortization 
Provisions
Part VI Risk-Weighted Assets for Equity Exposures
    Section 51 Introduction and Exposure Measurement
    Section 52 Simple Risk Weight Approach (SRWA)
    Section 53 Internal Models Approach (IMA)
    Section 54 Equity Exposures to Investment Funds
    Section 55 Equity Derivative Contracts
Part VII Risk-Weighted Assets for Operational Risk
    Section 61 Qualification Requirements for Incorporation of 
Operational Risk Mitigants
    Section 62 Mechanics of Risk-Weighted Asset Calculation
Part VIII Disclosure
    Section 71 Disclosure Requirements

                       Part I. General Provisions

    Section 1. Purpose, Applicability, Reservation of Authority, and 
                        Principle of Conservatism

    (a) Purpose. This appendix establishes:
    (1) Minimum qualifying criteria for [banks] using [bank]-specific 
internal risk measurement and management processes for calculating risk-
based capital requirements;
    (2) Methodologies for such [banks] to calculate their risk-based 
capital requirements; and

[[Page 50]]

    (3) Public disclosure requirements for such [banks].
    (b) Applicability. (1) This appendix applies to a [bank] that:
    (i) Has consolidated total assets, as reported on the most recent 
year-end Consolidated Report of Condition and Income (Call Report) or 
Thrift Financial Report (TFR), equal to $250 billion or more;
    (ii) Has consolidated total on-balance sheet foreign exposure at the 
most recent year-end equal to $10 billion or more (where total on-
balance sheet foreign exposure equals total cross-border claims less 
claims with head office or guarantor located in another country plus 
redistributed guaranteed amounts to the country of head office or 
guarantor plus local country claims on local residents plus revaluation 
gains on foreign exchange and derivative products, calculated in 
accordance with the Federal Financial Institutions Examination Council 
(FFIEC) 009 Country Exposure Report);
    (iii) Is a subsidiary of a depository institution that uses 12 CFR 
part 3, Appendix C, 12 CFR part 208, Appendix F, 12 CFR part 325, 
Appendix D, or 12 CFR part 567, Appendix C, to calculate its risk-based 
capital requirements; or
    (iv) Is a subsidiary of a bank holding company that uses 12 CFR part 
225, Appendix G, to calculate its risk-based capital requirements.
    (2) Any [bank] may elect to use this appendix to calculate its risk-
based capital requirements.
    (3) A [bank] that is subject to this appendix must use this appendix 
unless the [AGENCY] determines in writing that application of this 
appendix is not appropriate in light of the [bank]'s asset size, level 
of complexity, risk profile, or scope of operations. In making a 
determination under this paragraph, the [AGENCY] will apply notice and 
response procedures in the same manner and to the same extent as the 
notice and response procedures in 12 CFR 3.12 (for national banks), 12 
CFR 263.202 (for bank holding companies and state member banks), 12 CFR 
325.6(c) (for state nonmember banks), and 12 CFR 567.3(d) (for savings 
associations).
    (c) Reservation of authority--(1) Additional capital in the 
aggregate. The [AGENCY] may require a [bank] to hold an amount of 
capital greater than otherwise required under this appendix if the 
[AGENCY] determines that the [bank]'s risk-based capital requirement 
under this appendix is not commensurate with the [bank]'s credit, 
market, operational, or other risks. In making a determination under 
this paragraph, the [AGENCY] will apply notice and response procedures 
in the same manner and to the same extent as the notice and response 
procedures in 12 CFR 3.12 (for national banks), 12 CFR 263.202 (for bank 
holding companies and state member banks), 12 CFR 325.6(c) (for state 
nonmember banks), and 12 CFR 567.3(d) (for savings associations).
    (2) Specific risk-weighted asset amounts. (i) If the [AGENCY] 
determines that the risk-weighted asset amount calculated under this 
appendix by the [bank] for one or more exposures is not commensurate 
with the risks associated with those exposures, the [AGENCY] may require 
the [bank] to assign a different risk-weighted asset amount to the 
exposures, to assign different risk parameters to the exposures (if the 
exposures are wholesale or retail exposures), or to use different model 
assumptions for the exposures (if relevant), all as specified by the 
[AGENCY].
    (ii) If the [AGENCY] determines that the risk-weighted asset amount 
for operational risk produced by the [bank] under this appendix is not 
commensurate with the operational risks of the [bank], the [AGENCY] may 
require the [bank] to assign a different risk-weighted asset amount for 
operational risk, to change elements of its operational risk analytical 
framework, including distributional and dependence assumptions, or to 
make other changes to the [bank]'s operational risk management 
processes, data and assessment systems, or quantification systems, all 
as specified by the [AGENCY].
    (3) Other supervisory authority. Nothing in this appendix limits the 
authority of the [AGENCY] under any other provision of law or regulation 
to take supervisory or enforcement action, including action to address 
unsafe or unsound practices or conditions, deficient capital levels, or 
violations of law.
    (d) Principle of conservatism. Notwithstanding the requirements of 
this appendix, a [bank] may choose not to apply a provision of this 
appendix to one or more exposures, provided that:
    (1) The [bank] can demonstrate on an ongoing basis to the 
satisfaction of the [AGENCY] that not applying the provision would, in 
all circumstances, unambiguously generate a risk-based capital 
requirement for each such exposure greater than that which would 
otherwise be required under this appendix;
    (2) The [bank] appropriately manages the risk of each such exposure;
    (3) The [bank] notifies the [AGENCY] in writing prior to applying 
this principle to each such exposure; and
    (4) The exposures to which the [bank] applies this principle are 
not, in the aggregate, material to the [bank].

                         Section 2. Definitions

    Advanced internal ratings-based (IRB) systems means a [bank]'s 
internal risk rating and segmentation system; risk parameter 
quantification system; data management and maintenance system; and 
control, oversight, and validation system for credit risk of wholesale 
and retail exposures.

[[Page 51]]

    Advanced systems means a [bank]'s advanced IRB systems, operational 
risk management processes, operational risk data and assessment systems, 
operational risk quantification systems, and, to the extent the [bank] 
uses the following systems, the internal models methodology, double 
default excessive correlation detection process, IMA for equity 
exposures, and IAA for securitization exposures to ABCP programs.
    Affiliate with respect to a company means any company that controls, 
is controlled by, or is under common control with, the company.
    Applicable external rating means:
    (1) With respect to an exposure that has multiple external ratings 
assigned by NRSROs, the lowest solicited external rating assigned to the 
exposure by any NRSRO; and
    (2) With respect to an exposure that has a single external rating 
assigned by an NRSRO, the external rating assigned to the exposure by 
the NRSRO.
    Applicable inferred rating means:
    (1) With respect to an exposure that has multiple inferred ratings, 
the lowest inferred rating based on a solicited external rating; and
    (2) With respect to an exposure that has a single inferred rating, 
the inferred rating.
    Asset-backed commercial paper (ABCP) program means a program that 
primarily issues commercial paper that:
    (1) Has an external rating; and
    (2) Is backed by underlying exposures held in a bankruptcy-remote 
SPE.
    Asset-backed commercial paper (ABCP) program sponsor means a [bank] 
that:
    (1) Establishes an ABCP program;
    (2) Approves the sellers permitted to participate in an ABCP 
program;
    (3) Approves the exposures to be purchased by an ABCP program; or
    (4) Administers the ABCP program by monitoring the underlying 
exposures, underwriting or otherwise arranging for the placement of debt 
or other obligations issued by the program, compiling monthly reports, 
or ensuring compliance with the program documents and with the program's 
credit and investment policy.
    Backtesting means the comparison of a [bank]'s internal estimates 
with actual outcomes during a sample period not used in model 
development. In this context, backtesting is one form of out-of-sample 
testing.
    Bank holding company is defined in section 2 of the Bank Holding 
Company Act (12 U.S.C. 1841).
    Benchmarking means the comparison of a [bank]'s internal estimates 
with relevant internal and external data or with estimates based on 
other estimation techniques.
    Business environment and internal control factors means the 
indicators of a [bank]'s operational risk profile that reflect a current 
and forward-looking assessment of the [bank]'s underlying business risk 
factors and internal control environment.
    Carrying value means, with respect to an asset, the value of the 
asset on the balance sheet of the [bank], determined in accordance with 
GAAP.
    Clean-up call means a contractual provision that permits an 
originating [bank] or servicer to call securitization exposures before 
their stated maturity or call date. See also eligible clean-up call.
    Commodity derivative contract means a commodity-linked swap, 
purchased commodity-linked option, forward commodity-linked contract, or 
any other instrument linked to commodities that gives rise to similar 
counterparty credit risks.
    Company means a corporation, partnership, limited liability company, 
depository institution, business trust, special purpose entity, 
association, or similar organization.
    Control. A person or company controls a company if it:
    (1) Owns, controls, or holds with power to vote 25 percent or more 
of a class of voting securities of the company; or
    (2) Consolidates the company for financial reporting purposes.
    Controlled early amortization provision means an early amortization 
provision that meets all the following conditions:
    (1) The originating [bank] has appropriate policies and procedures 
to ensure that it has sufficient capital and liquidity available in the 
event of an early amortization;
    (2) Throughout the duration of the securitization (including the 
early amortization period), there is the same pro rata sharing of 
interest, principal, expenses, losses, fees, recoveries, and other cash 
flows from the underlying exposures based on the originating [bank]'s 
and the investors' relative shares of the underlying exposures 
outstanding measured on a consistent monthly basis;
    (3) The amortization period is sufficient for at least 90 percent of 
the total underlying exposures outstanding at the beginning of the early 
amortization period to be repaid or recognized as in default; and
    (4) The schedule for repayment of investor principal is not more 
rapid than would be allowed by straight-line amortization over an 18-
month period.
    Credit derivative means a financial contract executed under standard 
industry credit derivative documentation that allows one party (the 
protection purchaser) to transfer the credit risk of one or more 
exposures (reference exposure) to another party (the protection 
provider). See also eligible credit derivative.
    Credit-enhancing interest-only strip (CEIO) means an on-balance 
sheet asset that, in form or in substance:

[[Page 52]]

    (1) Represents a contractual right to receive some or all of the 
interest and no more than a minimal amount of principal due on the 
underlying exposures of a securitization; and
    (2) Exposes the holder to credit risk directly or indirectly 
associated with the underlying exposures that exceeds a pro rata share 
of the holder's claim on the underlying exposures, whether through 
subordination provisions or other credit-enhancement techniques.
    Credit-enhancing representations and warranties means 
representations and warranties that are made or assumed in connection 
with a transfer of underlying exposures (including loan servicing 
assets) and that obligate a [bank] to protect another party from losses 
arising from the credit risk of the underlying exposures. Credit-
enhancing representations and warranties include provisions to protect a 
party from losses resulting from the default or nonperformance of the 
obligors of the underlying exposures or from an insufficiency in the 
value of the collateral backing the underlying exposures. Credit-
enhancing representations and warranties do not include:
    (1) Early default clauses and similar warranties that permit the 
return of, or premium refund clauses that cover, first-lien residential 
mortgage exposures for a period not to exceed 120 days from the date of 
transfer, provided that the date of transfer is within one year of 
origination of the residential mortgage exposure;
    (2) Premium refund clauses that cover underlying exposures 
guaranteed, in whole or in part, by the U.S. government, a U.S. 
government agency, or a U.S. government sponsored enterprise, provided 
that the clauses are for a period not to exceed 120 days from the date 
of transfer; or
    (3) Warranties that permit the return of underlying exposures in 
instances of misrepresentation, fraud, or incomplete documentation.
    Credit risk mitigant means collateral, a credit derivative, or a 
guarantee.
    Credit-risk-weighted assets means 1.06 multiplied by the sum of:
    (1) Total wholesale and retail risk-weighted assets;
    (2) Risk-weighted assets for securitization exposures; and
    (3) Risk-weighted assets for equity exposures.
    Current exposure means, with respect to a netting set, the larger of 
zero or the market value of a transaction or portfolio of transactions 
within the netting set that would be lost upon default of the 
counterparty, assuming no recovery on the value of the transactions. 
Current exposure is also called replacement cost.
    Default--(1) Retail. (i) A retail exposure of a [bank] is in default 
if:
    (A) The exposure is 180 days past due, in the case of a residential 
mortgage exposure or revolving exposure;
    (B) The exposure is 120 days past due, in the case of all other 
retail exposures; or
    (C) The [bank] has taken a full or partial charge-off, write-down of 
principal, or material negative fair value adjustment of principal on 
the exposure for credit-related reasons.
    (ii) Notwithstanding paragraph (1)(i) of this definition, for a 
retail exposure held by a non-U.S. subsidiary of the [bank] that is 
subject to an internal ratings-based approach to capital adequacy 
consistent with the Basel Committee on Banking Supervision's 
``International Convergence of Capital Measurement and Capital 
Standards: A Revised Framework'' in a non-U.S. jurisdiction, the [bank] 
may elect to use the definition of default that is used in that 
jurisdiction, provided that the [bank] has obtained prior approval from 
the [AGENCY] to use the definition of default in that jurisdiction.
    (iii) A retail exposure in default remains in default until the 
[bank] has reasonable assurance of repayment and performance for all 
contractual principal and interest payments on the exposure.
    (2) Wholesale. (i) A [bank]'s wholesale obligor is in default if:
    (A) The [bank] determines that the obligor is unlikely to pay its 
credit obligations to the [bank] in full, without recourse by the [bank] 
to actions such as realizing collateral (if held); or
    (B) The obligor is past due more than 90 days on any material credit 
obligation(s) to the [bank].\1\
---------------------------------------------------------------------------

    \1\ Overdrafts are past due once the obligor has breached an advised 
limit or been advised of a limit smaller than the current outstanding 
balance.
---------------------------------------------------------------------------

    (ii) An obligor in default remains in default until the [bank] has 
reasonable assurance of repayment and performance for all contractual 
principal and interest payments on all exposures of the [bank] to the 
obligor (other than exposures that have been fully written-down or 
charged-off).
    Dependence means a measure of the association among operational 
losses across and within units of measure.
    Depository institution is defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813).
    Derivative contract means a financial contract whose value is 
derived from the values of one or more underlying assets, reference 
rates, or indices of asset values or reference rates. Derivative 
contracts include interest rate derivative contracts, exchange rate 
derivative contracts, equity derivative contracts, commodity derivative 
contracts, credit derivatives, and any other instrument

[[Page 53]]

that poses similar counterparty credit risks. Derivative contracts also 
include unsettled securities, commodities, and foreign exchange 
transactions with a contractual settlement or delivery lag that is 
longer than the lesser of the market standard for the particular 
instrument or five business days.
    Early amortization provision means a provision in the documentation 
governing a securitization that, when triggered, causes investors in the 
securitization exposures to be repaid before the original stated 
maturity of the securitization exposures, unless the provision:
    (1) Is triggered solely by events not directly related to the 
performance of the underlying exposures or the originating [bank] (such 
as material changes in tax laws or regulations); or
    (2) Leaves investors fully exposed to future draws by obligors on 
the underlying exposures even after the provision is triggered.
    Economic downturn conditions means, with respect to an exposure held 
by the [bank], those conditions in which the aggregate default rates for 
that exposure's wholesale or retail exposure subcategory (or subdivision 
of such subcategory selected by the [bank]) in the exposure's national 
jurisdiction (or subdivision of such jurisdiction selected by the 
[bank]) are significantly higher than average.
    Effective maturity (M) of a wholesale exposure means:
    (1) For wholesale exposures other than repo-style transactions, 
eligible margin loans, and OTC derivative contracts described in 
paragraph (2) or (3) of this definition:
    (i) The weighted-average remaining maturity (measured in years, 
whole or fractional) of the expected contractual cash flows from the 
exposure, using the undiscounted amounts of the cash flows as weights; 
or
    (ii) The nominal remaining maturity (measured in years, whole or 
fractional) of the exposure.
    (2) For repo-style transactions, eligible margin loans, and OTC 
derivative contracts subject to a qualifying master netting agreement 
for which the [bank] does not apply the internal models approach in 
paragraph (d) of section 32 of this appendix, the weighted-average 
remaining maturity (measured in years, whole or fractional) of the 
individual transactions subject to the qualifying master netting 
agreement, with the weight of each individual transaction set equal to 
the notional amount of the transaction.
    (3) For repo-style transactions, eligible margin loans, and OTC 
derivative contracts for which the [bank] applies the internal models 
approach in paragraph (d) of section 32 of this appendix, the value 
determined in paragraph (d)(4) of section 32 of this appendix.
    Effective notional amount means, for an eligible guarantee or 
eligible credit derivative, the lesser of the contractual notional 
amount of the credit risk mitigant and the EAD of the hedged exposure, 
multiplied by the percentage coverage of the credit risk mitigant. For 
example, the effective notional amount of an eligible guarantee that 
covers, on a pro rata basis, 40 percent of any losses on a $100 bond 
would be $40.
    Eligible clean-up call means a clean-up call that:
    (1) Is exercisable solely at the discretion of the originating 
[bank] or servicer;
    (2) Is not structured to avoid allocating losses to securitization 
exposures held by investors or otherwise structured to provide credit 
enhancement to the securitization; and
    (3) (i) For a traditional securitization, is only exercisable when 
10 percent or less of the principal amount of the underlying exposures 
or securitization exposures (determined as of the inception of the 
securitization) is outstanding; or
    (ii) For a synthetic securitization, is only exercisable when 10 
percent or less of the principal amount of the reference portfolio of 
underlying exposures (determined as of the inception of the 
securitization) is outstanding.
    Eligible credit derivative means a credit derivative in the form of 
a credit default swap, n\th\-to-default swap, total return swap, or any 
other form of credit derivative approved by the [AGENCY], provided that:
    (1) The contract meets the requirements of an eligible guarantee and 
has been confirmed by the protection purchaser and the protection 
provider;
    (2) Any assignment of the contract has been confirmed by all 
relevant parties;
    (3) If the credit derivative is a credit default swap or n\th\-to-
default swap, the contract includes the following credit events:
    (i) Failure to pay any amount due under the terms of the reference 
exposure, subject to any applicable minimal payment threshold that is 
consistent with standard market practice and with a grace period that is 
closely in line with the grace period of the reference exposure; and
    (ii) Bankruptcy, insolvency, or inability of the obligor on the 
reference exposure to pay its debts, or its failure or admission in 
writing of its inability generally to pay its debts as they become due, 
and similar events;
    (4) The terms and conditions dictating the manner in which the 
contract is to be settled are incorporated into the contract;
    (5) If the contract allows for cash settlement, the contract 
incorporates a robust valuation process to estimate loss reliably and 
specifies a reasonable period for obtaining post-credit event valuations 
of the reference exposure;

[[Page 54]]

    (6) If the contract requires the protection purchaser to transfer an 
exposure to the protection provider at settlement, the terms of at least 
one of the exposures that is permitted to be transferred under the 
contract provides that any required consent to transfer may not be 
unreasonably withheld;
    (7) If the credit derivative is a credit default swap or n\th\-to-
default swap, the contract clearly identifies the parties responsible 
for determining whether a credit event has occurred, specifies that this 
determination is not the sole responsibility of the protection provider, 
and gives the protection purchaser the right to notify the protection 
provider of the occurrence of a credit event; and
    (8) If the credit derivative is a total return swap and the [bank] 
records net payments received on the swap as net income, the [bank] 
records offsetting deterioration in the value of the hedged exposure 
(either through reductions in fair value or by an addition to reserves).
    Eligible credit reserves means all general allowances that have been 
established through a charge against earnings to absorb credit losses 
associated with on- or off-balance sheet wholesale and retail exposures, 
including the allowance for loan and lease losses (ALLL) associated with 
such exposures but excluding allocated transfer risk reserves 
established pursuant to 12 U.S.C. 3904 and other specific reserves 
created against recognized losses.
    Eligible double default guarantor, with respect to a guarantee or 
credit derivative obtained by a [bank], means:
    (1) U.S.-based entities. A depository institution, a bank holding 
company, a savings and loan holding company (as defined in 12 U.S.C. 
1467a) provided all or substantially all of the holding company's 
activities are permissible for a financial holding company under 12 
U.S.C. 1843(k), a securities broker or dealer registered with the SEC 
under the Securities Exchange Act of 1934 (15 U.S.C. 78o et seq.), or an 
insurance company in the business of providing credit protection (such 
as a monoline bond insurer or re-insurer) that is subject to supervision 
by a State insurance regulator, if:
    (i) At the time the guarantor issued the guarantee or credit 
derivative or at any time thereafter, the [bank] assigned a PD to the 
guarantor's rating grade that was equal to or lower than the PD 
associated with a long-term external rating in the third-highest 
investment-grade rating category; and
    (ii) The [bank] currently assigns a PD to the guarantor's rating 
grade that is equal to or lower than the PD associated with a long-term 
external rating in the lowest investment-grade rating category; or
    (2) Non-U.S.-based entities. A foreign bank (as defined in Sec. 
211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)), a 
non-U.S.-based securities firm, or a non-U.S.-based insurance company in 
the business of providing credit protection, if:
    (i) The [bank] demonstrates that the guarantor is subject to 
consolidated supervision and regulation comparable to that imposed on 
U.S. depository institutions, securities broker-dealers, or insurance 
companies (as the case may be), or has issued and outstanding an 
unsecured long-term debt security without credit enhancement that has a 
long-term applicable external rating of at least investment grade;
    (ii) At the time the guarantor issued the guarantee or credit 
derivative or at any time thereafter, the [bank] assigned a PD to the 
guarantor's rating grade that was equal to or lower than the PD 
associated with a long-term external rating in the third-highest 
investment-grade rating category; and
    (iii) The [bank] currently assigns a PD to the guarantor's rating 
grade that is equal to or lower than the PD associated with a long-term 
external rating in the lowest investment-grade rating category.
    Eligible guarantee means a guarantee that:
    (1) Is written and unconditional;
    (2) Covers all or a pro rata portion of all contractual payments of 
the obligor on the reference exposure;
    (3) Gives the beneficiary a direct claim against the protection 
provider;
    (4) Is not unilaterally cancelable by the protection provider for 
reasons other than the breach of the contract by the beneficiary;
    (5) Is legally enforceable against the protection provider in a 
jurisdiction where the protection provider has sufficient assets against 
which a judgment may be attached and enforced;
    (6) Requires the protection provider to make payment to the 
beneficiary on the occurrence of a default (as defined in the guarantee) 
of the obligor on the reference exposure in a timely manner without the 
beneficiary first having to take legal actions to pursue the obligor for 
payment;
    (7) Does not increase the beneficiary's cost of credit protection on 
the guarantee in response to deterioration in the credit quality of the 
reference exposure; and
    (8) Is not provided by an affiliate of the [bank], unless the 
affiliate is an insured depository institution, bank, securities broker 
or dealer, or insurance company that:
    (i) Does not control the [bank]; and
    (ii) Is subject to consolidated supervision and regulation 
comparable to that imposed on U.S. depository institutions, securities 
broker-dealers, or insurance companies (as the case may be).
    Eligible margin loan means an extension of credit where:
    (1) The extension of credit is collateralized exclusively by liquid 
and readily marketable

[[Page 55]]

debt or equity securities, gold, or conforming residential mortgages;
    (2) The collateral is marked to market daily, and the transaction is 
subject to daily margin maintenance requirements;
    (3) The extension of credit is conducted under an agreement that 
provides the [bank] the right to accelerate and terminate the extension 
of credit and to liquidate or set off collateral promptly upon an event 
of default (including upon an event of bankruptcy, insolvency, or 
similar proceeding) of the counterparty, provided that, in any such 
case, any exercise of rights under the agreement will not be stayed or 
avoided under applicable law in the relevant jurisdictions; \2\ and
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    \2\ This requirement is met where all transactions under the 
agreement are (i) executed under U.S. law and (ii) constitute 
``securities contracts'' under section 555 of the Bankruptcy Code (11 
U.S.C. 555), qualified financial contracts under section 11(e)(8) of the 
Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or netting 
contracts between or among financial institutions under sections 401-407 
of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 
U.S.C. 4401-4407) or the Federal Reserve Board's Regulation EE (12 CFR 
part 231).
---------------------------------------------------------------------------

    (4) The [bank] has conducted sufficient legal review to conclude 
with a well-founded basis (and maintains sufficient written 
documentation of that legal review) that the agreement meets the 
requirements of paragraph (3) of this definition and is legal, valid, 
binding, and enforceable under applicable law in the relevant 
jurisdictions.
    Eligible operational risk offsets means amounts, not to exceed 
expected operational loss, that:
    (1) Are generated by internal business practices to absorb highly 
predictable and reasonably stable operational losses, including reserves 
calculated consistent with GAAP; and
    (2) Are available to cover expected operational losses with a high 
degree of certainty over a one-year horizon.
    Eligible purchased wholesale exposure means a purchased wholesale 
exposure that:
    (1) The [bank] or securitization SPE purchased from an unaffiliated 
seller and did not directly or indirectly originate;
    (2) Was generated on an arm's-length basis between the seller and 
the obligor (intercompany accounts receivable and receivables subject to 
contra-accounts between firms that buy and sell to each other do not 
satisfy this criterion);
    (3) Provides the [bank] or securitization SPE with a claim on all 
proceeds from the exposure or a pro rata interest in the proceeds from 
the exposure;
    (4) Has an M of less than one year; and
    (5) When consolidated by obligor, does not represent a concentrated 
exposure relative to the portfolio of purchased wholesale exposures.
    Eligible securitization guarantor means:
    (1) A sovereign entity, the Bank for International Settlements, the 
International Monetary Fund, the European Central Bank, the European 
Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage 
Corporation (Farmer Mac), a multilateral development bank, a depository 
institution, a bank holding company, a savings and loan holding company 
(as defined in 12 U.S.C. 1467a) provided all or substantially all of the 
holding company's activities are permissible for a financial holding 
company under 12 U.S.C. 1843(k), a foreign bank (as defined in Sec. 
211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)), or a 
securities firm;
    (2) Any other entity (other than a securitization SPE) that has 
issued and outstanding an unsecured long-term debt security without 
credit enhancement that has a long-term applicable external rating in 
one of the three highest investment-grade rating categories; or
    (3) Any other entity (other than a securitization SPE) that has a PD 
assigned by the [bank] that is lower than or equal to the PD associated 
with a long-term external rating in the third highest investment-grade 
rating category.
    Eligible servicer cash advance facility means a servicer cash 
advance facility in which:
    (1) The servicer is entitled to full reimbursement of advances, 
except that a servicer may be obligated to make non-reimbursable 
advances for a particular underlying exposure if any such advance is 
contractually limited to an insignificant amount of the outstanding 
principal balance of that exposure;
    (2) The servicer's right to reimbursement is senior in right of 
payment to all other claims on the cash flows from the underlying 
exposures of the securitization; and
    (3) The servicer has no legal obligation to, and does not, make 
advances to the securitization if the servicer concludes the advances 
are unlikely to be repaid.
    Equity derivative contract means an equity-linked swap, purchased 
equity-linked option, forward equity-linked contract, or any other 
instrument linked to equities that gives rise to similar counterparty 
credit risks.
    Equity exposure means:
    (1) A security or instrument (whether voting or non-voting) that 
represents a direct or indirect ownership interest in, and is a residual 
claim on, the assets and income of a company, unless:
    (i) The issuing company is consolidated with the [bank] under GAAP;
    (ii) The [bank] is required to deduct the ownership interest from 
tier 1 or tier 2 capital under this appendix;

[[Page 56]]

    (iii) The ownership interest incorporates a payment or other similar 
obligation on the part of the issuing company (such as an obligation to 
make periodic payments); or
    (iv) The ownership interest is a securitization exposure;
    (2) A security or instrument that is mandatorily convertible into a 
security or instrument described in paragraph (1) of this definition;
    (3) An option or warrant that is exercisable for a security or 
instrument described in paragraph (1) of this definition; or
    (4) Any other security or instrument (other than a securitization 
exposure) to the extent the return on the security or instrument is 
based on the performance of a security or instrument described in 
paragraph (1) of this definition.
    Excess spread for a period means:
    (1) Gross finance charge collections and other income received by a 
securitization SPE (including market interchange fees) over a period 
minus interest paid to the holders of the securitization exposures, 
servicing fees, charge-offs, and other senior trust or similar expenses 
of the SPE over the period; divided by
    (2) The principal balance of the underlying exposures at the end of 
the period.
    Exchange rate derivative contract means a cross-currency interest 
rate swap, forward foreign-exchange contract, currency option purchased, 
or any other instrument linked to exchange rates that gives rise to 
similar counterparty credit risks.
    Excluded mortgage exposure means any one-to four-family residential 
pre-sold construction loan for a residence for which the purchase 
contract is cancelled that would receive a 100 percent risk weight under 
section 618(a)(2) of the Resolution Trust Corporation Refinancing, 
Restructuring, and Improvement Act and under 12 CFR part 3, Appendix A, 
section 3(a)(3)(iii) (for national banks), 12 CFR part 208, Appendix A, 
section III.C.3. (for state member banks), 12 CFR part 225, Appendix A, 
section III.C.3. (for bank holding companies), 12 CFR part 325, Appendix 
A, section II.C.a. (for state nonmember banks), or 12 CFR 567.1 
(definition of ``qualifying residential construction loan'') and 12 CFR 
567.6(a)(1)(iv) (for savings associations).
    Expected credit loss (ECL) means:
    (1) For a wholesale exposure to a non-defaulted obligor or segment 
of non-defaulted retail exposures that is carried at fair value with 
gains and losses flowing through earnings or that is classified as held-
for-sale and is carried at the lower of cost or fair value with losses 
flowing through earnings, zero.
    (2) For all other wholesale exposures to non-defaulted obligors or 
segments of non-defaulted retail exposures, the product of PD times LGD 
times EAD for the exposure or segment.
    (3) For a wholesale exposure to a defaulted obligor or segment of 
defaulted retail exposures, the [bank]'s impairment estimate for 
allowance purposes for the exposure or segment.
    (4) Total ECL is the sum of expected credit losses for all wholesale 
and retail exposures other than exposures for which the [bank] has 
applied the double default treatment in section 34 of this appendix.
    Expected exposure (EE) means the expected value of the probability 
distribution of non-negative credit risk exposures to a counterparty at 
any specified future date before the maturity date of the longest term 
transaction in the netting set. Any negative market values in the 
probability distribution of market values to a counterparty at a 
specified future date are set to zero to convert the probability 
distribution of market values to the probability distribution of credit 
risk exposures.
    Expected operational loss (EOL) means the expected value of the 
distribution of potential aggregate operational losses, as generated by 
the [bank]'s operational risk quantification system using a one-year 
horizon.
    Expected positive exposure (EPE) means the weighted average over 
time of expected (non-negative) exposures to a counterparty where the 
weights are the proportion of the time interval that an individual 
expected exposure represents. When calculating risk-based capital 
requirements, the average is taken over a one-year horizon.
    Exposure at default (EAD). (1) For the on-balance sheet component of 
a wholesale exposure or segment of retail exposures (other than an OTC 
derivative contract, or a repo-style transaction or eligible margin loan 
for which the [bank] determines EAD under section 32 of this appendix), 
EAD means:
    (i) If the exposure or segment is a security classified as 
available-for-sale, the [bank]'s carrying value (including net accrued 
but unpaid interest and fees) for the exposure or segment less any 
allocated transfer risk reserve for the exposure or segment, less any 
unrealized gains on the exposure or segment, and plus any unrealized 
losses on the exposure or segment; or
    (ii) If the exposure or segment is not a security classified as 
available-for-sale, the [bank]'s carrying value (including net accrued 
but unpaid interest and fees) for the exposure or segment less any 
allocated transfer risk reserve for the exposure or segment.
    (2) For the off-balance sheet component of a wholesale exposure or 
segment of retail exposures (other than an OTC derivative contract, or a 
repo-style transaction or eligible margin loan for which the [bank] 
determines EAD under section 32 of this appendix) in the form of a loan 
commitment, line of credit, trade-related letter of credit, or 
transaction-related contingency, EAD means the [bank]'s

[[Page 57]]

best estimate of net additions to the outstanding amount owed the 
[bank], including estimated future additional draws of principal and 
accrued but unpaid interest and fees, that are likely to occur over a 
one-year horizon assuming the wholesale exposure or the retail exposures 
in the segment were to go into default. This estimate of net additions 
must reflect what would be expected during economic downturn conditions. 
Trade-related letters of credit are short-term, self-liquidating 
instruments that are used to finance the movement of goods and are 
collateralized by the underlying goods. Transaction-related 
contingencies relate to a particular transaction and include, among 
other things, performance bonds and performance-based letters of credit.
    (3) For the off-balance sheet component of a wholesale exposure or 
segment of retail exposures (other than an OTC derivative contract, or a 
repo-style transaction or eligible margin loan for which the [bank] 
determines EAD under section 32 of this appendix) in the form of 
anything other than a loan commitment, line of credit, trade-related 
letter of credit, or transaction-related contingency, EAD means the 
notional amount of the exposure or segment.
    (4) EAD for OTC derivative contracts is calculated as described in 
section 32 of this appendix. A [bank] also may determine EAD for repo-
style transactions and eligible margin loans as described in section 32 
of this appendix.
    (5) For wholesale or retail exposures in which only the drawn 
balance has been securitized, the [bank] must reflect its share of the 
exposures' undrawn balances in EAD. Undrawn balances of revolving 
exposures for which the drawn balances have been securitized must be 
allocated between the seller's and investors' interests on a pro rata 
basis, based on the proportions of the seller's and investors' shares of 
the securitized drawn balances.
    Exposure category means any of the wholesale, retail, 
securitization, or equity exposure categories.
    External operational loss event data means, with respect to a 
[bank], gross operational loss amounts, dates, recoveries, and relevant 
causal information for operational loss events occurring at 
organizations other than the [bank].
    External rating means a credit rating that is assigned by an NRSRO 
to an exposure, provided:
    (1) The credit rating fully reflects the entire amount of credit 
risk with regard to all payments owed to the holder of the exposure. If 
a holder is owed principal and interest on an exposure, the credit 
rating must fully reflect the credit risk associated with timely 
repayment of principal and interest. If a holder is owed only principal 
on an exposure, the credit rating must fully reflect only the credit 
risk associated with timely repayment of principal; and
    (2) The credit rating is published in an accessible form and is or 
will be included in the transition matrices made publicly available by 
the NRSRO that summarize the historical performance of positions rated 
by the NRSRO.
    Financial collateral means collateral:
    (1) In the form of:
    (i) Cash on deposit with the [bank] (including cash held for the 
[bank] by a third-party custodian or trustee);
    (ii) Gold bullion;
    (iii) Long-term debt securities that have an applicable external 
rating of one category below investment grade or higher;
    (iv) Short-term debt instruments that have an applicable external 
rating of at least investment grade;
    (v) Equity securities that are publicly traded;
    (vi) Convertible bonds that are publicly traded;
    (vii) Money market mutual fund shares and other mutual fund shares 
if a price for the shares is publicly quoted daily; or
    (viii) Conforming residential mortgages; and
    (2) In which the [bank] has a perfected, first priority security 
interest or, outside of the United States, the legal equivalent thereof 
(with the exception of cash on deposit and notwithstanding the prior 
security interest of any custodial agent).
    GAAP means generally accepted accounting principles as used in the 
United States.
    Gain-on-sale means an increase in the equity capital (as reported on 
Schedule RC of the Call Report, Schedule HC of the FR Y-9C Report, or 
Schedule SC of the Thrift Financial Report) of a [bank] that results 
from a securitization (other than an increase in equity capital that 
results from the [bank]'s receipt of cash in connection with the 
securitization).
    Guarantee means a financial guarantee, letter of credit, insurance, 
or other similar financial instrument (other than a credit derivative) 
that allows one party (beneficiary) to transfer the credit risk of one 
or more specific exposures (reference exposure) to another party 
(protection provider). See also eligible guarantee.
    High volatility commercial real estate (HVCRE) exposure means a 
credit facility that finances or has financed the acquisition, 
development, or construction (ADC) of real property, unless the facility 
finances:
    (1) One- to four-family residential properties; or
    (2) Commercial real estate projects in which:
    (i) The loan-to-value ratio is less than or equal to the applicable 
maximum supervisory loan-to-value ratio in the [AGENCY]'s real estate 
lending standards at 12 CFR part

[[Page 58]]

34, Subpart D (OCC); 12 CFR part 208, Appendix C (Board); 12 CFR part 
365, Subpart D (FDIC); and 12 CFR 560.100-560.101 (OTS);
    (ii) The borrower has contributed capital to the project in the form 
of cash or unencumbered readily marketable assets (or has paid 
development expenses out-of-pocket) of at least 15 percent of the real 
estate's appraised ``as completed'' value; and
    (iii) The borrower contributed the amount of capital required by 
paragraph (2)(ii) of this definition before the [bank] advances funds 
under the credit facility, and the capital contributed by the borrower, 
or internally generated by the project, is contractually required to 
remain in the project throughout the life of the project. The life of a 
project concludes only when the credit facility is converted to 
permanent financing or is sold or paid in full. Permanent financing may 
be provided by the [bank] that provided the ADC facility as long as the 
permanent financing is subject to the [bank]'s underwriting criteria for 
long-term mortgage loans.
    Inferred rating. A securitization exposure has an inferred rating 
equal to the external rating referenced in paragraph (2)(i) of this 
definition if:
    (1) The securitization exposure does not have an external rating; 
and
    (2) Another securitization exposure issued by the same issuer and 
secured by the same underlying exposures:
    (i) Has an external rating;
    (ii) Is subordinated in all respects to the unrated securitization 
exposure;
    (iii) Does not benefit from any credit enhancement that is not 
available to the unrated securitization exposure; and
    (iv) Has an effective remaining maturity that is equal to or longer 
than that of the unrated securitization exposure.
    Interest rate derivative contract means a single-currency interest 
rate swap, basis swap, forward rate agreement, purchased interest rate 
option, when-issued securities, or any other instrument linked to 
interest rates that gives rise to similar counterparty credit risks.
    Internal operational loss event data means, with respect to a 
[bank], gross operational loss amounts, dates, recoveries, and relevant 
causal information for operational loss events occurring at the [bank].
    Investing [bank] means, with respect to a securitization, a [bank] 
that assumes the credit risk of a securitization exposure (other than an 
originating [bank] of the securitization). In the typical synthetic 
securitization, the investing [bank] sells credit protection on a pool 
of underlying exposures to the originating [bank].
    Investment fund means a company:
    (1) All or substantially all of the assets of which are financial 
assets; and
    (2) That has no material liabilities.
    Investors' interest EAD means, with respect to a securitization, the 
EAD of the underlying exposures multiplied by the ratio of:
    (1) The total amount of securitization exposures issued by the 
securitization SPE to investors; divided by
    (2) The outstanding principal amount of underlying exposures.
    Loss given default (LGD) means:
    (1) For a wholesale exposure, the greatest of:
    (i) Zero;
    (ii) The [bank]'s empirically based best estimate of the long-run 
default-weighted average economic loss, per dollar of EAD, the [bank] 
would expect to incur if the obligor (or a typical obligor in the loss 
severity grade assigned by the [bank] to the exposure) were to default 
within a one-year horizon over a mix of economic conditions, including 
economic downturn conditions; or
    (iii) The [bank]'s empirically based best estimate of the economic 
loss, per dollar of EAD, the [bank] would expect to incur if the obligor 
(or a typical obligor in the loss severity grade assigned by the [bank] 
to the exposure) were to default within a one-year horizon during 
economic downturn conditions.
    (2) For a segment of retail exposures, the greatest of:
    (i) Zero;
    (ii) The [bank]'s empirically based best estimate of the long-run 
default-weighted average economic loss, per dollar of EAD, the [bank] 
would expect to incur if the exposures in the segment were to default 
within a one-year horizon over a mix of economic conditions, including 
economic downturn conditions; or
    (iii) The [bank]'s empirically based best estimate of the economic 
loss, per dollar of EAD, the [bank] would expect to incur if the 
exposures in the segment were to default within a one-year horizon 
during economic downturn conditions.
    (3) The economic loss on an exposure in the event of default is all 
material credit-related losses on the exposure (including accrued but 
unpaid interest or fees, losses on the sale of collateral, direct 
workout costs, and an appropriate allocation of indirect workout costs). 
Where positive or negative cash flows on a wholesale exposure to a 
defaulted obligor or a defaulted retail exposure (including proceeds 
from the sale of collateral, workout costs, additional extensions of 
credit to facilitate repayment of the exposure, and draw-downs of unused 
credit lines) occur after the date of default, the economic loss must 
reflect the net present value of cash flows as of the default date using 
a discount rate appropriate to the risk of the defaulted exposure.
    Main index means the Standard & Poor's 500 Index, the FTSE All-World 
Index, and any other index for which the [bank] can demonstrate to the 
satisfaction of the

[[Page 59]]

[AGENCY] that the equities represented in the index have comparable 
liquidity, depth of market, and size of bid-ask spreads as equities in 
the Standard & Poor's 500 Index and FTSE All-World Index.
    Multilateral development bank means the International Bank for 
Reconstruction and Development, the International Finance Corporation, 
the Inter-American Development Bank, the Asian Development Bank, the 
African Development Bank, the European Bank for Reconstruction and 
Development, the European Investment Bank, the European Investment Fund, 
the Nordic Investment Bank, the Caribbean Development Bank, the Islamic 
Development Bank, the Council of Europe Development Bank, and any other 
multilateral lending institution or regional development bank in which 
the U.S. government is a shareholder or contributing member or which the 
[AGENCY] determines poses comparable credit risk.
    Nationally recognized statistical rating organization (NRSRO) means 
an entity registered with the SEC as a nationally recognized statistical 
rating organization under section 15E of the Securities Exchange Act of 
1934 (15 U.S.C. 78o-7).
    Netting set means a group of transactions with a single counterparty 
that are subject to a qualifying master netting agreement or qualifying 
cross-product master netting agreement. For purposes of the internal 
models methodology in paragraph (d) of section 32 of this appendix, each 
transaction that is not subject to such a master netting agreement is 
its own netting set.
    N\th\-to-default credit derivative means a credit derivative that 
provides credit protection only for the n\th\-defaulting reference 
exposure in a group of reference exposures.
    Obligor means the legal entity or natural person contractually 
obligated on a wholesale exposure, except that a [bank] may treat the 
following exposures as having separate obligors:
    (1) Exposures to the same legal entity or natural person denominated 
in different currencies;
    (2) (i) An income-producing real estate exposure for which all or 
substantially all of the repayment of the exposure is reliant on the 
cash flows of the real estate serving as collateral for the exposure; 
the [bank], in economic substance, does not have recourse to the 
borrower beyond the real estate collateral; and no cross-default or 
cross-acceleration clauses are in place other than clauses obtained 
solely out of an abundance of caution; and
    (ii) Other credit exposures to the same legal entity or natural 
person; and
    (3) (i) A wholesale exposure authorized under section 364 of the 
U.S. Bankruptcy Code (11 U.S.C. 364) to a legal entity or natural person 
who is a debtor-in-possession for purposes of Chapter 11 of the 
Bankruptcy Code; and
    (ii) Other credit exposures to the same legal entity or natural 
person.
    Operational loss means a loss (excluding insurance or tax effects) 
resulting from an operational loss event. Operational loss includes all 
expenses associated with an operational loss event except for 
opportunity costs, forgone revenue, and costs related to risk management 
and control enhancements implemented to prevent future operational 
losses.
    Operational loss event means an event that results in loss and is 
associated with any of the following seven operational loss event type 
categories:
    (1) Internal fraud, which means the operational loss event type 
category that comprises operational losses resulting from an act 
involving at least one internal party of a type intended to defraud, 
misappropriate property, or circumvent regulations, the law, or company 
policy, excluding diversity- and discrimination-type events.
    (2) External fraud, which means the operational loss event type 
category that comprises operational losses resulting from an act by a 
third party of a type intended to defraud, misappropriate property, or 
circumvent the law. Retail credit card losses arising from non-
contractual, third-party initiated fraud (for example, identity theft) 
are external fraud operational losses. All other third-party initiated 
credit losses are to be treated as credit risk losses.
    (3) Employment practices and workplace safety, which means the 
operational loss event type category that comprises operational losses 
resulting from an act inconsistent with employment, health, or safety 
laws or agreements, payment of personal injury claims, or payment 
arising from diversity- and discrimination-type events.
    (4) Clients, products, and business practices, which means the 
operational loss event type category that comprises operational losses 
resulting from the nature or design of a product or from an 
unintentional or negligent failure to meet a professional obligation to 
specific clients (including fiduciary and suitability requirements).
    (5) Damage to physical assets, which means the operational loss 
event type category that comprises operational losses resulting from the 
loss of or damage to physical assets from natural disaster or other 
events.
    (6) Business disruption and system failures, which means the 
operational loss event type category that comprises operational losses 
resulting from disruption of business or system failures.
    (7) Execution, delivery, and process management, which means the 
operational loss

[[Page 60]]

event type category that comprises operational losses resulting from 
failed transaction processing or process management or losses arising 
from relations with trade counterparties and vendors.
    Operational risk means the risk of loss resulting from inadequate or 
failed internal processes, people, and systems or from external events 
(including legal risk but excluding strategic and reputational risk).
    Operational risk exposure means the 99.9\th\ percentile of the 
distribution of potential aggregate operational losses, as generated by 
the [bank]'s operational risk quantification system over a one-year 
horizon (and not incorporating eligible operational risk offsets or 
qualifying operational risk mitigants).
    Originating [bank], with respect to a securitization, means a [bank] 
that:
    (1) Directly or indirectly originated or securitized the underlying 
exposures included in the securitization; or
    (2) Serves as an ABCP program sponsor to the securitization.
    Other retail exposure means an exposure (other than a securitization 
exposure, an equity exposure, a residential mortgage exposure, an 
excluded mortgage exposure, a qualifying revolving exposure, or the 
residual value portion of a lease exposure) that is managed as part of a 
segment of exposures with homogeneous risk characteristics, not on an 
individual-exposure basis, and is either:
    (1) An exposure to an individual for non-business purposes; or
    (2) An exposure to an individual or company for business purposes if 
the [bank]'s consolidated business credit exposure to the individual or 
company is $1 million or less.
    Over-the-counter (OTC) derivative contract means a derivative 
contract that is not traded on an exchange that requires the daily 
receipt and payment of cash-variation margin.
    Probability of default (PD) means:
    (1) For a wholesale exposure to a non-defaulted obligor, the 
[bank]'s empirically based best estimate of the long-run average one-
year default rate for the rating grade assigned by the [bank] to the 
obligor, capturing the average default experience for obligors in the 
rating grade over a mix of economic conditions (including economic 
downturn conditions) sufficient to provide a reasonable estimate of the 
average one-year default rate over the economic cycle for the rating 
grade.
    (2) For a segment of non-defaulted retail exposures, the [bank]'s 
empirically based best estimate of the long-run average one-year default 
rate for the exposures in the segment, capturing the average default 
experience for exposures in the segment over a mix of economic 
conditions (including economic downturn conditions) sufficient to 
provide a reasonable estimate of the average one-year default rate over 
the economic cycle for the segment and adjusted upward as appropriate 
for segments for which seasoning effects are material. For purposes of 
this definition, a segment for which seasoning effects are material is a 
segment where there is a material relationship between the time since 
origination of exposures within the segment and the [bank]'s best 
estimate of the long-run average one-year default rate for the exposures 
in the segment.
    (3) For a wholesale exposure to a defaulted obligor or segment of 
defaulted retail exposures, 100 percent.
    Protection amount (P) means, with respect to an exposure hedged by 
an eligible guarantee or eligible credit derivative, the effective 
notional amount of the guarantee or credit derivative, reduced to 
reflect any currency mismatch, maturity mismatch, or lack of 
restructuring coverage (as provided in section 33 of this appendix).
    Publicly traded means traded on:
    (1) Any exchange registered with the SEC as a national securities 
exchange under section 6 of the Securities Exchange Act of 1934 (15 
U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers to 
buy and sell so that a sales price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined promptly and a trade can be settled at such a price within 
five business days.
    Qualifying central counterparty means a counterparty (for example, a 
clearinghouse) that:
    (1) Facilitates trades between counterparties in one or more 
financial markets by either guaranteeing trades or novating contracts;
    (2) Requires all participants in its arrangements to be fully 
collateralized on a daily basis; and
    (3) The [bank] demonstrates to the satisfaction of the [AGENCY] is 
in sound financial condition and is subject to effective oversight by a 
national supervisory authority.
    Qualifying cross-product master netting agreement means a qualifying 
master netting agreement that provides for termination and close-out 
netting across multiple types of financial transactions or qualifying 
master netting agreements in the event of a counterparty's default, 
provided that:
    (1) The underlying financial transactions are OTC derivative 
contracts, eligible margin loans, or repo-style transactions; and
    (2) The [bank] obtains a written legal opinion verifying the 
validity and enforceability

[[Page 61]]

of the agreement under applicable law of the relevant jurisdictions if 
the counterparty fails to perform upon an event of default, including 
upon an event of bankruptcy, insolvency, or similar proceeding.
    Qualifying master netting agreement means any written, legally 
enforceable bilateral agreement, provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default, including bankruptcy, insolvency, or similar proceeding, of the 
counterparty;
    (2) The agreement provides the [bank] the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an event 
of default, including upon an event of bankruptcy, insolvency, or 
similar proceeding, of the counterparty, provided that, in any such 
case, any exercise of rights under the agreement will not be stayed or 
avoided under applicable law in the relevant jurisdictions;
    (3) The [bank] has conducted sufficient legal review to conclude 
with a well-founded basis (and maintains sufficient written 
documentation of that legal review) that:
    (i) The agreement meets the requirements of paragraph (2) of this 
definition; and
    (ii) In the event of a legal challenge (including one resulting from 
default or from bankruptcy, insolvency, or similar proceeding) the 
relevant court and administrative authorities would find the agreement 
to be legal, valid, binding, and enforceable under the law of the 
relevant jurisdictions;
    (4) The [bank] establishes and maintains procedures to monitor 
possible changes in relevant law and to ensure that the agreement 
continues to satisfy the requirements of this definition; and
    (5) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it would make otherwise under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement).
    Qualifying revolving exposure (QRE) means an exposure (other than a 
securitization exposure or equity exposure) to an individual that is 
managed as part of a segment of exposures with homogeneous risk 
characteristics, not on an individual-exposure basis, and:
    (1) Is revolving (that is, the amount outstanding fluctuates, 
determined largely by the borrower's decision to borrow and repay, up to 
a pre-established maximum amount);
    (2) Is unsecured and unconditionally cancelable by the [bank] to the 
fullest extent permitted by Federal law; and
    (3) Has a maximum exposure amount (drawn plus undrawn) of up to 
$100,000.
    Repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the [bank] acts as agent 
for a customer and indemnifies the customer against loss, provided that:
    (1) The transaction is based solely on liquid and readily marketable 
securities, cash, gold, or conforming residential mortgages;
    (2) The transaction is marked-to-market daily and subject to daily 
margin maintenance requirements;
    (3)(i) The transaction is a ``securities contract'' or ``repurchase 
agreement'' under section 555 or 559, respectively, of the Bankruptcy 
Code (11 U.S.C. 555 or 559), a qualified financial contract under 
section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 
1821(e)(8)), or a netting contract between or among financial 
institutions under sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407) or the Federal 
Reserve Board's Regulation EE (12 CFR part 231); or
    (ii) If the transaction does not meet the criteria set forth in 
paragraph (3)(i) of this definition, then either:
    (A) The transaction is executed under an agreement that provides the 
[bank] the right to accelerate, terminate, and close-out the transaction 
on a net basis and to liquidate or set off collateral promptly upon an 
event of default (including upon an event of bankruptcy, insolvency, or 
similar proceeding) of the counterparty, provided that, in any such 
case, any exercise of rights under the agreement will not be stayed or 
avoided under applicable law in the relevant jurisdictions; or
    (B) The transaction is:
    (1) Either overnight or unconditionally cancelable at any time by 
the [bank]; and
    (2) Executed under an agreement that provides the [bank] the right 
to accelerate, terminate, and close-out the transaction on a net basis 
and to liquidate or set off collateral promptly upon an event of 
counterparty default; and
    (4) The [bank] has conducted sufficient legal review to conclude 
with a well-founded basis (and maintains sufficient written 
documentation of that legal review) that the agreement meets the 
requirements of paragraph (3) of this definition and is legal, valid, 
binding, and enforceable under applicable law in the relevant 
jurisdictions.
    Residential mortgage exposure means an exposure (other than a 
securitization exposure, equity exposure, or excluded mortgage exposure) 
that is managed as part of a segment of exposures with homogeneous risk 
characteristics, not on an individual-exposure basis, and is:
    (1) An exposure that is primarily secured by a first or subsequent 
lien on one- to four-family residential property; or

[[Page 62]]

    (2) An exposure with an original and outstanding amount of $1 
million or less that is primarily secured by a first or subsequent lien 
on residential property that is not one to four family.
    Retail exposure means a residential mortgage exposure, a qualifying 
revolving exposure, or an other retail exposure.
    Retail exposure subcategory means the residential mortgage exposure, 
qualifying revolving exposure, or other retail exposure subcategory.
    Risk parameter means a variable used in determining risk-based 
capital requirements for wholesale and retail exposures, specifically 
probability of default (PD), loss given default (LGD), exposure at 
default (EAD), or effective maturity (M).
    Scenario analysis means a systematic process of obtaining expert 
opinions from business managers and risk management experts to derive 
reasoned assessments of the likelihood and loss impact of plausible 
high-severity operational losses. Scenario analysis may include the 
well-reasoned evaluation and use of external operational loss event 
data, adjusted as appropriate to ensure relevance to a [bank]'s 
operational risk profile and control structure.
    SEC means the U.S. Securities and Exchange Commission.
    Securitization means a traditional securitization or a synthetic 
securitization.
    Securitization exposure means an on-balance sheet or off-balance 
sheet credit exposure that arises from a traditional or synthetic 
securitization (including credit-enhancing representations and 
warranties).
    Securitization special purpose entity (securitization SPE) means a 
corporation, trust, or other entity organized for the specific purpose 
of holding underlying exposures of a securitization, the activities of 
which are limited to those appropriate to accomplish this purpose, and 
the structure of which is intended to isolate the underlying exposures 
held by the entity from the credit risk of the seller of the underlying 
exposures to the entity.
    Senior securitization exposure means a securitization exposure that 
has a first priority claim on the cash flows from the underlying 
exposures. When determining whether a securitization exposure has a 
first priority claim on the cash flows from the underlying exposures, a 
[bank] is not required to consider amounts due under interest rate or 
currency derivative contracts, fees due, or other similar payments. Both 
the most senior commercial paper issued by an ABCP program and a 
liquidity facility that supports the ABCP program may be senior 
securitization exposures if the liquidity facility provider's right to 
reimbursement of the drawn amounts is senior to all claims on the cash 
flows from the underlying exposures except amounts due under interest 
rate or currency derivative contracts, fees due, or other similar 
payments.
    Servicer cash advance facility means a facility under which the 
servicer of the underlying exposures of a securitization may advance 
cash to ensure an uninterrupted flow of payments to investors in the 
securitization, including advances made to cover foreclosure costs or 
other expenses to facilitate the timely collection of the underlying 
exposures. See also eligible servicer cash advance facility.
    Sovereign entity means a central government (including the U.S. 
government) or an agency, department, ministry, or central bank of a 
central government.
    Sovereign exposure means:
    (1) A direct exposure to a sovereign entity; or
    (2) An exposure directly and unconditionally backed by the full 
faith and credit of a sovereign entity.
    Subsidiary means, with respect to a company, a company controlled by 
that company.
    Synthetic securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is transferred to one or more third parties through the use of 
one or more credit derivatives or guarantees (other than a guarantee 
that transfers only the credit risk of an individual retail exposure);
    (2) The credit risk associated with the underlying exposures has 
been separated into at least two tranches reflecting different levels of 
seniority;
    (3) Performance of the securitization exposures depends upon the 
performance of the underlying exposures; and
    (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities).
    Tier 1 capital is defined in [the general risk-based capital rules], 
as modified in part II of this appendix.
    Tier 2 capital is defined in [the general risk-based capital rules], 
as modified in part II of this appendix.
    Total qualifying capital means the sum of tier 1 capital and tier 2 
capital, after all deductions required in this appendix.
    Total risk-weighted assets means:
    (1) The sum of:
    (i) Credit risk-weighted assets; and
    (ii) Risk-weighted assets for operational risk; minus
    (2) Excess eligible credit reserves not included in tier 2 capital.
    Total wholesale and retail risk-weighted assets means the sum of 
risk-weighted assets for wholesale exposures to non-defaulted obligors 
and segments of non-defaulted retail

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exposures; risk-weighted assets for wholesale exposures to defaulted 
obligors and segments of defaulted retail exposures; risk-weighted 
assets for assets not defined by an exposure category; and risk-weighted 
assets for non-material portfolios of exposures (all as determined in 
section 31 of this appendix) and risk-weighted assets for unsettled 
transactions (as determined in section 35 of this appendix) minus the 
amounts deducted from capital pursuant to [the general risk-based 
capital rules] (excluding those deductions reversed in section 12 of 
this appendix).
    Traditional securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is transferred to one or more third parties other than through 
the use of credit derivatives or guarantees;
    (2) The credit risk associated with the underlying exposures has 
been separated into at least two tranches reflecting different levels of 
seniority;
    (3) Performance of the securitization exposures depends upon the 
performance of the underlying exposures;
    (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities);
    (5) The underlying exposures are not owned by an operating company;
    (6) The underlying exposures are not owned by a small business 
investment company described in section 302 of the Small Business 
Investment Act of 1958 (15 U.S.C. 682); and
    (7) The underlying exposures are not owned by a firm an investment 
in which qualifies as a community development investment under 12 U.S.C. 
24(Eleventh).
    (8) The [AGENCY] may determine that a transaction in which the 
underlying exposures are owned by an investment firm that exercises 
substantially unfettered control over the size and composition of its 
assets, liabilities, and off-balance sheet exposures is not a 
traditional securitization based on the transaction's leverage, risk 
profile, or economic substance.
    (9) The [AGENCY] may deem a transaction that meets the definition of 
a traditional securitization, notwithstanding paragraph (5), (6), or (7) 
of this definition, to be a traditional securitization based on the 
transaction's leverage, risk profile, or economic substance.
    Tranche means all securitization exposures associated with a 
securitization that have the same seniority level.
    Underlying exposures means one or more exposures that have been 
securitized in a securitization transaction.
    Unexpected operational loss (UOL) means the difference between the 
[bank]'s operational risk exposure and the [bank]'s expected operational 
loss.
    Unit of measure means the level (for example, organizational unit or 
operational loss event type) at which the [bank]'s operational risk 
quantification system generates a separate distribution of potential 
operational losses.
    Value-at-Risk (VaR) means the estimate of the maximum amount that 
the value of one or more exposures could decline due to market price or 
rate movements during a fixed holding period within a stated confidence 
interval.
    Wholesale exposure means a credit exposure to a company, natural 
person, sovereign entity, or governmental entity (other than a 
securitization exposure, retail exposure, excluded mortgage exposure, or 
equity exposure). Examples of a wholesale exposure include:
    (1) A non-tranched guarantee issued by a [bank] on behalf of a 
company;
    (2) A repo-style transaction entered into by a [bank] with a company 
and any other transaction in which a [bank] posts collateral to a 
company and faces counterparty credit risk;
    (3) An exposure that a [bank] treats as a covered position under 
[the market risk rule] for which there is a counterparty credit risk 
capital requirement;
    (4) A sale of corporate loans by a [bank] to a third party in which 
the [bank] retains full recourse;
    (5) An OTC derivative contract entered into by a [bank] with a 
company;
    (6) An exposure to an individual that is not managed by a [bank] as 
part of a segment of exposures with homogeneous risk characteristics; 
and
    (7) A commercial lease.
    Wholesale exposure subcategory means the HVCRE or non-HVCRE 
wholesale exposure subcategory.

           Section 3. Minimum Risk-Based Capital Requirements

    (a) Except as modified by paragraph (c) of this section or by 
section 23 of this appendix, each [bank] must meet a minimum ratio of:
    (1) Total qualifying capital to total risk-weighted assets of 8.0 
percent; and
    (2) Tier 1 capital to total risk-weighted assets of 4.0 percent.
    (b) Each [bank] must hold capital commensurate with the level and 
nature of all risks to which the [bank] is exposed.
    (c) When a [bank] subject to [the market risk rule] calculates its 
risk-based capital requirements under this appendix, the [bank] must 
also refer to [the market risk rule] for supplemental rules to calculate 
risk-based capital requirements adjusted for market risk.

[[Page 64]]

                       Part II. Qualifying Capital

                    Section 11. Additional Deductions

    (a) General. A [bank] that uses this appendix must make the same 
deductions from its tier 1 capital and tier 2 capital required in [the 
general risk-based capital rules], except that:
    (1) A [bank] is not required to deduct certain equity investments 
and CEIOs (as provided in section 12 of this appendix); and
    (2) A [bank] also must make the deductions from capital required by 
paragraphs (b) and (c) of this section.
    (b) Deductions from tier 1 capital. A [bank] must deduct from tier 1 
capital any gain-on-sale associated with a securitization exposure as 
provided in paragraph (a) of section 41 and paragraphs (a)(1), (c), 
(g)(1), and (h)(1) of section 42 of this appendix.
    (c) Deductions from tier 1 and tier 2 capital. A [bank] must deduct 
the exposures specified in paragraphs (c)(1) through (c)(7) in this 
section 50 percent from tier 1 capital and 50 percent from tier 2 
capital. If the amount deductible from tier 2 capital exceeds the 
[bank]'s actual tier 2 capital, however, the [bank] must deduct the 
excess from tier 1 capital.
    (1) Credit-enhancing interest-only strips (CEIOs). In accordance 
with paragraphs (a)(1) and (c) of section 42 of this appendix, any CEIO 
that does not constitute gain-on-sale.
    (2) Non-qualifying securitization exposures. In accordance with 
paragraphs (a)(4) and (c) of section 42 of this appendix, any 
securitization exposure that does not qualify for the Ratings-Based 
Approach, the Internal Assessment Approach, or the Supervisory Formula 
Approach under sections 43, 44, and 45 of this appendix, respectively.
    (3) Securitizations of non-IRB exposures. In accordance with 
paragraphs (c) and (g)(4) of section 42 of this appendix, certain 
exposures to a securitization any underlying exposure of which is not a 
wholesale exposure, retail exposure, securitization exposure, or equity 
exposure.
    (4) Low-rated securitization exposures. In accordance with section 
43 and paragraph (c) of section 42 of this appendix, any securitization 
exposure that qualifies for and must be deducted under the Ratings-Based 
Approach.
    (5) High-risk securitization exposures subject to the Supervisory 
Formula Approach. In accordance with paragraphs (b) and (c) of section 
45 of this appendix and paragraph (c) of section 42 of this appendix, 
certain high-risk securitization exposures (or portions thereof) that 
qualify for the Supervisory Formula Approach.
    (6) Eligible credit reserves shortfall. In accordance with paragraph 
(a)(1) of section 13 of this appendix, any eligible credit reserves 
shortfall.
    (7) Certain failed capital markets transactions. In accordance with 
paragraph (e)(3) of section 35 of this appendix, the [bank]'s exposure 
on certain failed capital markets transactions.

           Section 12. Deductions and Limitations Not Required

    (a) Deduction of CEIOs. A [bank] is not required to make the 
deductions from capital for CEIOs in 12 CFR part 3, Appendix A, section 
2(c) (for national banks), 12 CFR part 208, Appendix A, section 
II.B.1.e. (for state member banks), 12 CFR part 225, Appendix A, section 
II.B.1.e. (for bank holding companies), 12 CFR part 325, Appendix A, 
section II.B.5. (for state nonmember banks), and 12 CFR 567.5(a)(2)(iii) 
and 567.12(e) (for savings associations).
    (b) Deduction of certain equity investments. A [bank] is not 
required to make the deductions from capital for nonfinancial equity 
investments in 12 CFR part 3, Appendix A, section 2(c) (for national 
banks), 12 CFR part 208, Appendix A, section II.B.5. (for state member 
banks), 12 CFR part 225, Appendix A, section II.B.5. (for bank holding 
companies), and 12 CFR part 325, Appendix A, section II.B. (for state 
nonmember banks).

                  Section 13. Eligible Credit Reserves

    (a) Comparison of eligible credit reserves to expected credit 
losses--(1) Shortfall of eligible credit reserves. If a [bank]'s 
eligible credit reserves are less than the [bank]'s total expected 
credit losses, the [bank] must deduct the shortfall amount 50 percent 
from tier 1 capital and 50 percent from tier 2 capital. If the amount 
deductible from tier 2 capital exceeds the [bank]'s actual tier 2 
capital, the [bank] must deduct the excess amount from tier 1 capital.
    (2) Excess eligible credit reserves. If a [bank]'s eligible credit 
reserves exceed the [bank]'s total expected credit losses, the [bank] 
may include the excess amount in tier 2 capital to the extent that the 
excess amount does not exceed 0.6 percent of the [bank]'s credit-risk-
weighted assets.
    (b) Treatment of allowance for loan and lease losses. Regardless of 
any provision in [the general risk-based capital rules], the ALLL is 
included in tier 2 capital only to the extent provided in paragraph 
(a)(2) of this section and in section 24 of this appendix.

                         Part III. Qualification

                    Section 21. Qualification Process

    (a) Timing. (1) A [bank] that is described in paragraph (b)(1) of 
section 1 of this appendix must adopt a written implementation plan no 
later than six months after the later of April 1, 2008, or the date the 
[bank] meets a criterion in that section. The implementation plan must 
incorporate an explicit first

[[Page 65]]

floor period start date no later than 36 months after the later of April 
1, 2008, or the date the [bank] meets at least one criterion under 
paragraph (b)(1) of section 1 of this appendix. The [AGENCY] may extend 
the first floor period start date.
    (2) A [bank] that elects to be subject to this appendix under 
paragraph (b)(2) of section 1 of this appendix must adopt a written 
implementation plan.
    (b) Implementation plan. (1) The [bank]'s implementation plan must 
address in detail how the [bank] complies, or plans to comply, with the 
qualification requirements in section 22 of this appendix. The [bank] 
also must maintain a comprehensive and sound planning and governance 
process to oversee the implementation efforts described in the plan. At 
a minimum, the plan must:
    (i) Comprehensively address the qualification requirements in 
section 22 of this appendix for the [bank] and each consolidated 
subsidiary (U.S. and foreign-based) of the [bank] with respect to all 
portfolios and exposures of the [bank] and each of its consolidated 
subsidiaries;
    (ii) Justify and support any proposed temporary or permanent 
exclusion of business lines, portfolios, or exposures from application 
of the advanced approaches in this appendix (which business lines, 
portfolios, and exposures must be, in the aggregate, immaterial to the 
[bank]);
    (iii) Include the [bank]'s self-assessment of:
    (A) The [bank]'s current status in meeting the qualification 
requirements in section 22 of this appendix; and
    (B) The consistency of the [bank]'s current practices with the 
[AGENCY]'s supervisory guidance on the qualification requirements;
    (iv) Based on the [bank]'s self-assessment, identify and describe 
the areas in which the [bank] proposes to undertake additional work to 
comply with the qualification requirements in section 22 of this 
appendix or to improve the consistency of the [bank]'s current practices 
with the [AGENCY]'s supervisory guidance on the qualification 
requirements (gap analysis);
    (v) Describe what specific actions the [bank] will take to address 
the areas identified in the gap analysis required by paragraph 
(b)(1)(iv) of this section;
    (vi) Identify objective, measurable milestones, including delivery 
dates and a date when the [bank]'s implementation of the methodologies 
described in this appendix will be fully operational;
    (vii) Describe resources that have been budgeted and are available 
to implement the plan; and
    (viii) Receive approval of the [bank]'s board of directors.
    (2) The [bank] must submit the implementation plan, together with a 
copy of the minutes of the board of directors' approval, to the [AGENCY] 
at least 60 days before the [bank] proposes to begin its parallel run, 
unless the [AGENCY] waives prior notice.
    (c) Parallel run. Before determining its risk-based capital 
requirements under this appendix and following adoption of the 
implementation plan, the [bank] must conduct a satisfactory parallel 
run. A satisfactory parallel run is a period of no less than four 
consecutive calendar quarters during which the [bank] complies with the 
qualification requirements in section 22 of this appendix to the 
satisfaction of the [AGENCY]. During the parallel run, the [bank] must 
report to the [AGENCY] on a calendar quarterly basis its risk-based 
capital ratios using [the general risk-based capital rules] and the 
risk-based capital requirements described in this appendix. During this 
period, the [bank] is subject to [the general risk-based capital rules].
    (d) Approval to calculate risk-based capital requirements under this 
appendix. The [AGENCY] will notify the [bank] of the date that the 
[bank] may begin its first floor period if the [AGENCY] determines that:
    (1) The [bank] fully complies with all the qualification 
requirements in section 22 of this appendix;
    (2) The [bank] has conducted a satisfactory parallel run under 
paragraph (c) of this section; and
    (3) The [bank] has an adequate process to ensure ongoing compliance 
with the qualification requirements in section 22 of this appendix.
    (e) Transitional floor periods. Following a satisfactory parallel 
run, a [bank] is subject to three transitional floor periods.
    (1) Risk-based capital ratios during the transitional floor 
periods--(i) Tier 1 risk-based capital ratio. During a [bank]'s 
transitional floor periods, the [bank]'s tier 1 risk-based capital ratio 
is equal to the lower of:
    (A) The [bank]'s floor-adjusted tier 1 risk-based capital ratio; or
    (B) The [bank]'s advanced approaches tier 1 risk-based capital 
ratio.
    (ii) Total risk-based capital ratio. During a [bank]'s transitional 
floor periods, the [bank]'s total risk-based capital ratio is equal to 
the lower of:
    (A) The [bank]'s floor-adjusted total risk-based capital ratio; or
    (B) The [bank]'s advanced approaches total risk-based capital ratio.
    (2) Floor-adjusted risk-based capital ratios. (i) A [bank]'s floor-
adjusted tier 1 risk-based capital ratio during a transitional floor 
period is equal to the [bank]'s tier 1 capital as calculated under [the 
general risk-based capital rules], divided by the product of:
    (A) The [bank]'s total risk-weighted assets as calculated under [the 
general risk-based capital rules]; and
    (B) The appropriate transitional floor percentage in Table 1.

[[Page 66]]

    (ii) A [bank]'s floor-adjusted total risk-based capital ratio during 
a transitional floor period is equal to the sum of the [bank]'s tier 1 
and tier 2 capital as calculated under [the general risk-based capital 
rules], divided by the product of:
    (A) The [bank]'s total risk-weighted assets as calculated under [the 
general risk-based capital rules]; and
    (B) The appropriate transitional floor percentage in Table 1.
    (iii) A [bank] that meets the criteria in paragraph (b)(1) or (b)(2) 
of section 1 of this appendix as of April 1, 2008, must use [the general 
risk-based capital rules] during the parallel run and as the basis for 
its transitional floors.

                      Table 1.--Transitional Floors
------------------------------------------------------------------------
                                                 Transitional floor
         Transitional floor period                   percentage
------------------------------------------------------------------------
First floor period........................  95 percent.
Second floor period.......................  90 percent.
Third floor period........................  85 percent.
------------------------------------------------------------------------

    (3) Advanced approaches risk-based capital ratios. (i) A [bank]'s 
advanced approaches tier 1 risk-based capital ratio equals the [bank]'s 
tier 1 risk-based capital ratio as calculated under this appendix (other 
than this section on transitional floor periods).
    (ii) A [bank]'s advanced approaches total risk-based capital ratio 
equals the [bank]'s total risk-based capital ratio as calculated under 
this appendix (other than this section on transitional floor periods).
    (4) Reporting. During the transitional floor periods, a [bank] must 
report to the [AGENCY] on a calendar quarterly basis both floor-adjusted 
risk-based capital ratios and both advanced approaches risk-based 
capital ratios.
    (5) Exiting a transitional floor period. A [bank] may not exit a 
transitional floor period until the [bank] has spent a minimum of four 
consecutive calendar quarters in the period and the [AGENCY] has 
determined that the [bank] may exit the floor period. The [AGENCY]'s 
determination will be based on an assessment of the [bank]'s ongoing 
compliance with the qualification requirements in section 22 of this 
appendix.
    (6) Interagency study. After the end of the second transition year 
(2010), the Federal banking agencies will publish a study that evaluates 
the advanced approaches to determine if there are any material 
deficiencies. For any primary Federal supervisor to authorize any 
institution to exit the third transitional floor period, the study must 
determine that there are no such material deficiencies that cannot be 
addressed by then-existing tools, or, if such deficiencies are found, 
they are first remedied by changes to this appendix. Notwithstanding the 
preceding sentence, a primary Federal supervisor that disagrees with the 
finding of material deficiency may not authorize any institution under 
its jurisdiction to exit the third transitional floor period unless it 
provides a public report explaining its reasoning.

                 Section 22. Qualification Requirements

    (a) Process and systems requirements. (1) A [bank] must have a 
rigorous process for assessing its overall capital adequacy in relation 
to its risk profile and a comprehensive strategy for maintaining an 
appropriate level of capital.
    (2) The systems and processes used by a [bank] for risk-based 
capital purposes under this appendix must be consistent with the 
[bank]'s internal risk management processes and management information 
reporting systems.
    (3) Each [bank] must have an appropriate infrastructure with risk 
measurement and management processes that meet the qualification 
requirements of this section and are appropriate given the [bank]'s size 
and level of complexity. Regardless of whether the systems and models 
that generate the risk parameters necessary for calculating a [bank]'s 
risk-based capital requirements are located at any affiliate of the 
[bank], the [bank] itself must ensure that the risk parameters and 
reference data used to determine its risk-based capital requirements are 
representative of its own credit risk and operational risk exposures.
    (b) Risk rating and segmentation systems for wholesale and retail 
exposures. (1) A [bank] must have an internal risk rating and 
segmentation system that accurately and reliably differentiates among 
degrees of credit risk for the [bank]'s wholesale and retail exposures.
    (2) For wholesale exposures:
    (i) A [bank] must have an internal risk rating system that 
accurately and reliably assigns each obligor to a single rating grade 
(reflecting the obligor's likelihood of default). A [bank] may elect, 
however, not to assign to a rating grade an obligor to whom the [bank] 
extends credit based solely on the financial strength of a guarantor, 
provided that all of the [bank]'s exposures to the obligor are fully 
covered by eligible guarantees, the [bank] applies the PD substitution 
approach in paragraph (c)(1) of section 33 of this appendix to all 
exposures to that obligor, and the [bank] immediately assigns the 
obligor to a rating grade if a guarantee can no longer be recognized 
under this appendix. The [bank]'s wholesale obligor rating system must 
have at least seven discrete rating grades for non-defaulted obligors 
and at least one rating grade for defaulted obligors.
    (ii) Unless the [bank] has chosen to directly assign LGD estimates 
to each wholesale exposure, the [bank] must have an internal risk rating 
system that accurately and reliably assigns each wholesale exposure to a

[[Page 67]]

loss severity rating grade (reflecting the [bank]'s estimate of the LGD 
of the exposure). A [bank] employing loss severity rating grades must 
have a sufficiently granular loss severity grading system to avoid 
grouping together exposures with widely ranging LGDs.
    (3) For retail exposures, a [bank] must have an internal system that 
groups retail exposures into the appropriate retail exposure 
subcategory, groups the retail exposures in each retail exposure 
subcategory into separate segments with homogeneous risk 
characteristics, and assigns accurate and reliable PD and LGD estimates 
for each segment on a consistent basis. The [bank]'s system must 
identify and group in separate segments by subcategories exposures 
identified in paragraphs (c)(2)(ii) and (iii) of section 31 of this 
appendix.
    (4) The [bank]'s internal risk rating policy for wholesale exposures 
must describe the [bank]'s rating philosophy (that is, must describe how 
wholesale obligor rating assignments are affected by the [bank]'s choice 
of the range of economic, business, and industry conditions that are 
considered in the obligor rating process).
    (5) The [bank]'s internal risk rating system for wholesale exposures 
must provide for the review and update (as appropriate) of each obligor 
rating and (if applicable) each loss severity rating whenever the [bank] 
receives new material information, but no less frequently than annually. 
The [bank]'s retail exposure segmentation system must provide for the 
review and update (as appropriate) of assignments of retail exposures to 
segments whenever the [bank] receives new material information, but 
generally no less frequently than quarterly.
    (c) Quantification of risk parameters for wholesale and retail 
exposures. (1) The [bank] must have a comprehensive risk parameter 
quantification process that produces accurate, timely, and reliable 
estimates of the risk parameters for the [bank]'s wholesale and retail 
exposures.
    (2) Data used to estimate the risk parameters must be relevant to 
the [bank]'s actual wholesale and retail exposures, and of sufficient 
quality to support the determination of risk-based capital requirements 
for the exposures.
    (3) The [bank]'s risk parameter quantification process must produce 
appropriately conservative risk parameter estimates where the [bank] has 
limited relevant data, and any adjustments that are part of the 
quantification process must not result in a pattern of bias toward lower 
risk parameter estimates.
    (4) The [bank]'s risk parameter estimation process should not rely 
on the possibility of U.S. government financial assistance, except for 
the financial assistance that the U.S. government has a legally binding 
commitment to provide.
    (5) Where the [bank]'s quantifications of LGD directly or indirectly 
incorporate estimates of the effectiveness of its credit risk management 
practices in reducing its exposure to troubled obligors prior to 
default, the [bank] must support such estimates with empirical analysis 
showing that the estimates are consistent with its historical experience 
in dealing with such exposures during economic downturn conditions.
    (6) PD estimates for wholesale obligors and retail segments must be 
based on at least five years of default data. LGD estimates for 
wholesale exposures must be based on at least seven years of loss 
severity data, and LGD estimates for retail segments must be based on at 
least five years of loss severity data. EAD estimates for wholesale 
exposures must be based on at least seven years of exposure amount data, 
and EAD estimates for retail segments must be based on at least five 
years of exposure amount data.
    (7) Default, loss severity, and exposure amount data must include 
periods of economic downturn conditions, or the [bank] must adjust its 
estimates of risk parameters to compensate for the lack of data from 
periods of economic downturn conditions.
    (8) The [bank]'s PD, LGD, and EAD estimates must be based on the 
definition of default in this appendix.
    (9) The [bank] must review and update (as appropriate) its risk 
parameters and its risk parameter quantification process at least 
annually.
    (10) The [bank] must at least annually conduct a comprehensive 
review and analysis of reference data to determine relevance of 
reference data to the [bank]'s exposures, quality of reference data to 
support PD, LGD, and EAD estimates, and consistency of reference data to 
the definition of default contained in this appendix.
    (d) Counterparty credit risk model. A [bank] must obtain the prior 
written approval of the [AGENCY] under section 32 of this appendix to 
use the internal models methodology for counterparty credit risk.
    (e) Double default treatment. A [bank] must obtain the prior written 
approval of the [AGENCY] under section 34 of this appendix to use the 
double default treatment.
    (f) Securitization exposures. A [bank] must obtain the prior written 
approval of the [AGENCY] under section 44 of this appendix to use the 
Internal Assessment Approach for securitization exposures to ABCP 
programs.
    (g) Equity exposures model. A [bank] must obtain the prior written 
approval of the [AGENCY] under section 53 of this appendix to use the 
Internal Models Approach for equity exposures.
    (h) Operational risk--(1) Operational risk management processes. A 
[bank] must:

[[Page 68]]

    (i) Have an operational risk management function that:
    (A) Is independent of business line management; and
    (B) Is responsible for designing, implementing, and overseeing the 
[bank]'s operational risk data and assessment systems, operational risk 
quantification systems, and related processes;
    (ii) Have and document a process (which must capture business 
environment and internal control factors affecting the [bank]'s 
operational risk profile) to identify, measure, monitor, and control 
operational risk in [bank] products, activities, processes, and systems; 
and
    (iii) Report operational risk exposures, operational loss events, 
and other relevant operational risk information to business unit 
management, senior management, and the board of directors (or a 
designated committee of the board).
    (2) Operational risk data and assessment systems. A [bank] must have 
operational risk data and assessment systems that capture operational 
risks to which the [bank] is exposed. The [bank]'s operational risk data 
and assessment systems must:
    (i) Be structured in a manner consistent with the [bank]'s current 
business activities, risk profile, technological processes, and risk 
management processes; and
    (ii) Include credible, transparent, systematic, and verifiable 
processes that incorporate the following elements on an ongoing basis:
    (A) Internal operational loss event data. The [bank] must have a 
systematic process for capturing and using internal operational loss 
event data in its operational risk data and assessment systems.
    (1) The [bank]'s operational risk data and assessment systems must 
include a historical observation period of at least five years for 
internal operational loss event data (or such shorter period approved by 
the [AGENCY] to address transitional situations, such as integrating a 
new business line).
    (2) The [bank] must be able to map its internal operational loss 
event data into the seven operational loss event type categories.
    (3) The [bank] may refrain from collecting internal operational loss 
event data for individual operational losses below established dollar 
threshold amounts if the [bank] can demonstrate to the satisfaction of 
the [AGENCY] that the thresholds are reasonable, do not exclude 
important internal operational loss event data, and permit the [bank] to 
capture substantially all the dollar value of the [bank]'s operational 
losses.
    (B) External operational loss event data. The [bank] must have a 
systematic process for determining its methodologies for incorporating 
external operational loss event data into its operational risk data and 
assessment systems.
    (C) Scenario analysis. The [bank] must have a systematic process for 
determining its methodologies for incorporating scenario analysis into 
its operational risk data and assessment systems.
    (D) Business environment and internal control factors. The [bank] 
must incorporate business environment and internal control factors into 
its operational risk data and assessment systems. The [bank] must also 
periodically compare the results of its prior business environment and 
internal control factor assessments against its actual operational 
losses incurred in the intervening period.
    (3) Operational risk quantification systems. (i) The [bank]'s 
operational risk quantification systems:
    (A) Must generate estimates of the [bank]'s operational risk 
exposure using its operational risk data and assessment systems;
    (B) Must employ a unit of measure that is appropriate for the 
[bank]'s range of business activities and the variety of operational 
loss events to which it is exposed, and that does not combine business 
activities or operational loss events with demonstrably different risk 
profiles within the same loss distribution;
    (C) Must include a credible, transparent, systematic, and verifiable 
approach for weighting each of the four elements, described in paragraph 
(h)(2)(ii) of this section, that a [bank] is required to incorporate 
into its operational risk data and assessment systems;
    (D) May use internal estimates of dependence among operational 
losses across and within units of measure if the [bank] can demonstrate 
to the satisfaction of the [AGENCY] that its process for estimating 
dependence is sound, robust to a variety of scenarios, and implemented 
with integrity, and allows for the uncertainty surrounding the 
estimates. If the [bank] has not made such a demonstration, it must sum 
operational risk exposure estimates across units of measure to calculate 
its total operational risk exposure; and
    (E) Must be reviewed and updated (as appropriate) whenever the 
[bank] becomes aware of information that may have a material effect on 
the [bank]'s estimate of operational risk exposure, but the review and 
update must occur no less frequently than annually.
    (ii) With the prior written approval of the [AGENCY], a [bank] may 
generate an estimate of its operational risk exposure using an 
alternative approach to that specified in paragraph (h)(3)(i) of this 
section. A [bank] proposing to use such an alternative operational risk 
quantification system must submit a proposal to the [AGENCY]. In 
determining whether to approve a [bank]'s proposal to use an alternative 
operational risk

[[Page 69]]

quantification system, the [AGENCY] will consider the following 
principles:
    (A) Use of the alternative operational risk quantification system 
will be allowed only on an exception basis, considering the size, 
complexity, and risk profile of the [bank];
    (B) The [bank] must demonstrate that its estimate of its operational 
risk exposure generated under the alternative operational risk 
quantification system is appropriate and can be supported empirically; 
and
    (C) A [bank] must not use an allocation of operational risk capital 
requirements that includes entities other than depository institutions 
or the benefits of diversification across entities.
    (i) Data management and maintenance. (1) A [bank] must have data 
management and maintenance systems that adequately support all aspects 
of its advanced systems and the timely and accurate reporting of risk-
based capital requirements.
    (2) A [bank] must retain data using an electronic format that allows 
timely retrieval of data for analysis, validation, reporting, and 
disclosure purposes.
    (3) A [bank] must retain sufficient data elements related to key 
risk drivers to permit adequate monitoring, validation, and refinement 
of its advanced systems.
    (j) Control, oversight, and validation mechanisms. (1) The [bank]'s 
senior management must ensure that all components of the [bank]'s 
advanced systems function effectively and comply with the qualification 
requirements in this section.
    (2) The [bank]'s board of directors (or a designated committee of 
the board) must at least annually review the effectiveness of, and 
approve, the [bank]'s advanced systems.
    (3) A [bank] must have an effective system of controls and oversight 
that:
    (i) Ensures ongoing compliance with the qualification requirements 
in this section;
    (ii) Maintains the integrity, reliability, and accuracy of the 
[bank]'s advanced systems; and
    (iii) Includes adequate governance and project management processes.
    (4) The [bank] must validate, on an ongoing basis, its advanced 
systems. The [bank]'s validation process must be independent of the 
advanced systems' development, implementation, and operation, or the 
validation process must be subjected to an independent review of its 
adequacy and effectiveness. Validation must include:
    (i) An evaluation of the conceptual soundness of (including 
developmental evidence supporting) the advanced systems;
    (ii) An ongoing monitoring process that includes verification of 
processes and benchmarking; and
    (iii) An outcomes analysis process that includes back-testing.
    (5) The [bank] must have an internal audit function independent of 
business-line management that at least annually assesses the 
effectiveness of the controls supporting the [bank]'s advanced systems 
and reports its findings to the [bank]'s board of directors (or a 
committee thereof).
    (6) The [bank] must periodically stress test its advanced systems. 
The stress testing must include a consideration of how economic cycles, 
especially downturns, affect risk-based capital requirements (including 
migration across rating grades and segments and the credit risk 
mitigation benefits of double default treatment).
    (k) Documentation. The [bank] must adequately document all material 
aspects of its advanced systems.

                    Section 23. Ongoing Qualification

    (a) Changes to advanced systems. A [bank] must meet all the 
qualification requirements in section 22 of this appendix on an ongoing 
basis. A [bank] must notify the [AGENCY] when the [bank] makes any 
change to an advanced system that would result in a material change in 
the [bank]'s risk-weighted asset amount for an exposure type, or when 
the [bank] makes any significant change to its modeling assumptions.
    (b) Failure to comply with qualification requirements. (1) If the 
[AGENCY] determines that a [bank] that uses this appendix and has 
conducted a satisfactory parallel run fails to comply with the 
qualification requirements in section 22 of this appendix, the [AGENCY] 
will notify the [bank] in writing of the [bank]'s failure to comply.
    (2) The [bank] must establish and submit a plan satisfactory to the 
[AGENCY] to return to compliance with the qualification requirements.
    (3) In addition, if the [AGENCY] determines that the [bank]'s risk-
based capital requirements are not commensurate with the [bank]'s 
credit, market, operational, or other risks, the [AGENCY] may require 
such a [bank] to calculate its risk-based capital requirements:
    (i) Under [the general risk-based capital rules]; or
    (ii) Under this appendix with any modifications provided by the 
[AGENCY].

      Section 24. Merger and Acquisition Transitional Arrangements

    (a) Mergers and acquisitions of companies without advanced systems. 
If a [bank] merges with or acquires a company that does not calculate 
its risk-based capital requirements using advanced systems, the [bank] 
may use [the general risk-based capital rules] to determine the risk-
weighted asset amounts for, and deductions from capital associated with, 
the merged or acquired company's exposures for up to 24 months after the 
calendar quarter during which the merger or acquisition consummates. The 
[AGENCY] may extend

[[Page 70]]

this transition period for up to an additional 12 months. Within 90 days 
of consummating the merger or acquisition, the [bank] must submit to the 
[AGENCY] an implementation plan for using its advanced systems for the 
acquired company. During the period when [the general risk-based capital 
rules] apply to the merged or acquired company, any ALLL, net of 
allocated transfer risk reserves established pursuant to 12 U.S.C. 3904, 
associated with the merged or acquired company's exposures may be 
included in the acquiring [bank]'s tier 2 capital up to 1.25 percent of 
the acquired company's risk-weighted assets. All general allowances of 
the merged or acquired company must be excluded from the [bank]'s 
eligible credit reserves. In addition, the risk-weighted assets of the 
merged or acquired company are not included in the [bank]'s credit-risk-
weighted assets but are included in total risk-weighted assets. If a 
[bank] relies on this paragraph, the [bank] must disclose publicly the 
amounts of risk-weighted assets and qualifying capital calculated under 
this appendix for the acquiring [bank] and under [the general risk-based 
capital rules] for the acquired company.
    (b) Mergers and acquisitions of companies with advanced systems--(1) 
If a [bank] merges with or acquires a company that calculates its risk-
based capital requirements using advanced systems, the [bank] may use 
the acquired company's advanced systems to determine the risk-weighted 
asset amounts for, and deductions from capital associated with, the 
merged or acquired company's exposures for up to 24 months after the 
calendar quarter during which the acquisition or merger consummates. The 
[AGENCY] may extend this transition period for up to an additional 12 
months. Within 90 days of consummating the merger or acquisition, the 
[bank] must submit to the [AGENCY] an implementation plan for using its 
advanced systems for the merged or acquired company.
    (2) If the acquiring [bank] is not subject to the advanced 
approaches in this appendix at the time of acquisition or merger, during 
the period when [the general risk-based capital rules] apply to the 
acquiring [bank], the ALLL associated with the exposures of the merged 
or acquired company may not be directly included in tier 2 capital. 
Rather, any excess eligible credit reserves associated with the merged 
or acquired company's exposures may be included in the [bank]'s tier 2 
capital up to 0.6 percent of the credit-risk-weighted assets associated 
with those exposures.

          Part IV. Risk-Weighted Assets for General Credit Risk

 Section 31. Mechanics for Calculating Total Wholesale and Retail Risk-
                             Weighted Assets

    (a) Overview. A [bank] must calculate its total wholesale and retail 
risk-weighted asset amount in four distinct phases:
    (1) Phase 1--categorization of exposures;
    (2) Phase 2--assignment of wholesale obligors and exposures to 
rating grades and segmentation of retail exposures;
    (3) Phase 3--assignment of risk parameters to wholesale exposures 
and segments of retail exposures; and
    (4) Phase 4--calculation of risk-weighted asset amounts.
    (b) Phase 1--Categorization. The [bank] must determine which of its 
exposures are wholesale exposures, retail exposures, securitization 
exposures, or equity exposures. The [bank] must categorize each retail 
exposure as a residential mortgage exposure, a QRE, or an other retail 
exposure. The [bank] must identify which wholesale exposures are HVCRE 
exposures, sovereign exposures, OTC derivative contracts, repo-style 
transactions, eligible margin loans, eligible purchased wholesale 
exposures, unsettled transactions to which section 35 of this appendix 
applies, and eligible guarantees or eligible credit derivatives that are 
used as credit risk mitigants. The [bank] must identify any on-balance 
sheet asset that does not meet the definition of a wholesale, retail, 
equity, or securitization exposure, as well as any non-material 
portfolio of exposures described in paragraph (e)(4) of this section.
    (c) Phase 2--Assignment of wholesale obligors and exposures to 
rating grades and retail exposures to segments--(1) Assignment of 
wholesale obligors and exposures to rating grades.
    (i) The [bank] must assign each obligor of a wholesale exposure to a 
single obligor rating grade and must assign each wholesale exposure to 
which it does not directly assign an LGD estimate to a loss severity 
rating grade.
    (ii) The [bank] must identify which of its wholesale obligors are in 
default.
    (2) Segmentation of retail exposures. (i) The [bank] must group the 
retail exposures in each retail subcategory into segments that have 
homogeneous risk characteristics.
    (ii) The [bank] must identify which of its retail exposures are in 
default. The [bank] must segment defaulted retail exposures separately 
from non-defaulted retail exposures.
    (iii) If the [bank] determines the EAD for eligible margin loans 
using the approach in paragraph (b) of section 32 of this appendix, the 
[bank] must identify which of its retail exposures are eligible margin 
loans for which the [bank] uses this EAD approach and must segment such 
eligible margin loans separately from other retail exposures.

[[Page 71]]

    (3) Eligible purchased wholesale exposures. A [bank] may group its 
eligible purchased wholesale exposures into segments that have 
homogeneous risk characteristics. A [bank] must use the wholesale 
exposure formula in Table 2 in this section to determine the risk-based 
capital requirement for each segment of eligible purchased wholesale 
exposures.
    (d) Phase 3--Assignment of risk parameters to wholesale exposures 
and segments of retail exposures--(1) Quantification process. Subject to 
the limitations in this paragraph (d), the [bank] must:
    (i) Associate a PD with each wholesale obligor rating grade;
    (ii) Associate an LGD with each wholesale loss severity rating grade 
or assign an LGD to each wholesale exposure;
    (iii) Assign an EAD and M to each wholesale exposure; and
    (iv) Assign a PD, LGD, and EAD to each segment of retail exposures.
    (2) Floor on PD assignment. The PD for each wholesale obligor or 
retail segment may not be less than 0.03 percent, except for exposures 
to or directly and unconditionally guaranteed by a sovereign entity, the 
Bank for International Settlements, the International Monetary Fund, the 
European Commission, the European Central Bank, or a multilateral 
development bank, to which the [bank] assigns a rating grade associated 
with a PD of less than 0.03 percent.
    (3) Floor on LGD estimation. The LGD for each segment of residential 
mortgage exposures (other than segments of residential mortgage 
exposures for which all or substantially all of the principal of each 
exposure is directly and unconditionally guaranteed by the full faith 
and credit of a sovereign entity) may not be less than 10 percent.
    (4) Eligible purchased wholesale exposures. A [bank] must assign a 
PD, LGD, EAD, and M to each segment of eligible purchased wholesale 
exposures. If the [bank] can estimate ECL (but not PD or LGD) for a 
segment of eligible purchased wholesale exposures, the [bank] must 
assume that the LGD of the segment equals 100 percent and that the PD of 
the segment equals ECL divided by EAD. The estimated ECL must be 
calculated for the exposures without regard to any assumption of 
recourse or guarantees from the seller or other parties.
    (5) Credit risk mitigation--credit derivatives, guarantees, and 
collateral. (i) A [bank] may take into account the risk reducing effects 
of eligible guarantees and eligible credit derivatives in support of a 
wholesale exposure by applying the PD substitution or LGD adjustment 
treatment to the exposure as provided in section 33 of this appendix or, 
if applicable, applying double default treatment to the exposure as 
provided in section 34 of this appendix. A [bank] may decide separately 
for each wholesale exposure that qualifies for the double default 
treatment under section 34 of this appendix whether to apply the double 
default treatment or to use the PD substitution or LGD adjustment 
treatment without recognizing double default effects.
    (ii) A [bank] may take into account the risk reducing effects of 
guarantees and credit derivatives in support of retail exposures in a 
segment when quantifying the PD and LGD of the segment.
    (iii) Except as provided in paragraph (d)(6) of this section, a 
[bank] may take into account the risk reducing effects of collateral in 
support of a wholesale exposure when quantifying the LGD of the exposure 
and may take into account the risk reducing effects of collateral in 
support of retail exposures when quantifying the PD and LGD of the 
segment.
    (6) EAD for OTC derivative contracts, repo-style transactions, and 
eligible margin loans. (i) A [bank] must calculate its EAD for an OTC 
derivative contract as provided in paragraphs (c) and (d) of section 32 
of this appendix. A [bank] may take into account the risk-reducing 
effects of financial collateral in support of a repo-style transaction 
or eligible margin loan and of any collateral in support of a repo-style 
transaction that is included in the [bank]'s VaR-based measure under 
[the market risk rule] through an adjustment to EAD as provided in 
paragraphs (b) and (d) of section 32 of this appendix. A [bank] that 
takes collateral into account through such an adjustment to EAD under 
section 32 of this appendix may not reflect such collateral in LGD.
    (ii) A [bank] may attribute an EAD of zero to:
    (A) Derivative contracts that are publicly traded on an exchange 
that requires the daily receipt and payment of cash-variation margin;
    (B) Derivative contracts and repo-style transactions that are 
outstanding with a qualifying central counterparty (but not for those 
transactions that a qualifying central counterparty has rejected); and
    (C) Credit risk exposures to a qualifying central counterparty in 
the form of clearing deposits and posted collateral that arise from 
transactions described in paragraph (d)(6)(ii)(B) of this section.
    (7) Effective maturity. An exposure's M must be no greater than five 
years and no less than one year, except that an exposure's M must be no 
less than one day if the exposure has an original maturity of less than 
one year and is not part of a [bank]'s ongoing financing of the obligor. 
An exposure is not part of a [bank]'s ongoing financing of the obligor 
if the [bank]:
    (i) Has a legal and practical ability not to renew or roll over the 
exposure in the event of credit deterioration of the obligor;

[[Page 72]]

    (ii) Makes an independent credit decision at the inception of the 
exposure and at every renewal or roll over; and
    (iii) Has no substantial commercial incentive to continue its credit 
relationship with the obligor in the event of credit deterioration of 
the obligor.
    (e) Phase 4--Calculation of risk-weighted assets--(1) Non-defaulted 
exposures. (i) A [bank] must calculate the dollar risk-based capital 
requirement for each of its wholesale exposures to a non-defaulted 
obligor (except eligible guarantees and eligible credit derivatives that 
hedge another wholesale exposure and exposures to which the [bank] 
applies the double default treatment in section 34 of this appendix) and 
segments of non-defaulted retail exposures by inserting the assigned 
risk parameters for the wholesale obligor and exposure or retail segment 
into the appropriate risk-based capital formula specified in Table 2 and 
multiplying the output of the formula (K) by the EAD of the exposure or 
segment. Alternatively, a [bank] may apply a 300 percent risk weight to 
the EAD of an eligible margin loan if the [bank] is not able to meet the 
agencies'' requirements for estimation of PD and LGD for the margin 
loan.
[GRAPHIC] [TIFF OMITTED] TR07DE07.005


[[Page 73]]


    (ii) The sum of all the dollar risk-based capital requirements for 
each wholesale exposure to a non-defaulted obligor and segment of non-
defaulted retail exposures calculated in paragraph (e)(1)(i) of this 
section and in paragraph (e) of section 34 of this appendix equals the 
total dollar risk-based capital requirement for those exposures and 
segments.
    (iii) The aggregate risk-weighted asset amount for wholesale 
exposures to non-defaulted obligors and segments of non-defaulted retail 
exposures equals the total dollar risk-based capital requirement 
calculated in paragraph (e)(1)(ii) of this section multiplied by 12.5.
    (2) Wholesale exposures to defaulted obligors and segments of 
defaulted retail exposures. (i) The dollar risk-based capital 
requirement for each wholesale exposure to a defaulted obligor equals 
0.08 multiplied by the EAD of the exposure.
    (ii) The dollar risk-based capital requirement for a segment of 
defaulted retail exposures equals 0.08 multiplied by the EAD of the 
segment.
    (iii) The sum of all the dollar risk-based capital requirements for 
each wholesale exposure to a defaulted obligor calculated in paragraph 
(e)(2)(i) of this section plus the dollar risk-based capital 
requirements for each segment of defaulted retail exposures calculated 
in paragraph (e)(2)(ii) of this section equals the total dollar risk-
based capital requirement for those exposures and segments.
    (iv) The aggregate risk-weighted asset amount for wholesale 
exposures to defaulted obligors and segments of defaulted retail 
exposures equals the total dollar risk-based capital requirement 
calculated in paragraph (e)(2)(iii) of this section multiplied by 12.5.
    (3) Assets not included in a defined exposure category. (i) A [bank] 
may assign a risk-weighted asset amount of zero to cash owned and held 
in all offices of the [bank] or in transit and for gold bullion held in 
the [bank]'s own vaults, or held in another [bank]'s vaults on an 
allocated basis, to the extent the gold bullion assets are offset by 
gold bullion liabilities.
    (ii) The risk-weighted asset amount for the residual value of a 
retail lease exposure equals such residual value.
    (iii) The risk-weighted asset amount for any other on-balance-sheet 
asset that does not meet the definition of a wholesale, retail, 
securitization, or equity exposure equals the carrying value of the 
asset.
    (4) Non-material portfolios of exposures. The risk-weighted asset 
amount of a portfolio of exposures for which the [bank] has demonstrated 
to the [AGENCY]'s satisfaction that the portfolio (when combined with 
all other portfolios of exposures that the [bank] seeks to treat under 
this paragraph) is not material to the [bank] is the sum of the carrying 
values of on-balance sheet exposures plus the notional amounts of off-
balance sheet exposures in the portfolio. For purposes of this paragraph 
(e)(4), the notional amount of an OTC derivative contract that is not a 
credit derivative is the EAD of the derivative as calculated in section 
32 of this appendix.

    Section 32. Counterparty Credit Risk of Repo-Style Transactions, 
           Eligible Margin Loans, and OTC Derivative Contracts

    (a) In General. (1) This section describes two methodologies--a 
collateral haircut approach and an internal models methodology--that a 
[bank] may use instead of an LGD estimation methodology to recognize the 
benefits of financial collateral in mitigating the counterparty credit 
risk of repo-style transactions, eligible margin loans, collateralized 
OTC derivative contracts, and single product netting sets of such 
transactions and to recognize the benefits of any collateral in 
mitigating the counterparty credit risk of repo-style transactions that 
are included in a [bank]'s VaR-based measure under [the market risk 
rule]. A third methodology, the simple VaR methodology, is available for 
single product netting sets of repo-style transactions and eligible 
margin loans.
    (2) This section also describes the methodology for calculating EAD 
for an OTC derivative contract or a set of OTC derivative contracts 
subject to a qualifying master netting agreement. A [bank] also may use 
the internal models methodology to estimate EAD for qualifying cross-
product master netting agreements.
    (3) A [bank] may only use the standard supervisory haircut approach 
with a minimum 10-business-day holding period to recognize in EAD the 
benefits of conforming residential mortgage collateral that secures 
repo-style transactions (other than repo-style transactions included in 
the [bank]'s VaR-based measure under [the market risk rule]), eligible 
margin loans, and OTC derivative contracts.
    (4) A [bank] may use any combination of the three methodologies for 
collateral recognition; however, it must use the same methodology for 
similar exposures.
    (b) EAD for eligible margin loans and repo-style transactions--(1) 
General. A [bank] may recognize the credit risk mitigation benefits of 
financial collateral that secures an eligible margin loan, repo-style 
transaction, or single-product netting set of such transactions by 
factoring the collateral into its LGD estimates for the exposure. 
Alternatively, a [bank] may estimate an unsecured LGD for the exposure, 
as well as for any repo-style transaction that is included in the 
[bank]'s VaR-based measure under [the market risk rule], and determine 
the EAD of the exposure using:

[[Page 74]]

    (i) The collateral haircut approach described in paragraph (b)(2) of 
this section;
    (ii) For netting sets only, the simple VaR methodology described in 
paragraph (b)(3) of this section; or
    (iii) The internal models methodology described in paragraph (d) of 
this section.
    (2) Collateral haircut approach--(i) EAD equation. A [bank] may 
determine EAD for an eligible margin loan, repo-style transaction, or 
netting set by setting EAD equal to max {0, [([Sigma]E-[Sigma]C) + 
[Sigma](Es x Hs) + [Sigma](Efx x Hfx)]{time} , where:
    (A) [Sigma]E equals the value of the exposure (the sum of the 
current market values of all instruments, gold, and cash the [bank] has 
lent, sold subject to repurchase, or posted as collateral to the 
counterparty under the transaction (or netting set));
    (B) [Sigma]C equals the value of the collateral (the sum of the 
current market values of all instruments, gold, and cash the [bank] has 
borrowed, purchased subject to resale, or taken as collateral from the 
counterparty under the transaction (or netting set));
    (C) Es equals the absolute value of the net position in a given 
instrument or in gold (where the net position in a given instrument or 
in gold equals the sum of the current market values of the instrument or 
gold the [bank] has lent, sold subject to repurchase, or posted as 
collateral to the counterparty minus the sum of the current market 
values of that same instrument or gold the [bank] has borrowed, 
purchased subject to resale, or taken as collateral from the 
counterparty);
    (D) Hs equals the market price volatility haircut appropriate to the 
instrument or gold referenced in Es;
    (E) Efx equals the absolute value of the net position of instruments 
and cash in a currency that is different from the settlement currency 
(where the net position in a given currency equals the sum of the 
current market values of any instruments or cash in the currency the 
[bank] has lent, sold subject to repurchase, or posted as collateral to 
the counterparty minus the sum of the current market values of any 
instruments or cash in the currency the [bank] has borrowed, purchased 
subject to resale, or taken as collateral from the counterparty); and
    (F) Hfx equals the haircut appropriate to the mismatch between the 
currency referenced in Efx and the settlement currency.
    (ii) Standard supervisory haircuts. (A) Under the standard 
supervisory haircuts approach:
    (1) A [bank] must use the haircuts for market price volatility (Hs) 
in Table 3, as adjusted in certain circumstances as provided in 
paragraph (b)(2)(ii)(A)(3) and (4) of this section;

                       Table 3.--Standard Supervisory Market Price Volatility Haircuts \1\
----------------------------------------------------------------------------------------------------------------
                                                                              Issuers exempt
 Applicable external rating grade    Residual maturity for debt securities   from the 3 basis    Other issuers
   category for debt securities                                                point floor
----------------------------------------------------------------------------------------------------------------
Two highest investment-grade        <= 1 year.............................              0.005               0.01
 rating categories for long-term    1 year, <= 5 years.........               0.02               0.04
 ratings/highest investment-grade    5 years...................               0.04               0.08
 rating category for short-term
 ratings.
----------------------------------------------------------------------------------------------------------------
Two lowest investment-grade rating  <= 1 year.............................               0.01               0.02
 categories for both short- and      1 year, <= 5 years........               0.03               0.06
 long-term ratings.                  5 years...................               0.06               0.12
----------------------------------------------------------------------------------------------------------------
One rating category below           All...................................               0.15               0.25
 investment grade.
----------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold.....0.15.......
----------------------------------------------------------------------------------------------------------------
Other publicly traded equities (including convertible bonds), c0.25rming
 residential mortgages, and nonfinancial collateral.
----------------------------------------------------------------------------------------------------------------
Mutual funds.........................Highest haircut applicable to any security in which the
                                                         fund can invest.
----------------------------------------------------------------------------------------------------------------
Cash on deposit with the [bank] (including a certificate of depo0it issued
 by the [bank]).
----------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 3 are based on a ten-business-day holding period.

    (2) For currency mismatches, a [bank] must use a haircut for foreign 
exchange rate volatility (Hfx) of 8 percent, as adjusted in certain 
circumstances as provided in paragraph (b)(2)(ii)(A)(3) and (4) of this 
section.
    (3) For repo-style transactions, a [bank] may multiply the 
supervisory haircuts provided in paragraphs (b)(2)(ii)(A)(1) and (2) of 
this section by the square root of \1/2\ (which equals 0.707107).
    (4) A [bank] must adjust the supervisory haircuts upward on the 
basis of a holding period longer than ten business days (for eligible 
margin loans) or five business days (for repo-style transactions) where 
and as appropriate to take into account the illiquidity of an 
instrument.

[[Page 75]]

    (iii) Own internal estimates for haircuts. With the prior written 
approval of the [AGENCY], a [bank] may calculate haircuts (Hs and Hfx) 
using its own internal estimates of the volatilities of market prices 
and foreign exchange rates.
    (A) To receive [AGENCY] approval to use its own internal estimates, 
a [bank] must satisfy the following minimum quantitative standards:
    (1) A [bank] must use a 99th percentile one-tailed confidence 
interval.
    (2) The minimum holding period for a repo-style transaction is five 
business days and for an eligible margin loan is ten business days. When 
a [bank] calculates an own-estimates haircut on a TN-day 
holding period, which is different from the minimum holding period for 
the transaction type, the applicable haircut (HM) is 
calculated using the following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TR07DE07.014

(i) TM equals 5 for repo-style transactions and 10 for 
          eligible margin loans;
(ii) TN equals the holding period used by the [bank] to 
          derive HN; and
(iii) HN equals the haircut based on the holding period 
          TN.
    (3) A [bank] must adjust holding periods upwards where and as 
appropriate to take into account the illiquidity of an instrument.
    (4) The historical observation period must be at least one year.
    (5) A [bank] must update its data sets and recompute haircuts no 
less frequently than quarterly and must also reassess data sets and 
haircuts whenever market prices change materially.
    (B) With respect to debt securities that have an applicable external 
rating of investment grade, a [bank] may calculate haircuts for 
categories of securities. For a category of securities, the [bank] must 
calculate the haircut on the basis of internal volatility estimates for 
securities in that category that are representative of the securities in 
that category that the [bank] has lent, sold subject to repurchase, 
posted as collateral, borrowed, purchased subject to resale, or taken as 
collateral. In determining relevant categories, the [bank] must at a 
minimum take into account:
    (1) The type of issuer of the security;
    (2) The applicable external rating of the security;
    (3) The maturity of the security; and
    (4) The interest rate sensitivity of the security.
    (C) With respect to debt securities that have an applicable external 
rating of below investment grade and equity securities, a [bank] must 
calculate a separate haircut for each individual security.
    (D) Where an exposure or collateral (whether in the form of cash or 
securities) is denominated in a currency that differs from the 
settlement currency, the [bank] must calculate a separate currency 
mismatch haircut for its net position in each mismatched currency based 
on estimated volatilities of foreign exchange rates between the 
mismatched currency and the settlement currency.
    (E) A [bank]'s own estimates of market price and foreign exchange 
rate volatilities may not take into account the correlations among 
securities and foreign exchange rates on either the exposure or 
collateral side of a transaction (or netting set) or the correlations 
among securities and foreign exchange rates between the exposure and 
collateral sides of the transaction (or netting set).
    (3) Simple VaR methodology. With the prior written approval of the 
[AGENCY], a [bank] may estimate EAD for a netting set using a VaR model 
that meets the requirements in paragraph (b)(3)(iii) of this section. In 
such event, the [bank] must set EAD equal to max {0, [([Sigma]E--
[Sigma]C) + PFE]{time} , where:
    (i) [Sigma]E equals the value of the exposure (the sum of the 
current market values of all instruments, gold, and cash the [bank] has 
lent, sold subject to repurchase, or posted as collateral to the 
counterparty under the netting set);
    (ii) [Sigma]C equals the value of the collateral (the sum of the 
current market values of all instruments, gold, and cash the [bank] has 
borrowed, purchased subject to resale, or taken as collateral from the 
counterparty under the netting set); and
    (iii) PFE (potential future exposure) equals the [bank]'s 
empirically based best estimate of the 99th percentile, one-tailed 
confidence interval for an increase in the value of ([Sigma]E--[Sigma]C) 
over a five-business-day holding period for repo-style transactions or 
over a ten-business-day holding period for eligible margin loans using a 
minimum one-year historical observation period of price data 
representing the instruments that the [bank] has lent, sold subject to 
repurchase, posted as collateral, borrowed, purchased subject to resale, 
or taken as collateral. The [bank] must validate its VaR model, 
including by establishing and maintaining a rigorous and regular back-
testing regime.
    (c) EAD for OTC derivative contracts. (1) A [bank] must determine 
the EAD for an OTC derivative contract that is not subject to a 
qualifying master netting agreement using the current exposure 
methodology in paragraph (c)(5) of this section or using the internal 
models methodology described in paragraph (d) of this section.
    (2) A [bank] must determine the EAD for multiple OTC derivative 
contracts that are

[[Page 76]]

subject to a qualifying master netting agreement using the current 
exposure methodology in paragraph (c)(6) of this section or using the 
internal models methodology described in paragraph (d) of this section.
    (3) Counterparty credit risk for credit derivatives. Notwithstanding 
the above, (i) A [bank] that purchases a credit derivative that is 
recognized under section 33 or 34 of this appendix as a credit risk 
mitigant for an exposure that is not a covered position under [the 
market risk rule] need not compute a separate counterparty credit risk 
capital requirement under this section so long as the [bank] does so 
consistently for all such credit derivatives and either includes all or 
excludes all such credit derivatives that are subject to a master 
netting agreement from any measure used to determine counterparty credit 
risk exposure to all relevant counterparties for risk-based capital 
purposes.
    (ii) A [bank] that is the protection provider in a credit derivative 
must treat the credit derivative as a wholesale exposure to the 
reference obligor and need not compute a counterparty credit risk 
capital requirement for the credit derivative under this section, so 
long as it does so consistently for all such credit derivatives and 
either includes all or excludes all such credit derivatives that are 
subject to a master netting agreement from any measure used to determine 
counterparty credit risk exposure to all relevant counterparties for 
risk-based capital purposes (unless the [bank] is treating the credit 
derivative as a covered position under [the market risk rule], in which 
case the [bank] must compute a supplemental counterparty credit risk 
capital requirement under this section).
    (4) Counterparty credit risk for equity derivatives. A [bank] must 
treat an equity derivative contract as an equity exposure and compute a 
risk-weighted asset amount for the equity derivative contract under part 
VI (unless the [bank] is treating the contract as a covered position 
under [the market risk rule]). In addition, if the [bank] is treating 
the contract as a covered position under [the market risk rule] and in 
certain other cases described in section 55 of this appendix, the [bank] 
must also calculate a risk-based capital requirement for the 
counterparty credit risk of an equity derivative contract under this 
part.
    (5) Single OTC derivative contract. Except as modified by paragraph 
(c)(7) of this section, the EAD for a single OTC derivative contract 
that is not subject to a qualifying master netting agreement is equal to 
the sum of the [bank]'s current credit exposure and potential future 
credit exposure (PFE) on the derivative contract.
    (i) Current credit exposure. The current credit exposure for a 
single OTC derivative contract is the greater of the mark-to-market 
value of the derivative contract or zero.
    (ii) PFE. The PFE for a single OTC derivative contract, including an 
OTC derivative contract with a negative mark-to-market value, is 
calculated by multiplying the notional principal amount of the 
derivative contract by the appropriate conversion factor in Table 4. For 
purposes of calculating either the PFE under this paragraph or the gross 
PFE under paragraph (c)(6) of this section for exchange rate contracts 
and other similar contracts in which the notional principal amount is 
equivalent to the cash flows, notional principal amount is the net 
receipts to each party falling due on each value date in each currency. 
For any OTC derivative contract that does not fall within one of the 
specified categories in Table 4, the PFE must be calculated using the 
``other'' conversion factors. A [bank] must use an OTC derivative 
contract's effective notional principal amount (that is, its apparent or 
stated notional principal amount multiplied by any multiplier in the OTC 
derivative contract) rather than its apparent or stated notional 
principal amount in calculating PFE. PFE of the protection provider of a 
credit derivative is capped at the net present value of the amount of 
unpaid premiums.

[[Page 77]]



                                           Table 4.--Conversion Factor Matrix for OTC Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Credit       Credit (non-
                                                              Foreign      (investment-     investment-                      Precious
         Remaining maturity \2\            Interest rate   exchange rate       grade           grade          Equity      metals (except       Other
                                                             and gold        reference       reference                         gold)
                                                                            obligor)\3\      obligor)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................           0.00            0.01             0.05            0.10            0.06            0.07            0.10
Over one to five years..................           0.005           0.05             0.05            0.10            0.08            0.07            0.12
Over five years.........................           0.015           0.075            0.05            0.10            0.10            0.08           0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
  derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
  the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
  with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A [bank] must use the column labeled ``Credit (investment-grade reference obligor)'' for a credit derivative whose reference obligor has an
  outstanding unsecured long-term debt security without credit enhancement that has a long-term applicable external rating of at least investment grade.
  A [bank] must use the column labeled ``Credit (non-investment-grade reference obligor)'' for all other credit derivatives.


[[Page 78]]

    (6) Multiple OTC derivative contracts subject to a qualifying master 
netting agreement. Except as modified by paragraph (c)(7) of this 
section, the EAD for multiple OTC derivative contracts subject to a 
qualifying master netting agreement is equal to the sum of the net 
current credit exposure and the adjusted sum of the PFE exposure for all 
OTC derivative contracts subject to the qualifying master netting 
agreement.
    (i) Net current credit exposure. The net current credit exposure is 
the greater of:
    (A) The net sum of all positive and negative mark-to-market values 
of the individual OTC derivative contracts subject to the qualifying 
master netting agreement; or
    (B) zero.
    (ii) Adjusted sum of the PFE. The adjusted sum of the PFE, Anet, is 
calculated as Anet = (0.4xAgross)+(0.6xNGRxAgross), where:
    (A) Agross = the gross PFE (that is, the sum of the PFE amounts (as 
determined under paragraph (c)(5)(ii) of this section) for each 
individual OTC derivative contract subject to the qualifying master 
netting agreement); and
    (B) NGR = the net to gross ratio (that is, the ratio of the net 
current credit exposure to the gross current credit exposure). In 
calculating the NGR, the gross current credit exposure equals the sum of 
the positive current credit exposures (as determined under paragraph 
(c)(5)(i) of this section) of all individual OTC derivative contracts 
subject to the qualifying master netting agreement.
    (7) Collateralized OTC derivative contracts. A [bank] may recognize 
the credit risk mitigation benefits of financial collateral that secures 
an OTC derivative contract or single-product netting set of OTC 
derivatives by factoring the collateral into its LGD estimates for the 
contract or netting set. Alternatively, a [bank] may recognize the 
credit risk mitigation benefits of financial collateral that secures 
such a contract or netting set that is marked to market on a daily basis 
and subject to a daily margin maintenance requirement by estimating an 
unsecured LGD for the contract or netting set and adjusting the EAD 
calculated under paragraph (c)(5) or (c)(6) of this section using the 
collateral haircut approach in paragraph (b)(2) of this section. The 
[bank] must substitute the EAD calculated under paragraph (c)(5) or 
(c)(6) of this section for [Sigma]E in the equation in paragraph 
(b)(2)(i) of this section and must use a ten-business-day minimum 
holding period (TM = 10).
    (d) Internal models methodology. (1) With prior written approval 
from the [AGENCY], a [bank] may use the internal models methodology in 
this paragraph (d) to determine EAD for counterparty credit risk for OTC 
derivative contracts (collateralized or uncollateralized) and single-
product netting sets thereof, for eligible margin loans and single-
product netting sets thereof, and for repo-style transactions and 
single-product netting sets thereof. A [bank] that uses the internal 
models methodology for a particular transaction type (OTC derivative 
contracts, eligible margin loans, or repo-style transactions) must use 
the internal models methodology for all transactions of that transaction 
type. A [bank] may choose to use the internal models methodology for one 
or two of these three types of exposures and not the other types. A 
[bank] may also use the internal models methodology for OTC derivative 
contracts, eligible margin loans, and repo-style transactions subject to 
a qualifying cross-product netting agreement if:
    (i) The [bank] effectively integrates the risk mitigating effects of 
cross-product netting into its risk management and other information 
technology systems; and
    (ii) The [bank] obtains the prior written approval of the [AGENCY]. 
A [bank] that uses the internal models methodology for a transaction 
type must receive approval from the [AGENCY] to cease using the 
methodology for that transaction type or to make a material change to 
its internal model.
    (2) Under the internal models methodology, a [bank] uses an internal 
model to estimate the expected exposure (EE) for a netting set and then 
calculates EAD based on that EE.
    (i) The [bank] must use its internal model's probability 
distribution for changes in the market value of a netting set that are 
attributable to changes in market variables to determine EE.
    (ii) Under the internal models methodology, EAD = [alpha] x 
effective EPE, or, subject to [AGENCY] approval as provided in paragraph 
(d)(7), a more conservative measure of EAD.
[GRAPHIC] [TIFF OMITTED] TR07DE07.026

(that is, effective EPE is the time-weighted average of effective EE 
where the weights are the proportion that an individual effective EE 
represents in a one-year time interval) where:
    (1) Effective EEtk = max (Effective EEtk-1, 
EEtk) (that is, for a specific datetk, effective 
EE is the greater of EE at that date or the effective EE at the previous 
date); and
    (2) tk represents the kth future time period in the model 
and there are n time periods represented in the model over the first 
year; and
    (B) [alpha] = 1.4 except as provided in paragraph (d)(6), or when 
the [AGENCY] has determined that the [bank] must set [alpha] higher 
based on the [bank]'s specific characteristics of counterparty credit 
risk.
    (iii) A [bank] may include financial collateral currently posted by 
the counterparty as

[[Page 79]]

collateral (but may not include other forms of collateral) when 
calculating EE.
    (iv) If a [bank] hedges some or all of the counterparty credit risk 
associated with a netting set using an eligible credit derivative, the 
[bank] may take the reduction in exposure to the counterparty into 
account when estimating EE. If the [bank] recognizes this reduction in 
exposure to the counterparty in its estimate of EE, it must also use its 
internal model to estimate a separate EAD for the [bank]'s exposure to 
the protection provider of the credit derivative.
    (3) To obtain [AGENCY] approval to calculate the distributions of 
exposures upon which the EAD calculation is based, the [bank] must 
demonstrate to the satisfaction of the [AGENCY] that it has been using 
for at least one year an internal model that broadly meets the following 
minimum standards, with which the [bank] must maintain compliance:
    (i) The model must have the systems capability to estimate the 
expected exposure to the counterparty on a daily basis (but is not 
expected to estimate or report expected exposure on a daily basis).
    (ii) The model must estimate expected exposure at enough future 
dates to reflect accurately all the future cash flows of contracts in 
the netting set.
    (iii) The model must account for the possible non-normality of the 
exposure distribution, where appropriate.
    (iv) The [bank] must measure, monitor, and control current 
counterparty exposure and the exposure to the counterparty over the 
whole life of all contracts in the netting set.
    (v) The [bank] must be able to measure and manage current exposures 
gross and net of collateral held, where appropriate. The [bank] must 
estimate expected exposures for OTC derivative contracts both with and 
without the effect of collateral agreements.
    (vi) The [bank] must have procedures to identify, monitor, and 
control specific wrong-way risk throughout the life of an exposure. 
Wrong-way risk in this context is the risk that future exposure to a 
counterparty will be high when the counterparty's probability of default 
is also high.
    (vii) The model must use current market data to compute current 
exposures. When estimating model parameters based on historical data, at 
least three years of historical data that cover a wide range of economic 
conditions must be used and must be updated quarterly or more frequently 
if market conditions warrant. The [bank] should consider using model 
parameters based on forward-looking measures, where appropriate.
    (viii) A [bank] must subject its internal model to an initial 
validation and annual model review process. The model review should 
consider whether the inputs and risk factors, as well as the model 
outputs, are appropriate.
    (4) Maturity. (i) If the remaining maturity of the exposure or the 
longest-dated contract in the netting set is greater than one year, the 
[bank] must set M for the exposure or netting set equal to the lower of 
five years or M(EPE),\3\ where:
---------------------------------------------------------------------------

    \3\ Alternatively, a [bank] that uses an internal model to calculate 
a one-sided credit valuation adjustment may use the effective credit 
duration estimated by the model as M(EPE) in place of the formula in 
paragraph (d)(4).
[GRAPHIC] [TIFF OMITTED] TR07DE07.015

    (B) dfk is the risk-free discount factor for future time 
period tk; and
    (C) [Delta]tk = tk-tk-1.
    (ii) If the remaining maturity of the exposure or the longest-dated 
contract in the netting set is one year or less, the [bank] must set M 
for the exposure or netting set equal to one year, except as provided in 
paragraph (d)(7) of section 31 of this appendix.
    (5) Collateral agreements. A [bank] may capture the effect on EAD of 
a collateral agreement that requires receipt of collateral when exposure 
to the counterparty increases but may not capture the effect on EAD of a 
collateral agreement that requires receipt of collateral when 
counterparty credit quality deteriorates. For this purpose, a collateral 
agreement means a legal contract that specifies the time when, and 
circumstances under which, the counterparty is required to pledge 
collateral to the [bank] for a single financial contract or for all 
financial contracts in a

[[Page 80]]

netting set and confers upon the [bank] a perfected, first priority 
security interest (notwithstanding the prior security interest of any 
custodial agent), or the legal equivalent thereof, in the collateral 
posted by the counterparty under the agreement. This security interest 
must provide the [bank] with a right to close out the financial 
positions and liquidate the collateral upon an event of default of, or 
failure to perform by, the counterparty under the collateral agreement. 
A contract would not satisfy this requirement if the [bank]'s exercise 
of rights under the agreement may be stayed or avoided under applicable 
law in the relevant jurisdictions. Two methods are available to capture 
the effect of a collateral agreement:
    (i) With prior written approval from the [AGENCY], a [bank] may 
include the effect of a collateral agreement within its internal model 
used to calculate EAD. The [bank] may set EAD equal to the expected 
exposure at the end of the margin period of risk. The margin period of 
risk means, with respect to a netting set subject to a collateral 
agreement, the time period from the most recent exchange of collateral 
with a counterparty until the next required exchange of collateral plus 
the period of time required to sell and realize the proceeds of the 
least liquid collateral that can be delivered under the terms of the 
collateral agreement and, where applicable, the period of time required 
to re-hedge the resulting market risk, upon the default of the 
counterparty. The minimum margin period of risk is five business days 
for repo-style transactions and ten business days for other transactions 
when liquid financial collateral is posted under a daily margin 
maintenance requirement. This period should be extended to cover any 
additional time between margin calls; any potential closeout 
difficulties; any delays in selling collateral, particularly if the 
collateral is illiquid; and any impediments to prompt re-hedging of any 
market risk.
    (ii) A [bank] that can model EPE without collateral agreements but 
cannot achieve the higher level of modeling sophistication to model EPE 
with collateral agreements can set effective EPE for a collateralized 
netting set equal to the lesser of:
    (A) The threshold, defined as the exposure amount at which the 
counterparty is required to post collateral under the collateral 
agreement, if the threshold is positive, plus an add-on that reflects 
the potential increase in exposure of the netting set over the margin 
period of risk. The add-on is computed as the expected increase in the 
netting set's exposure beginning from current exposure of zero over the 
margin period of risk. The margin period of risk must be at least five 
business days for netting sets consisting only of repo-style 
transactions subject to daily re-margining and daily marking-to-market, 
and ten business days for all other netting sets; or
    (B) Effective EPE without a collateral agreement.
    (6) Own estimate of alpha. With prior written approval of the 
[AGENCY], a [bank] may calculate alpha as the ratio of economic capital 
from a full simulation of counterparty exposure across counterparties 
that incorporates a joint simulation of market and credit risk factors 
(numerator) and economic capital based on EPE (denominator), subject to 
a floor of 1.2. For purposes of this calculation, economic capital is 
the unexpected losses for all counterparty credit risks measured at a 
99.9 percent confidence level over a one-year horizon. To receive 
approval, the [bank] must meet the following minimum standards to the 
satisfaction of the [AGENCY]:
    (i) The [bank]'s own estimate of alpha must capture in the numerator 
the effects of:
    (A) The material sources of stochastic dependency of distributions 
of market values of transactions or portfolios of transactions across 
counterparties;
    (B) Volatilities and correlations of market risk factors used in the 
joint simulation, which must be related to the credit risk factor used 
in the simulation to reflect potential increases in volatility or 
correlation in an economic downturn, where appropriate; and
    (C) The granularity of exposures (that is, the effect of a 
concentration in the proportion of each counterparty's exposure that is 
driven by a particular risk factor).
    (ii) The [bank] must assess the potential model uncertainty in its 
estimates of alpha.
    (iii) The [bank] must calculate the numerator and denominator of 
alpha in a consistent fashion with respect to modeling methodology, 
parameter specifications, and portfolio composition.
    (iv) The [bank] must review and adjust as appropriate its estimates 
of the numerator and denominator of alpha on at least a quarterly basis 
and more frequently when the composition of the portfolio varies over 
time.
    (7) Other measures of counterparty exposure. With prior written 
approval of the [AGENCY], a [bank] may set EAD equal to a measure of 
counterparty credit risk exposure, such as peak EAD, that is more 
conservative than an alpha of 1.4 (or higher under the terms of 
paragraph (d)(2)(ii)(B) of this section) times EPE for every 
counterparty whose EAD will be measured under the alternative measure of 
counterparty exposure. The [bank] must demonstrate the conservatism of 
the measure of counterparty credit risk exposure used for EAD. For 
material portfolios of new OTC derivative products, the [bank] may 
assume that the current exposure methodology in paragraphs (c)(5) and 
(c)(6) of this section meets the conservatism

[[Page 81]]

requirement of this paragraph for a period not to exceed 180 days. For 
immaterial portfolios of OTC derivative contracts, the [bank] generally 
may assume that the current exposure methodology in paragraphs (c)(5) 
and (c)(6) of this section meets the conservatism requirement of this 
paragraph.

 Section 33. Guarantees and Credit Derivatives: PD Substitution and LGD 
                          Adjustment Approaches

    (a) Scope. (1) This section applies to wholesale exposures for 
which:
    (i) Credit risk is fully covered by an eligible guarantee or 
eligible credit derivative; or
    (ii) Credit risk is covered on a pro rata basis (that is, on a basis 
in which the [bank] and the protection provider share losses 
proportionately) by an eligible guarantee or eligible credit derivative.
    (2) Wholesale exposures on which there is a tranching of credit risk 
(reflecting at least two different levels of seniority) are 
securitization exposures subject to the securitization framework in part 
V.
    (3) A [bank] may elect to recognize the credit risk mitigation 
benefits of an eligible guarantee or eligible credit derivative covering 
an exposure described in paragraph (a)(1) of this section by using the 
PD substitution approach or the LGD adjustment approach in paragraph (c) 
of this section or, if the transaction qualifies, using the double 
default treatment in section 34 of this appendix. A [bank]'s PD and LGD 
for the hedged exposure may not be lower than the PD and LGD floors 
described in paragraphs (d)(2) and (d)(3) of section 31 of this 
appendix.
    (4) If multiple eligible guarantees or eligible credit derivatives 
cover a single exposure described in paragraph (a)(1) of this section, a 
[bank] may treat the hedged exposure as multiple separate exposures each 
covered by a single eligible guarantee or eligible credit derivative and 
may calculate a separate risk-based capital requirement for each 
separate exposure as described in paragraph (a)(3) of this section.
    (5) If a single eligible guarantee or eligible credit derivative 
covers multiple hedged wholesale exposures described in paragraph (a)(1) 
of this section, a [bank] must treat each hedged exposure as covered by 
a separate eligible guarantee or eligible credit derivative and must 
calculate a separate risk-based capital requirement for each exposure as 
described in paragraph (a)(3) of this section.
    (6) A [bank] must use the same risk parameters for calculating ECL 
as it uses for calculating the risk-based capital requirement for the 
exposure.
    (b) Rules of recognition. (1) A [bank] may only recognize the credit 
risk mitigation benefits of eligible guarantees and eligible credit 
derivatives.
    (2) A [bank] may only recognize the credit risk mitigation benefits 
of an eligible credit derivative to hedge an exposure that is different 
from the credit derivative's reference exposure used for determining the 
derivative's cash settlement value, deliverable obligation, or 
occurrence of a credit event if:
    (i) The reference exposure ranks pari passu (that is, equally) with 
or is junior to the hedged exposure; and
    (ii) The reference exposure and the hedged exposure are exposures to 
the same legal entity, and legally enforceable cross-default or cross-
acceleration clauses are in place to assure payments under the credit 
derivative are triggered when the obligor fails to pay under the terms 
of the hedged exposure.
    (c) Risk parameters for hedged exposures--(1) PD substitution 
approach--(i) Full coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in paragraphs (a) and (b) of this 
section and the protection amount (P) of the guarantee or credit 
derivative is greater than or equal to the EAD of the hedged exposure, a 
[bank] may recognize the guarantee or credit derivative in determining 
the [bank]'s risk-based capital requirement for the hedged exposure by 
substituting the PD associated with the rating grade of the protection 
provider for the PD associated with the rating grade of the obligor in 
the risk-based capital formula applicable to the guarantee or credit 
derivative in Table 2 and using the appropriate LGD as described in 
paragraph (c)(1)(iii) of this section. If the [bank] determines that 
full substitution of the protection provider's PD leads to an 
inappropriate degree of risk mitigation, the [bank] may substitute a 
higher PD than that of the protection provider.
    (ii) Partial coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in paragraphs (a) and (b) of this 
section and the protection amount (P) of the guarantee or credit 
derivative is less than the EAD of the hedged exposure, the [bank] must 
treat the hedged exposure as two separate exposures (protected and 
unprotected) in order to recognize the credit risk mitigation benefit of 
the guarantee or credit derivative.
    (A) The [bank] must calculate its risk-based capital requirement for 
the protected exposure under section 31 of this appendix, where PD is 
the protection provider's PD, LGD is determined under paragraph 
(c)(1)(iii) of this section, and EAD is P. If the [bank] determines that 
full substitution leads to an inappropriate degree of risk mitigation, 
the [bank] may use a higher PD than that of the protection provider.
    (B) The [bank] must calculate its risk-based capital requirement for 
the unprotected exposure under section 31 of this appendix, where PD is 
the obligor's PD, LGD is the hedged exposure's LGD (not adjusted to 
reflect the guarantee or credit derivative),

[[Page 82]]

and EAD is the EAD of the original hedged exposure minus P.
    (C) The treatment in this paragraph (c)(1)(ii) is applicable when 
the credit risk of a wholesale exposure is covered on a partial pro rata 
basis or when an adjustment is made to the effective notional amount of 
the guarantee or credit derivative under paragraph (d), (e), or (f) of 
this section.
    (iii) LGD of hedged exposures. The LGD of a hedged exposure under 
the PD substitution approach is equal to:
    (A) The lower of the LGD of the hedged exposure (not adjusted to 
reflect the guarantee or credit derivative) and the LGD of the guarantee 
or credit derivative, if the guarantee or credit derivative provides the 
[bank] with the option to receive immediate payout upon triggering the 
protection; or
    (B) The LGD of the guarantee or credit derivative, if the guarantee 
or credit derivative does not provide the [bank] with the option to 
receive immediate payout upon triggering the protection.
    (2) LGD adjustment approach--(i) Full coverage. If an eligible 
guarantee or eligible credit derivative meets the conditions in 
paragraphs (a) and (b) of this section and the protection amount (P) of 
the guarantee or credit derivative is greater than or equal to the EAD 
of the hedged exposure, the [bank]'s risk-based capital requirement for 
the hedged exposure is the greater of:
    (A) The risk-based capital requirement for the exposure as 
calculated under section 31 of this appendix, with the LGD of the 
exposure adjusted to reflect the guarantee or credit derivative; or
    (B) The risk-based capital requirement for a direct exposure to the 
protection provider as calculated under section 31 of this appendix, 
using the PD for the protection provider, the LGD for the guarantee or 
credit derivative, and an EAD equal to the EAD of the hedged exposure.
    (ii) Partial coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in paragraphs (a) and (b) of this 
section and the protection amount (P) of the guarantee or credit 
derivative is less than the EAD of the hedged exposure, the [bank] must 
treat the hedged exposure as two separate exposures (protected and 
unprotected) in order to recognize the credit risk mitigation benefit of 
the guarantee or credit derivative.
    (A) The [bank]'s risk-based capital requirement for the protected 
exposure would be the greater of:
    (1) The risk-based capital requirement for the protected exposure as 
calculated under section 31 of this appendix, with the LGD of the 
exposure adjusted to reflect the guarantee or credit derivative and EAD 
set equal to P; or
    (2) The risk-based capital requirement for a direct exposure to the 
guarantor as calculated under section 31 of this appendix, using the PD 
for the protection provider, the LGD for the guarantee or credit 
derivative, and an EAD set equal to P.
    (B) The [bank] must calculate its risk-based capital requirement for 
the unprotected exposure under section 31 of this appendix, where PD is 
the obligor's PD, LGD is the hedged exposure's LGD (not adjusted to 
reflect the guarantee or credit derivative), and EAD is the EAD of the 
original hedged exposure minus P.
    (3) M of hedged exposures. The M of the hedged exposure is the same 
as the M of the exposure if it were unhedged.
    (d) Maturity mismatch. (1) A [bank] that recognizes an eligible 
guarantee or eligible credit derivative in determining its risk-based 
capital requirement for a hedged exposure must adjust the effective 
notional amount of the credit risk mitigant to reflect any maturity 
mismatch between the hedged exposure and the credit risk mitigant.
    (2) A maturity mismatch occurs when the residual maturity of a 
credit risk mitigant is less than that of the hedged exposure(s).
    (3) The residual maturity of a hedged exposure is the longest 
possible remaining time before the obligor is scheduled to fulfill its 
obligation on the exposure. If a credit risk mitigant has embedded 
options that may reduce its term, the [bank] (protection purchaser) must 
use the shortest possible residual maturity for the credit risk 
mitigant. If a call is at the discretion of the protection provider, the 
residual maturity of the credit risk mitigant is at the first call date. 
If the call is at the discretion of the [bank] (protection purchaser), 
but the terms of the arrangement at origination of the credit risk 
mitigant contain a positive incentive for the [bank] to call the 
transaction before contractual maturity, the remaining time to the first 
call date is the residual maturity of the credit risk mitigant. For 
example, where there is a step-up in cost in conjunction with a call 
feature or where the effective cost of protection increases over time 
even if credit quality remains the same or improves, the residual 
maturity of the credit risk mitigant will be the remaining time to the 
first call.
    (4) A credit risk mitigant with a maturity mismatch may be 
recognized only if its original maturity is greater than or equal to one 
year and its residual maturity is greater than three months.
    (5) When a maturity mismatch exists, the [bank] must apply the 
following adjustment to the effective notional amount of the credit risk 
mitigant: Pm = E x (t - 0.25)/(T - 0.25), where:
    (i) Pm = effective notional amount of the credit risk mitigant, 
adjusted for maturity mismatch;
    (ii) E = effective notional amount of the credit risk mitigant;

[[Page 83]]

    (iii) t = the lesser of T or the residual maturity of the credit 
risk mitigant, expressed in years; and
    (iv) T = the lesser of five or the residual maturity of the hedged 
exposure, expressed in years.
    (e) Credit derivatives without restructuring as a credit event. If a 
[bank] recognizes an eligible credit derivative that does not include as 
a credit event a restructuring of the hedged exposure involving 
forgiveness or postponement of principal, interest, or fees that results 
in a credit loss event (that is, a charge-off, specific provision, or 
other similar debit to the profit and loss account), the [bank] must 
apply the following adjustment to the effective notional amount of the 
credit derivative: Pr = Pm x 0.60, where:
    (1) Pr = effective notional amount of the credit risk mitigant, 
adjusted for lack of restructuring event (and maturity mismatch, if 
applicable); and
    (2) Pm = effective notional amount of the credit risk mitigant 
adjusted for maturity mismatch (if applicable).
    (f) Currency mismatch. (1) If a [bank] recognizes an eligible 
guarantee or eligible credit derivative that is denominated in a 
currency different from that in which the hedged exposure is 
denominated, the [bank] must apply the following formula to the 
effective notional amount of the guarantee or credit derivative: Pc = Pr 
x (1 - HFX), where:
    (i) Pc = effective notional amount of the credit risk mitigant, 
adjusted for currency mismatch (and maturity mismatch and lack of 
restructuring event, if applicable);
    (ii) Pr = effective notional amount of the credit risk mitigant 
(adjusted for maturity mismatch and lack of restructuring event, if 
applicable); and
    (iii) HFX = haircut appropriate for the currency mismatch 
between the credit risk mitigant and the hedged exposure.
    (2) A [bank] must set HFX equal to 8 percent unless it 
qualifies for the use of and uses its own internal estimates of foreign 
exchange volatility based on a ten-business-day holding period and daily 
marking-to-market and remargining. A [bank] qualifies for the use of its 
own internal estimates of foreign exchange volatility if it qualifies 
for:
    (i) The own-estimates haircuts in paragraph (b)(2)(iii) of section 
32 of this appendix;
    (ii) The simple VaR methodology in paragraph (b)(3) of section 32 of 
this appendix; or
    (iii) The internal models methodology in paragraph (d) of section 32 
of this appendix.
    (3) A [bank] must adjust HFX calculated in paragraph 
(f)(2) of this section upward if the [bank] revalues the guarantee or 
credit derivative less frequently than once every ten business days 
using the square root of time formula provided in paragraph 
(b)(2)(iii)(A)(2) of section 32 of this appendix.

 Section 34. Guarantees and Credit Derivatives: Double Default Treatment

    (a) Eligibility and operational criteria for double default 
treatment. A [bank] may recognize the credit risk mitigation benefits of 
a guarantee or credit derivative covering an exposure described in 
paragraph (a)(1) of section 33 of this appendix by applying the double 
default treatment in this section if all the following criteria are 
satisfied.
    (1) The hedged exposure is fully covered or covered on a pro rata 
basis by:
    (i) An eligible guarantee issued by an eligible double default 
guarantor; or
    (ii) An eligible credit derivative that meets the requirements of 
paragraph (b)(2) of section 33 of this appendix and is issued by an 
eligible double default guarantor.
    (2) The guarantee or credit derivative is:
    (i) An uncollateralized guarantee or uncollateralized credit 
derivative (for example, a credit default swap) that provides protection 
with respect to a single reference obligor; or
    (ii) An nth-to-default credit derivative (subject to the 
requirements of paragraph (m) of section 42 of this appendix).
    (3) The hedged exposure is a wholesale exposure (other than a 
sovereign exposure).
    (4) The obligor of the hedged exposure is not:
    (i) An eligible double default guarantor or an affiliate of an 
eligible double default guarantor; or
    (ii) An affiliate of the guarantor.
    (5) The [bank] does not recognize any credit risk mitigation 
benefits of the guarantee or credit derivative for the hedged exposure 
other than through application of the double default treatment as 
provided in this section.
    (6) The [bank] has implemented a process (which has received the 
prior, written approval of the [AGENCY]) to detect excessive correlation 
between the creditworthiness of the obligor of the hedged exposure and 
the protection provider. If excessive correlation is present, the [bank] 
may not use the double default treatment for the hedged exposure.
    (b) Full coverage. If the transaction meets the criteria in 
paragraph (a) of this section and the protection amount (P) of the 
guarantee or credit derivative is at least equal to the EAD of the 
hedged exposure, the [bank] may determine its risk-weighted asset amount 
for the hedged exposure under paragraph (e) of this section.
    (c) Partial coverage. If the transaction meets the criteria in 
paragraph (a) of this section and the protection amount (P) of the 
guarantee or credit derivative is less than the EAD of the hedged 
exposure, the [bank] must treat the hedged exposure as two separate 
exposures (protected and unprotected)

[[Page 84]]

in order to recognize double default treatment on the protected portion 
of the exposure.
    (1) For the protected exposure, the [bank] must set EAD equal to P 
and calculate its risk-weighted asset amount as provided in paragraph 
(e) of this section.
    (2) For the unprotected exposure, the [bank] must set EAD equal to 
the EAD of the original exposure minus P and then calculate its risk-
weighted asset amount as provided in section 31 of this appendix.
    (d) Mismatches. For any hedged exposure to which a [bank] applies 
double default treatment, the [bank] must make applicable adjustments to 
the protection amount as required in paragraphs (d), (e), and (f) of 
section 33 of this appendix.
    (e) The double default dollar risk-based capital requirement. The 
dollar risk-based capital requirement for a hedged exposure to which a 
[bank] has applied double default treatment is KDD multiplied 
by the EAD of the exposure. KDD is calculated according to 
the following formula: KDD = Ko x (0.15 + 160 x 
PDg),

Where:

(1)
[GRAPHIC] [TIFF OMITTED] TR07DE07.016

(2) PDg = PD of the protection provider.
(3) PDo = PD of the obligor of the hedged exposure.
(4) LGDg = (i) The lower of the LGD of the hedged exposure 
          (not adjusted to reflect the guarantee or credit derivative) 
          and the LGD of the guarantee or credit derivative, if the 
          guarantee or credit derivative provides the [bank] with the 
          option to receive immediate payout on triggering the 
          protection; or
(ii) The LGD of the guarantee or credit derivative, if the guarantee or 
          credit derivative does not provide the [bank] with the option 
          to receive immediate payout on triggering the protection.
(5) [rho]OS (asset value correlation of the obligor) is 
          calculated according to the appropriate formula for (R) 
          provided in Table 2 in section 31 of this appendix, with PD 
          equal to PDo.
(6) b (maturity adjustment coefficient) is calculated according to the 
          formula for b provided in Table 2 in section 31 of this 
          appendix, with PD equal to the lesser of PDo and 
          PDg.
(7) M (maturity) is the effective maturity of the guarantee or credit 
          derivative, which may not be less than one year or greater 
          than five years.

  Section 35. Risk-Based Capital Requirement for Unsettled Transactions

    (a) Definitions. For purposes of this section:
    (1) Delivery-versus-payment (DvP) transaction means a securities or 
commodities transaction in which the buyer is obligated to make payment 
only if the seller has made delivery of the securities or commodities 
and the seller is obligated to deliver the securities or commodities 
only if the buyer has made payment.
    (2) Payment-versus-payment (PvP) transaction means a foreign 
exchange transaction in which each counterparty is obligated to make a 
final transfer of one or more currencies only if the other counterparty 
has made a final transfer of one or more currencies.
    (3) Normal settlement period. A transaction has a normal settlement 
period if the contractual settlement period for the transaction is equal 
to or less than the market standard for the instrument underlying the 
transaction and equal to or less than five business days.
    (4) Positive current exposure. The positive current exposure of a 
[bank] for a transaction is the difference between the transaction value 
at the agreed settlement price and the current market price of the 
transaction, if the difference results in a credit exposure of the 
[bank] to the counterparty.
    (b) Scope. This section applies to all transactions involving 
securities, foreign exchange instruments, and commodities that have a 
risk of delayed settlement or delivery. This section does not apply to:
    (1) Transactions accepted by a qualifying central counterparty that 
are subject to daily marking-to-market and daily receipt and payment of 
variation margin;
    (2) Repo-style transactions, including unsettled repo-style 
transactions (which are addressed in sections 31 and 32 of this 
appendix);
    (3) One-way cash payments on OTC derivative contracts (which are 
addressed in sections 31 and 32 of this appendix); or
    (4) Transactions with a contractual settlement period that is longer 
than the normal settlement period (which are treated as OTC derivative 
contracts and addressed in sections 31 and 32 of this appendix).

[[Page 85]]

    (c) System-wide failures. In the case of a system-wide failure of a 
settlement or clearing system, the [AGENCY] may waive risk-based capital 
requirements for unsettled and failed transactions until the situation 
is rectified.
    (d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) 
transactions. A [bank] must hold risk-based capital against any DvP or 
PvP transaction with a normal settlement period if the [bank]'s 
counterparty has not made delivery or payment within five business days 
after the settlement date. The [bank] must determine its risk-weighted 
asset amount for such a transaction by multiplying the positive current 
exposure of the transaction for the [bank] by the appropriate risk 
weight in Table 5.

      Table 5.--Risk Weights for Unsettled DvP and PvP Transactions
------------------------------------------------------------------------
                                                       Risk weight to be
Number of business days after contractual settlement      applied to
                        date                           positive current
                                                      exposure (percent)
------------------------------------------------------------------------
From 5 to 15........................................               100
From 16 to 30.......................................               625
From 31 to 45.......................................               937.5
46 or more..........................................             1,250
------------------------------------------------------------------------

    (e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-
payment) transactions. (1) A [bank] must hold risk-based capital against 
any non-DvP/non-PvP transaction with a normal settlement period if the 
[bank] has delivered cash, securities, commodities, or currencies to its 
counterparty but has not received its corresponding deliverables by the 
end of the same business day. The [bank] must continue to hold risk-
based capital against the transaction until the [bank] has received its 
corresponding deliverables.
    (2) From the business day after the [bank] has made its delivery 
until five business days after the counterparty delivery is due, the 
[bank] must calculate its risk-based capital requirement for the 
transaction by treating the current market value of the deliverables 
owed to the [bank] as a wholesale exposure.
    (i) A [bank] may assign an obligor rating to a counterparty for 
which it is not otherwise required under this appendix to assign an 
obligor rating on the basis of the applicable external rating of any 
outstanding unsecured long-term debt security without credit enhancement 
issued by the counterparty.
    (ii) A [bank] may use a 45 percent LGD for the transaction rather 
than estimating LGD for the transaction provided the [bank] uses the 45 
percent LGD for all transactions described in paragraphs (e)(1) and 
(e)(2) of this section.
    (iii) A [bank] may use a 100 percent risk weight for the transaction 
provided the [bank] uses this risk weight for all transactions described 
in paragraphs (e)(1) and (e)(2) of this section.
    (3) If the [bank] has not received its deliverables by the fifth 
business day after the counterparty delivery was due, the [bank] must 
deduct the current market value of the deliverables owed to the [bank] 
50 percent from tier 1 capital and 50 percent from tier 2 capital.
    (f) Total risk-weighted assets for unsettled transactions. Total 
risk-weighted assets for unsettled transactions is the sum of the risk-
weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP 
transactions.

        Part V. Risk-Weighted Assets for Securitization Exposures

  Section 41. Operational Criteria for Recognizing the Transfer of Risk

    (a) Operational criteria for traditional securitizations. A [bank] 
that transfers exposures it has originated or purchased to a 
securitization SPE or other third party in connection with a traditional 
securitization may exclude the exposures from the calculation of its 
risk-weighted assets only if each of the conditions in this paragraph 
(a) is satisfied. A [bank] that meets these conditions must hold risk-
based capital against any securitization exposures it retains in 
connection with the securitization. A [bank] that fails to meet these 
conditions must hold risk-based capital against the transferred 
exposures as if they had not been securitized and must deduct from tier 
1 capital any after-tax gain-on-sale resulting from the transaction. The 
conditions are:
    (1) The transfer is considered a sale under GAAP;
    (2) The [bank] has transferred to third parties credit risk 
associated with the underlying exposures; and
    (3) Any clean-up calls relating to the securitization are eligible 
clean-up calls.
    (b) Operational criteria for synthetic securitizations. For 
synthetic securitizations, a [bank] may recognize for risk-based capital 
purposes the use of a credit risk mitigant to hedge underlying exposures 
only if each of the conditions in this paragraph (b) is satisfied. A 
[bank] that fails to meet these conditions must hold risk-based capital 
against the underlying exposures as if they had not been synthetically 
securitized. The conditions are:
    (1) The credit risk mitigant is financial collateral, an eligible 
credit derivative from an eligible securitization guarantor or an 
eligible guarantee from an eligible securitization guarantor;
    (2) The [bank] transfers credit risk associated with the underlying 
exposures to third parties, and the terms and conditions in the credit 
risk mitigants employed do not include provisions that:

[[Page 86]]

    (i) Allow for the termination of the credit protection due to 
deterioration in the credit quality of the underlying exposures;
    (ii) Require the [bank] to alter or replace the underlying exposures 
to improve the credit quality of the pool of underlying exposures;
    (iii) Increase the [bank]'s cost of credit protection in response to 
deterioration in the credit quality of the underlying exposures;
    (iv) Increase the yield payable to parties other than the [bank] in 
response to a deterioration in the credit quality of the underlying 
exposures; or
    (v) Provide for increases in a retained first loss position or 
credit enhancement provided by the [bank] after the inception of the 
securitization;
    (3) The [bank] obtains a well-reasoned opinion from legal counsel 
that confirms the enforceability of the credit risk mitigant in all 
relevant jurisdictions; and
    (4) Any clean-up calls relating to the securitization are eligible 
clean-up calls.

 Section 42. Risk-Based Capital Requirement for Securitization Exposures

    (a) Hierarchy of approaches. Except as provided elsewhere in this 
section:
    (1) A [bank] must deduct from tier 1 capital any after-tax gain-on-
sale resulting from a securitization and must deduct from total capital 
in accordance with paragraph (c) of this section the portion of any CEIO 
that does not constitute gain-on-sale.
    (2) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section and qualifies for the Ratings-Based 
Approach in section 43 of this appendix, a [bank] must apply the 
Ratings-Based Approach to the exposure.
    (3) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section and does not qualify for the Ratings-
Based Approach, the [bank] may either apply the Internal Assessment 
Approach in section 44 of this appendix to the exposure (if the [bank], 
the exposure, and the relevant ABCP program qualify for the Internal 
Assessment Approach) or the Supervisory Formula Approach in section 45 
of this appendix to the exposure (if the [bank] and the exposure qualify 
for the Supervisory Formula Approach).
    (4) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section and does not qualify for the Ratings-
Based Approach, the Internal Assessment Approach, or the Supervisory 
Formula Approach, the [bank] must deduct the exposure from total capital 
in accordance with paragraph (c) of this section.
    (5) If a securitization exposure is an OTC derivative contract 
(other than a credit derivative) that has a first priority claim on the 
cash flows from the underlying exposures (notwithstanding amounts due 
under interest rate or currency derivative contracts, fees due, or other 
similar payments), with approval of the [AGENCY], a [bank] may choose to 
set the risk-weighted asset amount of the exposure equal to the amount 
of the exposure as determined in paragraph (e) of this section rather 
than apply the hierarchy of approaches described in paragraphs (a) (1) 
through (4) of this section.
    (b) Total risk-weighted assets for securitization exposures. A 
[bank]'s total risk-weighted assets for securitization exposures is 
equal to the sum of its risk-weighted assets calculated using the 
Ratings-Based Approach in section 43 of this appendix, the Internal 
Assessment Approach in section 44 of this appendix, and the Supervisory 
Formula Approach in section 45 of this appendix, and its risk-weighted 
assets amount for early amortization provisions calculated in section 47 
of this appendix.
    (c) Deductions. (1) If a [bank] must deduct a securitization 
exposure from total capital, the [bank] must take the deduction 50 
percent from tier 1 capital and 50 percent from tier 2 capital. If the 
amount deductible from tier 2 capital exceeds the [bank]'s tier 2 
capital, the [bank] must deduct the excess from tier 1 capital.
    (2) A [bank] may calculate any deduction from tier 1 capital and 
tier 2 capital for a securitization exposure net of any deferred tax 
liabilities associated with the securitization exposure.
    (d) Maximum risk-based capital requirement. Regardless of any other 
provisions of this part, unless one or more underlying exposures does 
not meet the definition of a wholesale, retail, securitization, or 
equity exposure, the total risk-based capital requirement for all 
securitization exposures held by a single [bank] associated with a 
single securitization (including any risk-based capital requirements 
that relate to an early amortization provision of the securitization but 
excluding any risk-based capital requirements that relate to the 
[bank]'s gain-on-sale or CEIOs associated with the securitization) may 
not exceed the sum of:
    (1) The [bank]'s total risk-based capital requirement for the 
underlying exposures as if the [bank] directly held the underlying 
exposures; and
    (2) The total ECL of the underlying exposures.
    (e) Amount of a securitization exposure. (1) The amount of an on-
balance sheet securitization exposure that is not a repo-style 
transaction, eligible margin loan, or OTC derivative contract (other 
than a credit derivative) is:
    (i) The [bank]'s carrying value minus any unrealized gains and plus 
any unrealized losses on the exposure, if the exposure is a security 
classified as available-for-sale; or

[[Page 87]]

    (ii) The [bank]'s carrying value, if the exposure is not a security 
classified as available-for-sale.
    (2) The amount of an off-balance sheet securitization exposure that 
is not an OTC derivative contract (other than a credit derivative) is 
the notional amount of the exposure. For an off-balance-sheet 
securitization exposure to an ABCP program, such as a liquidity 
facility, the notional amount may be reduced to the maximum potential 
amount that the [bank] could be required to fund given the ABCP 
program's current underlying assets (calculated without regard to the 
current credit quality of those assets).
    (3) The amount of a securitization exposure that is a repo-style 
transaction, eligible margin loan, or OTC derivative contract (other 
than a credit derivative) is the EAD of the exposure as calculated in 
section 32 of this appendix.
    (f) Overlapping exposures. If a [bank] has multiple securitization 
exposures that provide duplicative coverage of the underlying exposures 
of a securitization (such as when a [bank] provides a program-wide 
credit enhancement and multiple pool-specific liquidity facilities to an 
ABCP program), the [bank] is not required to hold duplicative risk-based 
capital against the overlapping position. Instead, the [bank] may apply 
to the overlapping position the applicable risk-based capital treatment 
that results in the highest risk-based capital requirement.
    (g) Securitizations of non-IRB exposures. If a [bank] has a 
securitization exposure where any underlying exposure is not a wholesale 
exposure, retail exposure, securitization exposure, or equity exposure, 
the [bank] must:
    (1) If the [bank] is an originating [bank], deduct from tier 1 
capital any after-tax gain-on-sale resulting from the securitization and 
deduct from total capital in accordance with paragraph (c) of this 
section the portion of any CEIO that does not constitute gain-on-sale;
    (2) If the securitization exposure does not require deduction under 
paragraph (g)(1), apply the RBA in section 43 of this appendix to the 
securitization exposure if the exposure qualifies for the RBA;
    (3) If the securitization exposure does not require deduction under 
paragraph (g)(1) and does not qualify for the RBA, apply the IAA in 
section 44 of this appendix to the exposure (if the [bank], the 
exposure, and the relevant ABCP program qualify for the IAA); and
    (4) If the securitization exposure does not require deduction under 
paragraph (g)(1) and does not qualify for the RBA or the IAA, deduct the 
exposure from total capital in accordance with paragraph (c) of this 
section.
    (h) Implicit support. If a [bank] provides support to a 
securitization in excess of the [bank]'s contractual obligation to 
provide credit support to the securitization (implicit support):
    (1) The [bank] must hold regulatory capital against all of the 
underlying exposures associated with the securitization as if the 
exposures had not been securitized and must deduct from tier 1 capital 
any after-tax gain-on-sale resulting from the securitization; and
    (2) The [bank] must disclose publicly:
    (i) That it has provided implicit support to the securitization; and
    (ii) The regulatory capital impact to the [bank] of providing such 
implicit support.
    (i) Eligible servicer cash advance facilities. Regardless of any 
other provisions of this part, a [bank] is not required to hold risk-
based capital against the undrawn portion of an eligible servicer cash 
advance facility.
    (j) Interest-only mortgage-backed securities. Regardless of any 
other provisions of this part, the risk weight for a non-credit-
enhancing interest-only mortgage-backed security may not be less than 
100 percent.
    (k) Small-business loans and leases on personal property transferred 
with recourse. (1) Regardless of any other provisions of this appendix, 
a [bank] that has transferred small-business loans and leases on 
personal property (small-business obligations) with recourse must 
include in risk-weighted assets only the contractual amount of retained 
recourse if all the following conditions are met:
    (i) The transaction is a sale under GAAP.
    (ii) The [bank] establishes and maintains, pursuant to GAAP, a non-
capital reserve sufficient to meet the [bank]'s reasonably estimated 
liability under the recourse arrangement.
    (iii) The loans and leases are to businesses that meet the criteria 
for a small-business concern established by the Small Business 
Administration under section 3(a) of the Small Business Act (15 U.S.C. 
632).
    (iv) The [bank] is well capitalized, as defined in the [AGENCY]'s 
prompt corrective action regulation--12 CFR part 6 (for national banks), 
12 CFR part 208, subpart D (for state member banks or bank holding 
companies), 12 CFR part 325, subpart B (for state nonmember banks), and 
12 CFR part 565 (for savings associations). For purposes of determining 
whether a [bank] is well capitalized for purposes of this paragraph, the 
[bank]'s capital ratios must be calculated without regard to the capital 
treatment for transfers of small-business obligations with recourse 
specified in paragraph (k)(1) of this section.
    (2) The total outstanding amount of recourse retained by a [bank] on 
transfers of small-business obligations receiving the capital treatment 
specified in paragraph (k)(1) of this section cannot exceed 15 percent 
of the [bank]'s total qualifying capital.
    (3) If a [bank] ceases to be well capitalized or exceeds the 15 
percent capital limitation, the preferential capital treatment specified

[[Page 88]]

in paragraph (k)(1) of this section will continue to apply to any 
transfers of small-business obligations with recourse that occurred 
during the time that the [bank] was well capitalized and did not exceed 
the capital limit.
    (4) The risk-based capital ratios of the [bank] must be calculated 
without regard to the capital treatment for transfers of small-business 
obligations with recourse specified in paragraph (k)(1) of this section 
as provided in 12 CFR part 3, Appendix A (for national banks), 12 CFR 
part 208, Appendix A (for state member banks), 12 CFR part 225, Appendix 
A (for bank holding companies), 12 CFR part 325, Appendix A (for state 
nonmember banks), and 12 CFR 567.6(b)(5)(v) (for savings associations).
    (l) Consolidated ABCP programs. (1) A [bank] that qualifies as a 
primary beneficiary and must consolidate an ABCP program as a variable 
interest entity under GAAP may exclude the consolidated ABCP program 
assets from risk-weighted assets if the [bank] is the sponsor of the 
ABCP program. If a [bank] excludes such consolidated ABCP program assets 
from risk-weighted assets, the [bank] must hold risk-based capital 
against any securitization exposures of the [bank] to the ABCP program 
in accordance with this part.
    (2) If a [bank] either is not permitted, or elects not, to exclude 
consolidated ABCP program assets from its risk-weighted assets, the 
[bank] must hold risk-based capital against the consolidated ABCP 
program assets in accordance with this appendix but is not required to 
hold risk-based capital against any securitization exposures of the 
[bank] to the ABCP program.
    (m) N th-to-default credit derivatives--(1) First-to-default credit 
derivatives--(i) Protection purchaser. A [bank] that obtains credit 
protection on a group of underlying exposures through a first-to-default 
credit derivative must determine its risk-based capital requirement for 
the underlying exposures as if the [bank] synthetically securitized the 
underlying exposure with the lowest risk-based capital requirement and 
had obtained no credit risk mitigant on the other underlying exposures.
    (ii) Protection provider. A [bank] that provides credit protection 
on a group of underlying exposures through a first-to-default credit 
derivative must determine its risk-weighted asset amount for the 
derivative by applying the RBA in section 43 of this appendix (if the 
derivative qualifies for the RBA) or, if the derivative does not qualify 
for the RBA, by setting its risk-weighted asset amount for the 
derivative equal to the product of:
    (A) The protection amount of the derivative;
    (B) 12.5; and
    (C) The sum of the risk-based capital requirements of the individual 
underlying exposures, up to a maximum of 100 percent.
    (2) Second-or-subsequent-to-default credit derivatives--(i) 
Protection purchaser. (A) A [bank] that obtains credit protection on a 
group of underlying exposures through a n\th\-to-default credit 
derivative (other than a first-to-default credit derivative) may 
recognize the credit risk mitigation benefits of the derivative only if:
    (1) The [bank] also has obtained credit protection on the same 
underlying exposures in the form of first-through-(n-1)-to-default 
credit derivatives; or
    (2) If n-1 of the underlying exposures have already defaulted.
    (B) If a [bank] satisfies the requirements of paragraph (m)(2)(i)(A) 
of this section, the [bank] must determine its risk-based capital 
requirement for the underlying exposures as if the [bank] had only 
synthetically securitized the underlying exposure with the 
nth lowest risk-based capital requirement and had obtained no 
credit risk mitigant on the other underlying exposures.
    (ii) Protection provider. A [bank] that provides credit protection 
on a group of underlying exposures through a nth-to-default 
credit derivative (other than a first-to-default credit derivative) must 
determine its risk-weighted asset amount for the derivative by applying 
the RBA in section 43 of this appendix (if the derivative qualifies for 
the RBA) or, if the derivative does not qualify for the RBA, by setting 
its risk-weighted asset amount for the derivative equal to the product 
of:
    (A) The protection amount of the derivative;
    (B) 12.5; and
    (C) The sum of the risk-based capital requirements of the individual 
underlying exposures (excluding the n-1 underlying exposures with the 
lowest risk-based capital requirements), up to a maximum of 100 percent.

                Section 43. Ratings-Based Approach (RBA)

    (a) Eligibility requirements for use of the RBA--(1) Originating 
[bank]. An originating [bank] must use the RBA to calculate its risk-
based capital requirement for a securitization exposure if the exposure 
has two or more external ratings or inferred ratings (and may not use 
the RBA if the exposure has fewer than two external ratings or inferred 
ratings).
    (2) Investing [bank]. An investing [bank] must use the RBA to 
calculate its risk-based capital requirement for a securitization 
exposure if the exposure has one or more external or inferred ratings 
(and may not use the RBA if the exposure has no external or inferred 
rating).
    (b) Ratings-based approach. (1) A [bank] must determine the risk-
weighted asset

[[Page 89]]

amount for a securitization exposure by multiplying the amount of the 
exposure (as defined in paragraph (e) of section 42 of this appendix) by 
the appropriate risk weight provided in Table 6 and Table 7.
    (2) A [bank] must apply the risk weights in Table 6 when the 
securitization exposure's applicable external or applicable inferred 
rating represents a long-term credit rating, and must apply the risk 
weights in Table 7 when the securitization exposure's applicable 
external or applicable inferred rating represents a short-term credit 
rating.
    (i) A [bank] must apply the risk weights in column 1 of Table 6 or 
Table 7 to the securitization exposure if:
    (A) N (as calculated under paragraph (e)(6) of section 45 of this 
appendix) is six or more (for purposes of this section only, if the 
notional number of underlying exposures is 25 or more or if all of the 
underlying exposures are retail exposures, a [bank] may assume that N is 
six or more unless the [bank] knows or has reason to know that N is less 
than six); and
    (B) The securitization exposure is a senior securitization exposure.
    (ii) A [bank] must apply the risk weights in column 3 of Table 6 or 
Table 7 to the securitization exposure if N is less than six, regardless 
of the seniority of the securitization exposure.
    (iii) Otherwise, a [bank] must apply the risk weights in column 2 of 
Table 6 or Table 7.

                        Table 6.--Long-Term Credit Rating Risk Weights Under RBA and IAA
----------------------------------------------------------------------------------------------------------------
                                                        Column 1        Column 2        Column 3
                                                    -----------------------------------------------    Applicable
                                                      Risk weights    Risk weights    Risk weights    external or
       Applicable external or inferred rating          for senior    for non-senior        for          inferred
           (Illustrative rating example)             securitization  securitization  securitization      rating
                                                        exposures       exposures       exposures    (Illustrative
                                                        backed by       backed by    backed by non-      rating
                                                     granular pools  granular pools  granular pools     example)
--------------------------------------------------------------------------------------------------- ---------------
Highest investment grade (for example, AAA)........              7%             12%             20%
Second highest investment grade (for example, AA)..              8%             15%             25%
Third-highest investment grade--positive                        10%             18%             35%
 designation (for example, A+).....................
Third-highest investment grade (for example, A)....             12%             20%
Third-highest investment grade--negative                        20%             35%
 designation (for example, A-).....................
                                                                    --------------------------------------------
Lowest investment grade--positive designation (for              35%                50%
 example, BBB+)....................................
Lowest investment grade (for example, BBB).........             60%                75%
                                                    ------------------------------------------------------------
Lowest investment grade--negative designation (for
 example, BBB-)....................................                       100%
One category below investment grade--positive
 designation (for example, BB+)....................                       250%
One category below investment grade (for example,
 BB)...............................................                       425%
One category below investment grade--negative
 designation (for example, BB-)....................                       650%
More than one category below investment grade......     Deduction from tier 1 and tier 2 capital.
----------------------------------------------------------------------------------------------------------------


                        Table 7.--Short-Term Credit Rating Risk Weights Under RBA and IAA
----------------------------------------------------------------------------------------------------------------
                                                        Column 1        Column 2        Column 3
                                                    -----------------------------------------------    Applicable
                                                      Risk weights    Risk weights    Risk weights    external or
       Applicable external or inferred rating          for senior    for non-senior        for          inferred
           (Illustrative rating example)             securitization  securitization  securitization      rating
                                                        exposures       exposures       exposures    (Illustrative
                                                        backed by       backed by    backed by non-      rating
                                                     granular pools  granular pools  granular pools     example)
--------------------------------------------------------------------------------------------------- ---------------
Highest investment grade (for example, A1).........              7%             12%             20%
Second highest investment grade (for example, A2)..             12%             20%             35%
Third highest investment grade (for example, A3)...             60%             75%             75%
All other ratings..................................     Deduction from tier 1 and tier 2 capital.
----------------------------------------------------------------------------------------------------------------

             Section 44. Internal Assessment Approach (IAA)

    (a) Eligibility requirements. A [bank] may apply the IAA to 
calculate the risk-weighted asset amount for a securitization exposure 
that the [bank] has to an ABCP program (such as a liquidity facility or 
credit enhancement) if the [bank], the ABCP program, and the exposure 
qualify for use of the IAA.
    (1) [Bank] qualification criteria. A [bank] qualifies for use of the 
IAA if the [bank] has received the prior written approval of the 
[AGENCY]. To receive such approval, the

[[Page 90]]

[bank] must demonstrate to the [AGENCY]'s satisfaction that the [bank]'s 
internal assessment process meets the following criteria:
    (i) The [bank]'s internal credit assessments of securitization 
exposures must be based on publicly available rating criteria used by an 
NRSRO.
    (ii) The [bank]'s internal credit assessments of securitization 
exposures used for risk-based capital purposes must be consistent with 
those used in the [bank]'s internal risk management process, management 
information reporting systems, and capital adequacy assessment process.
    (iii) The [bank]'s internal credit assessment process must have 
sufficient granularity to identify gradations of risk. Each of the 
[bank]'s internal credit assessment categories must correspond to an 
external rating of an NRSRO.
    (iv) The [bank]'s internal credit assessment process, particularly 
the stress test factors for determining credit enhancement requirements, 
must be at least as conservative as the most conservative of the 
publicly available rating criteria of the NRSROs that have provided 
external ratings to the commercial paper issued by the ABCP program.
    (A) Where the commercial paper issued by an ABCP program has an 
external rating from two or more NRSROs and the different NRSROs'' 
benchmark stress factors require different levels of credit enhancement 
to achieve the same external rating equivalent, the [bank] must apply 
the NRSRO stress factor that requires the highest level of credit 
enhancement.
    (B) If any NRSRO that provides an external rating to the ABCP 
program's commercial paper changes its methodology (including stress 
factors), the [bank] must evaluate whether to revise its internal 
assessment process.
    (v) The [bank] must have an effective system of controls and 
oversight that ensures compliance with these operational requirements 
and maintains the integrity and accuracy of the internal credit 
assessments. The [bank] must have an internal audit function independent 
from the ABCP program business line and internal credit assessment 
process that assesses at least annually whether the controls over the 
internal credit assessment process function as intended.
    (vi) The [bank] must review and update each internal credit 
assessment whenever new material information is available, but no less 
frequently than annually.
    (vii) The [bank] must validate its internal credit assessment 
process on an ongoing basis and at least annually.
    (2) ABCP-program qualification criteria. An ABCP program qualifies 
for use of the IAA if all commercial paper issued by the ABCP program 
has an external rating.
    (3) Exposure qualification criteria. A securitization exposure 
qualifies for use of the IAA if the exposure meets the following 
criteria:
    (i) The [bank] initially rated the exposure at least the equivalent 
of investment grade.
    (ii) The ABCP program has robust credit and investment guidelines 
(that is, underwriting standards) for the exposures underlying the 
securitization exposure.
    (iii) The ABCP program performs a detailed credit analysis of the 
sellers of the exposures underlying the securitization exposure.
    (iv) The ABCP program's underwriting policy for the exposures 
underlying the securitization exposure establishes minimum asset 
eligibility criteria that include the prohibition of the purchase of 
assets that are significantly past due or of assets that are defaulted 
(that is, assets that have been charged off or written down by the 
seller prior to being placed into the ABCP program or assets that would 
be charged off or written down under the program's governing contracts), 
as well as limitations on concentration to individual obligors or 
geographic areas and the tenor of the assets to be purchased.
    (v) The aggregate estimate of loss on the exposures underlying the 
securitization exposure considers all sources of potential risk, such as 
credit and dilution risk.
    (vi) Where relevant, the ABCP program incorporates structural 
features into each purchase of exposures underlying the securitization 
exposure to mitigate potential credit deterioration of the underlying 
exposures. Such features may include wind-down triggers specific to a 
pool of underlying exposures.
    (b) Mechanics. A [bank] that elects to use the IAA to calculate the 
risk-based capital requirement for any securitization exposure must use 
the IAA to calculate the risk-based capital requirements for all 
securitization exposures that qualify for the IAA approach. Under the 
IAA, a [bank] must map its internal assessment of such a securitization 
exposure to an equivalent external rating from an NRSRO. Under the IAA, 
a [bank] must determine the risk-weighted asset amount for such a 
securitization exposure by multiplying the amount of the exposure (as 
defined in paragraph (e) of section 42 of this appendix) by the 
appropriate risk weight in Table 6 and Table 7 in paragraph (b) of 
section 43 of this appendix.

             Section 45. Supervisory Formula Approach (SFA)

    (a) Eligibility requirements. A [bank] may use the SFA to determine 
its risk-based capital requirement for a securitization exposure only if 
the [bank] can calculate on an ongoing basis each of the SFA parameters 
in paragraph (e) of this section.

[[Page 91]]

    (b) Mechanics. Under the SFA, a securitization exposure incurs a 
deduction from total capital (as described in paragraph (c) of section 
42 of this appendix) and/or an SFA risk-based capital requirement, as 
determined in paragraph (c) of this section. The risk-weighted asset 
amount for the securitization exposure equals the SFA risk-based capital 
requirement for the exposure multiplied by 12.5.
    (c) The SFA risk-based capital requirement. (1) If KIRB 
is greater than or equal to L + T, the entire exposure must be deducted 
from total capital.
    (2) If KIRB is less than or equal to L, the exposure's 
SFA risk-based capital requirement is UE multiplied by TP multiplied by 
the greater of:
    (i) 0.0056 * T; or
    (ii) S[L + T] - S[L].
    (3) If KIRB is greater than L and less than L + T, the 
[bank] must deduct from total capital an amount equal to 
UE*TP*(KIRB - L), and the exposure's SFA risk-based capital 
requirement is UE multiplied by TP multiplied by the greater of:
    (i) 0.0056 * (T - (KIRB - L)); or
    (ii) S[L + T] - S[KIRB].
    (d) The supervisory formula:

[[Page 92]]

[GRAPHIC] [TIFF OMITTED] TR07DE07.017

    (11) In these expressions, [beta][Y; a, b] refers to the cumulative 
beta distribution with parameters a and b evaluated at Y. In the case 
where N = 1 and EWALGD = 100 percent, S[Y] in formula (1) must be 
calculated with K[Y] set equal to the product of KIRB and Y, 
and d set equal to 1 - KIRB.
    (e) SFA parameters--(1) Amount of the underlying exposures (UE). UE 
is the EAD of any underlying exposures that are wholesale and retail 
exposures (including the amount of any funded spread accounts, cash 
collateral accounts, and other similar funded credit enhancements) plus 
the amount of any underlying exposures that are securitization exposures 
(as defined in paragraph (e) of section 42 of this appendix) plus the 
adjusted carrying value of any underlying exposures that are equity 
exposures (as defined in paragraph (b) of section 51 of this appendix).
    (2) Tranche percentage (TP). TP is the ratio of the amount of the 
[bank]'s securitization

[[Page 93]]

exposure to the amount of the tranche that contains the securitization 
exposure.
    (3) Capital requirement on underlying exposures (KIRB). (i) 
KIRB is the ratio of:
    (A) The sum of the risk-based capital requirements for the 
underlying exposures plus the expected credit losses of the underlying 
exposures (as determined under this appendix as if the underlying 
exposures were directly held by the [bank]); to
    (B) UE.
    (ii) The calculation of KIRB must reflect the effects of 
any credit risk mitigant applied to the underlying exposures (either to 
an individual underlying exposure, to a group of underlying exposures, 
or to the entire pool of underlying exposures).
    (iii) All assets related to the securitization are treated as 
underlying exposures, including assets in a reserve account (such as a 
cash collateral account).
    (4) Credit enhancement level (L). (i) L is the ratio of:
    (A) The amount of all securitization exposures subordinated to the 
tranche that contains the [bank]'s securitization exposure; to
    (B) UE.
    (ii) A [bank] must determine L before considering the effects of any 
tranche-specific credit enhancements.
    (iii) Any gain-on-sale or CEIO associated with the securitization 
may not be included in L.
    (iv) Any reserve account funded by accumulated cash flows from the 
underlying exposures that is subordinated to the tranche that contains 
the [bank]'s securitization exposure may be included in the numerator 
and denominator of L to the extent cash has accumulated in the account. 
Unfunded reserve accounts (that is, reserve accounts that are to be 
funded from future cash flows from the underlying exposures) may not be 
included in the calculation of L.
    (v) In some cases, the purchase price of receivables will reflect a 
discount that provides credit enhancement (for example, first loss 
protection) for all or certain tranches of the securitization. When this 
arises, L should be calculated inclusive of this discount if the 
discount provides credit enhancement for the securitization exposure.
    (5) Thickness of tranche (T). T is the ratio of:
    (i) The amount of the tranche that contains the [bank]'s 
securitization exposure; to
    (ii) UE.
    (6) Effective number of exposures (N). (i) Unless the [bank] elects 
to use the formula provided in paragraph (f) of this section,
[GRAPHIC] [TIFF OMITTED] TR07DE07.018

where EADi represents the EAD associated with the ith 
instrument in the pool of underlying exposures.
    (ii) Multiple exposures to one obligor must be treated as a single 
underlying exposure.
    (iii) In the case of a re-securitization (that is, a securitization 
in which some or all of the underlying exposures are themselves 
securitization exposures), the [bank] must treat each underlying 
exposure as a single underlying exposure and must not look through to 
the originally securitized underlying exposures.
    (7) Exposure-weighted average loss given default (EWALGD). EWALGD is 
calculated as:
[GRAPHIC] [TIFF OMITTED] TR07DE07.019

where LGDi represents the average LGD associated with all 
exposures to the ith obligor. In the case of a re-securitization, an LGD 
of 100 percent must be assumed for the underlying exposures that are 
themselves securitization exposures.
    (f) Simplified method for computing N and EWALGD. (1) If all 
underlying exposures of a securitization are retail exposures, a [bank] 
may apply the SFA using the following simplifications:
    (i) h = 0; and
    (ii) v = 0.
    (2) Under the conditions in paragraphs (f)(3) and (f)(4) of this 
section, a [bank] may employ a simplified method for calculating N and 
EWALGD.
    (3) If C1 is no more than 0.03, a [bank] may set EWALGD = 
0.50 if none of the underlying exposures is a securitization exposure or 
EWALGD = 1 if one or more of the underlying exposures is a 
securitization exposure, and may set N equal to the following amount:
[GRAPHIC] [TIFF OMITTED] TR07DE07.020


[[Page 94]]


where:
    (i) Cm is the ratio of the sum of the amounts of the `m' 
largest underlying exposures to UE; and
    (ii) The level of m is to be selected by the [bank].

    (4) Alternatively, if only C1 is available and 
C1 is no more than 0.03, the [bank] may set EWALGD = 0.50 if 
none of the underlying exposures is a securitization exposure or EWALGD 
= 1 if one or more of the underlying exposures is a securitization 
exposure and may set N = 1/C1.

  Section 46. Recognition of Credit Risk Mitigants for Securitization 
                                Exposures

    (a) General. An originating [bank] that has obtained a credit risk 
mitigant to hedge its securitization exposure to a synthetic or 
traditional securitization that satisfies the operational criteria in 
section 41 of this appendix may recognize the credit risk mitigant, but 
only as provided in this section. An investing [bank] that has obtained 
a credit risk mitigant to hedge a securitization exposure may recognize 
the credit risk mitigant, but only as provided in this section. A [bank] 
that has used the RBA in section 43 of this appendix or the IAA in 
section 44 of this appendix to calculate its risk-based capital 
requirement for a securitization exposure whose external or inferred 
rating (or equivalent internal rating under the IAA) reflects the 
benefits of a credit risk mitigant provided to the associated 
securitization or that supports some or all of the underlying exposures 
may not use the credit risk mitigation rules in this section to further 
reduce its risk-based capital requirement for the exposure to reflect 
that credit risk mitigant.
    (b) Collateral--(1) Rules of recognition. A [bank] may recognize 
financial collateral in determining the [bank]'s risk-based capital 
requirement for a securitization exposure (other than a repo-style 
transaction, an eligible margin loan, or an OTC derivative contract for 
which the [bank] has reflected collateral in its determination of 
exposure amount under section 32 of this appendix) as follows. The 
[bank]'s risk-based capital requirement for the collateralized 
securitization exposure is equal to the risk-based capital requirement 
for the securitization exposure as calculated under the RBA in section 
43 of this appendix or under the SFA in section 45 of this appendix 
multiplied by the ratio of adjusted exposure amount (SE*) to original 
exposure amount (SE), where:
    (i) SE* = max {0, [SE--C x (1-Hs-Hfx)]{time} ;
    (ii) SE = the amount of the securitization exposure calculated under 
paragraph (e) of section 42 of this appendix;
    (iii) C = the current market value of the collateral;
    (iv) Hs = the haircut appropriate to the collateral type; and
    (v) Hfx = the haircut appropriate for any currency mismatch between 
the collateral and the exposure.
    (2) Mixed collateral. Where the collateral is a basket of different 
asset types or a basket of assets denominated in different currencies, 
the haircut on the basket will be
[GRAPHIC] [TIFF OMITTED] TR07DE07.023

where ai is the current market value of the asset in the 
basket divided by the current market value of all assets in the basket 
and Hi is the haircut applicable to that asset.
    (3) Standard supervisory haircuts. Unless a [bank] qualifies for use 
of and uses own-estimates haircuts in paragraph (b)(4) of this section:
    (i) A [bank] must use the collateral type haircuts (Hs) in Table 3;
    (ii) A [bank] must use a currency mismatch haircut (Hfx) of 8 
percent if the exposure and the collateral are denominated in different 
currencies;
    (iii) A [bank] must multiply the supervisory haircuts obtained in 
paragraphs (b)(3)(i) and (ii) by the square root of 6.5 (which equals 
2.549510); and
    (iv) A [bank] must adjust the supervisory haircuts upward on the 
basis of a holding period longer than 65 business days where and as 
appropriate to take into account the illiquidity of the collateral.
    (4) Own estimates for haircuts. With the prior written approval of 
the [AGENCY], a [bank] may calculate haircuts using its own internal 
estimates of market price volatility and foreign exchange volatility, 
subject to paragraph (b)(2)(iii) of section 32 of this appendix. The 
minimum holding period (TM) for securitization exposures is 65 business 
days.
    (c) Guarantees and credit derivatives--(1) Limitations on 
recognition. A [bank] may only recognize an eligible guarantee or 
eligible credit derivative provided by an eligible securitization 
guarantor in determining the [bank]'s risk-based capital requirement for 
a securitization exposure.
    (2) ECL for securitization exposures. When a [bank] recognizes an 
eligible guarantee or eligible credit derivative provided by an eligible 
securitization guarantor in determining the [bank]'s risk-based capital 
requirement for a securitization exposure, the [bank] must also:
    (i) Calculate ECL for the protected portion of the exposure using 
the same risk parameters that it uses for calculating the risk-weighted 
asset amount of the exposure as described in paragraph (c)(3) of this 
section; and
    (ii) Add the exposure's ECL to the [bank]'s total ECL.

[[Page 95]]

    (3) Rules of recognition. A [bank] may recognize an eligible 
guarantee or eligible credit derivative provided by an eligible 
securitization guarantor in determining the [bank]'s risk-based capital 
requirement for the securitization exposure as follows:
    (i) Full coverage. If the protection amount of the eligible 
guarantee or eligible credit derivative equals or exceeds the amount of 
the securitization exposure, the [bank] may set the risk-weighted asset 
amount for the securitization exposure equal to the risk-weighted asset 
amount for a direct exposure to the eligible securitization guarantor 
(as determined in the wholesale risk weight function described in 
section 31 of this appendix), using the [bank]'s PD for the guarantor, 
the [bank]'s LGD for the guarantee or credit derivative, and an EAD 
equal to the amount of the securitization exposure (as determined in 
paragraph (e) of section 42 of this appendix).
    (ii) Partial coverage. If the protection amount of the eligible 
guarantee or eligible credit derivative is less than the amount of the 
securitization exposure, the [bank] may set the risk-weighted asset 
amount for the securitization exposure equal to the sum of:
    (A) Covered portion. The risk-weighted asset amount for a direct 
exposure to the eligible securitization guarantor (as determined in the 
wholesale risk weight function described in section 31 of this 
appendix), using the [bank]'s PD for the guarantor, the [bank]'s LGD for 
the guarantee or credit derivative, and an EAD equal to the protection 
amount of the credit risk mitigant; and
    (B) Uncovered portion. (1) 1.0 minus the ratio of the protection 
amount of the eligible guarantee or eligible credit derivative to the 
amount of the securitization exposure); multiplied by
    (2) The risk-weighted asset amount for the securitization exposure 
without the credit risk mitigant (as determined in sections 42-45 of 
this appendix).
    (4) Mismatches. The [bank] must make applicable adjustments to the 
protection amount as required in paragraphs (d), (e), and (f) of section 
33 of this appendix for any hedged securitization exposure and any more 
senior securitization exposure that benefits from the hedge. In the 
context of a synthetic securitization, when an eligible guarantee or 
eligible credit derivative covers multiple hedged exposures that have 
different residual maturities, the [bank] must use the longest residual 
maturity of any of the hedged exposures as the residual maturity of all 
the hedged exposures.

   Section 47. Risk-Based Capital Requirement for Early Amortization 
                               Provisions

    (a) General. (1) An originating [bank] must hold risk-based capital 
against the sum of the originating [bank]'s interest and the investors' 
interest in a securitization that:
    (i) Includes one or more underlying exposures in which the borrower 
is permitted to vary the drawn amount within an agreed limit under a 
line of credit; and
    (ii) Contains an early amortization provision.
    (2) For securitizations described in paragraph (a)(1) of this 
section, an originating [bank] must calculate the risk-based capital 
requirement for the originating [bank]'s interest under sections 42-45 
of this appendix, and the risk-based capital requirement for the 
investors' interest under paragraph (b) of this section.
    (b) Risk-weighted asset amount for investors' interest. The 
originating [bank]'s risk-weighted asset amount for the investors' 
interest in the securitization is equal to the product of the following 
5 quantities:
    (1) The investors' interest EAD;
    (2) The appropriate conversion factor in paragraph (c) of this 
section;
    (3) KIRB (as defined in paragraph (e)(3) of section 45 of 
this appendix);
    (4) 12.5; and
    (5) The proportion of the underlying exposures in which the borrower 
is permitted to vary the drawn amount within an agreed limit under a 
line of credit.
    (c) Conversion factor. (1) (i) Except as provided in paragraph 
(c)(2) of this section, to calculate the appropriate conversion factor, 
a [bank] must use Table 8 for a securitization that contains a 
controlled early amortization provision and must use Table 9 for a 
securitization that contains a non-controlled early amortization 
provision. In circumstances where a securitization contains a mix of 
retail and nonretail exposures or a mix of committed and uncommitted 
exposures, a [bank] may take a pro rata approach to determining the 
conversion factor for the securitization's early amortization provision. 
If a pro rata approach is not feasible, a [bank] must treat the mixed 
securitization as a securitization of nonretail exposures if a single 
underlying exposure is a nonretail exposure and must treat the mixed 
securitization as a securitization of committed exposures if a single 
underlying exposure is a committed exposure.
    (ii) To find the appropriate conversion factor in the tables, a 
[bank] must divide the three-month average annualized excess spread of 
the securitization by the excess spread trapping point in the 
securitization structure. In securitizations that do not require excess 
spread to be trapped, or that specify trapping points based primarily on 
performance measures other than the three-month average annualized 
excess spread, the excess spread trapping point is 4.5 percent.

[[Page 96]]



           Table 8.--Controlled Early Amortization Provisions
------------------------------------------------------------------------
                                       Uncommitted          Committed
------------------------------------------------------------------------
Retail Credit Lines............  Three-month average     90% CF
                                  annualized excess
                                  spread Conversion
                                  Factor (CF).
                                 133.33% of trapping
                                  point or more, 0% CF.
                                 less than 133.33% to
                                  100% of trapping
                                  point, 1% CF.
                                 less than 100% to 75%
                                  of trapping point, 2%
                                  CF.
                                 less than 75% to 50%
                                  of trapping point,
                                  10% CF.
                                 less than 50% to 25%
                                  of trapping point,
                                  20% CF.
                                 less than 25% of
                                  trapping point, 40%
                                  CF.
Non-retail Credit Lines........  90% CF................  90% CF
------------------------------------------------------------------------


         Table 9.--Non-Controlled Early Amortization Provisions
------------------------------------------------------------------------
                                       Uncommitted          Committed
------------------------------------------------------------------------
Retail Credit Lines............  Three-month average     100% CF
                                  annualized excess
                                  spread Conversion
                                  Factor (CF).
                                 133.33% of trapping
                                  point or more, 0% CF.
                                 less than 133.33% to
                                  100% of trapping
                                  point, 5% CF.
                                 less than 100% to 75%
                                  of trapping point,
                                  15% CF.
                                 less than 75% to 50%
                                  of trapping point,
                                  50% CF.
                                 less than 50% of
                                  trapping point, 100%
                                  CF.
Non-retail Credit Lines........  100% CF...............  100% CF
------------------------------------------------------------------------

    (2) For a securitization for which all or substantially all of the 
underlying exposures are residential mortgage exposures, a [bank] may 
calculate the appropriate conversion factor using paragraph (c)(1) of 
this section or may use a conversion factor of 10 percent. If the [bank] 
chooses to use a conversion factor of 10 percent, it must use that 
conversion factor for all securitizations for which all or substantially 
all of the underlying exposures are residential mortgage exposures.

           Part VI. Risk-Weighted Assets for Equity Exposures

            Section 51. Introduction and Exposure Measurement

    (a) General. To calculate its risk-weighted asset amounts for equity 
exposures that are not equity exposures to investment funds, a [bank] 
may apply either the Simple Risk Weight Approach (SRWA) in section 52 of 
this appendix or, if it qualifies to do so, the Internal Models Approach 
(IMA) in section 53 of this appendix. A [bank] must use the look-through 
approaches in section 54 of this appendix to calculate its risk-weighted 
asset amounts for equity exposures to investment funds.
    (b) Adjusted carrying value. For purposes of this part, the adjusted 
carrying value of an equity exposure is:
    (1) For the on-balance sheet component of an equity exposure, the 
[bank]'s carrying value of the exposure reduced by any unrealized gains 
on the exposure that are reflected in such carrying value but excluded 
from the [bank]'s tier 1 and tier 2 capital; and
    (2) For the off-balance sheet component of an equity exposure, the 
effective notional principal amount of the exposure, the size of which 
is equivalent to a hypothetical on-balance sheet position in the 
underlying equity instrument that would evidence the same change in fair 
value (measured in dollars) for a given small change in the price of the 
underlying equity instrument, minus the adjusted carrying value of the 
on-balance sheet component of the exposure as calculated in paragraph 
(b)(1) of this section. For unfunded equity commitments that are 
unconditional, the effective notional principal amount is the notional 
amount of the commitment. For unfunded equity commitments that are 
conditional, the effective notional principal amount is the [bank]'s 
best estimate of the amount that would be funded under economic downturn 
conditions.

             Section 52. Simple Risk Weight Approach (SRWA)

    (a) General. Under the SRWA, a [bank]'s aggregate risk-weighted 
asset amount for its equity exposures is equal to the sum of the risk-
weighted asset amounts for each of the [bank]'s individual equity 
exposures (other than equity exposures to an investment fund) as 
determined in this section and the risk-weighted asset amounts for each 
of the [bank]'s individual equity exposures to an investment fund as 
determined in section 54 of this appendix.
    (b) SRWA computation for individual equity exposures. A [bank] must 
determine the risk-weighted asset amount for an individual equity 
exposure (other than an equity exposure to an investment fund) by 
multiplying the adjusted carrying value of the equity exposure or the 
effective portion and ineffective

[[Page 97]]

portion of a hedge pair (as defined in paragraph (c) of this section) by 
the lowest applicable risk weight in this paragraph (b).
    (1) 0 percent risk weight equity exposures. An equity exposure to an 
entity whose credit exposures are exempt from the 0.03 percent PD floor 
in paragraph (d)(2) of section 31 of this appendix is assigned a 0 
percent risk weight.
    (2) 20 percent risk weight equity exposures. An equity exposure to a 
Federal Home Loan Bank or Farmer Mac is assigned a 20 percent risk 
weight.
    (3) 100 percent risk weight equity exposures. The following equity 
exposures are assigned a 100 percent risk weight:
    (i) Community development equity exposures. An equity exposure that 
qualifies as a community development investment under 12 U.S.C. 24 
(Eleventh), excluding equity exposures to an unconsolidated small 
business investment company and equity exposures held through a 
consolidated small business investment company described in section 302 
of the Small Business Investment Act of 1958 (15 U.S.C. 682).
    (ii) Effective portion of hedge pairs. The effective portion of a 
hedge pair.
    (iii) Non-significant equity exposures. Equity exposures, excluding 
exposures to an investment firm that would meet the definition of a 
traditional securitization were it not for the [AGENCY]'s application of 
paragraph (8) of that definition and has greater than immaterial 
leverage, to the extent that the aggregate adjusted carrying value of 
the exposures does not exceed 10 percent of the [bank]'s tier 1 capital 
plus tier 2 capital.
    (A) To compute the aggregate adjusted carrying value of a [bank]'s 
equity exposures for purposes of this paragraph (b)(3)(iii), the [bank] 
may exclude equity exposures described in paragraphs (b)(1), (b)(2), 
(b)(3)(i), and (b)(3)(ii) of this section, the equity exposure in a 
hedge pair with the smaller adjusted carrying value, and a proportion of 
each equity exposure to an investment fund equal to the proportion of 
the assets of the investment fund that are not equity exposures or that 
meet the criterion of paragraph (b)(3)(i) of this section. If a [bank] 
does not know the actual holdings of the investment fund, the [bank] may 
calculate the proportion of the assets of the fund that are not equity 
exposures based on the terms of the prospectus, partnership agreement, 
or similar contract that defines the fund's permissible investments. If 
the sum of the investment limits for all exposure classes within the 
fund exceeds 100 percent, the [bank] must assume for purposes of this 
paragraph (b)(3)(iii) that the investment fund invests to the maximum 
extent possible in equity exposures.
    (B) When determining which of a [bank]'s equity exposures qualify 
for a 100 percent risk weight under this paragraph, a [bank] first must 
include equity exposures to unconsolidated small business investment 
companies or held through consolidated small business investment 
companies described in section 302 of the Small Business Investment Act 
of 1958 (15 U.S.C. 682), then must include publicly traded equity 
exposures (including those held indirectly through investment funds), 
and then must include non-publicly traded equity exposures (including 
those held indirectly through investment funds).
    (4) 300 percent risk weight equity exposures. A publicly traded 
equity exposure (other than an equity exposure described in paragraph 
(b)(6) of this section and including the ineffective portion of a hedge 
pair) is assigned a 300 percent risk weight.
    (5) 400 percent risk weight equity exposures. An equity exposure 
(other than an equity exposure described in paragraph (b)(6) of this 
section) that is not publicly traded is assigned a 400 percent risk 
weight.
    (6) 600 percent risk weight equity exposures. An equity exposure to 
an investment firm that:
    (i) Would meet the definition of a traditional securitization were 
it not for the [AGENCY]'s application of paragraph (8) of that 
definition; and
    (ii) Has greater than immaterial leverage is assigned a 600 percent 
risk weight.
    (c) Hedge transactions--(1) Hedge pair. A hedge pair is two equity 
exposures that form an effective hedge so long as each equity exposure 
is publicly traded or has a return that is primarily based on a publicly 
traded equity exposure.
    (2) Effective hedge. Two equity exposures form an effective hedge if 
the exposures either have the same remaining maturity or each has a 
remaining maturity of at least three months; the hedge relationship is 
formally documented in a prospective manner (that is, before the [bank] 
acquires at least one of the equity exposures); the documentation 
specifies the measure of effectiveness (E) the [bank] will use for the 
hedge relationship throughout the life of the transaction; and the hedge 
relationship has an E greater than or equal to 0.8. A [bank] must 
measure E at least quarterly and must use one of three alternative 
measures of E:
    (i) Under the dollar-offset method of measuring effectiveness, the 
[bank] must determine the ratio of value change (RVC). The RVC is the 
ratio of the cumulative sum of the periodic changes in value of one 
equity exposure to the cumulative sum of the periodic changes in the 
value of the other equity exposure. If RVC is positive, the hedge is not 
effective and E equals 0. If RVC is negative and greater than or equal 
to -1 (that is, between zero and -1), then E equals the absolute value 
of RVC. If RVC is negative and less than -1, then E equals 2 plus RVC.
    (ii) Under the variability-reduction method of measuring 
effectiveness:

[[Page 98]]

[GRAPHIC] [TIFF OMITTED] TR07DE07.021

(A) Xt = At - Bt;
(B) At = the value at time t of one exposure in a hedge pair; 
          and
(C) Bt = the value at time t of the other exposure in a hedge 
          pair.
    (iii) Under the regression method of measuring effectiveness, E 
equals the coefficient of determination of a regression in which the 
change in value of one exposure in a hedge pair is the dependent 
variable and the change in value of the other exposure in a hedge pair 
is the independent variable. However, if the estimated regression 
coefficient is positive, then the value of E is zero.
    (3) The effective portion of a hedge pair is E multiplied by the 
greater of the adjusted carrying values of the equity exposures forming 
a hedge pair.
    (4) The ineffective portion of a hedge pair is (1-E) multiplied by 
the greater of the adjusted carrying values of the equity exposures 
forming a hedge pair.

               Section 53. Internal Models Approach (IMA)

    (a) General. A [bank] may calculate its risk-weighted asset amount 
for equity exposures using the IMA by modeling publicly traded and non-
publicly traded equity exposures (in accordance with paragraph (c) of 
this section) or by modeling only publicly traded equity exposures (in 
accordance with paragraph (d) of this section).
    (b) Qualifying criteria. To qualify to use the IMA to calculate 
risk-based capital requirements for equity exposures, a [bank] must 
receive prior written approval from the [AGENCY]. To receive such 
approval, the [bank] must demonstrate to the [AGENCY]'s satisfaction 
that the [bank] meets the following criteria:
    (1) The [bank] must have one or more models that:
    (i) Assess the potential decline in value of its modeled equity 
exposures;
    (ii) Are commensurate with the size, complexity, and composition of 
the [bank]'s modeled equity exposures; and
    (iii) Adequately capture both general market risk and idiosyncratic 
risk.
    (2) The [bank]'s model must produce an estimate of potential losses 
for its modeled equity exposures that is no less than the estimate of 
potential losses produced by a VaR methodology employing a 99.0 percent, 
one-tailed confidence interval of the distribution of quarterly returns 
for a benchmark portfolio of equity exposures comparable to the [bank]'s 
modeled equity exposures using a long-term sample period.
    (3) The number of risk factors and exposures in the sample and the 
data period used for quantification in the [bank]'s model and 
benchmarking exercise must be sufficient to provide confidence in the 
accuracy and robustness of the [bank]'s estimates.
    (4) The [bank]'s model and benchmarking process must incorporate 
data that are relevant in representing the risk profile of the [bank]'s 
modeled equity exposures, and must include data from at least one equity 
market cycle containing adverse market movements relevant to the risk 
profile of the [bank]'s modeled equity exposures. In addition, the 
[bank]'s benchmarking exercise must be based on daily market prices for 
the benchmark portfolio. If the [bank]'s model uses a scenario 
methodology, the [bank] must demonstrate that the model produces a 
conservative estimate of potential losses on the [bank]'s modeled equity 
exposures over a relevant long-term market cycle. If the [bank] employs 
risk factor models, the [bank] must demonstrate through empirical 
analysis the appropriateness of the risk factors used.
    (5) The [bank] must be able to demonstrate, using theoretical 
arguments and empirical evidence, that any proxies used in the modeling 
process are comparable to the [bank]'s modeled equity exposures and that 
the [bank] has made appropriate adjustments for differences. The [bank] 
must derive any proxies for its modeled equity exposures and benchmark 
portfolio using historical market data that are relevant to the [bank]'s 
modeled equity exposures and benchmark portfolio (or, where not, must 
use appropriately adjusted data), and such proxies must be robust 
estimates of the risk of the [bank]'s modeled equity exposures.
    (c) Risk-weighted assets calculation for a [bank] modeling publicly 
traded and non-publicly traded equity exposures. If a [bank] models 
publicly traded and non-publicly traded equity exposures, the [bank]'s 
aggregate risk-weighted asset amount for its equity exposures is equal 
to the sum of:
    (1) The risk-weighted asset amount of each equity exposure that 
qualifies for a 0 percent, 20 percent, or 100 percent risk weight under 
paragraphs (b)(1) through (b)(3)(i) of section 52 (as determined under 
section 52 of this appendix) and each equity exposure to

[[Page 99]]

an investment fund (as determined under section 54 of this appendix); 
and
    (2) The greater of:
    (i) The estimate of potential losses on the [bank]'s equity 
exposures (other than equity exposures referenced in paragraph (c)(1) of 
this section) generated by the [bank]'s internal equity exposure model 
multiplied by 12.5; or
    (ii) The sum of:
    (A) 200 percent multiplied by the aggregate adjusted carrying value 
of the [bank]'s publicly traded equity exposures that do not belong to a 
hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent 
risk weight under paragraphs (b)(1) through (b)(3)(i) of section 52 of 
this appendix, and are not equity exposures to an investment fund;
    (B) 200 percent multiplied by the aggregate ineffective portion of 
all hedge pairs; and
    (C) 300 percent multiplied by the aggregate adjusted carrying value 
of the [bank]'s equity exposures that are not publicly traded, do not 
qualify for a 0 percent, 20 percent, or 100 percent risk weight under 
paragraphs (b)(1) through (b)(3)(i) of section 52 of this appendix, and 
are not equity exposures to an investment fund.
    (d) Risk-weighted assets calculation for a [bank] using the IMA only 
for publicly traded equity exposures. If a [bank] models only publicly 
traded equity exposures, the [bank]'s aggregate risk-weighted asset 
amount for its equity exposures is equal to the sum of:
    (1) The risk-weighted asset amount of each equity exposure that 
qualifies for a 0 percent, 20 percent, or 100 percent risk weight under 
paragraphs (b)(1) through (b)(3)(i) of section 52 (as determined under 
section 52 of this appendix), each equity exposure that qualifies for a 
400 percent risk weight under paragraph (b)(5) of section 52 or a 600 
percent risk weight under paragraph (b)(6) of section 52 (as determined 
under section 52 of this appendix), and each equity exposure to an 
investment fund (as determined under section 54 of this appendix); and
    (2) The greater of:
    (i) The estimate of potential losses on the [bank]'s equity 
exposures (other than equity exposures referenced in paragraph (d)(1) of 
this section) generated by the [bank]'s internal equity exposure model 
multiplied by 12.5; or
    (ii) The sum of:
    (A) 200 percent multiplied by the aggregate adjusted carrying value 
of the [bank]'s publicly traded equity exposures that do not belong to a 
hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent 
risk weight under paragraphs (b)(1) through (b)(3)(i) of section 52 of 
this appendix, and are not equity exposures to an investment fund; and
    (B) 200 percent multiplied by the aggregate ineffective portion of 
all hedge pairs.

            Section 54. Equity Exposures to Investment Funds

    (a) Available approaches. (1) Unless the exposure meets the 
requirements for a community development equity exposure in paragraph 
(b)(3)(i) of section 52 of this appendix, a [bank] must determine the 
risk-weighted asset amount of an equity exposure to an investment fund 
under the Full Look-Through Approach in paragraph (b) of this section, 
the Simple Modified Look-Through Approach in paragraph (c) of this 
section, the Alternative Modified Look-Through Approach in paragraph (d) 
of this section, or, if the investment fund qualifies for the Money 
Market Fund Approach, the Money Market Fund Approach in paragraph (e) of 
this section.
    (2) The risk-weighted asset amount of an equity exposure to an 
investment fund that meets the requirements for a community development 
equity exposure in paragraph (b)(3)(i) of section 52 of this appendix is 
its adjusted carrying value.
    (3) If an equity exposure to an investment fund is part of a hedge 
pair and the [bank] does not use the Full Look-Through Approach, the 
[bank] may use the ineffective portion of the hedge pair as determined 
under paragraph (c) of section 52 of this appendix as the adjusted 
carrying value for the equity exposure to the investment fund. The risk-
weighted asset amount of the effective portion of the hedge pair is 
equal to its adjusted carrying value.
    (b) Full Look-Through Approach. A [bank] that is able to calculate a 
risk-weighted asset amount for its proportional ownership share of each 
exposure held by the investment fund (as calculated under this appendix 
as if the proportional ownership share of each exposure were held 
directly by the [bank]) may either:
    (1) Set the risk-weighted asset amount of the [bank]'s exposure to 
the fund equal to the product of:
    (i) The aggregate risk-weighted asset amounts of the exposures held 
by the fund as if they were held directly by the [bank]; and
    (ii) The [bank]'s proportional ownership share of the fund; or
    (2) Include the [bank]'s proportional ownership share of each 
exposure held by the fund in the [bank]'s IMA.
    (c) Simple Modified Look-Through Approach. Under this approach, the 
risk-weighted asset amount for a [bank]'s equity exposure to an 
investment fund equals the adjusted carrying value of the equity 
exposure multiplied by the highest risk weight in Table 10 that applies 
to any exposure the fund is permitted to hold under its prospectus, 
partnership agreement, or similar contract that defines the fund's 
permissible investments (excluding derivative contracts that are used 
for hedging rather than speculative purposes

[[Page 100]]

and that do not constitute a material portion of the fund's exposures).

   Table 10.--Modified Look-Through Approaches for Equity Exposures to
                            Investment Funds
------------------------------------------------------------------------
               Risk weight                         Exposure class
------------------------------------------------------------------------
0 percent................................  Sovereign exposures with a
                                            long-term applicable
                                            external rating in the
                                            highest investment-grade
                                            rating category and
                                            sovereign exposures of the
                                            United States.
20 percent...............................  Non-sovereign exposures with
                                            a long-term applicable
                                            external rating in the
                                            highest or second-highest
                                            investment-grade rating
                                            category; exposures with a
                                            short-term applicable
                                            external rating in the
                                            highest investment-grade
                                            rating category; and
                                            exposures to, or guaranteed
                                            by, depository institutions,
                                            foreign banks (as defined in
                                            12 CFR 211.2), or securities
                                            firms subject to
                                            consolidated supervision and
                                            regulation comparable to
                                            that imposed on U.S.
                                            securities broker-dealers
                                            that are repo-style
                                            transactions or bankers'
                                            acceptances.
50 percent...............................  Exposures with a long-term
                                            applicable external rating
                                            in the third-highest
                                            investment-grade rating
                                            category or a short-term
                                            applicable external rating
                                            in the second-highest
                                            investment-grade rating
                                            category.
100 percent..............................  Exposures with a long-term or
                                            short-term applicable
                                            external rating in the
                                            lowest investment-grade
                                            rating category.
200 percent..............................  Exposures with a long-term
                                            applicable external rating
                                            one rating category below
                                            investment grade.
300 percent..............................  Publicly traded equity
                                            exposures.
400 percent..............................  Non-publicly traded equity
                                            exposures; exposures with a
                                            long-term applicable
                                            external rating two rating
                                            categories or more below
                                            investment grade; and
                                            exposures without an
                                            external rating (excluding
                                            publicly traded equity
                                            exposures).
1,250 percent............................  OTC derivative contracts and
                                            exposures that must be
                                            deducted from regulatory
                                            capital or receive a risk
                                            weight greater than 400
                                            percent under this appendix.
------------------------------------------------------------------------

    (d) Alternative Modified Look-Through Approach. Under this approach, 
a [bank] may assign the adjusted carrying value of an equity exposure to 
an investment fund on a pro rata basis to different risk weight 
categories in Table 10 based on the investment limits in the fund's 
prospectus, partnership agreement, or similar contract that defines the 
fund's permissible investments. The risk-weighted asset amount for the 
[bank]'s equity exposure to the investment fund equals the sum of each 
portion of the adjusted carrying value assigned to an exposure class 
multiplied by the applicable risk weight. If the sum of the investment 
limits for exposure classes within the fund exceeds 100 percent, the 
[bank] must assume that the fund invests to the maximum extent permitted 
under its investment limits in the exposure class with the highest risk 
weight under Table 10, and continues to make investments in order of the 
exposure class with the next highest risk weight under Table 10 until 
the maximum total investment level is reached. If more than one exposure 
class applies to an exposure, the [bank] must use the highest applicable 
risk weight. A [bank] may exclude derivative contracts held by the fund 
that are used for hedging rather than for speculative purposes and do 
not constitute a material portion of the fund's exposures.
    (e) Money Market Fund Approach. The risk-weighted asset amount for a 
[bank]'s equity exposure to an investment fund that is a money market 
fund subject to 17 CFR 270.2a-7 and that has an applicable external 
rating in the highest investment-grade rating category equals the 
adjusted carrying value of the equity exposure multiplied by 7 percent.

                 Section 55. Equity Derivative Contracts

    Under the IMA, in addition to holding risk-based capital against an 
equity derivative contract under this part, a [bank] must hold risk-
based capital against the counterparty credit risk in the equity 
derivative contract by also treating the equity derivative contract as a 
wholesale exposure and computing a supplemental risk-weighted asset 
amount for the contract under part IV. Under the SRWA, a [bank] may 
choose not to hold risk-based capital against the counterparty credit 
risk of equity derivative contracts, as long as it does so for all such 
contracts. Where the equity derivative contracts are subject to a 
qualified master netting agreement, a [bank] using the SRWA must either 
include all or exclude all of the contracts from any measure used to 
determine counterparty credit risk exposure.

           Part VII. Risk-Weighted Assets for Operational Risk

Section 61. Qualification Requirements for Incorporation of Operational 
                             Risk Mitigants

    (a) Qualification to use operational risk mitigants. A [bank] may 
adjust its estimate of operational risk exposure to reflect qualifying 
operational risk mitigants if:
    (1) The [bank]'s operational risk quantification system is able to 
generate an estimate of the [bank]'s operational risk exposure (which 
does not incorporate qualifying

[[Page 101]]

operational risk mitigants) and an estimate of the [bank]'s operational 
risk exposure adjusted to incorporate qualifying operational risk 
mitigants; and
    (2) The [bank]'s methodology for incorporating the effects of 
insurance, if the [bank] uses insurance as an operational risk mitigant, 
captures through appropriate discounts to the amount of risk mitigation:
    (i) The residual term of the policy, where less than one year;
    (ii) The cancellation terms of the policy, where less than one year;
    (iii) The policy's timeliness of payment;
    (iv) The uncertainty of payment by the provider of the policy; and
    (v) Mismatches in coverage between the policy and the hedged 
operational loss event.
    (b) Qualifying operational risk mitigants. Qualifying operational 
risk mitigants are:
    (1) Insurance that:
    (i) Is provided by an unaffiliated company that has a claims payment 
ability that is rated in one of the three highest rating categories by a 
NRSRO;
    (ii) Has an initial term of at least one year and a residual term of 
more than 90 days;
    (iii) Has a minimum notice period for cancellation by the provider 
of 90 days;
    (iv) Has no exclusions or limitations based upon regulatory action 
or for the receiver or liquidator of a failed depository institution; 
and
    (v) Is explicitly mapped to a potential operational loss event; and
    (2) Operational risk mitigants other than insurance for which the 
[AGENCY] has given prior written approval. In evaluating an operational 
risk mitigant other than insurance, the [AGENCY] will consider whether 
the operational risk mitigant covers potential operational losses in a 
manner equivalent to holding regulatory capital.

        Section 62. Mechanics of Risk-Weighted Asset Calculation

    (a) If a [bank] does not qualify to use or does not have qualifying 
operational risk mitigants, the [bank]'s dollar risk-based capital 
requirement for operational risk is its operational risk exposure minus 
eligible operational risk offsets (if any).
    (b) If a [bank] qualifies to use operational risk mitigants and has 
qualifying operational risk mitigants, the [bank]'s dollar risk-based 
capital requirement for operational risk is the greater of:
    (1) The [bank]'s operational risk exposure adjusted for qualifying 
operational risk mitigants minus eligible operational risk offsets (if 
any); or
    (2) 0.8 multiplied by the difference between:
    (i) The [bank]'s operational risk exposure; and
    (ii) Eligible operational risk offsets (if any).
    (c) The [bank]'s risk-weighted asset amount for operational risk 
equals the [bank]'s dollar risk-based capital requirement for 
operational risk determined under paragraph (a) or (b) of this section 
multiplied by 12.5.

                          Part VIII. Disclosure

                   Section 71. Disclosure Requirements

    (a) Each [bank] must publicly disclose each quarter its total and 
tier 1 risk-based capital ratios and their components (that is, tier 1 
capital, tier 2 capital, total qualifying capital, and total risk-
weighted assets).\4\
---------------------------------------------------------------------------

    \4\ Other public disclosure requirements continue to apply--for 
example, Federal securities law and regulatory reporting requirements.
---------------------------------------------------------------------------

    [Disclosure paragraph (b)]
    [Disclosure paragraph (c)]

                                * * * * *

    2.At 72 FR 69429 and 69430, Dec. 7, 2007, Part 3 was amended by 
amending Appendix C, effective Apr. 1, 2008. For the convenience of the 
user, the revised text is set forth as follows:



  Sec. Appendix C to Part 3--Capital Adequacy Guidelines for [Banks]: 
       Internal-Ratings-Based and Advanced Measurement Approaches

    a. Remove ``[AGENCY]'' and add ``OCC'' in its place wherever it 
appears.
    b. Remove ``[bank]'' and add ``bank'' in its place wherever it 
appears, remove ``[banks]'' and add ``banks'' in its place wherever it 
appears, remove ``[Banks]'' and add ``Banks'' in its place wherever it 
appears, and remove ``[Bank]'' and add ``Bank'' in its place wherever it 
appears.
    c. Remove ``[Appendix-- to Part --]'' and add ``Appendix C to Part 
3'' in its place wherever it appears.
    d. Remove ``[the general risk-based capital rules]'' and add ``12 
CFR part 3, Appendix A'' in its place wherever it appears.
    e. Remove ``[the market risk rule]'' and add ``12 CFR part 3, 
Appendix B'' in its place wherever it appears.
    f. In section 1, revise paragraph (b)(1)(i), the last sentence in 
paragraph (b)(3), and the last sentence in paragraph (c)(1) to read as 
follows:

    Section 1. Purpose, Applicability, Reservation of Authority, and 
                        Principle of Conservatism

                                * * * * *

    (b) Applicability. (1) * * *

[[Page 102]]

    (i) Has consolidated assets, as reported on the most recent year-end 
Consolidated Report of Condition and Income (Call Report) equal to $250 
billion or more; * * *
    (3) * * * In making a determination under this paragraph, the OCC 
will apply notice and response procedures in the same manner and to the 
same extent as the notice and response procedures in 12 CFR 3.12.
    (c) Reservation of authority--(1) * * * In making a determination 
under this paragraph, the OCC will apply notice and response procedures 
in the same manner and to the same extent as the notice and response 
procedures in 12 CFR 3.12.

                                * * * * *

    g. In section 2, revise the definition of excluded mortgage 
exposure, the definition of gain-on-sale, and paragraph (2)(i) of the 
definition of high volatility commercial real estate (HVCRE) exposure to 
read as follows:

                         Section 2. Definitions

                                * * * * *

    Excluded mortgage exposure means any one- to four-family residential 
pre-sold construction loan for a residence for which the purchase 
contract is cancelled that would receive a 100 percent risk weight under 
section 618(a)(2) of the Resolution Trust Corporation Refinancing, 
Restructuring, and Improvement Act and under and 12 CFR part 3, Appendix 
A, section 3(a)(3)(iii).

                                * * * * *

    Gain-on-sale means an increase in the equity capital (as reported on 
Schedule RC of the Call Report) of a bank that results from a 
securitization (other than an increase in equity capital that results 
from the bank's receipt of cash in connection with the securitization).

                                * * * * *

    High volatility commercial real estate (HVCRE) exposure * * *
    (2) * * *
    (i) The loan-to-value ratio is less than or equal to the applicable 
maximum supervisory loan-to-value ratio in the OCC's real estate lending 
standards at 12 CFR part 34, Subpart D;

                                * * * * *

    h. Revise section 12 to read as follows:

           Section 12. Deductions and Limitations Not Required

    (a) Deduction of CEIOs. A bank is not required to make the 
deductions from capital for CEIOs in 12 CFR part 3, Appendix A, section 
2(c).
    (b) Deduction of certain equity investments. A bank is not required 
to make the deductions from capital for nonfinancial equity investments 
in 12 CFR part 3, Appendix A, section 2(c).

                                * * * * *

    i. Revise the first sentence of paragraph (k)(1)(iv) and paragraph 
(k)(4) of section 42 to read as follows:

 Section 42. Risk-Based Capital Requirement for Securitization Exposures

                                * * * * *

    (k) * * *
    (1) * * *
    (iv) The bank is well capitalized, as defined in the OCC's prompt 
corrective action regulation at 12 CFR part 6. * * *

                                * * * * *

    (4) The risk-based capital ratios of the bank must be calculated 
without regard to the capital treatment for transfers of small-business 
obligations with recourse specified in paragraph (k)(1) of this section 
as provided in 12 CFR part 3, Appendix A.

                                * * * * *

    j. Remove ``[Disclosure paragraph (b)]'' and add in its place ``(b) 
A bank must comply with paragraph (b) of section 71 of appendix G to the 
Federal Reserve Board's Regulation Y (12 CFR part 225, appendix G) 
unless it is a consolidated subsidiary of a bank holding company or 
depository institution that is subject to these requirements.''
    k. Remove ``[Disclosure paragraph (c)].''



PART 4_ORGANIZATION AND FUNCTIONS, AVAILABILITY AND RELEASE OF INFORMATION, CONTRACTING OUTREACH PROGRAM, POST-EMPLOYMENT RESTRICTIONS FOR SENIOR EXAMINERS--Table of Contents




                  Subpart A_Organization and Functions

Sec.
4.1 Purpose.
4.2 Office of the Comptroller of the Currency.
4.3 Comptroller of the Currency.
4.4 Washington office.
4.5 District and field offices.
4.6 Frequency of examination of national banks.

[[Page 103]]

4.7 Frequency of examination of Federal agencies and branches.

 Subpart B_Availability of Information Under the Freedom of Information 
                                   Act

4.11 Purpose and scope.
4.12 Information available under the FOIA.
4.13 Publication in the Federal Register.
4.14 Public inspection and copying.
4.15 Specific requests for records.
4.16 Predisclosure notice for confidential commercial information.
4.17 Fees for services.

             Subpart C_Release of Non-Public OCC Information

4.31 Purpose and scope.
4.32 Definitions.
4.33 Requirements for a request of records or testimony.
4.34 Where to submit a request.
4.35 Consideration of requests.
4.36 Disclosure of non-public OCC information.
4.37 Persons and entities with access to OCC information; prohibition on 
          dissemination.
4.38 Restrictions on dissemination of released information.
4.39 Notification of parties and procedures for sharing and using OCC 
          records in litigation.
4.40 Fees for services.

Appendix A to Subpart C--Model Stipulation for Protective Order and 
          Model Protective Order

  Subpart D_Minority-, Women-, and Individuals With Disabilities-Owned 
    Business Contracting Outreach Program; Contracting for Goods and 
                                Services

4.61 Purpose.
4.62 Definitions.
4.63 Policy.
4.64 Promotion.
4.65 Certification.
4.66 Oversight and monitoring.

Subpart E_One-Year Restrictions on Post-Employment Activities of Senior 
                                Examiners

4.72 Scope and purpose.
4.73 Definitions.
4.74 One-year post-employment restrictions.
4.75 Effective date; waivers.
4.76 Penalties.

    Authority: 12 U.S.C. 93a. Subpart A also issued under 5 U.S.C. 552; 
Subpart B also issued under 5 U.S.C. 552; E.O. 12600 (3 CFR 1987 Comp., 
p. 235). Subpart C also issued under 5 U.S.C. 301, 552; 12 U.S.C. 161, 
481, 482, 484(a), 1442, 1817(a)(3), 1818(u) and (v), 1820(d)(6), 
1820(k), 1821(c), 1821(o), 1821(t), 1831m, 1831p-1, 1831o, 1867, 1951 et 
seq., 2601 et seq., 2801 et seq., 2901 et seq., 3101 et seq., 3401 et 
seq.; 15 U.S.C. 77uu(b), 78q(c)(3); 18 U.S.C. 641, 1905, 1906; 29 U.S.C. 
1204; 31 U.S.C. 9701; 42 U.S.C. 3601; 44 U.S.C. 3506, 3510. Subpart D 
also issued under 12 U.S.C. 1833e.

    Source: 60 FR 57322, Nov. 15, 1995, unless otherwise noted.



                  Subpart A_Organization and Functions



Sec. 4.1  Purpose.

    This subpart describes the organization and functions of the Office 
of the Comptroller of the Currency (OCC), and provides the OCC's 
principal addresses.



Sec. 4.2  Office of the Comptroller of the Currency.

    The OCC supervises and regulates national banks and Federal branches 
and agencies of foreign banks by examining these institutions to 
determine compliance with applicable laws and regulations; approving or 
denying applications for new charters or for changes in corporate or 
banking structure; approving or denying activities; taking supervisory 
or enforcement actions; appointing receivers and conservators; and 
issuing rules and regulations applicable to these institutions, their 
subsidiaries, and affiliates.



Sec. 4.3  Comptroller of the Currency.

    The Comptroller of the Currency (Comptroller), as head of the OCC, 
is responsible for all OCC programs and functions. The Comptroller is 
appointed by the President, by and with the advice and consent of the 
Senate, for a term of five years. The Comptroller serves as a member of 
the board of the Federal Deposit Insurance Corporation, a member of the 
Federal Financial Institutions Examination Council, and a member of the 
board of the Neighborhood Reinvestment Corporation. The Comptroller is 
advised and assisted by OCC staff, who perform the duties and functions 
that the Comptroller directs.



Sec. 4.4  Washington office.

    The Washington office of the OCC is the main office and headquarters 
of the OCC. The Washington office directs OCC policy, oversees OCC 
operations,

[[Page 104]]

and is responsible for the direct supervision of certain national banks, 
including the largest national banks (through its Multinational Banking 
Department) and other national banks requiring special supervision. The 
Washington office is located at 250 E Street, SW, Washington, DC 20219.



Sec. 4.5  District and field offices.

    (a) District offices. Each district office of the OCC is responsible 
for the direct supervision of the national banks and Federal branches 
and agencies of foreign banks in its district, with the exception of the 
national banks supervised by the Washington office. The six district 
offices cover the United States, Puerto Rico, the Virgin Islands, Guam, 
and the Northern Mariana Islands. The office address and the 
geographical composition of each district follows:

------------------------------------------------------------------------
                                                        Geographical
         District               Office address          composition
------------------------------------------------------------------------
Northeastern..............  Office of the          Connecticut,
                             Comptroller of the     Delaware, District
                             Currency, 1114         of Columbia, Maine,
                             Avenue of the          Maryland,
                             Americas, Suite        Massachusetts, New
                             3900, New York, NY     Hampshire, New
                             10036.                 Jersey, New York,
                                                    Pennsylvania, Puerto
                                                    Rico, Rhode Island,
                                                    Vermont, Virgin
                                                    Islands
Southeastern..............  Office of the          Alabama, Florida,
                             Comptroller of the     Georgia,
                             Currency, Marquis      Mississippi, North
                             One Tower, Suite       Carolina, South
                             600, 245 Peachtree     Carolina, Tennessee,
                             Center Ave., NE,       Virginia, West
                             Atlanta, GA 30303.     Virginia
Central...................  Office of the          Illinois, Indiana,
                             Comptroller of the     Kentucky, Michigan,
                             Currency, One          Ohio, Wisconsin
                             Financial Place,
                             Suite 2700, 440
                             South LaSalle
                             Street, Chicago, IL
                             60605.
Midwestern................  Office of the          Iowa, Kansas,
                             Comptroller of the     Minnesota, Missouri,
                             Currency, 2345 Grand   Nebraska, North
                             Ave., Suite 700,       Dakota, South Dakota
                             Kansas City, MO
                             64108.
Southwestern..............  Office of the          Arkansas, Louisiana,
                             Comptroller of the     New Mexico,
                             Currency, 1600         Oklahoma, Texas.
                             Lincoln Plaza, 500
                             N. Akard Street,
                             Dallas, TX 75201.
Western...................  Office of the          Alaska, Arizona,
                             Comptroller of the     California,
                             Currency, 50 Fremont   Colorado, Guam,
                             Street, Suite 3900,    Hawaii, Idaho,
                             San Francisco, CA      Montana, Nevada,
                             94105.                 Northern Mariana
                                                    Islands, Oregon,
                                                    Washington, Wyoming,
                                                    Utah.
------------------------------------------------------------------------

    (b) Field offices and duty stations. Field offices and duty stations 
support the bank supervisory responsibilities of the district offices.



Sec. 4.6  Frequency of examination of national banks.

    (a) General. The OCC examines national banks pursuant to authority 
conferred by 12 U.S.C. 481 and the requirements of 12 U.S.C. 1820(d). 
The OCC is required to conduct a full-scope, on-site examination of 
every national bank at least once during each 12-month period.
    (b) 18-month rule for certain small institutions. The OCC may 
conduct a full-scope, on-site examination of a national bank at least 
once during each 18-month period, rather than each 12-month period as 
provided in paragraph (a) of this section, if the following conditions 
are satisfied:
    (1) The bank has total assets of less than $500 million;
    (2) The bank is well capitalized as defined in part 6 of this 
chapter;
    (3) At the most recent examination, the OCC:
    (i) Assigned the bank a rating of 1 or 2 for management as part of 
the bank's rating under the Uniform Financial Institutions Rating 
System; and
    (ii) Assigned the bank a composite rating of 1 or 2 under the 
Uniform Financial Institutions Rating System;
    (4) The bank currently is not subject to a formal enforcement 
proceeding or order by the FDIC, OCC or the Federal Reserve System; and
    (5) No person acquired control of the bank during the preceding 12-
month period in which a full-scope, on-site examination would have been 
required but for this section.
    (c) Authority to conduct more frequent examinations. This section 
does not

[[Page 105]]

limit the authority of the OCC to examine any national bank as 
frequently as the agency deems necessary.

[63 FR 16380, Apr. 2, 1998, as amended at 72 FR 17802, Apr. 10, 2007]



Sec. 4.7  Frequency of examination of Federal agencies and branches.

    (a) General. The OCC examines Federal agencies and Federal branches 
(as these entities are defined in Sec. 28.11 (h) and (i), respectively, 
of this chapter) pursuant to the authority conferred by 12 U.S.C. 
3105(c)(1)(C). Except as noted in paragraph (b) of this section, the OCC 
will conduct a full-scope, on-site examination of every Federal branch 
and agency at least once during each 12-month period.
    (b) 18-month rule for certain small institutions--(1) Mandatory 
standards. The OCC may conduct a full-scope, on-site examination at 
least once during each 18-month period, rather than each 12-month period 
as provided in paragraph (a) of this section, if the Federal branch or 
agency:
    (i) Has total assets of less than $500 million;
    (ii) Has received a composite ROCA supervisory rating (which rates 
risk management, operational controls, compliance, and asset quality) of 
1 or 2 at its most recent examination;
    (iii) Satisfies the requirements of either the following paragraph 
(b)(1)(iii) (A) or (B):
    (A) The foreign bank's most recently reported capital adequacy 
position consists of, or is equivalent to, Tier 1 and total risk-based 
capital ratios of at least 6 percent and 10 percent, respectively, on a 
consolidated basis; or
    (B) The branch or agency has maintained on a daily basis, over the 
past three quarters, eligible assets in an amount not less than 108 
percent of the preceding quarter's average third party liabilities 
(determined consistent with applicable federal and state law), and 
sufficient liquidity is currently available to meet its obligations to 
third parties;
    (iv) Is not subject to a formal enforcement action or order by the 
Federal Reserve Board, the Federal Deposit Insurance Corporation, or the 
OCC; and
    (v) Has not experienced a change in control during the preceding 12-
month period in which a full-scope, on-site examination would have been 
required but for this section.
    (2) Discretionary standards. In determining whether a Federal branch 
or agency that meets the standards of paragraph (b)(1) of this section 
should not be eligible for an 18-month examination cycle pursuant to 
this paragraph (b), the OCC may consider additional factors, including 
whether:
    (i) Any of the individual components of the ROCA rating of the 
Federal branch or agency is rated ``3'' or worse;
    (ii) The results of any off-site supervision indicate a 
deterioration in the condition of the Federal branch or agency;
    (iii) The size, relative importance, and role of a particular office 
when reviewed in the context of the foreign bank's entire U.S. 
operations otherwise necessitate an annual examination; and
    (iv) The condition of the foreign bank gives rise to such a need.
    (c) Authority to conduct more frequent examinations. Nothing in 
paragraph (a) or (b) of this section limits the authority of the OCC to 
examine any Federal branch or agency as frequently as the OCC deems 
necessary.

[63 FR 46120, Aug. 28, 1998, as amended at 64 FR 56952, Oct. 22, 1999; 
72 FR 17802, Apr. 10, 2007]



 Subpart B_Availability of Information Under the Freedom of Information 
                                   Act



Sec. 4.11  Purpose and scope.

    (a) Purpose. This subpart sets forth the standards, policies, and 
procedures that the OCC applies in administering the Freedom of 
Information Act (FOIA) (5 U.S.C. 552) to facilitate the OCC's 
interaction with the banking industry and the public.
    (b) Scope. (1) This subpart describes the information that the FOIA 
requires the OCC to disclose to the public (Sec. 4.12), and the three 
methods by which the OCC discloses that information under the FOIA 
(Sec. Sec. 4.13, 4.14, and 4.15).
    (2) This subpart also sets forth predisclosure notice procedures 
that

[[Page 106]]

the OCC follows, in accordance with Executive Order 12600 (3 CFR, 1987 
Comp., p. 235), when the OCC receives a request under Sec. 4.15 for 
disclosure of records that arguably are exempt from disclosure as 
confidential commercial information (Sec. 4.16). Finally, this subpart 
describes the fees that the OCC assesses for the services it renders in 
providing information under the FOIA (Sec. 4.17).
    (3) This subpart does not apply to a request for records pursuant to 
the Privacy Act (5 U.S.C. 552a). A person requesting records from the 
OCC pursuant to the Privacy Act should refer to 31 CFR part 1, subpart 
C, and appendix J of subpart C.



Sec. 4.12  Information available under the FOIA.

    (a) General. In accordance with the FOIA, OCC records are available 
to the public, except the exempt records described in paragraph (b) of 
this section.
    (b) Exemptions from availability. The following records, or portions 
thereof, are exempt from disclosure under the FOIA:
    (1) A record that is specifically authorized, under criteria 
established by an Executive order, to be kept secret in the interest of 
national defense or foreign policy, and that is properly classified 
pursuant to that Executive order;
    (2) A record relating solely to the internal personnel rules and 
practices of an agency;
    (3) A record specifically exempted from disclosure by statute (other 
than 5 U.S.C. 552b), provided that the statute requires that the matters 
be withheld from the public in such a manner as to leave no discretion 
on the issue, establishes particular criteria for withholding, or refers 
to particular types of matters to be withheld;
    (4) A record that is privileged or contains trade secrets, or 
commercial or financial information, furnished in confidence, that 
relates to the business, personal, or financial affairs of any person 
(see Sec. 4.16 for notice requirements regarding disclosure of 
confidential commercial information);
    (5) An intra-agency or interagency memorandum or letter not 
routinely available by law to a private party in litigation, including 
memoranda, reports, and other documents prepared by OCC employees, and 
records of deliberations and discussions at meetings of OCC employees;
    (6) A personnel, medical, or similar record, including a financial 
record, or any portion thereof, where disclosure would constitute a 
clearly unwarranted invasion of personal privacy;
    (7) A record or information compiled for law enforcement purposes, 
but only to the extent that the OCC reasonably believes that producing 
the record or information may:
    (i) Interfere with enforcement proceedings;
    (ii) Deprive a person of the right to a fair trial or an impartial 
adjudication;
    (iii) Constitute an unwarranted invasion of personal privacy;
    (iv) Disclose the identity of a confidential source, including a 
State, local, or foreign agency or authority, or any private institution 
that furnished information on a confidential basis;
    (v) Disclose information furnished by a confidential source, in the 
case of a record or information compiled by a criminal law enforcement 
authority in the course of a criminal investigation, or by an agency 
conducting a lawful national security intelligence investigation;
    (vi) Disclose techniques and procedures for law enforcement 
investigations or prosecutions, or disclose guidelines for law 
enforcement investigations or prosecutions if such disclosure reasonably 
could be expected to risk circumvention of the law; or
    (vii) Endanger the life or physical safety of any individual;
    (8) A record contained in or related to an examination, operating, 
or condition report prepared by, on behalf of, or for the use of the OCC 
or any other agency responsible for regulating or supervising financial 
institutions; and
    (9) A record containing or relating to geological and geophysical 
information and data, including maps, concerning wells.
    (c) Discretionary disclosure of exempt records. Even if a record is 
exempt under paragraph (b) of this section, the OCC may elect, on a 
case-by-case basis, not to apply the exemption to the requested record. 
The OCC's election not

[[Page 107]]

to apply an exemption to a requested record has no precedential 
significance as to the application or nonapplication of the exemption to 
any other requested record, regardless of who requests the record or 
when the OCC receives the request. The OCC will provide predisclosure 
notice to submitters of confidential commercial information in 
accordance with Sec. 4.16.
    (d) Segregability. The OCC provides copies of reasonably segregable 
portions of a record to any person properly requesting the record 
pursuant to Sec. 4.15, after redacting any portion that is exempt under 
paragraph (b) of this section.



Sec. 4.13  Publication in the Federal Register.

    The OCC publishes certain documents in the Federal Register for the 
guidance of the public, including the following:
    (a) Proposed and final rules; and
    (b) Certain notices and policy statements of concern to the general 
public.



Sec. 4.14  Public inspection and copying.

    (a) Available information. Subject to the exemptions listed in Sec. 
4.12(b), the OCC makes the following information readily available for 
public inspection and copying:
    (1) Any final order, agreement, or other enforceable document issued 
in the adjudication of an OCC enforcement case, including a final order 
published pursuant to 12 U.S.C. 1818(u);
    (2) Any final opinion issued in the adjudication of an OCC 
enforcement case;
    (3) Any statement of general policy or interpretation of general 
applicability not published in the Federal Register;
    (4) Any administrative staff manual or instruction to staff that may 
affect a member of the public as such;
    (5) A current index identifying the information referred to in 
paragraphs (a)(1) through (a)(4) of this section issued, adopted, or 
promulgated after July 4, 1967;
    (6) A list of available OCC publications;
    (7) A list of forms available from the OCC, and specific forms and 
instructions; \1\
---------------------------------------------------------------------------

    \1\ Some forms and instructions that national banks use, such as the 
Consolidated Report of Condition and Income (FFIEC 031-034), are not 
available from the OCC. The OCC will provide information on where 
persons may obtain these forms and instructions upon request.
---------------------------------------------------------------------------

    (8) Any public Community Reinvestment Act performance evaluation;
    (9) Any public securities-related filing required under part 11 or 
16 of this chapter;
    (10) Any public comment letter regarding a proposed rule; and
    (11) The public file (as defined in 12 CFR 5.9) with respect to a 
pending application described in part 5 of this chapter.
    (b) Redaction of identifying details. To the extent necessary to 
prevent an invasion of personal privacy, the OCC may redact identifying 
details from any information described in paragraph (a) of this section 
before making the information available for public inspection and 
copying.
    (c) Addresses. The information described in paragraphs (a)(1) 
through (a)(10) of this section is available from the Disclosure 
Officer, Communications Division, Office of the Comptroller of the 
Currency, 250 E Street, SW, Washington, DC 20219. The information 
described in paragraph (a)(11) of this section is available from the 
Licensing Manager at the appropriate district office at the address 
listed in Sec. 4.5(a), or in the case of banks supervised by the 
Multinational Banking Department, from the Licensing Manager, 
Multinational Banking, Office of the Comptroller of the Currency, 250 E 
Street, SW, Washington, DC 20219.



Sec. 4.15  Specific requests for records.

    (a) Available information. Subject to the exemptions described in 
Sec. 4.12(b), any OCC record is available to any person upon specific 
request in accordance with this section.
    (b) Where to submit request or appeal--(1) General. Except as 
provided in paragraph (b)(2) of this section, a person requesting a 
record or filing an administrative appeal under this section must submit 
the request or appeal to the

[[Page 108]]

Disclosure Officer, Communications Division, Office of the Comptroller 
of the Currency, 250 E Street, SW, Washington, DC 20219.
    (2) Exceptions--(i) Records at the Federal Deposit Insurance 
Corporation. A person requesting any of the following records, other 
than blank forms (see Sec. 4.14(a)(7)), must submit the request to the 
Disclosure Group, Federal Deposit Insurance Corporation, 550-17th 
Street, NW, Washington, DC 20429, (800) 945-2186:
    (A) Consolidated Report of Condition and Income (FFIEC 031, 032, 
033, 034);
    (B) Annual Report of Trust Assets (FFIEC 001);
    (C) Uniform Bank Performance Report; and
    (D) Special Report.
    (ii) Records of another agency. When the OCC receives a request for 
records in its possession that another Federal agency either generated 
or provided to the OCC, the OCC promptly informs the requester and 
immediately forwards the request to that agency for processing in 
accordance with that agency's regulations.
    (c) Request for records--(1) Content of request for records. A 
person requesting records under this section must state, in writing:
    (i) The requester's full name, address, and telephone number;
    (ii) A reasonable description of the records sought (including 
sufficient detail to enable OCC employees who are familiar with the 
subject matter of the request to locate the records with a reasonable 
amount of effort);
    (iii) A statement agreeing to pay all fees that the OCC assesses 
under Sec. 4.17;
    (iv) A description of how the requester intends to use the records, 
if a requester seeks placement in a lower fee category (i.e., a fee 
category other than ``commercial use requester'') under Sec. 4.17; and
    (v) Whether the requester prefers the OCC to deliver a copy of the 
records or to allow the requester to inspect the records at the 
appropriate OCC office.
    (2) Initial determination. The OCC's Director of Communications or 
that person's delegate initially determines whether to grant a request 
for OCC records.
    (3) If request is granted. If the OCC grants a request for records, 
in whole or in part, the OCC promptly discloses the records in one of 
two ways, depending on the requester's stated preference:
    (i) The OCC may deliver a copy of the records to the requester. If 
the OCC delivers a copy of the records to the requester, the OCC 
duplicates the records at reasonable and proper times that do not 
interfere with their use by the OCC or preclude other persons from 
making inspections; or
    (ii) The OCC may allow the requester to inspect the records at 
reasonable and proper times that do not interfere with their use by the 
OCC or preclude other persons from making inspections. If the OCC allows 
the requester to inspect the records, the OCC may place a reasonable 
limit on the number of records that a person may inspect during a day.
    (4) If request is denied. If the OCC denies a request for records, 
in whole or in part, the OCC notifies the requester by mail. The 
notification is dated and contains a brief statement of the reasons for 
the denial, sets forth the name and title or position of the official 
making the decision, and advises the requester of the right to an 
administrative appeal in accordance with paragraph (d) of this section.
    (d) Administrative appeal of a denial--(1) Procedure. A requester 
must submit an administrative appeal of denial of a request for records 
in writing within 35 days of the date of the initial determination. The 
appeal must include the circumstances and arguments supporting 
disclosure of the requested records.
    (2) Appellate determination. The Comptroller or the Comptroller's 
delegate determines whether to grant an appeal of a denial of a request 
for OCC records.
    (3) If appeal is granted. If the OCC grants an appeal, in whole or 
in part, the OCC treats the request as if it were originally granted, in 
whole or in part, by the OCC in accordance with paragraph (c)(3) of this 
section.
    (4) If appeal is denied. If the OCC denies an appeal, in whole or in 
part, the OCC notifies the requester by mail. The notification contains 
a brief statement of the reasons for the denial, sets forth

[[Page 109]]

the name and title or position of the official making the decision, and 
advises the requester of the right to judicial review of the denial 
under 5 U.S.C. 552(a)(4)(B).
    (e) Judicial review--(1) General. If the OCC denies an appeal 
pursuant to paragraph (d) of this section, or if the OCC fails to make a 
determination within the time limits specified in paragraph (f) of this 
section, the requester may commence an action to compel disclosure of 
records, pursuant to 5 U.S.C. 552(a)(4)(B), in the United States 
district court in:
    (i) The district where the requester resides;
    (ii) The district where the requester's principal place of business 
is located;
    (iii) The district where the records are located; or
    (iv) The District of Columbia.
    (2) Service of process. In commencing an action described in 
paragraph (e)(1) of this section, the requester, in addition to 
complying with the Federal Rules of Civil Procedure (28 U.S.C. appendix) 
for service upon the United States or agencies thereof, must serve 
process on the Chief Counsel or the Chief Counsel's delegate at the 
following location: Office of the Comptroller of the Currency, 250 E 
Street, SW, Washington, DC 20219.
    (f) Time limits--(1) Request. The OCC makes an initial determination 
to grant or deny a request for records within 10 business days after the 
date of receipt of the request, as described in paragraph (g) of this 
section, except as stated in paragraph (f)(3) of this section.
    (2) Appeal. The OCC makes a determination to grant or deny an 
administrative appeal within 20 business days after the date of receipt 
of the appeal, as described in paragraph (g) of this section, except as 
stated in paragraph (f)(3) of this section.
    (3) Extension of time. The time limits set forth in paragraphs 
(f)(1) and (2) of this section may be extended as follows:
    (i) In unusual circumstances. The OCC may extend the time limits in 
unusual circumstances for a maximum of 10 business days. If the OCC 
extends the time limits, the OCC provides written notice to the person 
making the request or appeal, containing the reason for the extension 
and the date on which the OCC expects to make a determination. Unusual 
circumstances exist when the OCC requires additional time to:
    (A) Search for and collect the requested records from field 
facilities or other buildings that are separate from the office 
processing the request or appeal;
    (B) Search for, collect, and appropriately examine a voluminous 
amount of requested records;
    (C) Consult with another agency that has a substantial interest in 
the determination of the request; or
    (D) Allow two or more components of the OCC that have substantial 
interest in the determination of the request to consult with each other;
    (ii) By agreement. A requester may agree to extend the time limits 
for any amount of time; or
    (iii) By judicial action. If a requester commences an action 
pursuant to paragraph (e) of this section for failure to comply with the 
time limits set forth in this paragraph (f), a court with jurisdiction 
may, pursuant to 5 U.S.C. 552(a)(6)(C), allow the OCC additional time to 
complete the review of the records requested.
    (g) Date of receipt of request or appeal. The date of receipt of a 
request for records or an appeal is the date that OCC Communications 
Division receives a request that satisfies the requirements of paragraph 
(c)(1) or (d)(1) of this section, except as provided in Sec. 4.17(d).



Sec. 4.16  Predisclosure notice for confidential commercial information.

    (a) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Confidential commercial information means records that arguably 
contain material exempt from release under Exemption 4 of the FOIA (5 
U.S.C. 552(b)(4); Sec. 4.12(b)(4)), because disclosure reasonably could 
cause substantial competitive harm to the submitter.
    (2) Submitter means any person or entity that provides confidential 
commercial information to the OCC. This term includes corporations, 
State governments, foreign governments, and

[[Page 110]]

banks and their employees, officers, directors, and principal 
shareholders.
    (b) Notice to submitter--(1) When provided. In accordance with 
Executive Order 12600 (3 CFR, 1987 Comp., p. 235), when the OCC receives 
a request under Sec. 4.15(c) or, where appropriate, an appeal under 
Sec. 4.15(d) for disclosure of confidential commercial information, the 
OCC provides a submitter with prompt written notice of the receipt of 
that request (except as provided in paragraph (b)(2) of this section) in 
the following circumstances:
    (i) With respect to confidential commercial information submitted to 
the OCC prior to January 1, 1988, if:
    (A) The records are less than 10 years old and the submitter 
designated the information as confidential commercial information;
    (B) The OCC reasonably believes that disclosure of the information 
may cause substantial competitive harm to the submitter; or
    (C) The information is subject to a prior express OCC commitment of 
confidentiality; and
    (ii) With respect to confidential commercial information submitted 
to the OCC on or after January 1, 1988, if:
    (A) The submitter in good faith designated the information as 
confidential commercial information;
    (B) The OCC designated the class of information to which the 
requested information belongs as confidential commercial information; or
    (C) The OCC reasonably believes that disclosure of the information 
may cause substantial competitive harm to the submitter.
    (2) Exceptions. The OCC generally does not provide notice under 
paragraph (b)(1) of this section if the OCC determines that:
    (i) It will not disclose the information;
    (ii) The information already has been disclosed officially to the 
public;
    (iii) The OCC is required by law (other than 5 U.S.C. 552) to 
disclose the information;
    (iv) The OCC acquired the information in the course of a lawful 
investigation of a possible violation of criminal law;
    (v) The submitter had an opportunity to designate the requested 
information as confidential commercial information at the time of 
submission of the information or a reasonable time thereafter and did 
not do so, unless the OCC has substantial reason to believe that 
disclosure of the information would result in competitive harm; or
    (vi) The OCC determines that the submitter's designation under 
paragraph (b)(1)(ii)(A) of this section is frivolous; in such case, 
however, the OCC will provide the submitter with written notice of any 
final administrative determination to disclose the information at least 
10 business days prior to the date that the OCC intends to disclose the 
information.
    (3) Content of notice. The OCC either describes in the notice the 
exact nature of the confidential commercial information requested or 
includes with the notice copies of the records or portions of records 
containing that information.
    (4) Expiration of notice period. The OCC provides notice under this 
paragraph (b) with respect to information that the submitter designated 
under paragraph (b)(1)(ii)(A) of this section only for a period of 10 
years after the date of the submitter's designation, unless the 
submitter requests and justifies to the OCC's satisfaction a specific 
notice period of greater duration.
    (5) Certification of confidentiality. If possible, the submitter 
should support the claim of confidentiality with a statement or 
certification that the requested information is confidential commercial 
information that the submitter has not disclosed to the public. This 
statement should be prepared by an officer or authorized representative 
if the submitter is a corporation or other entity.
    (c) Notice to requester. If the OCC provides notice to a submitter 
under paragraph (b) of this section, the OCC notifies the person 
requesting confidential commercial information (requester) that it has 
provided notice to the submitter. The OCC also advises the requester 
that if there is a delay in its decision whether to grant or deny access 
to the information sought, the delay may be considered a denial of 
access to the information, and that the requester may proceed with an 
administrative appeal or seek judicial review. However, the requester 
may agree to a

[[Page 111]]

voluntary extension of time to allow the OCC to review the submitter's 
objection to disclosure (see Sec. 4.15(f)(3)(ii)).
    (d) Opportunity to object to disclosure. Within 10 days after 
receiving notice under paragraph (b) of this section, the submitter may 
provide the OCC with a detailed statement of objection to disclosure of 
the information. That statement must specify the grounds for withholding 
any of the information under any exemption of the FOIA. Any statement 
that the submitter provides under this paragraph (d) may be subject to 
disclosure under the FOIA.
    (e) Notice of intent to disclose. The OCC considers carefully a 
submitter's objection and specific grounds for nondisclosure prior to 
determining whether to disclose the requested information. If the OCC 
decides to disclose information over the objection of the submitter, the 
OCC provides to the submitter, with a copy to the requester, a written 
notice that includes:
    (1) A statement of the OCC's reasons for not sustaining the 
submitter's objections to disclosure;
    (2) A description of the information to be disclosed;
    (3) The anticipated disclosure date, which is not less than 10 
business days after the OCC mails the written notice required under this 
paragraph (e); and
    (4) A statement that the submitter must notify the OCC immediately 
if the submitter intends to seek injunctive relief.
    (f) Notice of requester's lawsuit. Whenever the OCC receives service 
of process indicating that a requester has brought suit seeking to 
compel the OCC to disclose information covered by paragraph (b)(1) of 
this section, the OCC promptly notifies the submitter.



Sec. 4.17  Fees for services.

    (a) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Actual costs means those expenditures that the OCC incurs in 
providing services (including searching for, reviewing, and duplicating 
records) in response to a request for records under Sec. 4.15.
    (2) Search means the process of locating a record in response to a 
request, including page-by-page or line-by-line identification of 
material within a record. The OCC may perform a search manually or by 
electronic means.
    (3) Review means the process of examining a record located in 
response to a request to determine which portions of that record should 
be released. It also includes processing a record for disclosure.
    (4) Duplication means the process of copying a record in response to 
a request. A copy may take the form of a paper copy, microform, 
audiovisual materials, or machine readable material (e.g., magnetic tape 
or disk), among others.
    (5) Commercial use requester means a person who seeks records for a 
use or purpose that furthers the commercial, trade, or profit interests 
of the requester or the person on whose behalf the request is made.
    (6) Educational institution requester means a person who seeks 
records on behalf of a public or private educational institution, 
including a preschool, an elementary or secondary school, an institution 
of undergraduate or graduate higher education, an institution of 
professional education, or an institution of vocational education that 
operates a program of scholarly research.
    (7) Noncommercial scientific institution requester means a person 
who is not a ``commercial use requester,'' as that term is defined in 
paragraph (a)(5) of this section, and who seeks records on behalf of an 
institution operated solely for the purpose of conducting scientific 
research, the results of which are not intended to promote any 
particular product or industry.
    (8) Requester who is a representative of the news media means a 
person who seeks records for the purpose of gathering news (i.e., 
information about current events or of current interest to the public) 
on behalf of, or a free-lance journalist who reasonably expects to have 
his or her work product published or broadcast by, an entity organized 
and operated to publish or broadcast news to the public.
    (b) Fees--(1) General. The hourly and per page rate that the OCC 
generally charges requesters is set forth in the ``Notice of Comptroller 
of the Currency Fees'' (Notice) described in 12 CFR 8.8.

[[Page 112]]

Any interested person may request a copy of the Notice from the OCC by 
mail or may obtain a copy at the location described in Sec. 4.14(c). 
The OCC may contract with a commercial service to search for, duplicate, 
or disseminate records, provided that the OCC determines that the fee 
assessed upon a requester is no greater than if the OCC performed the 
tasks itself. The OCC does not contract out responsibilities that the 
FOIA provides that the OCC alone may discharge, such as determining the 
applicability of an exemption or whether to waive or reduce a fee.
    (2) Fee categories. The OCC assesses a fee based on the fee category 
in which the OCC places the requester. If the request states how the 
requester intends to use the requested records (see Sec. 
4.15(c)(1)(iv)), the OCC may place the requester in a lower fee 
category; otherwise, the OCC categorizes the requester as a ``commercial 
use requester.'' If the OCC reasonably doubts the requester's stated 
intended use, or if that use is not clear from the request, the OCC may 
place the requester in the ``commercial use'' category or may seek 
additional clarification. The fee categories are as follows:
    (i) Commercial use requesters. The OCC assesses a fee for a 
requester in this category for the actual cost of search, review, and 
duplication. A requester in this category does not receive any free 
search, review, or duplication services.
    (ii) Educational institution requesters, noncommercial scientific 
institution requesters, and requesters who are representatives of the 
news media. The OCC assesses a fee for a requester in this category for 
the actual cost of duplication. A requester in this category receives 
100 free pages.
    (iii) All other requesters. The OCC assesses a fee for a requester 
who does not fit into either of the above categories for the actual cost 
of search and duplication. A requester in this category receives 100 
free pages and two hours of free search time.
    (3) Special services. The OCC may, in its discretion, accommodate a 
request for special services. The OCC may recover the actual cost of 
providing any special services.
    (4) Waiving or reducing a fee. The OCC may waive or reduce a fee 
under this section whenever, in its opinion, disclosure of records is in 
the public interest because the disclosure:
    (i) Is likely to contribute significantly to public understanding of 
the operations or activities of the government; and
    (ii) Is not primarily in the commercial interest of the requester.
    (5) Fee for unsuccessful search. The OCC may assess a fee for time 
spent searching for records, even if the OCC does not locate the records 
requested.
    (c) Payment of fees--(1) General. The OCC generally assesses a fee 
when it delivers the records in response to the request, if any. A 
requester must send payment within 30 calendar days of the billing date 
to the Communications Division, Office of the Comptroller of the 
Currency, 250 E Street, SW., Washington, DC 20219.
    (2) Fee likely to exceed $25. If the OCC estimates that a fee is 
likely to exceed $25, the OCC notifies the requester of the estimated 
fee, unless the requester has indicated in advance a willingness to pay 
a fee as high as the estimated fee. If so notified by the OCC, the 
requester may confer with OCC employees to revise the request to reflect 
a lower fee.
    (3) Fee likely to exceed $250. If the OCC estimates that a fee is 
likely to exceed $250, the OCC notifies the requester of the estimated 
fee. In this circumstance, the OCC may require, as a condition to 
processing the request, that the requester:
    (i) Provide satisfactory assurance of full payment, if the requester 
has a history of prompt payment; or
    (ii) Pay the estimated fee in full, if the requester does not have a 
history of prompt payment.
    (4) Failure to pay a fee. If the requester fails to pay a fee within 
30 days of the date of the billing, the OCC may require, as a condition 
to processing any further request, that the requester pay any unpaid 
fee, plus interest (as provided in paragraph (c)(5) of this section), 
and any estimated fee in full for that further request.

[[Page 113]]

    (5) Interest on unpaid fee. The OCC may assess interest charges on 
an unpaid fee beginning on the 31st day following the billing date. The 
OCC charges interest at the rate prescribed in 31 U.S.C. 3717.
    (d) Tolling of time limits. Under the circumstances described in 
paragraphs (c) (2), (3), and (4) of this section, the time limits set 
forth in Sec. 4.15(f) (i.e., 10 business days from the receipt of a 
request for records and 20 business days from the receipt of an 
administrative appeal, plus any permissible extension) begin only after 
the OCC receives a revised request under paragraph (c)(2) of this 
section, an assurance of payment under paragraph (c)(3)(i) of this 
section, or the required payments under paragraph (c)(3)(i) or (c)(4) of 
this section.
    (e) Aggregating requests. When the OCC reasonably believes that a 
requester or group of requesters is attempting to break a request into a 
series of requests for the purpose of evading the assessment of a fee, 
the OCC may aggregate the requests and assess a fee accordingly.



             Subpart C_Release of Non-Public OCC Information



Sec. 4.31  Purpose and scope.

    (a) Purpose. The purposes of this subpart are to:
    (1) Afford an orderly mechanism for the OCC to process expeditiously 
requests for non-public OCC information; to address the release of non-
public OCC information without a request; and, when appropriate, for the 
OCC to assert evidentiary privileges in litigation;
    (2) Recognize the public's interest in obtaining access to relevant 
and necessary information and the countervailing public interest of 
maintaining the effectiveness of the OCC supervisory process and 
appropriate confidentiality of OCC supervisory information;
    (3) Ensure that the OCC's information is used in a manner that 
supports the public interest and the interests of the OCC;
    (4) Ensure that OCC resources are used in the most efficient manner 
consistent with the OCC's statutory mission;
    (5) Minimize burden on national banks, the public, and the OCC;
    (6) Limit the expenditure of government resources for private 
purposes; and
    (7) Maintain the OCC's impartiality among private litigants.
    (b) Scope. (1) This subpart applies to requests for, and 
dissemination of, non-public OCC information, including requests for 
records or testimony arising out of civil lawsuits and administrative 
proceedings to which the OCC is not a party and the release of non-
public OCC information without a specific request. Lawsuits and 
administrative proceedings to which the OCC is not a party include 
proceedings in which a Federal agency is a party in opposition to the 
private requester.
    (2) This subpart does not apply to:
    (i) A request for a record or testimony in a proceeding in which the 
OCC is a party; or
    (ii) A request for a record that is required to be disclosed under 
the Freedom of Information Act (FOIA) (5 U.S.C. 552), as described in 
Sec. 4.12.
    (3) A request for a record or testimony made by the Board of 
Governors of the Federal Reserve System, the Federal Deposit Insurance 
Corporation, a government agency of the United States or a foreign 
government, a state agency with authority to investigate violations of 
criminal law, or a state bank regulatory agency is governed solely by 
Sec. 4.37(c).

[60 FR 57322, Nov. 15, 1995, as amended at 63 FR 62929, Nov. 10, 1998; 
64 FR 29216, June 1, 1999]



Sec. 4.32  Definitions.

    (a) Complete request means a request containing sufficient 
information to allow the OCC to make an informed decision.
    (b) Non-public OCC information. Non-public OCC information:
    (1) Means information that the OCC is not required to release under 
the FOIA (5 U.S.C. 552) or that the OCC has not yet published or made 
available pursuant to 12 U.S.C. 1818(u) and includes:
    (i) A record created or obtained by the OCC in connection with the 
OCC's

[[Page 114]]

performance of its responsibilities, such as a record concerning 
supervision, licensing, regulation, and examination of a national bank, 
a bank holding company, or an affiliate;
    (ii) A record compiled by the OCC in connection with the OCC's 
enforcement responsibilities;
    (iii) A report of examination, supervisory correspondence, an 
investigatory file compiled by the OCC in connection with an 
investigation, and any internal agency memorandum, whether the 
information is in the possession of the OCC or some other individual or 
entity;
    (iv) Confidential OCC information obtained by a third party or 
otherwise incorporated in the records of a third party, including 
another government agency;
    (v) Testimony from, or an interview with, a current or former OCC 
employee, officer, or agent concerning information acquired by that 
person in the course of his or her performance of official duties with 
the OCC or due to that person's official status at the OCC;
    (vi) Confidential information relating to operating and no longer 
operating national banks as well as their subsidiaries and their 
affiliates; and
    (vii) A Suspicious Activity Report filed by the OCC, a national 
bank, or a Federal branch or agency of a foreign bank licensed or 
chartered by the OCC under 12 CFR 21.11; and
    (2) Is the property of the Comptroller. A report of examination is 
loaned to the bank or holding company for its confidential use only.
    (c) Relevant means could contribute substantially to the resolution 
of one or more specifically identified issues in the case.
    (d) Show a compelling need means, in support of a request for 
testimony, demonstrate with as much detail as is necessary under the 
circumstances, that the requested information is relevant and that the 
relevant material contained in the testimony is not available from any 
other source. Sources, without limitation, include the books and records 
of other persons or entities and non-public OCC records that have been, 
or might be, released.
    (e) Supervised entity includes a national bank, a subsidiary of a 
national bank, a Federal branch or agency of a foreign bank licensed by 
the OCC as defined under 12 CFR 28.11(h) and (i), or any other entity 
supervised by the OCC.
    (f) Testimony means an interview or sworn testimony on the record.

[60 FR 57322, Nov. 15, 1995, as amended at 63 FR 62929, Nov. 10, 1998; 
64 FR 29216, June 1, 1999]



Sec. 4.33  Requirements for a request of records or testimony.

    (a) Generally--(1) Form of request. A person seeking non-public OCC 
information must submit a request in writing to the OCC. The requester 
must explain, in as detailed a description as is necessary under the 
circumstances, the bases for the request and how the requested non-
public OCC information relates to the issues in the lawsuit or matter.
    (2) Expedited request. A requester seeking a response in less than 
60 days must explain why the request was not submitted earlier and why 
the OCC should expedite the request.
    (3) Request arising from adversarial matters. Where the requested 
information is to be used in connection with an adversarial matter:
    (i) The OCC generally will require that the lawsuit or 
administrative action has been filed before it will consider the 
request;
    (ii) The request must include:
    (A) A copy of the complaint or other pleading setting forth the 
assertions in the case;
    (B) The caption and docket number of the case;
    (C) The name, address, and phone number of counsel to each party in 
the case; and
    (D) A description of any prior judicial decisions or pending motions 
in the case that may bear on the asserted relevance of the requested 
information;
    (iii) The request must also:
    (A) Show that the information is relevant to the purpose for which 
it is sought;
    (B) Show that other evidence reasonably suited to the requester's 
needs is not available from any other source;

[[Page 115]]

    (C) Show that the need for the information outweighs the public 
interest considerations in maintaining the confidentiality of the OCC 
information and outweighs the burden on the OCC to produce the 
information;
    (D) Explain how the issues in the case and the status of the case 
warrant that the OCC allow disclosure; and
    (E) Identify any other issue that may bear on the question of waiver 
of privilege by the OCC.
    (b) Request for records. If the request is for a record, the 
requester must adequately describe the record or records sought by type 
and date.
    (c) Request for testimony--(1) Generally. A requester seeking 
testimony:
    (i) Must show a compelling need for the requested information; and
    (ii) Should request OCC testimony with sufficient time to obtain the 
testimony in deposition form.
    (2) Trial or hearing testimony. A requester seeking testimony at a 
trial or hearing must show that a deposition would not suffice.



Sec. 4.34  Where to submit a request.

    (a) A request for non-public OCC information. A person requesting 
information under this subpart, requesting authentication of a record 
under Sec. 4.39(d), or submitting a notification of the issuance of a 
subpoena or compulsory process under Sec. 4.37, shall send the request 
or notification to: Office of the Comptroller of the Currency, 250 E 
Street, SW, Washington, DC 20219, Attention: Director, Litigation 
Division.
    (b) Combined requests for non-public and other OCC information. A 
person requesting public OCC information and non-public OCC information 
under this subpart may submit a combined request for both to the address 
in paragraph (a) of this section. If a requester decides to submit a 
combined request under this section, the OCC will process the combined 
request under this subpart and not under subpart B of this part (FOIA).
    (c) Request by government agencies. A request made pursuant to Sec. 
4.37(c) must be submitted:
    (1) In a civil action, to the Director of the OCC's Litigation 
Division at the Washington office; or
    (2) In a criminal action, to the appropriate district counsel or the 
Director of the OCC's Enforcement and Compliance Division at the 
Washington office.

[60 FR 57322, Nov. 15, 1995, as amended at 64 FR 29216, June 1, 1999]



Sec. 4.35  Consideration of requests.

    (a) In general--(1) OCC discretion. The OCC decides whether to 
release non-public OCC information based on its weighing of all 
appropriate factors including the requestor's fulfilling of the 
requirements enumerated in Sec. 4.33. Each decision is at the sole 
discretion of the Comptroller or the Comptroller's delegate and is a 
final agency decision. OCC action on a request for non-public OCC 
information exhausts administrative remedies for discovery of the 
information.
    (2) Bases for denial. The OCC may deny a request for non-public OCC 
information for reasons that include the following:
    (i) The requester was unsuccessful in showing that the information 
is relevant to the pending matter;
    (ii) The requester seeks testimony and the requestor did not show a 
compelling need for the information;
    (iii) The request arises from an adversarial matter and other 
evidence reasonably suited to the requester's need is available from 
another source;
    (iv) A lawsuit or administrative action has not yet been filed and 
the request was made in connection with potential litigation; or
    (v) The production of the information would be contrary to the 
public interest or unduly burdensome to the OCC.
    (3) Additional information. A requester must submit a complete 
request. The OCC may require the requester to provide additional 
information to complete a request. Consistent with the purposes stated 
in Sec. 4.31, the OCC may inquire into the circumstances of any case 
underlying the request and rely on sources of information other than the 
requester, including other parties.
    (4) Time required by the OCC to respond. The OCC generally will 
process requests in the order in which they are received. The OCC will 
notify the requester in writing of the final decision. Absent exigent or 
unusual circumstances, the OCC will respond to a

[[Page 116]]

request within 60 days from the date that the OCC receives a request 
that it deems a complete request. Consistent with Sec. 4.33(a)(2), the 
OCC weighs a request to respond to provide information in less than 60 
days against the unfairness to other requesters whose pending requests 
may be delayed and the burden imposed on the OCC by the expedited 
processing.
    (5) Notice to subject national banks. Following receipt of a request 
for non-public OCC information, the OCC generally notifies the national 
bank that is the subject of the requested information, unless the OCC, 
in its discretion, determines that to do so would advantage or prejudice 
any of the parties in the matter at issue.
    (b) Testimony. (1) The OCC generally will not authorize a current 
OCC employee to provide expert or opinion evidence for a private party.
    (2) The OCC may restrict the scope of any authorized testimony and 
may act to ensure that the scope of testimony given by the OCC employee 
adheres to the scope authorized by the OCC.
    (3) Once a request for testimony has been submitted, and before the 
requested testimony occurs, a party to the relevant case, who did not 
join in the request and who wishes to question the witness beyond the 
scope of testimony sought by the request, shall timely submit the 
party's own request for OCC information pursuant to this subpart.
    (4) The OCC may offer the requester the employee's written 
declaration in lieu of testimony.
    (c) Release of non-public OCC information by others. In appropriate 
cases, the OCC may respond to a request for information by authorizing a 
party to the case who is in possession of non-public OCC information to 
release the information to the requester. An OCC authorization to 
release records does not preclude the party in possession from asserting 
its own privilege, arguing that the records are not relevant, or 
asserting any other argument for which it has standing to protect the 
records from release.



Sec. 4.36  Disclosure of non-public OCC information.

    (a) Discretionary disclosure of non-public OCC information. The OCC 
may make non-public OCC information available to a supervised entity and 
to other persons, that in the sole discretion of the Comptroller may be 
necessary or appropriate, without a request for records or testimony.
    (b) OCC policy. It is the OCC's policy regarding non-public OCC 
information that such information is confidential and privileged. 
Accordingly, the OCC will not normally disclose this information to 
third parties.
    (c) Conditions and limitations. The OCC may impose any conditions or 
limitations on disclosures under this section, including the 
restrictions on dissemination contained in Sec. 4.38, that it 
determines are necessary to effect the purposes of this section.
    (d) Unauthorized disclosures prohibited. All non-public OCC 
information remains the property of the OCC. No supervised entity, 
government agency, person, or other party to whom the information is 
made available, or any officer, director, employee, or agent thereof, 
may disclose non-public OCC information without the prior written 
permission of the OCC, except in published statistical material that 
does not disclose, either directly or when used in conjunction with 
other publicly available information, the affairs of any individual, 
corporation, or other entity. Except as authorized by the OCC, no person 
obtaining access to non-public OCC information under this section may 
make a copy of the information and no person may remove non-public OCC 
information from the premises of the institution, agency, or other party 
in authorized possession of the information.

[63 FR 62929, Nov. 10, 1998, as amended at 64 FR 29216, June 1, 1999]



Sec. 4.37  Persons and entities with access to OCC information; prohibition on dissemination.

    (a) Current and former OCC employees or agents--(1) Generally. 
Except as authorized by this subpart or otherwise by the OCC, no current 
or former OCC employee or agent may, in any manner, disclose or permit 
the disclosure of

[[Page 117]]

any non-public OCC information to anyone other than an employee or agent 
of the Comptroller for use in the performance of OCC duties.
    (2) Duty of person served. Any current or former OCC employee or 
agent subpoenaed or otherwise requested to provide information covered 
by this subpart must immediately notify the OCC as provided in this 
paragraph. The OCC may intervene, attempt to have the compulsory process 
withdrawn, and register appropriate objections when a current or former 
OCC employee or agent receives a subpoena and the subpoena requires the 
current or former employee or agent to appear or produce OCC 
information. If necessary, the current or former employee or agent must 
appear as required and respectfully decline to produce the information 
sought, citing this subpart as authority and United States ex rel. Touhy 
v. Ragen, 340 U.S. 462 (1951). The current or former OCC employee or 
agent must immediately notify the OCC if subpoenaed or otherwise asked 
for non-public OCC information:
    (i) In a civil action, by notifying the Director of the OCC's 
Litigation Division at the Washington office; or
    (ii) In a criminal action, by notifying the appropriate district 
counsel for current and former district employees or agents; or the 
Director of the OCC's Enforcement and Compliance Division at the 
Washington office, for current and former Washington employees or 
agents.
    (b) Non-OCC employees or entities--(1) Generally. (i) Without OCC 
approval, no person, national bank, or other entity, including one in 
lawful possession of non-public OCC information under paragraph (b)(2) 
of this section, may disclose information covered by this subpart in any 
manner, except:
    (A) After the requester has sought the information from the OCC 
pursuant to the procedures set forth in this subpart; and
    (B) As ordered by a Federal court in a judicial proceeding in which 
the OCC has had the opportunity to appear and oppose discovery.
    (ii) Any person who discloses or uses non-public OCC information 
except as expressly permitted by the Comptroller of the Currency or as 
ordered by a Federal court, under paragraph (b)(1)(i) of this section, 
may be subject to the penalties provided in 18 U.S.C. 641.
    (2) Exception for national banks. When necessary or appropriate for 
bank business purposes, a national bank or holding company, or any 
director, officer, or employee thereof, may disclose non-public OCC 
information, including information contained in, or related to, OCC 
reports of examination, to a person or organization officially connected 
with the bank as officer, director, employee, attorney, auditor, or 
independent auditor. A national bank or holding company or a director, 
officer, or employee thereof may also release non-public OCC information 
to a consultant under this paragraph if the consultant is under a 
written contract to provide services to the bank and the consultant has 
a written agreement with the bank in which the consultant:
    (i) States its awareness of, and agreement to abide by, the 
prohibition on the dissemination of non-public OCC information contained 
in paragraph (b)(1) of this section; and
    (ii) Agrees not to use the non-public OCC information for any 
purpose other than as provided under its contract to provide services to 
the bank.
    (3) Duty of person or entity served. Any person, national bank, or 
other entity served with a request, subpoena, order, motion to compel, 
or other judicial or administrative process to provide non-public OCC 
information shall:
    (i) Immediately notify the Director of the OCC's Litigation Division 
at the Washington, DC office and inform the Director of all relevant 
facts, including the documents and information requested, so that the 
OCC may intervene in the judicial or administrative action if 
appropriate;
    (ii) Inform the requester of the substance of these rules and, in 
particular, of the obligation to follow the request procedures in 
Sec. Sec. 4.33 and 4.34; and
    (iii) At the appropriate time, inform the court or tribunal that 
issued the process of the substance of these rules.
    (4) Actions of the OCC following notice of service. Following 
receipt of notice pursuant to paragraph (b)(3) of this section, the OCC 
may direct the requester to comply with Sec. Sec. 4.33 and 4.34, 
intervene in the judicial or administrative

[[Page 118]]

action, attempt to have the compulsory process withdrawn, or register 
other appropriate objections.
    (5) Return of records. The OCC may require any person in possession 
of OCC records to return the records to the OCC.
    (c) Disclosure to government agencies. When not prohibited by law, 
the Comptroller may make available to the Board of Governors of the 
Federal Reserve System, the Federal Deposit Insurance Corporation, and, 
in the Comptroller's sole discretion, to certain other government 
agencies of the United States and foreign governments, state agencies 
with authority to investigate violations of criminal law, and state bank 
regulatory agencies, a copy of a report of examination, testimony, or 
other non-public OCC information for their use, when necessary, in the 
performance of their official duties. All non-public OCC information 
made available pursuant to this paragraph is OCC property, and the OCC 
may condition its use on appropriate confidentiality protections, 
including the mechanisms identified in Sec. 4.37.
    (d) Intention of OCC not to waive rights. The possession by any of 
the entities or individuals described in paragraphs (a), (b), and (c) of 
this section of non-public OCC information does not constitute a waiver 
by the OCC of its right to control, or impose limitations on, the 
subsequent use and dissemination of the information.

[60 FR 57322, Nov. 15, 1995. Redesignated and amended at 63 FR 62929, 
Nov. 10, 1998; 64 FR 29217, June 1, 1999]



Sec. 4.38  Restrictions on dissemination of released information.

    (a) Records. The OCC may condition a decision to release non-public 
OCC information on entry of a protective order by the court or 
administrative tribunal presiding in the particular case or, in non-
adversarial matters, on a written agreement of confidentiality. In a 
case in which a protective order has already been entered, the OCC may 
condition approval for release of non-public OCC information upon the 
inclusion of additional or amended provisions in the protective order. 
The OCC may authorize a party who obtained records for use in one case 
to provide them to another party in another case.
    (b) Testimony. The OCC may condition its authorization of deposition 
testimony on an agreement of the parties to appropriate limitations, 
such as an agreement to keep the transcript of the testimony under seal 
or to make the transcript available only to the parties, the court, and 
the jury. Upon request or on its own initiative, the OCC may allow use 
of a transcript in other litigation. The OCC may require the requester, 
at the requester's expense, to furnish the OCC with a copy of the 
transcript. The OCC employee whose deposition was transcribed does not 
waive his or her right to review the transcript and to note errors.

[60 FR 57322, Nov. 15, 1995. Redesignated at 63 FR 62929, Nov. 10, 1998]



Sec. 4.39  Notification of parties and procedures for sharing and using OCC records in litigation.

    (a) Responsibility of litigants to notify parties of a request for 
testimony. Upon submitting a request to the OCC for the testimony of an 
OCC employee or former employee, the requester shall notify all other 
parties to the case that a request has been submitted.
    (b) Responsibility of litigants to share released records. The 
requester shall promptly notify other parties to a case of the release 
of non-public OCC information obtained pursuant to this subpart, and, 
upon entry of a protective order, shall provide copies of OCC 
information, including OCC information obtained pursuant to Sec. 4.15, 
to the other parties.
    (c) Retrieval and destruction of released records. At the conclusion 
of an action:
    (1) The requester shall retrieve any non-public OCC information from 
the court's file as soon as the court no longer requires the 
information;
    (2) Each party shall destroy the non-public OCC information covered 
by the protective order; and
    (3) Each party shall certify to the OCC that the non-public OCC 
information covered by the protective order has been destroyed.
    (d) Authentication for use as evidence. Upon request, the OCC 
authenticates released records to facilitate their use as evidence. 
Requesters who require

[[Page 119]]

authenticated records or certificates of nonexistence of records should, 
as early as possible, request certificates from the OCC's Litigation 
Division pursuant to Sec. 4.34(a).

[60 FR 57322, Nov. 15, 1995. Redesignated at 63 FR 62929, Nov. 10, 1998]



Sec. 4.40  Fees for services.

    (a) Fees for records search, copying, and certification. The 
requester shall pay a fee to the OCC, or to a commercial copier under 
contract to the OCC, for any records search, copying, or certification 
in accordance with the standards specified in Sec. 4.17. The OCC may 
require a requester to remit payment prior to providing the requested 
information.
    (b) Witness fees and mileage. A person whose request for testimony 
of a current OCC employee is approved shall, upon completion of the 
testimonial appearance, tender promptly to the OCC payment for the 
witness fees and mileage. The litigant shall compute these amounts in 
accordance with 28 U.S.C. 1821. A litigant whose request for testimony 
of a former OCC employee is approved shall tender promptly to the 
witness any witness fees or mileage due in accordance with 28 U.S.C. 
1821.

[60 FR 57322, Nov. 15, 1995. Redesignated at 63 FR 62929, Nov. 10, 1998]



Sec. Appendix A to Subpart C of Part 4--Model Stipulation for Protective 
                    Order and Model Protective Order

                          I. Model Stipulation

                              CASE CAPTION

                 Model Stipulation for Protective Order

    Whereas, counsel for ------------ have applied to the Comptroller of 
the Currency (hereinafter ``Comptroller'') pursuant to 12 CFR Part 4, 
Subpart C, for permission to have made available, in connection with the 
captioned action, certain records; and
    Whereas, such records are deemed by the Comptroller to be 
confidential and privileged, pursuant to 12 U.S.C. 481; 5 U.S.C. 
552(b)(8); 18 U.S.C. 641, 1906; and 12 CFR 4.12, and Part 4, Subpart C; 
and
    Whereas, following consideration by the Comptroller of the 
application of the above described party, the Comptroller has determined 
that the particular circumstances of the captioned action warrant making 
certain possibly relevant records as denoted in Appendix ``A'' to this 
Stipulation [records to be specified by type and date] available to the 
parties in this action, provided that appropriate protection of their 
confidentiality can be secured;
    Therefore, it is hereby stipulated by and between the parties 
hereto, through their respective attorneys that they will be bound by 
the following protective order which may be entered by the Court without 
further notice.
    Dated this ------------ day of --------------, 19----.

________________________________________________________________________
Attorney for Plaintiff

________________________________________________________________________
Attorney for Defendant

                       II. Model Protective Order

                              CASE CAPTION

                         Model Protective Order

    Whereas, counsel for ------------ have applied to the Comptroller of 
the Currency (hereinafter Comptroller'') pursuant to 12 CFR Part 4, 
Subpart C, for permission to have made available, in connection with the 
captioned action, certain records; and
    Whereas, such records are deemed by the Comptroller to be 
confidential and privileged, pursuant to 12 U.S.C. 481; 5 U.S.C. 
552(b)(8); 18 U.S.C. 641, 1906; and 12 CFR 4.12, and Part 4, Subpart C;
    Whereas, following consideration by the Comptroller of the 
application of the above described party, the Comptroller has determined 
that the particular circumstances of the captioned action warrant making 
certain possibly relevant records available to the parties in this 
action, provided that appropriate protection of their confidentiality 
can be secured;
    Now, Therefore, it is Ordered That:
    1. The records, as denoted in Appendix ``A'' to the Stipulation for 
this Protective Order, upon being furnished [or released for use] by the 
Comptroller, shall be disclosed only to the parties to this action, 
their counsel, and the court [and the jury].
    2. The parties to this action and their counsel shall keep such 
records and any information contained in such records confidential and 
shall in no way divulge the same to any person or entity, except to such 
experts, consultants and non-party witnesses to whom the records and 
their contents shall be disclosed, solely for the purpose of properly 
preparing for and trying the action.
    3. No person to whom information and records covered by this Order 
are disclosed shall make any copies or otherwise use such information or 
records or their contents for any purpose whatsoever, except in 
connection with this action.

[[Page 120]]

    4. Any party or other person who wishes to use the information or 
records or their contents in any other action shall make a separate 
application to the Comptroller pursuant to 12 CFR Part 4, Subpart C.
    5. Should any records covered by this Order be filed with the Court 
or utilized as exhibits at depositions in the captioned action, or 
should information or records or their contents covered by this Order be 
disclosed in the transcripts of depositions or the trial in the 
captioned action, such records, exhibits and transcripts shall be filed 
in sealed envelopes or other sealed containers marked with the title of 
this action, identifying each document and article therein and bearing a 
statement substantially in the following form:

                              CONFIDENTIAL

    Pursuant to the Order of the Court dated ------------ this envelope 
containing the above-identified papers filed by (the name of the party) 
is not to be opened nor the contents thereof displayed or revealed 
except to the parties to this action or their counsel or by further 
Order of the Court.
    6. FOR JURY TRIAL: Any party offering any of the records into 
evidence shall offer only those pages, or portions thereof, that are 
relevant and material to the issues to be decided in the action and 
shall block out any portion of any page that contains information not 
relevant or material. Furthermore, the name of any person or entity 
contained on any page of the records who is not a party to this action, 
or whose name is not otherwise relevant or material to the action, shall 
be blocked out prior to the admission of such page into evidence. Any 
disagreement regarding what portion of any page that should be blocked 
out in this manner shall be resolved by the Court in camera, and the 
Court shall decide its admissibility into evidence.
    7. At the conclusion of this action, all parties shall certify to 
the Comptroller that the records covered by this Order have been 
destroyed. Furthermore, counsel for ------------, pursuant to 12 CFR 
4.39(c), shall retrieve any records covered by this Order that may have 
been filed with the Court.

    So Ordered:

________________________________________________________________________
Judge

    Date

[60 FR 57322, Nov. 15, 1995, as amended at 64 FR 29217, June 1, 1999]



 Subpart D_Minority- , Women- , and Individuals With Disabilities-Owned 
    Business Contracting Outreach Program; Contracting for Goods and 
                                Services



Sec. 4.61  Purpose.

    Pursuant to the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989, Sec. 1216(c), Pub. L. 101-73, 103 Stat. 183, 
529 (12 U.S.C. 1833e(c)) and consistent with the Rehabilitation Act of 
1973, as amended (29 U.S.C. 701 et seq.), this subpart establishes the 
OCC Minority- , Women- , and Individuals with Disabilities-Owned 
Business Contracting Outreach Program (Outreach Program). The Outreach 
Program is intended to ensure that firms owned and operated by 
minorities, women, and individuals with disabilities have the 
opportunity to participate, to the maximum extent possible, in all 
contracting activities of the OCC.



Sec. 4.62  Definitions.

    (a) Minority- and/or women-owned (small and large) businesses and 
entities owned by minorities and women (MWOB) means firms at least 51 
percent unconditionally-owned by one or more members of a minority group 
or by one or more women who are citizens of the United States. In the 
case of publicly-owned companies, at least 51 percent of each class of 
voting stock must be unconditionally-owned by one or more members of a 
minority group or by one or more women who are citizens of the United 
States. In the case of a partnership, at least 51 percent of the 
partnership interest must be unconditionally-owned by one or more 
members of a minority group or by one or more women who are citizens of 
the United States. Additionally, for the foregoing cases, the management 
and daily business operations must be controlled by one or more such 
individuals.
    (b) Minority means any African American, Native American (i.e., 
American Indian, Eskimo, Aleut and Native Hawaiian), Hispanic American, 
Asian-Pacific American, or Subcontinent-Asian American.

[[Page 121]]

    (c) Individual with disabilities-owned (small and large) businesses 
and entities owned by individuals with disabilities (IDOB) means firms 
at least 51 percent unconditionally-owned by one or more members who are 
individuals with disabilities and citizens of the United States. In the 
case of publicly-owned companies, at least 51 percent of each class of 
voting stock must be unconditionally-owned by one or more members who 
are individuals with disabilities and who are citizens of the United 
States. In the case of a partnership, at least 51 percent of the 
partnership interest must be unconditionally-owned by one or more 
members who are individuals with disabilities and citizens of the United 
States. Additionally, for the foregoing cases, the management and daily 
business operations must be controlled by one or more such individuals.
    (d) Individual with disabilities means any person who has a physical 
or mental impairment that substantially limits one or more of such 
person's major life activities, has a record of such an impairment, or 
is regarded as having such an impairment. For purposes of this part, it 
does not include an individual who is currently engaging in the illegal 
use of drugs nor an individual who has a currently contagious disease or 
infection and who, by reason of such disease or infection, would 
constitute a direct threat to the health or safety of other individuals 
or who, by reason of the currently contagious disease or infection, is 
unable to perform the duties of the job as defined by the IDOB.
    (e) Unconditional ownership means ownership that is not subject to 
conditions or similar arrangements which cause the benefits of the 
Outreach Program to accrue to persons other than the participating MWOB 
or IDOB.



Sec. 4.63  Policy.

    The OCC's policy is to ensure that MWOBs and IDOBs have the 
opportunity to participate, to the maximum extent possible, in contracts 
awarded by the OCC. The OCC awards contracts consistent with the 
principles of full and open competition and best value acquisition, and 
with the concept of contracting for agency needs at the lowest 
practicable cost. The OCC ensures that MWOBs and IDOBs have the 
opportunity to participate fully in all contracting activities that the 
OCC enters into for goods and services, whether generated by the 
headquarters office in Washington, DC, or any other office of the OCC. 
Contracting opportunities may include small purchase awards, contracts 
above the small purchase threshold, and delivery orders issued against 
other governmental agency contracts.



Sec. 4.64  Promotion.

    (a) Scope. The OCC, under the direction of the Deputy Comptroller 
for Resource Management, engages in promotion and outreach activities 
designed to identify MWOBs and IDOBs capable of providing goods and 
services needed by the OCC, to facilitate interaction between the OCC 
and the MWOBs and IDOBs community, and to indicate the OCC's commitment 
to doing business with that community. The Outreach Program is designed 
to facilitate OCC's participation in business promotion events sponsored 
by other government agencies and attended by minorities, women and 
individuals with disabilities. Once the OCC has identified a prospective 
participant, it will assist the minority- or women-owned business or 
individual with disabilities-owned business in understanding the OCC's 
needs and contracting process.
    (b) Outreach activities. OCC's Outreach Program includes the 
following:
    (1) Obtaining various lists and directories of MWOBs and IDOBs 
maintained by government agencies;
    (2) Contacting appropriate firms for participation in the OCC's 
Outreach Program;
    (3) Participating in business promotion events comprised of or 
attended by MWOBs and IDOBs to explain OCC contracting opportunities and 
to obtain names of potential MWOBs and IDOBs;
    (4) Ensuring that the OCC contracting staff understands and actively 
promotes this Outreach Program; and
    (5) Registering MWOBs and IDOBs in the Department of the Treasury's 
database to facilitate their participation in the competitive 
procurement process for OCC contracts. This database is

[[Page 122]]

used by OCC procurement staff to identify firms to be solicited for OCC 
procurements.



Sec. 4.65  Certification.

    (a) Objective. To preserve the integrity and foster the Outreach 
Program's objectives, each prospective MWOB or IDOB must demonstrate 
that it meets the ownership and control requirements for participation 
in the Outreach Program.
    (b) MWOB. A prospective MWOB may demonstrate its eligibility for 
participation in the Outreach Program by:
    (1) Submitting a valid MWOB certification received from another 
government agency whose definition of MWOB is substantially similar to 
that specified in Sec. 4.62(a);
    (2) Self-certifying MWOB ownership status by filing with the OCC a 
completed and signed certification form as prescribed by the Federal 
Acquisition Regulation, 48 CFR 53.301-129; or
    (3) Submitting a valid MWOB certification received from the Small 
Business Administration.
    (c) IDOB. A prospective IDOB may demonstrate its eligibility for 
participation in the Outreach Program by:
    (1) Submitting a valid IDOB certification received from another 
government agency whose definition of IDOB is substantially similar to 
that specified in Sec. 4.62(c); or
    (2) Self-certifying IDOB ownership status by filing with the OCC a 
completed and signed certification as prescribed in the Federal 
Acquisition Regulation, 48 CFR 53.301-129, and adding an additional 
certifying statement to read as follows:

    I certify that I am an individual with disabilities as defined in 12 
CFR 4.62(d), and that my firm, (Name of Firm) qualifies as an individual 
with disabilities-owned business as defined in 12 CFR 4.62(c).



Sec. 4.66  Oversight and monitoring.

    The Deputy Comptroller for Resource Management shall appoint an 
Outreach Program Manager, who shall appoint an Outreach Program 
Specialist. The Outreach Program Manager is primarily responsible for 
program advocacy, oversight and monitoring.



Subpart E_One-Year Restrictions on Post-Employment Activities of Senior 
                                Examiners

    Source: 70 FR 69637, Nov. 17, 2005, unless otherwise noted.



Sec. 4.72  Scope and purpose.

    This subpart describes those OCC examiners who are subject to the 
post-employment restrictions set forth in section 10(k) of the Federal 
Deposit Insurance Act (FDI Act) (12 U.S.C. 1820(k)) and implements those 
restrictions for officers and employees of the OCC.



Sec. 4.73  Definitions.

    For purposes of this subpart:
    Bank holding company means any company that controls a bank (as 
provided in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 
1841 et seq.)).
    Consultant. For purposes of this subpart, a consultant for a 
national bank, bank holding company, or other company shall include only 
an individual who works directly on matters for, or on behalf of, such 
bank, bank holding company, or other company.
    Control has the meaning given in section 2 of the Bank Holding 
Company Act (12 U.S.C. 1841(a)). For purposes of this subpart, a foreign 
bank shall be deemed to control any branch or agency of the foreign 
bank.
    Depository institution has the meaning given in section 3 of the FDI 
Act (12 U.S.C. 1813(c)). For purposes of this subpart, a depository 
institution includes an uninsured branch or agency of a foreign bank, if 
such branch or agency is located in any State.
    Federal Reserve means the Board of Governors of the Federal Reserve 
System and the Federal Reserve Banks.
    Foreign bank means any foreign bank or company described in section 
8(a) of the International Banking Act of 1978 (12 U.S.C. 3106(a)).
    Insured depository institution has the meaning given in section 3 of 
the FDI Act (12 U.S.C. 1813(c)(2)).
    National bank means a national banking association or a Federal 
branch or agency of a foreign bank.

[[Page 123]]

    Senior examiner. For purposes of this subpart, an officer or 
employee of the OCC is considered to be the ``senior examiner'' for a 
particular national bank if--
    (1) The officer or employee has been authorized by the OCC to 
conduct examinations on behalf of the OCC;
    (2) The officer or employee has been assigned continuing, broad, and 
lead responsibility for examining the national bank; and
    (3) The officer's or employee's responsibilities for examining the 
national bank--
    (i) Represent a substantial portion of the officer's or employee's 
assigned responsibilities; and
    (ii) Require the officer or employee to interact routinely with 
officers or employees of the national bank or its affiliates.



Sec. 4.74  One-year post-employment restrictions.

    An officer or employee of the OCC who serves as the senior examiner 
of a national bank for two or more months during the last twelve months 
of such individual's employment with the OCC may not, within one year 
after leaving the employment of the OCC, knowingly accept compensation 
as an employee, officer, director or consultant from the national bank, 
or any company (including a bank holding company) that controls the 
national bank.



Sec. 4.75  Effective date; waivers.

    The post-employment restrictions set forth in section 10(k) of the 
FDI Act and Sec. 4.74 do not apply to any officer or employee of the 
OCC, or any former officer or employee of the OCC, if--
    (a) The individual ceased to be an officer or employee of the OCC 
before December 17, 2005; or
    (b) The Comptroller of the Currency certifies, in writing and on a 
case-by-case basis, that granting the individual a waiver of the 
restrictions would not affect the integrity of the OCC's supervisory 
program.



Sec. 4.76  Penalties.

    (a) Penalties under section 10(k) of FDI Act. If a senior examiner 
of a national bank, after leaving the employment of the OCC, accepts 
compensation as an employee, officer, director, or consultant from that 
bank, or any company (including a bank holding company) that controls 
that bank, then the examiner shall, in accordance with section 10(k)(6) 
of the FDI Act, be subject to one of the following penalties--
    (1) An order--
    (i) Removing the individual from office or prohibiting the 
individual from further participation in the affairs of the relevant 
national bank, bank holding company, or other company that controls such 
institution for a period of up to five years; and
    (ii) Prohibiting the individual from participating in the affairs of 
any insured depository institution for a period of up to five years; or
    (2) A civil monetary penalty of not more than $250,000.
    (b) Enforcement by appropriate Federal banking agency. Violations of 
Sec. 4.74 shall be administered or enforced by the appropriate Federal 
banking agency for the depository institution or depository institution 
holding company that provided compensation to the former senior 
examiner. For purposes of this paragraph, the appropriate Federal 
banking agency for a company that is not a depository institution or 
depository institution holding company shall be the Federal banking 
agency that formerly employed the senior examiner.
    (c) Scope of prohibition orders. Any senior examiner who is subject 
to an order issued under paragraph (a) of this section shall, as 
required by 12 U.S.C. 1820(k)(6)(B), be subject to paragraphs (6) and 
(7) of section 8(e) of the FDI Act (12 U.S.C. 1818(e)(6)-(7)) in the 
same manner and to the same extent as a person subject to an order 
issued under section 8(e).
    (d) Procedures. The procedures applicable to actions under paragraph 
(a) of this section are provided in section 10(k)(6) of the FDI Act (12 
U.S.C. 1820(k)(6)) and in 12 CFR part 19.
    (e) Remedies not exclusive. The OCC may seek both of the penalties 
described in paragraph (a) of this section. In addition, a senior 
examiner who accepts compensation as described in Sec. 4.74 may be 
subject to other administrative, civil or criminal remedies or penalties 
as provided in law.

[[Page 124]]



PART 5_RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES--Table of Contents




Sec.
5.1 Scope.

                Subpart A_Rules of General Applicability

5.2 Rules of general applicability.
5.3 Definitions.
5.4 Filing required.
5.5 Fees.
5.6 [Reserved]
5.7 Investigations.
5.8 Public notice.
5.9 Public availability.
5.10 Comments.
5.11 Hearings and other meetings.
5.12 Computation of time.
5.13 Decisions.

                      Subpart B_Initial Activities

5.20 Organizing a bank.
5.24 Conversion.
5.26 Fiduciary powers.

                    Subpart C_Expansion of Activities

5.30 Establishment, acquisition, and relocation of a branch.
5.32 Expedited procedures for certain reorganizations.
5.33 Business combinations.
5.34 Operating subsidiaries.
5.35 Bank service companies.
5.36 Other equity investments.
5.37 Investment in bank premises.
5.39 Financial subsidiaries.

          Subpart D_Other Changes in Activities and Operations

5.40 Change in location of main office.
5.42 Corporate title.
5.46 Changes in permanent capital.
5.47 Subordinated debt as capital.
5.48 Voluntary liquidation.
5.50 Change in bank control; reporting of stock loans.
5.51 Changes in directors and senior executive officers.
5.52 Change of address.
5.53 Change in asset composition.

                     Subpart E_Payment of Dividends

5.60 Authority, scope, and exceptions to rules of general applicability.
5.61 Definitions.
5.62 Date of declaration of dividend.
5.63 Capital limitation under 12 U.S.C. 56.
5.64 Earnings limitation under 12 U.S.C. 60.
5.65 Restrictions on undercapitalized institutions.
5.66 Dividends payable in property other than cash.
5.67 Fractional shares.

                 Subpart F_Federal Branches and Agencies

5.70 Federal branches and agencies.

    Authority: 12 U.S.C. 1 et seq., 93a, 215a-2, 215a-3, 481, and 
section 5136A of the Revised Statutes (12 U.S.C. 24a).

    Source: 61 FR 60363, Nov. 27, 1996, unless otherwise noted.



Sec. 5.1  Scope.

    This part establishes rules, policies and procedures of the Office 
of the Comptroller of the Currency (OCC) for corporate activities and 
transactions involving national banks. It contains information on rules 
of general and specific applicability, where and how to file, and 
requirements and policies applicable to filings. This part also 
establishes the corporate filing procedures for Federal branches and 
agencies of foreign banks.



                Subpart A_Rules of General Applicability



Sec. 5.2  Rules of general applicability.

    (a) General. The rules in this subpart apply to all sections in this 
part unless otherwise stated.
    (b) Exceptions. The OCC may adopt materially different procedures 
for a particular filing, or class of filings, in exceptional 
circumstances or for unusual transactions, after providing notice of the 
change to the applicant and to any other party that the OCC determines 
should receive notice.
    (c) Additional information. The ``Comptroller's Licensing Manual'' 
(Manual) provides additional guidance, including policies, procedures, 
and sample forms. The Manual is available on the OCC's Internet Web page 
at http://www.occ.treas.gov. Printed copies are available for a fee from 
Publications, Communications Division, Comptroller of the Currency, 250 
E Street, SW., Washington, DC 20219-0001.
    (d) Electronic filing. The OCC may permit electronic filing for any 
class of filings. The Manual identifies filings that may be made 
electronically and

[[Page 125]]

describes the procedures that the OCC requires in those cases.

[61 FR 60363, Nov. 27, 1996, as amended at 68 FR 17892, Apr. 14, 2003]



Sec. 5.3  Definitions.

    (a) Applicant means a person or entity that submits a notice or 
application to the OCC under this part.
    (b) Application means a submission requesting OCC approval to engage 
in various corporate activities and transactions.
    (c) Appropriate district office means:
    (1) The Licensing Department for all national bank subsidiaries of 
those holding companies assigned to the Washington, DC, licensing unit;
    (2) The appropriate OCC district office for all national bank 
subsidiaries of certain holding companies assigned to a district office 
licensing unit;
    (3) The OCC's district office where the national bank's supervisory 
office is located for all other banks; or
    (4) The licensing unit in the Northeastern District Office for 
Federal branches and agencies of foreign banks.
    (d) Capital and surplus means:
    (1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's 
risk-based capital standards set forth in Appendix A to 12 CFR part 3 as 
reported in the bank's Consolidated Report of Condition and Income filed 
under 12 U.S.C. 161; plus
    (2) The balance of a bank's allowance for loan and lease losses not 
included in the bank's Tier 2 capital, for purposes of the calculation 
of risk-based capital described in paragraph (d)(1) of this section, as 
reported in the bank's Consolidated Report of Condition and Income filed 
under 12 U.S.C. 161.
    (e) Central city means the city or cities identified as central 
cities by the Director of the Office of Management and Budget.
    (f) Depository institution means any bank or savings association.
    (g) Eligible bank means a national bank that:
    (1) Is well capitalized as defined in 12 CFR 6.4(b)(1);
    (2) Has a composite rating of 1 or 2 under the Uniform Financial 
Institutions Rating System (CAMELS);
    (3) Has a Community Reinvestment Act (CRA), 12 U.S.C. 2901 et seq., 
rating of ``Outstanding'' or ``Satisfactory''; and
    (4) Is not subject to a cease and desist order, consent order, 
formal written agreement, or Prompt Corrective Action directive (see 12 
CFR part 6, subpart B) or, if subject to any such order, agreement, or 
directive, is informed in writing by the OCC that the bank may be 
treated as an ``eligible bank'' for purposes of this part.
    (h) Eligible depository institution means a state bank or a Federal 
or state savings association that meets the criteria for an ``eligible 
bank'' under Sec. 5.3(g) and is FDIC-insured.
    (i) Filing means an application or notice submitted to the OCC under 
this part.
    (j) National bank means any national banking association and any 
bank or trust company located in the District of Columbia operating 
under the OCC's supervision.
    (k) Notice means a submission notifying the OCC that a national bank 
intends to engage in or has commenced certain corporate activities or 
transactions.
    (l) Short-distance relocation means moving the premises of a branch 
or main office within a:
    (1) One thousand foot-radius of the site if the branch is located 
within a central city of an MSA;
    (2) One-mile radius of the site if the branch is not located within 
a central city, but is located within an MSA; or
    (3) Two-mile radius of the site if the branch is not located within 
an MSA.

[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999; 68 
FR 70698, Dec. 19, 2003]



Sec. 5.4  Filing required.

    (a) Filing. A depository institution shall file an application or 
notice with the OCC to engage in corporate activities and transactions 
as described in this part.
    (b) Availability of forms. Individual sample forms and instructions 
for filings are available in the Manual and from each district office.
    (c) Other applications accepted. At the request of the applicant, 
the OCC may accept an application form or other filing submitted to 
another Federal agency that covers the proposed action or

[[Page 126]]

transaction and contains substantially the same information as required 
by the OCC. The OCC may also require the applicant to submit 
supplemental information.
    (d) Where to file. An applicant should address a filing or other 
submission under this part to the attention of the Licensing Manager at 
the appropriate district office. However, the OCC may advise an 
applicant through a pre-filing communication to send the filing or 
submission directly to the Bank Organization and Structure Department or 
elsewhere as otherwise directed by the OCC. Relevant addresses are 
listed in the Manual.
    (e) Incorporation of other material. An applicant may incorporate 
any material contained in any other application or filing filed with the 
OCC or other Federal agency by reference, provided that the material is 
attached to the application and is current and responsive to the 
information requested by the OCC. The filing must clearly indicate that 
the information is so incorporated and include a cross-reference to the 
information incorporated.



Sec. 5.5  Fees.

    An applicant shall submit the appropriate filing fee, if any, in 
connection with its filing. An applicant shall pay the fee by check 
payable to the Comptroller of the Currency or by other means acceptable 
to the OCC. The OCC publishes a fee schedule annually in the ``Notice of 
Comptroller of the Currency fees,'' described in 12 CFR 8.8. The OCC 
generally does not refund the filing fees.



Sec. 5.6  [Reserved]



Sec. 5.7  Investigations.

    (a) Authority. The OCC may examine or investigate and evaluate facts 
related to a filing to the extent necessary to reach an informed 
decision.
    (b) Fees. The OCC may assess fees for investigations or examinations 
conducted under paragraph (a) of this section. The OCC publishes the 
rates, described in 12 CFR 8.6, annually in the ``Notice of Comptroller 
of the Currency fees.''



Sec. 5.8  Public notice.

    (a) General. An applicant shall publish a public notice of its 
filing in a newspaper of general circulation in the community in which 
the applicant proposes to engage in business, on the date of filing, or 
as soon as practicable before or after the date of filing.
    (b) Contents of the public notice. The public notice shall state 
that a filing is being made, the date of the filing, the name of the 
applicant, the subject matter of the filing, that the public may submit 
comments to the OCC, the address of the appropriate office(s) where 
comments should be sent, the closing date of the public comment period, 
and any other information that the OCC requires.
    (c) Confirmation of public notice. The applicant shall mail or 
otherwise deliver a statement containing the date of publication, the 
name and address of the newspaper that published the public notice, a 
copy of the public notice, and any other information that the OCC 
requires, to the appropriate district office promptly following 
publication.
    (d) Multiple transactions. The OCC may consider more than one 
transaction, or a series of transactions, to be a single filing for 
purposes of the publication requirements of this section. When filing a 
single public notice for multiple transactions, the applicant shall 
explain in the notice how the transactions are related.
    (e) Joint public notices accepted. Upon the request of an applicant 
for a transaction subject to the OCC's public notice requirements and 
public notice required by another Federal agency, the OCC may accept 
publication of a single joint notice containing the information required 
by both the OCC and the other Federal agency, provided that the notice 
states that comments must be submitted to both the OCC and, if 
applicable, the other Federal agency.
    (f) Public notice by the OCC. In addition to the foregoing, the OCC 
may require or give public notice and request comment on any filing and 
in any manner the OCC determines appropriate for the particular filing.

[[Page 127]]



Sec. 5.9  Public availability.

    (a) General. The OCC provides a copy of the public file to any 
person who requests it. A requestor should submit a request for the 
public file concerning a pending application to the appropriate district 
office. A requestor should submit a request for the public file 
concerning a decided or closed application to the Disclosure Officer, 
Communications Division, at the address listed in the Manual. Requests 
should be in writing. The OCC may impose a fee in accordance with 12 CFR 
4.17 and with the rates the OCC publishes annually in the ``Notice of 
Comptroller of the Currency Fees'' described in 12 CFR 8.8.
    (b) Public file. A public file consists of the portions of the 
filing, supporting data, supplementary information, and information 
submitted by interested persons, to the extent that those documents have 
not been afforded confidential treatment. Applicants and other 
interested persons may request that confidential treatment be afforded 
information submitted to the OCC pursuant to paragraph (c) of this 
section.
    (c) Confidential treatment. The applicant or an interested person 
submitting information may request that specific information be treated 
as confidential under the Freedom of Information Act, 5 U.S.C. 552 (see 
12 CFR 4.12(b)). A submitter should draft its request for confidential 
treatment narrowly to extend only to those portions of a document it 
considers to be confidential. If a submitter requests confidential 
treatment for information that the OCC does not consider to be 
confidential, the OCC may include that information in the public file 
after providing notice to the submitter. Moreover, at its own 
initiative, the OCC may determine that certain information should be 
treated as confidential and withhold that information from the public 
file. A person requesting information withheld from the public file 
should submit the request to the Disclosure Officer, Communications 
Division, under the procedures described in 12 CFR part 4, subpart B. 
That request may be subject to the predisclosure notice procedures of 12 
CFR 4.16.



Sec. 5.10  Comments.

    (a) Submission of comments. During the comment period, any person 
may submit written comments on a filing to the appropriate district 
office.
    (b) Comment period--(1) General. Unless otherwise stated, the 
comment period is 30 days after publication of the public notice 
required by Sec. 5.8(a).
    (2) Extension. The OCC may extend the comment period if:
    (i) The applicant fails to file all required publicly available 
information on a timely basis to permit review by interested persons or 
makes a request for confidential treatment not granted by the OCC that 
delays the public availability of that information;
    (ii) Any person requesting an extension of time satisfactorily 
demonstrates to the OCC that additional time is necessary to develop 
factual information that the OCC determines is necessary to consider the 
application; or
    (iii) The OCC determines that other extenuating circumstances exist.
    (3) Applicant response. The OCC may give the applicant an 
opportunity to respond to comments received.



Sec. 5.11  Hearings and other meetings.

    (a) Hearing requests. Prior to the end of the comment period, any 
person may submit to the appropriate district office a written request 
for a hearing on a filing. The request must describe the nature of the 
issues or facts to be presented and the reasons why written submissions 
would be insufficient to make an adequate presentation of those issues 
or facts to the OCC. A person requesting a hearing shall simultaneously 
submit a copy of the request to the applicant.
    (b) Action on a hearing request. The OCC may grant or deny a request 
for a hearing and may limit the issues to those it deems relevant or 
material. The OCC generally grants a hearing request only if the OCC 
determines that written submissions would be insufficient or that a 
hearing would otherwise benefit the decisionmaking process. The OCC also 
may order a hearing if it concludes that a hearing would be in the 
public interest.
    (c) Denial of a hearing request. If the OCC denies a hearing 
request, it shall

[[Page 128]]

notify the person requesting the hearing of the reason for the denial.
    (d) OCC procedures prior to the hearing--(1) Notice of Hearing. The 
OCC issues a Notice of Hearing if it grants a request for a hearing or 
orders a hearing because it is in the public interest. The OCC sends a 
copy of the Notice of Hearing to the applicant, to the person requesting 
the hearing, and anyone else requesting a copy. The Notice of Hearing 
states the subject and date of the filing, the time and place of the 
hearing, and the issues to be addressed.
    (2) Presiding officer. The OCC appoints a presiding officer to 
conduct the hearing. The presiding officer is responsible for all 
procedural questions not governed by this section.
    (e) Participation in the hearing. Any person who wishes to appear 
(participant) shall notify the appropriate district office of his or her 
intent to participate in the hearing within ten days from the date the 
OCC issues the Notice of Hearing. At least five days before the hearing, 
each participant shall submit to the appropriate district office, the 
applicant, and any other person the OCC requires, the names of 
witnesses, and one copy of each exhibit the participant intends to 
present.
    (f) Transcripts. The OCC arranges for a hearing transcript. The 
person requesting the hearing generally bears the cost of one copy of 
the transcript for his or her use.
    (g) Conduct of the hearing--(1) Presentations. Subject to the 
rulings of the presiding officer, the applicant and participants may 
make opening statements and present witnesses, material, and data.
    (2) Information submitted. A person presenting documentary material 
shall furnish one copy to the OCC, and one copy to the applicant and 
each participant.
    (3) Laws not applicable to hearings. The Administrative Procedure 
Act (5 U.S.C. 551 et seq.), the Federal Rules of Evidence (28 U.S.C. 
Appendix), the Federal Rules of Civil Procedure (28 U.S.C. Rule 1 et 
seq.), and the OCC's Rules of Practice and Procedure (12 CFR part 19) do 
not apply to hearings under this section.
    (h) Closing the hearing record. At the applicant's or participant's 
request, the OCC may keep the hearing record open for up to 14 days 
following the OCC's receipt of the transcript. The OCC resumes 
processing the filing after the record closes.
    (i) Other meetings--(1) Public meetings. The OCC may arrange for a 
public meeting in connection with an application, either upon receipt of 
a written request for such a meeting which is made during the comment 
period, or upon the OCC's own initiative. Public meetings will be 
arranged and presided over by a presiding officer.
    (2) Private meetings. The OCC may arrange a meeting with an 
applicant or other interested parties to an application, or with an 
applicant and other interested parties to an application, to clarify and 
narrow the issues and to facilitate the resolution of the issues.

[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999]



Sec. 5.12  Computation of time.

    In computing the period of days, the OCC includes the day of the act 
(e.g., the date an application is received by the OCC) from which the 
period begins to run and the last day of the period, regardless of 
whether it is a Saturday, Sunday, or legal holiday.



Sec. 5.13  Decisions.

    (a) General. The OCC may approve, conditionally approve, or deny a 
filing after appropriate review and consideration of the record. In 
deciding an application under this part, the OCC may consider the 
activities, resources, or condition of an affiliate of the applicant 
that may reasonably reflect on or affect the applicant.
    (1) Conditional approval. The OCC may impose conditions on any 
approval, including to address a significant supervisory, CRA (if 
applicable), or compliance concern, if the OCC determines that the 
conditions are necessary or appropriate to ensure that approval is 
consistent with relevant statutory and regulatory standards and OCC 
policies thereunder and safe and sound banking practices.
    (2) Expedited review. The OCC grants eligible banks expedited review 
within a specified time after filing or commencement of the public 
comment period, including any extension of the

[[Page 129]]

comment period granted pursuant to Sec. 5.10, as described in 
applicable sections of this part.
    (i) The OCC may extend the expedited review process for a filing 
subject to the CRA up to an additional 10 days if a comment contains 
specific assertions concerning a bank's CRA performance that, if true, 
would indicate a reasonable possibility that:
    (A) A bank's CRA rating would be less than satisfactory, 
institution-wide, or, where applicable, in a state or multistate MSA; or
    (B) A bank's CRA performance would be less than satisfactory in an 
MSA, or in the non-MSA portion of a state, in which it seeks to expand 
through approval of an application for a deposit facility as defined in 
12 U.S.C. 2902(3).
    (ii) The OCC will remove a filing from expedited review procedures, 
if the OCC concludes that the filing, or an adverse comment regarding 
the filing, presents a significant supervisory, CRA (if applicable), or 
compliance concern, or raises a significant legal or policy issue, 
requiring additional OCC review. The OCC will provide the applicant with 
a written explanation if it decides not to process an application from 
an eligible bank under expedited review pursuant to this paragraph 
(a)(2)(ii). For purposes of this section, a significant CRA concern 
exists if the OCC concludes that:
    (A) A bank's CRA rating is less than satisfactory, institution-wide, 
or, where applicable, in a state or multistate MSA; or
    (B) A bank's CRA performance is less than satisfactory in an MSA, or 
in the non-MSA portion of a state, in which it seeks to expand through 
approval of an application for a deposit facility as defined in 12 
U.S.C. 2902(3).
    (iii) Adverse comments that the OCC determines do not raise a 
significant supervisory, CRA (if applicable), or compliance concern, or 
a significant legal or policy issue, or are frivolous, filed primarily 
as a means of delaying action on the filing, or that raise a CRA concern 
that the OCC determines has been satisfactorily resolved, do not affect 
the OCC's decision under paragraphs (a)(2)(i) or (a)(2)(ii) of this 
section. The OCC considers a CRA concern to have been satisfactorily 
resolved if the OCC previously reviewed (e.g., in an examination or an 
application) a concern presenting substantially the same issue in 
substantially the same assessment area during substantially the same 
time, and the OCC determines that the concern would not warrant denial 
or imposition of a condition on approval of the application.
    (iv) If a bank files an application for any activity or transaction 
that is dependent upon the approval of another application under this 
part, or if requests for approval for more than one activity or 
transaction are combined in a single application under applicable 
sections of this part, none of the subject applications may be deemed 
approved upon expiration of the applicable time periods, unless all of 
the applications are subject to expedited review procedures and the 
longest of the time periods expires without the OCC issuing a decision 
or notifying the bank that the filings are not eligible for expedited 
review under the standards in paragraph (a)(2)(ii) of this section.
    (b) Denial. The OCC may deny a filing if:
    (1) A significant supervisory, CRA (if applicable), or compliance 
concern exists with respect to the applicant;
    (2) Approval of the filing is inconsistent with applicable law, 
regulation, or OCC policy thereunder; or
    (3) The applicant fails to provide information requested by the OCC 
that is necessary for the OCC to make an informed decision.
    (c) Required information and abandonment of filing. A filing must 
contain information required by the applicable section set forth in this 
part. To the extent necessary to evaluate an application, the OCC may 
require an applicant to provide additional information. The OCC may deem 
a filing abandoned if information required or requested by the OCC in 
connection with the filing is not furnished within the time period 
specified by the OCC.
    (d) Notification of final disposition. The OCC notifies the 
applicant, and any person who makes a written request, of the final 
disposition of a filing, including confirmation of an expedited review 
under this part. If the OCC denies

[[Page 130]]

a filing, the OCC notifies the applicant in writing of the reasons for 
the denial.
    (e) Publication of decision. The OCC will issue a public decision 
when a decision represents a new or changed policy or presents issues of 
general interest to the public or the banking industry. In rendering its 
decisions, the OCC may elect not to disclose information that the OCC 
deems to be private or confidential.
    (f) Appeal. An applicant may file an appeal of an OCC decision with 
the Deputy Comptroller for Bank Organization and Structure or with the 
Ombudsman. Relevant addresses and telephone numbers are located in the 
Manual.
    (g) Extension of time. When the OCC approves or conditionally 
approves a filing, the OCC generally gives the applicant a specified 
period of time to commence that new or expanded activity. The OCC does 
not generally grant an extension of the time specified to commence a new 
or expanded corporate activity approved under this part, unless the OCC 
determines that the delay is beyond the applicant's control.
    (h) Nullifying a decision--(1) Material misrepresentation or 
omission. An applicant shall certify that any filing or supporting 
material submitted to the OCC contains no material misrepresentations or 
omissions. The OCC may review and verify any information filed in 
connection with a notice or an application. If the OCC discovers a 
material misrepresentation or omission after the OCC has rendered a 
decision on the filing, the OCC may nullify its decision. Any person 
responsible for any material misrepresentation or omission in a filing 
or supporting materials may be subject to enforcement action and other 
penalties, including criminal penalties provided in 18 U.S.C. 1001.
    (2) Other nullifications. The OCC may nullify any decision on a 
filing that is:
    (i) Contrary to law, regulation, or OCC policy thereunder; or
    (ii) Granted due to clerical or administrative error, or a material 
mistake of law or fact.



                      Subpart B_Initial Activities



Sec. 5.20  Organizing a bank.

    (a) Authority. 12 U.S.C. 21, 22, 24(Seventh), 26, 27, 92a, 93a, 
1814(b), 1816, and 2903.
    (b) Licensing requirements. Any person desiring to establish a 
national bank shall submit an application and obtain prior OCC approval.
    (c) Scope. This section describes the procedures and requirements 
governing OCC review and approval of an application to establish a 
national bank, including a national bank with a special purpose. 
Information regarding an application to establish an interim national 
bank solely to facilitate a business combination is set forth in Sec. 
5.33.
    (d) Definitions. For purposes of this section:
    (1) Bankers' bank means a bank owned exclusively (except to the 
extent directors' qualifying shares are required by law) by other 
depository institutions or depository institution holding companies (as 
that term is defined in section 3 of the Federal Deposit Insurance Act, 
12 U.S.C. 1813), the activities of which are limited by its articles of 
association exclusively to providing services to or for other depository 
institutions, their holding companies, and the officers, directors, and 
employees of such institutions and companies, and to providing 
correspondent banking services at the request of other depository 
institutions or their holding companies.
    (2) Control means control as used in section 2 of the Bank Holding 
Company Act, 12 U.S.C. 1841(a)(2).
    (3) Final approval means the OCC action issuing a charter 
certificate and authorizing a national bank to open for business.
    (4) Holding company means any company that controls or proposes to 
control a national bank whether or not the company is a bank holding 
company under section 2 of the Bank Holding Company Act, 12 U.S.C. 
1841(a)(1).
    (5) Lead depository institution means the largest depository 
institution controlled by a bank holding company based on a comparison 
of the average

[[Page 131]]

total assets controlled by each depository institution as reported in 
its Consolidated Report of Condition and Income required to be filed for 
the immediately preceding four calendar quarters.
    (6) Organizing group means five or more persons acting on their own 
behalf, or serving as representatives of a sponsoring holding company, 
who apply to the OCC for a national bank charter.
    (7) Preliminary approval means a decision by the OCC permitting an 
organizing group to go forward with the organization of the proposed 
national bank. A preliminary approval generally is subject to certain 
conditions that an applicant must satisfy before the OCC will grant 
final approval.
    (e) Statutory requirements--(1) General. The OCC charters a national 
bank under the authority of the National Bank Act of 1864, as amended, 
12 U.S.C. 1 et seq. The bank may be a special purpose bank that limits 
its activities to fiduciary activities or to any other activities within 
the business of banking. A special purpose bank that conducts activities 
other than fiduciary activities must conduct at least one of the 
following three core banking functions: receiving deposits; paying 
checks; or lending money. The name of a proposed bank must include the 
word ``national.'' In determining whether to approve an application to 
establish a national bank, the OCC verifies that the proposed national 
bank has complied with the following requirements of the National Bank 
Act. A national bank shall:
    (i) Draft and file articles of association with the OCC;
    (ii) Draft and file an organization certificate containing specified 
information with the OCC;
    (iii) Ensure that all capital stock is paid in; and
    (iv) Have at least five elected directors.
    (2) Community Reinvestment Act. Twelve CFR part 25 requires the OCC 
to take into account a proposed insured national bank's description of 
how it will meet its CRA objectives.
    (f) Policy--(1) General. The marketplace is normally the best 
regulator of economic activity, and competition within the marketplace 
promotes efficiency and better customer service. Accordingly, it is the 
OCC's policy to approve proposals to establish national banks, including 
minority-owned institutions, that have a reasonable chance of success 
and that will be operated in a safe and sound manner. It is not the 
OCC's policy to ensure that a proposal to establish a national bank is 
without risk to the organizers or to protect existing institutions from 
healthy competition from a new national bank.
    (2) Policy considerations. (i) In evaluating an application to 
establish a national bank, the OCC considers whether the proposed bank:
    (A) Has organizers who are familiar with national banking laws and 
regulations;
    (B) Has competent management, including a board of directors, with 
ability and experience relevant to the types of services to be provided;
    (C) Has capital that is sufficient to support the projected volume 
and type of business;
    (D) Can reasonably be expected to achieve and maintain 
profitability; and
    (E) Will be operated in a safe and sound manner.
    (ii) The OCC may also consider additional factors listed in section 
6 of the Federal Deposit Insurance Act, 12 U.S.C. 1816, including the 
risk to the Federal deposit insurance fund, and whether the proposed 
bank's corporate powers are consistent with the purposes of the Federal 
Deposit Insurance Act and the National Bank Act.
    (3) OCC evaluation. The OCC evaluates a proposed national bank's 
organizing group and its business plan or operating plan together. The 
OCC's judgment concerning one may affect the evaluation of the other. An 
organizing group and its business plan or operating plan must be 
stronger in markets where economic conditions are marginal or 
competition is intense.
    (g) Organizing group--(1) General. Strong organizing groups 
generally include diverse business and financial interests and community 
involvement. An organizing group must have the experience, competence, 
willingness, and ability to be active in directing the proposed national 
bank's affairs in a

[[Page 132]]

safe and sound manner. The bank's initial board of directors generally 
is comprised of many, if not all, of the organizers. The business plan 
or operating plan and other information supplied in the application must 
demonstrate an organizing group's collective ability to establish and 
operate a successful bank in the economic and competitive conditions of 
the market to be served. Each organizer should be knowledgeable about 
the business plan or business plan or operating plan. A poor business 
plan or operating plan reflects adversely on the organizing group's 
ability, and the OCC generally denies applications with poor business 
plans or operating plans.
    (2) Management selection. The initial board of directors must select 
competent senior executive officers before the OCC grants final 
approval. Early selection of executive officers, especially the chief 
executive officer, contributes favorably to the preparation and review 
of a business plan or operating plan that is accurate, complete, and 
appropriate for the type of bank proposed and its market, and reflects 
favorably upon an application. As a condition of the charter approval, 
the OCC retains the right to object to and preclude the hiring of any 
officer, or the appointment or election of any director, for a two-year 
period from the date the bank commences business.
    (3) Financial resources. (i) Each organizer must have a history of 
responsibility, personal honesty, and integrity. Personal wealth is not 
a prerequisite to become an organizer or director of a national bank. 
However, directors' stock purchases, individually and in the aggregate, 
should reflect a financial commitment to the success of the national 
bank that is reasonable in relation to their individual and collective 
financial strength. A director should not have to depend on bank 
dividends, fees, or other compensation to satisfy financial obligations.
    (ii) Because directors are often the primary source of additional 
capital for a bank not affiliated with a holding company, it is 
desirable that an organizer who is also proposed as a director of the 
national bank be able to supply or have a realistic plan to enable the 
bank to obtain capital when needed.
    (iii) Any financial or other business arrangement, direct or 
indirect, between the organizing group or other insider and the proposed 
national bank must be on nonpreferential terms.
    (4) Organizational expenses. (i) Organizers are expected to 
contribute time and expertise to the organization of the bank. 
Organizers should not bill excessive charges to the bank for 
professional and consulting services or unduly rely upon these fees as a 
source of income.
    (ii) A proposed national bank shall not pay any fee that is 
contingent upon an OCC decision. Such action generally is grounds for 
denial of the application or withdrawal of preliminary approval. 
Organizational expenses for denied applications are the sole 
responsibility of the organizing group.
    (5) Sponsor's experience and support. A sponsor must be financially 
able to support the new bank's operations and to provide or locate 
capital when needed. The OCC primarily considers the financial and 
managerial resources of the sponsor and the sponsor's record of 
performance, rather than the financial and managerial resources of the 
organizing group, if an organizing group is sponsored by:
    (i) An existing holding company;
    (ii) Individuals currently affiliated with other depository 
institutions; or
    (iii) Individuals who, in the OCC's view, are otherwise collectively 
experienced in banking and have demonstrated the ability to work 
together effectively.
    (h) Business plan or Operating plan--(1) General. (i) Organizers of 
a proposed national bank shall submit a business plan or operating plan 
that adequately addresses the statutory and policy considerations set 
forth in paragraphs (e) and (f)(2) of this section. The plan must 
reflect sound banking principles and demonstrate realistic assessments 
of risk in light of economic and competitive conditions in the market to 
be served.
    (ii) The OCC may offset deficiencies in one factor by strengths in 
one or more other factors. However, deficiencies in some factors, such 
as unrealistic earnings prospects, may have a negative influence on the 
evaluation of other factors, such as capital adequacy,

[[Page 133]]

or may be serious enough by themselves to result in denial. The OCC 
considers inadequacies in a business plan or operating plan to reflect 
negatively on the organizing group's ability to operate a successful 
bank.
    (2) Earnings prospects. The organizing group shall submit pro forma 
balance sheets and income statements as part of the business plan or 
operating plan. The OCC reviews all projections for reasonableness of 
assumptions and consistency with the business plan or operating plan.
    (3) Management. (i) The organizing group shall include in the 
business plan or operating plan information sufficient to permit the OCC 
to evaluate the overall management ability of the organizing group. If 
the organizing group has limited banking experience or community 
involvement, the senior executive officers must be able to compensate 
for such deficiencies.
    (ii) The organizing group may not hire an officer or elect or 
appoint a director if the OCC objects to that person at any time prior 
to the date the bank commences business.
    (4) Capital. A proposed bank must have sufficient initial capital, 
net of any organizational expenses that will be charged to the bank's 
capital after it begins operations, to support the bank's projected 
volume and type of business.
    (5) Community service. (i) The business plan or operating plan must 
indicate the organizing group's knowledge of and plans for serving the 
community. The organizing group shall evaluate the banking needs of the 
community, including its consumer, business, nonprofit, and government 
sectors. The business plan or operating plan must demonstrate how the 
proposed bank responds to those needs consistent with the safe and sound 
operation of the bank. The provisions of this paragraph may not apply to 
an application to organize a bank for a special purpose.
    (ii) As part of its business plan or operating plan, the organizing 
group shall submit a statement that demonstrates its plans to achieve 
CRA objectives.
    (iii) Because community support is important to the long-term 
success of a bank, the organizing group shall include plans for 
attracting and maintaining community support.
    (6) Safety and soundness. The business plan or operating plan must 
demonstrate that the organizing group (and the sponsoring company, if 
any), is aware of, and understands, national banking laws and 
regulations, and safe and sound banking operations and practices. The 
OCC will deny an application that does not meet these safety and 
soundness requirements.
    (7) Fiduciary services. The business plan or operating plan must 
indicate if the proposed bank intends to offer fiduciary services. The 
information required by Sec. 5.26 shall be filed with the charter 
application. A separate application is not required.
    (i) Procedures--(1) Prefiling meeting. The OCC normally requires a 
prefiling meeting with the organizers of a proposed national bank before 
the organizers file an application. Organizers should be familiar with 
the OCC's chartering policy and procedural requirements in the Manual 
before the prefiling meeting. The prefiling meeting normally is held in 
the district office where the application will be filed but may be held 
at another location at the request of the applicant.
    (2) Business plan or operating plan. An organizing group shall file 
a business plan or operating plan that addresses the subjects discussed 
in paragraph (h) of this section.
    (3) Spokesperson. The organizing group shall designate a 
spokesperson to represent the organizing group in all contacts with the 
OCC. The spokesperson shall be an organizer and proposed director of the 
new bank, except a representative of the sponsor or sponsors may serve 
as spokesperson if an application is sponsored by an existing holding 
company, individuals currently affiliated with other depository 
institutions, or individuals who, in the OCC's view, are otherwise 
collectively experienced in banking and have demonstrated the ability to 
work together effectively.
    (4) Decision notification. The OCC notifies the spokesperson and 
other interested persons in writing of its decision on an application.

[[Page 134]]

    (5) Post-decision activities. (i) Before the OCC grants final 
approval, a proposed national bank must be established as a legal 
entity. A national bank becomes a legal entity after it has filed its 
organization certificate and articles of association with the OCC as 
required by law. In addition, the organizing group shall elect a board 
of directors. The proposed bank may not conduct the business of banking 
until the OCC grants final approval.
    (ii) For all capital obtained through a public offering a proposed 
national bank shall use an offering circular that complies with the 
OCC's securities offering regulations, 12 CFR part 16.
    (iii) A national bank in organization shall raise its capital before 
it commences business. Preliminary approval expires if a national bank 
in organization does not raise the required capital within 12 months 
from the date the OCC grants preliminary approval. Approval expires if 
the national bank does not commence business within 18 months from the 
date the OCC grants preliminary approval.
    (j) Expedited review. An application to establish a full-service 
national bank that is sponsored by a bank holding company whose lead 
depository institution is an eligible bank or eligible depository 
institution is deemed preliminarily approved by the OCC as of the 15th 
day after the close of the public comment period or the 45th day after 
the filing is received by the OCC, whichever is later, unless the OCC:
    (1) Notifies the applicant prior to that date that the filing is not 
eligible for expedited review, or the expedited review process is 
extended, under Sec. 5.13(a)(2); or
    (2) Notifies the applicant prior to that date that the OCC has 
determined that the proposed bank will offer banking services that are 
materially different than those offered by the lead depository 
institution.
    (k) National bankers' banks--(1) Activities and customers. In 
addition to the other requirements of this section, when an organizing 
group seeks to organize a national bankers' bank, the organizing group 
shall list in the application the anticipated activities and customers 
or clients of the proposed national bankers' bank.
    (2) Waiver of requirements. At the organizing group's request, the 
OCC may waive requirements that are applicable to national banks in 
general if those requirements are inappropriate for a national bankers' 
bank and would impede its ability to provide desired services to its 
market. An applicant must submit a request for a waiver with the 
application and must support the request with adequate justification and 
legal analysis. A national bankers' bank that is already in operation 
may also request a waiver. The OCC cannot waive statutory provisions 
that specifically apply to national bankers' banks pursuant to 12 U.S.C. 
27(b)(1).
    (3) Investments. A national bank may invest up to ten percent of its 
capital and surplus in a bankers' bank and may own five percent or less 
of any class of a bankers' bank's voting securities.
    (l) Special purpose banks. An applicant for a national bank charter 
that will limit its activities to fiduciary activities, credit card 
operations, or another special purpose shall adhere to established 
charter procedures with modifications appropriate for the circumstances 
as determined by the OCC. An applicant for a national bank charter that 
will have a community development focus shall also adhere to established 
charter procedures with modifications appropriate for the circumstances 
as determined by the OCC. In addition to the other requirements in this 
section, a bank limited to fiduciary activities, credit card operations, 
or another special purpose may not conduct that business until the OCC 
grants final approval for the bank to commence operations. A national 
bank that seeks to invest in a bank with a community development focus 
must comply with applicable requirements of 12 CFR part 24.

[61 FR 60363, Nov. 27, 1996, as amended at 68 FR 70129, Dec. 17, 2003; 
69 FR 50297, Aug. 16, 2004]



Sec. 5.24  Conversion.

    (a) Authority. 12 U.S.C. 35, 93a, 214a, 214b, 214c, and 2903.

[[Page 135]]

    (b) Licensing requirements. A state bank (including a ``state bank'' 
as defined in 12 U.S.C. 214(a)) or a Federal savings association shall 
submit an application and obtain prior OCC approval to convert to a 
national bank charter. A national bank shall give notice to the OCC 
before converting to a state bank (including a ``state bank'' as defined 
in 12 U.S.C. 214(a)) or Federal savings association.
    (c) Scope. This section describes procedures and standards governing 
OCC review and approval of an application by a state bank or Federal 
savings association to convert to a national bank charter. This section 
also describes notice procedures for a national bank seeking to convert 
to a state bank or Federal savings association.
    (d) Conversion of a state bank or Federal savings association to a 
national bank--(1) Policy. Consistent with the OCC's chartering policy, 
it is OCC policy to allow conversion to a national bank charter by 
another financial institution that can operate safely and soundly as a 
national bank in compliance with applicable laws, regulations, and 
policies. The OCC may deny an application by any state bank (including a 
``state bank'' as defined in 12 U.S.C. 214(a)) and any Federal savings 
association to convert to a national bank charter on the basis of the 
standards for denial set forth in Sec. 5.13(b), or when conversion 
would permit the applicant to escape supervisory action by its current 
regulator.
    (2) Procedures. (i) Prefiling communications. The applicant should 
consult with the appropriate district office prior to filing if it 
anticipates that its application will raise unusual or complex issues. 
If a prefiling meeting is appropriate, it will normally be held in the 
district office where the application will be filed, but may be held at 
another location at the request of the applicant.
    (ii) A state bank (including a state bank as defined in 12 U.S.C. 
214(a)) or Federal savings association shall submit its application to 
convert to a national bank to the appropriate district office. The 
application must:
    (A) Be signed by the president or other duly authorized officer;
    (B) Identify each branch that the resulting bank expects to operate 
after conversion;
    (C) Include the institution's most recent audited financial 
statements (if any);
    (D) Include the latest report of condition and report of income (the 
most recent daily statement of condition will suffice if the institution 
does not file these reports);
    (E) Unless otherwise advised by the OCC in a prefiling 
communication, include an opinion of counsel that, in the case of a 
state bank, the conversion is not in contravention of applicable state 
law, or in the case of a Federal savings association, the conversion is 
not in contravention of applicable Federal law;
    (F) State whether the institution wishes to exercise fiduciary 
powers after the conversion;
    (G) Identify all subsidiaries that will be retained following the 
conversion, and provide the information and analysis of the 
subsidiaries' activities that would be required if the converting bank 
or savings association were a national bank establishing each subsidiary 
pursuant to Sec. Sec. 5.34 or 5.39; and
    (H) Identify any nonconforming assets (including nonconforming 
subsidiaries) and nonconforming activities that the institution engages 
in, and describe the plans to retain or divest those assets.
    (iii) The OCC may permit a national bank to retain such 
nonconforming assets of a state bank, subject to conditions and an OCC 
determination of the carrying value of the retained assets, pursuant to 
12 U.S.C. 35.
    (iv) Approval for an institution to convert to a national bank 
expires if the conversion has not occurred within six months of the 
OCC's preliminary approval of the application.
    (v) When the OCC determines that the applicant has satisfied all 
statutory and regulatory requirements, including those set forth in 12 
U.S.C. 35, and any other conditions, the OCC issues a charter 
certificate. The certificate provides that the institution is authorized 
to begin conducting business as a national bank as of a specified date.

[[Page 136]]

    (3) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to this section. However, if the OCC 
concludes that an application presents significant and novel policy, 
supervisory, or legal issues, the OCC may determine that any or all 
parts of Sec. Sec. 5.8, 5.10, and 5.11 apply.
    (4) Expedited review. An application by an eligible depository 
institution to convert to a national bank charter is deemed approved by 
the OCC as of the 30th day after the filing is received by the OCC, 
unless the OCC notifies the applicant prior to that date that the filing 
is not eligible for expedited review under Sec. 5.13(a)(2).
    (e) Conversion of a national bank to a state bank--(1) Procedure. A 
national bank may convert to a state bank, in accordance with 12 U.S.C. 
214c, without prior OCC approval. Termination of the national bank's 
status as a national bank occurs upon the bank's completion of the 
requirements of 12 U.S.C. 214a, and upon the appropriate district 
office's receipt of the bank's national bank charter (or copy) in 
connection with the consummation of the transaction.
    (2) Notice of intent. A national bank that desires to convert to a 
state bank shall submit to the appropriate district office a notice of 
its intent to convert. The national bank shall file this notice when it 
first submits a request to convert to the appropriate state authorities. 
The appropriate district office then provides instructions to the 
national bank for terminating its status as a national bank.
    (3) Exceptions to the rules of general applicability. Sections 5.5 
through 5.8, and 5.10 through 5.13, do not apply to the conversion of a 
national bank to a state bank.
    (f) Conversion of a national bank to a Federal savings association. 
A national bank may convert to a Federal savings association without 
prior OCC approval. The requirements and procedures set forth in 
paragraph (e) of this section and 12 U.S.C. 214a and 12 U.S.C. 214c 
apply to a conversion to a Federal savings association, except as 
follows:
    (1) In paragraph (e) of this section references to ``appropriate 
state authorities'' mean ``appropriate Federal authorities''; and
    (2) References in 12 U.S.C. 214c to the ``law of the State in which 
the national banking association is located'' and ``any State 
authority'' mean ``laws and regulations governing Federal savings 
associations'' and ``Office of Thrift Supervision,'' respectively.

[61 FR 60363, Nov. 27, 1996, as amended at 65 FR 12910, Mar. 10, 2000]



Sec. 5.26  Fiduciary powers.

    (a) Authority. 12 U.S.C. 92a.
    (b) Licensing requirements. A national bank must submit an 
application and obtain prior approval from, or in certain circumstances 
file a notice with, the OCC in order to exercise fiduciary powers. No 
approval or notice is required in the following circumstances:
    (1) Where two or more national banks consolidate or merge, and any 
of the banks has, prior to the consolidation or merger, received OCC 
approval to exercise fiduciary powers and that approval is in force at 
the time of the consolidation or merger, the resulting bank may exercise 
fiduciary powers in the same manner and to the same extent as the 
national bank to which approval was originally granted; and
    (2) Where a national bank with prior OCC approval to exercise 
fiduciary powers is the resulting bank in a merger or consolidation with 
a state bank.
    (c) Scope. This section sets forth the procedures governing OCC 
review and approval of an application, and in certain cases the filing 
of a notice, by a national bank to exercise fiduciary powers. A national 
bank's fiduciary activities are subject to the provisions of 12 CFR part 
9.
    (d) Policy. The exercise of fiduciary powers is primarily a 
management decision of the national bank. The OCC generally permits a 
national bank to exercise fiduciary powers if the bank is operating in a 
satisfactory manner, the proposed activities comply with applicable 
statutes and regulations, and the bank retains qualified fiduciary 
management.
    (e) Procedure--(1) General. The following institutions must obtain 
approval from the OCC in order to offer fiduciary services to the 
public:
    (i) A national bank without fiduciary powers;

[[Page 137]]

    (ii) A national bank without fiduciary powers that desires to 
exercise fiduciary powers after merging with a state bank or savings 
association with fiduciary powers; and
    (iii) A national bank that results from the conversion of a state 
bank or a state or Federal savings association that was exercising 
fiduciary powers prior to the conversion.
    (2) Application. (i) Except as provided in paragraph (e)(2)(ii) of 
this section, a national bank that desires to exercise fiduciary powers 
shall submit to the OCC an application requesting approval. The 
application must contain:
    (A) A statement requesting full or limited powers (specifying which 
powers);
    (B) An opinion of counsel that the proposed activities do not 
violate applicable Federal or state law, including citations to 
applicable law;
    (C) A statement that the capital and surplus of the national bank is 
not less than the capital and surplus required by state law of state 
banks, trust companies, and other corporations exercising comparable 
fiduciary powers;
    (D) Sufficient biographical information on proposed trust management 
personnel to enable the OCC to assess their qualifications; and
    (E) A description of the locations where the bank will conduct 
fiduciary activities.
    (ii) If approval to exercise fiduciary powers is desired in 
connection with any other transaction subject to an application under 
this part, the applicant covered under paragraph (e)(1)(ii) or 
(e)(1)(iii) of this section may include a request for approval of 
fiduciary powers, including the information required by paragraph 
(e)(2)(i) of this section, as part of its other application. The OCC 
does not require a separate application requesting approval to exercise 
fiduciary powers under these circumstances.
    (3) Expedited review. (i) An application by an eligible bank to 
exercise fiduciary powers is deemed approved by the OCC as of the 30th 
day after the application is received by the OCC, unless the OCC 
notifies the bank prior to that date that the filing is not eligible for 
expedited review under Sec. 5.13(a)(2).
    (ii) An eligible bank applying for fiduciary powers may omit the 
opinion of counsel required by paragraph (e)(2)(i)(B) of this section 
unless such opinion is specifically requested by the OCC.
    (4) Permit. Approval of an application under this section 
constitutes a permit under 12 U.S.C. 92a to conduct the fiduciary powers 
requested in the application.
    (5) Notice of fiduciary activities in additional states. No further 
application under this section is required when a national bank with 
existing OCC approval to exercise fiduciary powers plans to engage in 
any of the activities specified in Sec. 9.7(d) of this chapter or to 
conduct activities ancillary to its fiduciary business, in a state in 
addition to the state described in the application for fiduciary powers 
that the OCC has approved. Instead, unless the bank provides notice 
through other means (such as a merger application), the bank shall 
provide written notice to the OCC no later than ten days after it begins 
to engage in any of the activities specified in Sec. 9.7(d) of this 
chapter in the new state. The written notice must identify the new state 
or states involved, identify the fiduciary activities to be conducted, 
and describe the extent to which the activities differ materially from 
the fiduciary activities that the bank was previously authorized to 
conduct. No notice is required if the bank is conducting only activities 
ancillary to its fiduciary business through a trust representative 
office or otherwise.
    (6) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to this section. However, if the OCC 
concludes that an application presents significant and novel policy, 
supervisory, or legal issues, the OCC may determine that any or all 
parts of Sec. Sec. 5.8, 5.10, and 5.11 apply.
    (7) Expiration of approval. Approval expires if a national bank does 
not commence fiduciary activities within 18 months from the date of 
approval.

[61 FR 60363, Nov. 27, 1996, as amended at 66 FR 34797, July 2, 2001]

[[Page 138]]



                    Subpart C_Expansion of Activities



Sec. 5.30  Establishment, acquisition, and relocation of a branch.

    (a) Authority. 12 U.S.C. 1-42, and 2901-2907.
    (b) Licensing requirements. A national bank shall submit an 
application and obtain prior OCC approval in order to establish or 
relocate a branch.
    (c) Scope. This section describes the procedures and standards 
governing OCC review and approval of a national bank's application to 
establish a new branch or to relocate a branch. The standards of this 
section and, as applicable, 12 U.S.C. 36(b), but not the procedures set 
forth in this section, apply to a branch established as a result of a 
business combination approved under Sec. 5.33. A branch established 
through a business combination is subject only to the procedures set 
forth in Sec. 5.33.
    (d) Definitions--(1) Branch includes any branch bank, branch office, 
branch agency, additional office, or any branch place of business 
established by a national bank in the United States or its territories 
at which deposits are received, checks paid, or money lent. A branch 
does not include an automated teller machine (ATM) or a remote service 
unit.
    (i) A branch established by a national bank includes a mobile 
facility, temporary facility, drop box or a seasonal agency, as 
described in 12 U.S.C. 36(c).
    (ii) A facility otherwise described in this paragraph (d)(1) is not 
a branch if:
    (A) The bank establishing the facility does not permit members of 
the public to have physical access to the facility for purposes of 
making deposits, paying checks, or borrowing money (e.g., an office 
established by the bank that receives deposits only through the mail); 
or
    (B) It is located at the site of, or is an extension of, an approved 
main or branch office of the national bank. The OCC determines whether a 
facility is an extension of an existing main or branch office on a case-
by-case basis.
    (2) Home state means the state in which the national bank's main 
office is located.
    (3) Messenger service has the meaning set forth in 12 CFR 7.1012.
    (4) Mobile branch is a branch, other than a messenger service 
branch, that does not have a single, permanent site, and includes a 
vehicle that travels to various public locations to enable customers to 
conduct their banking business. A mobile branch may provide services at 
various regularly scheduled locations or it may be open at irregular 
times and locations such as at county fairs, sporting events, or school 
registration periods. A branch license is needed for each mobile unit.
    (5) Temporary branch means a branch that is located at a fixed site 
and which, from the time of its opening, is scheduled to, and will, 
permanently close no later than a certain date (not longer than one year 
after the branch is first opened) specified in the branch application 
and the public notice.
    (e) Policy. In determining whether to approve an application to 
establish or relocate a branch, the OCC is guided by the following 
principles:
    (1) Maintaining a sound banking system;
    (2) Encouraging a national bank to help meet the credit needs of its 
entire community;
    (3) Relying on the marketplace as generally the best regulator of 
economic activity; and
    (4) Encouraging healthy competition to promote efficiency and better 
service to customers.
    (f) Procedures--(1) General. Except as provided in paragraph (f)(2) 
of this section, each national bank proposing to establish a branch 
shall submit to the appropriate district office a separate application 
for each proposed branch.
    (2) Messenger services. A national bank may request approval, 
through a single application, for multiple messenger services to serve 
the same general geographic area. (See 12 CFR 7.1012). Unless otherwise 
required by law, the bank need not list the specific locations to be 
served.
    (3) Jointly established branches. If a national bank proposes to 
establish a branch jointly with one or more national banks or depository 
institutions, only one of the national banks must submit a branch 
application. The national bank submitting the application may act as 
agent for all national banks in the group of depository institutions

[[Page 139]]

proposing to share the branch. The application must include the name and 
main office address of each national bank in the group.
    (4) Authorization. The OCC authorizes operation of the branch when 
all requirements and conditions for opening are satisfied.
    (5) Expedited review. An application submitted by an eligible bank 
to establish or relocate a branch is deemed approved by the OCC as of 
the 15th day after the close of the applicable public comment period, or 
the 45th day after the filing is received by the OCC, whichever is 
later, unless the OCC notifies the bank prior to that date that the 
filing is not eligible for expedited review, or the expedited review 
process is extended, under Sec. 5.13(a)(2). An application to establish 
or relocate more than one branch is deemed approved by the OCC as of the 
15th day after the close of the last public comment period.
    (g) Interstate branches. A national bank that seeks to establish and 
operate a de novo branch in any state other than the bank's home state 
or a state in which the bank already has a branch shall satisfy the 
standards and requirements of 12 U.S.C. 36(g).
    (h) Exceptions to rules of general applicability. (1) A national 
bank filing an application for a mobile branch or messenger service 
branch shall publish a public notice, as described in Sec. 5.8, in the 
communities in which the bank proposes to engage in business.
    (2) The comment period on an application to engage in a short-
distance branch relocation is 15 days.
    (3) The OCC may waive or reduce the public notice and comment 
period, as appropriate, with respect to an application to establish a 
branch to restore banking services to a community affected by a disaster 
or to temporarily replace banking facilities where, because of an 
emergency, the bank cannot provide services or must curtail banking 
services.
    (4) The OCC may waive or reduce the public notice and comment 
period, as appropriate, for an application by a national bank with a CRA 
rating of Satisfactory or better to establish a temporary branch which, 
if it were established by a state bank to operate in the manner 
proposed, would be permissible under state law without state approval.
    (i) Expiration of approval. Approval expires if a branch has not 
commenced business within 18 months after the date of approval.
    (j) Branch closings. A national bank shall comply with the 
requirements of 12 U.S.C. 1831r-1 with respect to procedures for branch 
closings.



Sec. 5.32  Expedited procedures for certain reorganizations.

    (a) Authority. 12 U.S.C. 93a and 215a-2.
    (b) Scope. This section prescribes the procedures for OCC review and 
approval of a national bank's reorganization to become a subsidiary of a 
bank holding company or a company that will, upon consummation of such 
reorganization, become a bank holding company. For purposes of this 
section, a ``bank holding company'' means any company that owns or 
controls a national bank, or will own or control one as a result of the 
reorganization.
    (c) Licensing requirements. A national bank shall submit an 
application to, and obtain approval from, the OCC prior to participating 
in a reorganization described in paragraph (b) of this section.
    (d) Procedures--(1) General. An application filed in accordance with 
this section shall be deemed approved on the 30th day after the OCC 
receives the application, unless the OCC notifies the bank otherwise. 
Approval is subject to the condition that the bank provide the OCC with 
60 days' prior notice of any significant deviation from the bank's 
business plan or any significant deviation from the proposed changes to 
the bank's business plan described in the bank's plan of reorganization.
    (2) Reorganization plan. The application must include a 
reorganization plan that:
    (i) Specifies the manner in which the reorganization shall be 
carried out;
    (ii) Is approved by a majority of the entire board of directors of 
the national bank;
    (iii) Specifies:
    (A) The amount and type of consideration that the bank holding 
company will provide to the shareholders of the reorganizing bank for 
their shares of stock of the bank;

[[Page 140]]

    (B) The date as of which the rights of each shareholder to 
participate in that exchange will be determined; and
    (C) The manner in which the exchange will be carried out;
    (iv) Is submitted to the shareholders of the reorganizing bank at a 
meeting to be held at the call of the directors in accordance with the 
procedures prescribed in connection with a merger of a national bank 
under section 3 of the National Bank Consolidation and Merger Act, 12 
U.S.C. 215a(a)(2); and
    (v) Describes any changes to the bank's business plan resulting from 
the reorganization.
    (3) Financial and managerial resources and future prospects. In 
reviewing an application under this section, the OCC will consider the 
impact of the proposed affiliation on the financial and managerial 
resources and future prospects of the national bank.
    (e) Rights of dissenting shareholders. Any shareholder of a bank who 
has voted against an approved reorganization at the meeting referred to 
in paragraph (d)(2)(iv) of this section, or who has given notice of 
dissent in writing to the presiding officer at or prior to that meeting, 
is entitled to receive the value of his or her shares by providing a 
written request to the bank within 30 days after the consummation of the 
reorganization, as provided by section 3 of the National Bank 
Consolidation and Merger Act, 12 U.S.C. 215a(b) and (c), for the merger 
of a national bank.
    (f) Approval under the Bank Holding Company Act. This section does 
not affect the applicability of the Bank Holding Company Act of 1956. 
Applicants shall indicate in their application the status of any 
application required to be filed with the Board of Governors of the 
Federal Reserve System.
    (g) Expiration of approval. Approval expires if a national bank has 
not completed the reorganization within one year of the date of 
approval.
    (h) Adequacy of disclosure. (1) An applicant shall inform 
shareholders of all material aspects of a reorganization and comply with 
applicable requirements of the Federal securities laws, including the 
OCC's securities regulations at 12 CFR part 11.
    (2) Any applicant not subject to the registration provisions of the 
Securities Exchange Act of 1934 shall submit the proxy materials or 
information statements it uses in connection with the reorganization to 
the appropriate district office no later than when the materials are 
sent to the shareholders.

[68 FR 70129, Dec. 17, 2003]



Sec. 5.33  Business combinations.

    (a) Authority. 12 U.S.C. 24(Seventh), 93a, 181, 214a, 214b, 215, 
215a, 215a-1, 215a-3, 215c, 1815(d)(3), 1828(c), 1831u, and 2903.
    (b) Scope. This section sets forth the provisions governing business 
combinations and the standards for:
    (1) OCC review and approval of an application for a business 
combination between a national bank and another depository institution 
resulting in a national bank or between a national bank and one of its 
nonbank affiliates; and
    (2) Requirements of notices and other procedures for national banks 
involved in other combinations with depository institutions.
    (c) Licensing requirements. A national bank shall submit an 
application and obtain prior OCC approval for a business combination 
between the national bank and another depository institution when the 
resulting institution is a national bank. A national bank shall give 
notice to the OCC prior to engaging in a combination where the resulting 
institution will not be a national bank. A national bank shall submit an 
application and obtain prior OCC approval for any merger between the 
national bank and one or more of its nonbank affiliates.
    (d) Definitions--(1) Bank means any national bank or any state bank.
    (2) Business combination means any merger or consolidation between a 
national bank and one or more depository institutions in which the 
resulting institution is a national bank, the acquisition by a national 
bank of all, or substantially all, of the assets of another depository 
institution, the assumption by a national bank of deposit liabilities of 
another depository institution, or a merger between a national bank and 
one or more of its nonbank affiliates.
    (3) Business reorganization means either:

[[Page 141]]

    (i) A business combination between eligible banks, or between an 
eligible bank and an eligible depository institution, that are 
controlled by the same holding company or that will be controlled by the 
same holding company prior to the combination; or
    (ii) A business combination between an eligible bank and an interim 
bank chartered in a transaction in which a person or group of persons 
exchanges its shares of the eligible bank for shares of a newly formed 
holding company and receives after the transaction substantially the 
same proportional share interest in the holding company as it held in 
the eligible bank (except for changes in interests resulting from the 
exercise of dissenters' rights), and the reorganization involves no 
other transactions involving the bank.
    (4) Company means a corporation, limited liability company, 
partnership, business trust, association, or similar organization.
    (5) For business combinations under Sec. 5.33(g)(4) and (5), a 
company or shareholder is deemed to control another company if:
    (i) Such company or shareholder, directly or indirectly, or acting 
through one or more other persons owns, controls, or has power to vote 
25 percent or more of any class of voting securities of the other 
company, or
    (ii) Such company or shareholder controls in any manner the election 
of a majority of the directors or trustees of the other company. No 
company shall be deemed to own or control another company by virtue of 
its ownership or control of shares in a fiduciary capacity.
    (6) Home state means, with respect to a national bank, the state in 
which the main office of the bank is located and, with respect to a 
state bank, the state by which the bank is chartered.
    (7) Interim bank means a national bank that does not operate 
independently but exists solely as a vehicle to accomplish a business 
combination.
    (8) Nonbank affiliate of a national bank means any company (other 
than a bank or Federal savings association) that controls, is controlled 
by, or is under common control with the national bank.
    (e) Policy--(1) Factors. The OCC considers the following factors in 
evaluating an application for a business combination:
    (i) Competition. (A) The OCC considers the effect of a proposed 
business combination on competition. The applicant shall provide a 
competitive analysis of the transaction, including a definition of the 
relevant geographic market or markets. An applicant may refer to the 
Manual for procedures to expedite its competitive analysis.
    (B) The OCC will deny an application for a business combination if 
the combination would result in a monopoly or would be in furtherance of 
any combination or conspiracy to monopolize or attempt to monopolize the 
business of banking in any part of the United States. The OCC also will 
deny any proposed business combination whose effect in any section of 
the United States may be substantially to lessen competition, or tend to 
create a monopoly, or which in any other manner would be in restraint of 
trade, unless the probable effects of the transaction in meeting the 
convenience and needs of the community clearly outweigh the 
anticompetitive effects of the transaction. For purposes of weighing 
against anticompetitive effects, a business combination may have 
favorable effects in meeting the convenience and needs of the community 
if the depository institution being acquired has limited long-term 
prospects, or if the resulting national bank will provide significantly 
improved, additional, or less costly services to the community.
    (ii) Financial and managerial resources and future prospects. The 
OCC considers the financial and managerial resources and future 
prospects of the existing or proposed institutions.
    (iii) Convenience and needs of community. The OCC considers the 
probable effects of the business combination on the convenience and 
needs of the community served. The applicant shall describe these 
effects in its application, including any planned office closings or 
reductions in services following the business combination and the likely 
impact on the community. The OCC also considers additional relevant 
factors, including the resulting national

[[Page 142]]

bank's ability and plans to provide expanded or less costly services to 
the community.
    (iv) Community reinvestment. The OCC considers the performance of 
the applicant and the other depository institutions involved in the 
business combination in helping to meet the credit needs of the relevant 
communities, including low- and moderate-income neighborhoods, 
consistent with safe and sound banking practices.
    (v) Money laundering. The OCC considers the effectiveness of any 
insured depository institution involved in the business combination in 
combating money laundering activities, including in overseas branches.
    (2) Acquisition and retention of branches. An applicant shall 
disclose the location of any branch it will acquire and retain in a 
business combination. The OCC considers the acquisition and retention of 
a branch under the standards set out in Sec. 5.30, but it does not 
require a separate application under Sec. 5.30.
    (3) Subsidiaries. (i) An applicant must identify any subsidiary to 
be acquired in a business combination and state the activities of each 
subsidiary. The OCC does not require a separate application under Sec. 
5.34 or a separate notice under Sec. 5.39.
    (ii) An applicant proposing to acquire, through a business 
combination, a subsidiary of any entity other than a national bank must 
provide the same information and analysis of the subsidiary's activities 
that would be required if the applicant were establishing the subsidiary 
pursuant to Sec. Sec. 5.34 or 5.39.
    (4) Interim bank--(i) Application. An applicant for a business 
combination that plans to use an interim bank to accomplish the 
transaction shall file an application to organize an interim bank as 
part of the application for the related business combination.
    (ii) Conditional approval. The OCC grants conditional approval to 
form an interim bank when it acknowledges receipt of the application for 
the related business combination.
    (iii) Corporate status. An interim bank becomes a legal entity and 
may enter into legally valid agreements when it has filed, and the OCC 
has accepted, the interim bank's duly executed articles of association 
and organization certificate. OCC acceptance occurs:
    (A) On the date the OCC advises the interim bank that its articles 
of association and organization certificate are acceptable; or
    (B) On the date the interim bank files articles of association and 
an organization certificate that conform to the form for those documents 
provided by the OCC in the Manual.
    (iv) Other corporate procedures. An applicant should consult the 
Manual to determine what other information is necessary to complete the 
chartering of the interim bank as a national bank.
    (5) Nonconforming assets. An applicant shall identify any 
nonconforming activities and assets, including nonconforming 
subsidiaries, of other institutions involved in the business 
combination, that will not be disposed of or discontinued prior to 
consummation of the transaction. The OCC generally requires a national 
bank to divest or conform nonconforming assets, or discontinue 
nonconforming activities, within a reasonable time following the 
business combination.
    (6) Fiduciary powers. An applicant shall state whether the resulting 
bank intends to exercise fiduciary powers pursuant to Sec. 5.26(b) (1) 
or (2).
    (7) Expiration of approval. Approval of a business combination, and 
conditional approval to form an interim bank charter, if applicable, 
expires if the business combination is not consummated within one year 
after the date of OCC approval.
    (8) Adequacy of disclosure. (i) An applicant shall inform 
shareholders of all material aspects of a business combination and shall 
comply with any applicable requirements of the Federal securities laws 
and securities regulations of the OCC. Accordingly, an applicant shall 
ensure that all proxy and information statements prepared in connection 
with a business combination do not contain any untrue or misleading 
statement of a material fact, or omit to state a material fact necessary 
in order to make the statements made, in the light of the circumstances 
under which they were made, not misleading.

[[Page 143]]

    (ii) A national bank applicant with one or more classes of 
securities subject to the registration provisions of section 12 (b) or 
(g) of the Securities Exchange Act of 1934, 15 U.S.C. 78l(b) or 78l(g), 
shall file preliminary proxy material or information statements for 
review with the Director, Securities and Corporate Practices Division, 
OCC, Washington, DC 20219, and with the appropriate district office. Any 
other applicant shall submit the proxy materials or information 
statements it uses in connection with the combination to the appropriate 
district office no later than when the materials are sent to the 
shareholders.
    (f) Exceptions to rules of general applicability--(1) National bank 
applicant. Section 5.8 (a) through (c) does not apply to a national bank 
applicant that is subject to specific statutory notice requirements for 
a business combination. A national bank applicant shall follow, as 
applicable, the public notice requirements contained in 12 U.S.C. 
1828(c)(3) (business combinations), 12 U.S.C. 215(a) (consolidation 
under a national bank charter), 12 U.S.C. 215a(a)(2) (merger under a 
national bank charter), paragraph (g)(2) of this section (merger or 
consolidation with a Federal savings association resulting in a national 
bank), paragraph (g)(4) of this section (merger with a nonbank affiliate 
under a national bank charter), and paragraph (g)(5) of this section 
(merger with nonbank affiliate not under national bank charter). 
Sections 5.10 and 5.11 do not apply to mergers of a national bank with 
its nonbank affiliate. However, if the OCC concludes that an application 
presents significant and novel policy, supervisory, or legal issues, the 
OCC may determine that some or all provisions in Sec. Sec. 5.10 and 
5.11 apply.
    (2) Interim bank. Sections 5.8, 5.10, and 5.11 do not apply to an 
application to organize an interim bank. However, if the OCC concludes 
that an application presents significant and novel policy, supervisory, 
or legal issues, the OCC may determine that any or all parts of 
Sec. Sec. 5.8, 5.10, and 5.11 apply. The OCC treats an application to 
organize an interim bank as part of the related application to engage in 
a business combination and does not require a separate public notice and 
public comment process.
    (3) State bank or Federal savings association as resulting 
institution. Sections 5.2 and 5.5 through 5.13 do not apply to 
transactions covered by paragraph (g)(3) of this section.
    (g) Approval procedures and treatment of dissenting shareholders in 
consolidations and mergers--(1) Consolidations and mergers with other 
national banks and state banks as defined in 12 U.S.C. 215b(1) resulting 
in a national bank. A national bank entering into a consolidation or 
merger authorized pursuant to 12 U.S.C. 215 or 215a, respectively, is 
subject to the approval procedures and requirements with respect to 
treatment of dissenting shareholders set forth in those provisions.
    (2) Consolidations and mergers with Federal savings associations 
under 12 U.S.C. 215c resulting in a national bank. (i) With the approval 
of the OCC, any national bank and any Federal savings association may 
consolidate or merge with a national bank as the resulting institution 
by complying with the following procedures:
    (A) A national bank entering into the consolidation or merger shall 
follow the procedures of 12 U.S.C. 215 or 215a, respectively, as if the 
Federal savings association were a state or national bank.
    (B) A Federal savings association entering into the consolidation or 
merger also shall follow the procedures of 12 U.S.C. 215 or 215a, 
respectively, as if the Federal savings association were a state bank or 
national bank, except where the laws or regulations governing Federal 
savings associations specifically provide otherwise.
    (ii) The OCC may conduct an appraisal or reappraisal of dissenters' 
shares of stock in a national bank involved in a consolidation or merger 
with a Federal savings association if all parties agree that the 
determination is final and binding on each party.
    (3) Merger or consolidation of a national bank resulting in a state 
bank as defined in 12 U.S.C. 214(a) or a Federal savings association--
(i) Policy. Prior OCC approval is not required for the merger or 
consolidation of a national

[[Page 144]]

bank with a state bank or Federal savings association when the resulting 
institution will be a state bank or Federal savings association. 
Termination of a national bank's status as a national banking 
association is automatic upon completion of the requirements of 12 
U.S.C. 214a, in accordance with 12 U.S.C. 214c, in the case of a merger 
or consolidation when the resulting institution is a state bank, or 
paragraph (g)(3)(iii) of this section, in the case of a merger or 
consolidation when the resulting institution is a Federal savings 
association, and consummation of the transaction.
    (ii) Procedures. A national bank desiring to merge or consolidate 
with a state bank or a Federal savings association when the resulting 
institution will be a state bank or Federal savings association shall 
submit a notice to the appropriate district office advising of its 
intention. The national bank shall submit this notice at the time the 
application to merge or consolidate is filed with the responsible agency 
under the Bank Merger Act, 12 U.S.C. 1828(c). The OCC then provides 
instructions to the national bank for terminating its status as a 
national bank, including requiring the bank to provide the appropriate 
district office with the bank's charter (or a copy) in connection with 
the consummation of the transaction.
    (iii) Special procedures for merger or consolidation into a Federal 
savings association. (A) With the exception of the procedures in 
paragraph (g)(3)(iii)(B) of this section, a national bank entering into 
a merger or consolidation with a Federal savings association when the 
resulting institution will be a Federal savings association shall comply 
with the requirements of 12 U.S.C. 214a and 12 U.S.C. 214c as if the 
Federal savings association were a state bank. However, for these 
purposes the references in 12 U.S.C. 214c to ``law of the State in which 
such national banking association is located'' and ``any State 
authority'' mean ``laws and regulations governing Federal savings 
associations'' and ``Office of Thrift Supervision,'' respectively.
    (B) National bank shareholders who dissent from a plan to merge or 
consolidate may receive in cash the value of their national bank shares 
if they comply with the requirements of 12 U.S.C. 214a as if the Federal 
savings association were a state bank. The OCC conducts an appraisal or 
reappraisal of the value of the national bank shares held by dissenting 
shareholders only if all parties agree that the determination will be 
final and binding. The parties shall also agree on how the total 
expenses of the OCC in making the appraisal will be divided among the 
parties and paid to the OCC. The plan of merger or consolidation must 
provide, consistent with the requirements of the Office of Thrift 
Supervision, the manner of disposing of the shares of the resulting 
Federal savings association not taken by the dissenting shareholders of 
the national bank.
    (4) Mergers of a national bank with its nonbank affiliates under 12 
U.S.C. 215a-3 resulting in a national bank. (i) With the approval of the 
OCC, a national bank may merge with one or more of its nonbank 
affiliates, with the national bank as the resulting institution, in 
accordance with the provisions of this paragraph, provided that the law 
of the state or other jurisdiction under which the nonbank affiliate is 
organized allows the nonbank affiliate to engage in such mergers. The 
transaction is also subject to approval by the FDIC under the Bank 
Merger Act, 12 U.S.C. 1828(c). In determining whether to approve the 
merger, the OCC shall consider the purpose of the transaction, its 
impact on the safety and soundness of the bank, and any effect on the 
bank's customers, and may deny the merger if it would have a negative 
effect in any such respect.
    (ii) A national bank entering into the merger shall follow the 
procedures of 12 U.S.C. 215a as if the nonbank affiliate were a state 
bank, except as otherwise provided herein.
    (iii) A nonbank affiliate entering into the merger shall follow the 
procedures for such mergers set out in the law of the state or other 
jurisdiction under which the nonbank affiliate is organized.
    (iv) The rights of dissenting shareholders and appraisal of 
dissenters' shares of stock in the nonbank affiliate entering into the 
merger shall be determined in the manner prescribed by the law of the 
state or other jurisdiction

[[Page 145]]

under which the nonbank affiliate is organized.
    (v) The corporate existence of each institution participating in the 
merger shall be continued in the resulting national bank, and all the 
rights, franchises, property, appointments, liabilities, and other 
interests of the participating institutions shall be transferred to the 
resulting national bank, as set forth in 12 U.S.C. 215a(a), (e), and (f) 
in the same manner and to the same extent as in a merger between a 
national bank and a state bank under 12 U.S.C. 215a(a), as if the 
nonbank affiliate were a state bank.
    (5) Mergers of an uninsured national bank with its nonbank 
affiliates under 12 U.S.C. 215a-3 resulting in a nonbank affiliate. (i) 
With the approval of the OCC, a national bank that is not an insured 
bank as defined in 12 U.S.C. 1813(h) may merge with one or more of its 
nonbank affiliates, with the nonbank affiliate as the resulting entity, 
in accordance with the provisions of this paragraph, provided that the 
law of the state or other jurisdiction under which the nonbank affiliate 
is organized allows the nonbank affiliate to engage in such mergers. In 
determining whether to approve the merger, the OCC shall consider the 
purpose of the transaction, its impact on the safety and soundness of 
the bank, and any effect on the bank's customers, and may deny the 
merger if it would have a negative effect in any such respect.
    (ii) A national bank entering into the merger shall follow the 
procedures of 12 U.S.C. 214a, as if the nonbank affiliate were a state 
bank, except as otherwise provided in this section.
    (iii) A nonbank affiliate entering into the merger shall follow the 
procedures for such mergers set out in the law of the state or other 
jurisdiction under which the nonbank affiliate is organized.
    (iv) (A) National bank shareholders who dissent from an approved 
plan to merge may receive in cash the value of their national bank 
shares if they comply with the requirements of 12 U.S.C. 214a as if the 
nonbank affiliate were a state bank. The OCC may conduct an appraisal or 
reappraisal of dissenters' shares of stock in a national bank involved 
in the merger if all parties agree that the determination is final and 
binding on each party and agree on how the total expenses of the OCC in 
making the appraisal will be divided among the parties and paid to the 
OCC.
    (B) The rights of dissenting shareholders and appraisal of 
dissenters' shares of stock in the nonbank affiliate involved in the 
merger shall be determined in the manner prescribed by the law of the 
state or other jurisdiction under which the nonbank affiliate is 
organized.
    (v) The corporate existence of each entity participating in the 
merger shall be continued in the resulting nonbank affiliate, and all 
the rights, franchises, property, appointments, liabilities, and other 
interests of the participating national bank shall be transferred to the 
resulting nonbank affiliate as set forth in 12 U.S.C. 214b, in the same 
manner and to the same extent as in a merger between a national bank and 
a state bank under 12 U.S.C. 214a, as if the nonbank affiliate were a 
state bank.
    (h) Interstate combinations. A business combination between banks 
under the authority of 12 U.S.C. 1831u(a)(1) must satisfy the standards 
and requirements and comply with the procedures of 12 U.S.C. 1831u and 
the procedures of 12 U.S.C. 215 and 215a as applicable. For purposes of 
this section, the acquisition of a branch without the acquisition of all 
or substantially all of the assets of a bank is treated as the 
acquisition of a bank whose home state is the state in which the branch 
is located.
    (i) Expedited review for business reorganizations and streamlined 
applications. A filing that qualifies as a business reorganization as 
defined in paragraph (d)(2) of this section, or a filing that qualifies 
as a streamlined application as described in paragraph (j) of this 
section, is deemed approved by the OCC as of the 45th day after the 
application is received by the OCC, or the 15th day after the close of 
the comment period, whichever is later, unless the OCC notifies the 
applicant that the filing is not eligible for expedited review, or the 
expedited review process is extended, under Sec. 5.13(a)(2). An 
application under

[[Page 146]]

this paragraph must contain all necessary information for the OCC to 
determine if it qualifies as a business reorganization or streamlined 
application.
    (j) Streamlined applications. (1) An applicant may qualify for a 
streamlined business combination application in the following 
situations:
    (i) At least one party to the transaction is an eligible bank, and 
all other parties to the transaction are eligible banks or eligible 
depository institutions, the resulting national bank will be well 
capitalized immediately following consummation of the transaction, and 
the total assets of the target institution are no more than 50 percent 
of the total assets of the acquiring bank, as reported in each 
institution's Consolidated Report of Condition and Income filed for the 
quarter immediately preceding the filing of the application;
    (ii) The acquiring bank is an eligible bank, the target bank is not 
an eligible bank or an eligible depository institution, the resulting 
national bank will be well capitalized immediately following 
consummation of the transaction, and the applicants in a prefiling 
communication request and obtain approval from the appropriate district 
office to use the streamlined application;
    (iii) The acquiring bank is an eligible bank, the target bank is not 
an eligible bank or an eligible depository institution, the resulting 
bank will be well capitalized immediately following consummation of the 
transaction, and the total assets acquired do not exceed 10 percent of 
the total assets of the acquiring national bank, as reported in each 
institution's Consolidated Report of Condition and Income filed for the 
quarter immediately preceding the filing of the application; or
    (iv) In the case of a transaction under paragraph (g)(4) of this 
section, the acquiring bank is an eligible bank, the resulting national 
bank will be well capitalized immediately following consummation of the 
transaction, the applicants in a prefiling communication request and 
obtain approval from the appropriate district office to use the 
streamlined application, and the total assets acquired do not exceed 10 
percent of the total assets of the acquiring national bank, as reported 
in the bank's Consolidated Report of Condition and Income filed for the 
quarter immediately preceding the filing of the application.
    (2) When a business combination qualifies for a streamlined 
application, the applicant should consult the Manual to determine the 
abbreviated application information required by the OCC. The OCC 
encourages prefiling communications between the applicants and the 
appropriate district office before filing under paragraph (j) of this 
section.

[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999; 65 
FR 12911, Mar. 10, 2000; 68 FR 70129, Dec. 17, 2003]



Sec. 5.34  Operating subsidiaries.

    (a) Authority. 12 U.S.C. 24 (Seventh), 24a, 93a, 3101 et seq.
    (b) Licensing requirements. A national bank must file a notice or 
application as prescribed in this section to acquire or establish an 
operating subsidiary, or to commence a new activity in an existing 
operating subsidiary.
    (c) Scope. This section sets forth authorized activities and 
application or notice procedures for national banks engaging in 
activities through an operating subsidiary. The procedures in this 
section do not apply to financial subsidiaries authorized under Sec. 
5.39. Unless provided otherwise, this section applies to a Federal 
branch or agency that acquires, establishes, or maintains any subsidiary 
that a national bank is authorized to acquire or establish under this 
section in the same manner and to the same extent as if the Federal 
branch or agency were a national bank, except that the ownership 
interest required in paragraphs (e)(2) and (e)(5)(i)(B) of this section 
shall apply to the parent foreign bank of the Federal branch or agency 
and not to the Federal branch or agency.
    (d) Definitions. For purposes of this Sec. 5.34:
    (1) Authorized product means a product that would be defined as 
insurance under section 302(c) of the Gramm-Leach-Bliley Act (Public Law 
106-102, 113 Stat. 1338, 1407) (GLBA) (15 U.S.C. 6712) that, as of 
January 1, 1999, the OCC had determined in writing that

[[Page 147]]

national banks may provide as principal or national banks were in fact 
lawfully providing the product as principal, and as of that date no 
court of relevant jurisdiction had, by final judgment, overturned a 
determination by the OCC that national banks may provide the product as 
principal. An authorized product does not include title insurance, or an 
annuity contract the income of which is subject to treatment under 
section 72 of the Internal Revenue Code of 1986 (26 U.S.C. 72).
    (2) Well capitalized means the capital level described in 12 CFR 
6.4(b)(1) or, in the case of a Federal branch or agency, the capital 
level described in 12 CFR 4.7(b)(1)(iii).
    (3) Well managed means, unless otherwise determined in writing by 
the OCC:
    (i) In the case of a national bank:
    (A) The national bank has received a composite rating of 1 or 2 
under the Uniform Financial Institutions Rating System in connection 
with its most recent examination; or
    (B) In the case of any national bank that has not been examined, the 
existence and use of managerial resources that the OCC determines are 
satisfactory.
    (ii) In the case of a Federal branch or agency:
    (A) The Federal branch or agency has received a composite ROCA 
supervisory rating (which rates risk management, operational controls, 
compliance, and asset quality) of 1 or 2 at its most recent examination; 
or
    (B) In the case of a Federal branch or agency that has not been 
examined, the existence and use of managerial resources that the OCC 
determines are satisfactory.
    (e) Standards and requirements--(1) Authorized activities. A 
national bank may conduct in an operating subsidiary activities that are 
permissible for a national bank to engage in directly either as part of, 
or incidental to, the business of banking, as determined by the OCC, or 
otherwise under other statutory authority, including:
    (i) Providing authorized products as principal; and
    (ii) Providing title insurance as principal if the national bank or 
subsidiary thereof was actively and lawfully underwriting title 
insurance before November 12, 1999, and no affiliate of the national 
bank (other than a subsidiary) provides insurance as principal. A 
subsidiary may not provide title insurance as principal if the state had 
in effect before November 12, 1999, a law which prohibits any person 
from underwriting title insurance with respect to real property in that 
state.
    (2) Qualifying subsidiaries. An operating subsidiary in which a 
national bank may invest includes a corporation, limited liability 
company, or similar entity if the parent bank owns more than 50 percent 
of the voting (or similar type of controlling) interest of the operating 
subsidiary; or the parent bank otherwise controls the operating 
subsidiary and no other party controls more than 50 percent of the 
voting (or similar type of controlling) interest of the operating 
subsidiary. However, the following subsidiaries are not operating 
subsidiaries subject to this section:
    (i) A subsidiary in which the bank's investment is made pursuant to 
specific authorization in a statute or OCC regulation (e.g., a bank 
service company under 12 U.S.C. 1861 et seq. or a financial subsidiary 
under section 5136A of the Revised Statutes (12 U.S.C. 24a)); and
    (ii) A subsidiary in which the bank has acquired, in good faith, 
shares through foreclosure on collateral, by way of compromise of a 
doubtful claim, or to avoid a loss in connection with a debt previously 
contracted.
    (3) Examination and supervision. An operating subsidiary conducts 
activities authorized under this section pursuant to the same 
authorization, terms and conditions that apply to the conduct of such 
activities by its parent national bank. If, upon examination, the OCC 
determines that the operating subsidiary is operating in violation of 
law, regulation, or written condition, or in an unsafe or unsound manner 
or otherwise threatens the safety or soundness of the bank, the OCC will 
direct the bank or operating subsidiary to take appropriate remedial 
action, which may include requiring the bank to divest or liquidate the 
operating subsidiary, or discontinue specified activities. OCC authority 
under this paragraph is subject to the limitations

[[Page 148]]

and requirements of section 45 of the Federal Deposit Insurance Act (12 
U.S.C. 1831v) and section 115 of the Gramm-Leach-Bliley Act (12 U.S.C. 
1820a).
    (4) Consolidation of figures--(i) National banks. Pertinent book 
figures of the parent national bank and its operating subsidiary shall 
be combined for the purpose of applying statutory or regulatory 
limitations when combination is needed to effect the intent of the 
statute or regulation, e.g., for purposes of 12 U.S.C. 56, 60, 84, and 
371d.
    (ii) Federal branch or agencies. Transactions conducted by all of a 
foreign bank's Federal branches and agencies and State branches and 
agencies, and their operating subsidiaries, shall be combined for the 
purpose of applying any limitation or restriction as provided in 12 CFR 
28.14.
    (5) Procedures--(i) Application required. (A) Except as provided in 
paragraph (e)(5)(iv) or (e)(5)(vi) of this section, a national bank that 
intends to acquire or establish an operating subsidiary, or to perform a 
new activity in an existing operating subsidiary, must first submit an 
application to, and receive approval from, the OCC. The application must 
include a complete description of the bank's investment in the 
subsidiary, the proposed activities of the subsidiary, the 
organizational structure and management of the subsidiary, the relations 
between the bank and the subsidiary, and other information necessary to 
adequately describe the proposal. To the extent the application relates 
to the initial affiliation of the bank with a company engaged in 
insurance activities, the bank should describe the type of insurance 
activity that the company is engaged in and has present plans to 
conduct. The bank must also list for each state the lines of business 
for which the company holds, or will hold, an insurance license, 
indicating the state where the company holds a resident license or 
charter, as applicable. The application must state whether the operating 
subsidiary will conduct any activity at a location other than the main 
office or a previously approved branch of the bank. The OCC may require 
the applicant to submit a legal analysis if the proposal is novel, 
unusually complex, or raises substantial unresolved legal issues. In 
these cases, the OCC encourages applicants to have a pre-filing meeting 
with the OCC.
    (B) A national bank must file an application and obtain prior 
approval before acquiring or establishing an operating subsidiary, or 
performing a new activity in an existing operating subsidiary, if the 
bank controls the subsidiary but owns 50 percent or less of the voting 
(or similar type of controlling) interest of the subsidiary. These 
applications are not subject to the filing exemption in paragraph 
(e)(5)(vi) of this section and are not eligible for the notice 
procedures in paragraph (e)(5)(iv) of this section.
    (ii) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to this section. However, if the OCC 
concludes that an application presents significant and novel policy, 
supervisory, or legal issues, the OCC may determine that some or all 
provisions in Sec. Sec. 5.8, 5.10, and 5.11 apply.
    (iii) OCC review and approval. The OCC reviews a national bank's 
application to determine whether the proposed activities are legally 
permissible and to ensure that the proposal is consistent with safe and 
sound banking practices and OCC policy and does not endanger the safety 
or soundness of the parent national bank. As part of this process, the 
OCC may request additional information and analysis from the applicant.
    (iv) Notice process for certain activities. A national bank that is 
``well capitalized'' and ``well managed'' may acquire or establish an 
operating subsidiary, or perform a new activity in an existing operating 
subsidiary, by providing the appropriate district office written notice 
within 10 days after acquiring or establishing the subsidiary, or 
commencing the activity, if the activity is listed in paragraph 
(e)(5)(v) of this section. The written notice must include a complete 
description of the bank's investment in the subsidiary and of the 
activity conducted and a representation and undertaking that the 
activity will be conducted in accordance with OCC policies contained in 
guidance issued by the OCC regarding the activity. To the extent the 
notice relates to the initial affiliation of the bank with

[[Page 149]]

a company engaged in insurance activities, the bank should describe the 
type of insurance activity that the company is engaged in and has 
present plans to conduct. The bank must also list for each state the 
lines of business for which the company holds, or will hold, an 
insurance license, indicating the state where the company holds a 
resident license or charter, as applicable. Any bank receiving approval 
under this paragraph is deemed to have agreed that the subsidiary will 
conduct the activity in a manner consistent with published OCC guidance.
    (v) Activities eligible for notice. The following activities qualify 
for the notice procedures, provided the activity is conducted pursuant 
to the same terms and conditions as would be applicable if the activity 
were conducted directly by a national bank:
    (A) Holding and managing assets acquired by the parent bank, 
including investment assets and property acquired by the bank through 
foreclosure or otherwise in good faith to compromise a doubtful claim, 
or in the ordinary course of collecting a debt previously contracted;
    (B) Providing services to or for the bank or its affiliates, 
including accounting, auditing, appraising, advertising and public 
relations, and financial advice and consulting;
    (C) Making loans or other extensions of credit, and selling money 
orders, savings bonds, and travelers checks;
    (D) Purchasing, selling, servicing, or warehousing loans or other 
extensions of credit, or interests therein;
    (E) Providing courier services between financial institutions;
    (F) Providing management consulting, operational advice, and 
services for other financial institutions;
    (G) Providing check guaranty, verification and payment services;
    (H) Providing data processing, data warehousing and data 
transmission products, services, and related activities and facilities, 
including associated equipment and technology, for the bank or its 
affiliates;
    (I) Acting as investment adviser (including an adviser with 
investment discretion) or financial adviser or counselor to governmental 
entities or instrumentalities, businesses, or individuals, including 
advising registered investment companies and mortgage or real estate 
investment trusts, furnishing economic forecasts or other economic 
information, providing investment advice related to futures and options 
on futures, and providing consumer financial counseling;
    (J) Providing tax planning and preparation services;
    (K) Providing financial and transactional advice and assistance, 
including advice and assistance for customers in structuring, arranging, 
and executing mergers and acquisitions, divestitures, joint ventures, 
leveraged buyouts, swaps, foreign exchange, derivative transactions, 
coin and bullion, and capital restructurings;
    (L) Underwriting and reinsuring credit related insurance to the 
extent permitted under section 302 of the GLBA (15 U.S.C. 6712);
    (M) Leasing of personal property and acting as an agent or adviser 
in leases for others;
    (N) Providing securities brokerage or acting as a futures commission 
merchant, and providing related credit and other related services;
    (O) Underwriting and dealing, including making a market, in bank 
permissible securities and purchasing and selling as principal, asset 
backed obligations;
    (P) Acting as an insurance agent or broker, including title 
insurance to the extent permitted under section 303 of the GLBA (15 
U.S.C. 6713);
    (Q) Reinsuring mortgage insurance on loans originated, purchased, or 
serviced by the bank, its subsidiaries, or its affiliates, provided that 
if the subsidiary enters into a quota share agreement, the subsidiary 
assumes less than 50 percent of the aggregate insured risk covered by 
the quota share agreement. A ``quota share agreement'' is an agreement 
under which the reinsurer is liable to the primary insurance underwriter 
for an agreed upon percentage of every claim arising out of the covered 
book of business ceded by the primary insurance underwriter to the 
reinsurer;

[[Page 150]]

    (R) Acting as a finder pursuant to 12 CFR 7.1002 to the extent 
permitted by published OCC precedent; \1\
---------------------------------------------------------------------------

    \1\ See, e.g., the OCC's monthly publication ``Interpretations and 
Actions.'' Beginning with the May 1996 issue, the OCC's Web site 
provides access to electronic versions of ``Interpretations and 
Actions'' (www.occ.treas.gov).
---------------------------------------------------------------------------

    (S) Offering correspondent services to the extent permitted by 
published OCC precedent;
    (T) Acting as agent or broker in the sale of fixed or variable 
annuities;
    (U) Offering debt cancellation or debt suspension agreements;
    (V) Providing real estate settlement, closing, escrow, and related 
services; and real estate appraisal services for the subsidiary, parent 
bank, or other financial institutions;
    (W) Acting as a transfer or fiscal agent;
    (X) Acting as a digital certification authority to the extent 
permitted by published OCC precedent, subject to the terms and 
conditions contained in that precedent; and
    (Y) Providing or selling public transportation tickets, event and 
attraction tickets, gift certificates, prepaid phone cards, promotional 
and advertising material, postage stamps, and Electronic Benefits 
Transfer (EBT) script, and similar media, to the extent permitted by 
published OCC precedent, subject to the terms and conditions contained 
in that precedent.
    (vi) No application or notice required. A national bank may acquire 
or establish an operating subsidiary without filing an application or 
providing notice to the OCC, if the bank is adequately capitalized or 
well capitalized and the:
    (A) Activities of the new subsidiary are limited to those activities 
previously reported by the bank in connection with the establishment or 
acquisition of a prior operating subsidiary;
    (B) Activities in which the new subsidiary will engage continue to 
be legally permissible for the subsidiary; and
    (C) Activities of the new subsidiary will be conducted in accordance 
with any conditions imposed by the OCC in approving the conduct of these 
activities for any prior operating subsidiary of the bank.
    (vii) Fiduciary powers. If an operating subsidiary proposes to 
exercise investment discretion on behalf of customers or provide 
investment advice for a fee, the national bank must have prior OCC 
approval to exercise fiduciary powers pursuant to Sec. 5.26.
    (6) Annual Report on Operating Subsidiaries--(i) Filing requirement. 
Each national bank shall prepare and file with the OCC an Annual Report 
on Operating Subsidiaries containing the information set forth in 
paragraph (e)(6)(ii) of this section for each of its operating 
subsidiaries that:
    (A) Is not functionally regulated within the meaning of section 
5(c)(5) of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 
1844(c)(5)); and
    (B) Does business directly with consumers in the United States. For 
purposes of paragraph (e)(6) of this section, an operating subsidiary, 
or any subsidiary thereof, does business directly with consumers if, in 
the ordinary course of its business, it provides products or services to 
individuals to be used primarily for personal, family, or household 
purposes.
    (ii) Information required. The Annual Report on Operating 
Subsidiaries must contain the following information for each covered 
operating subsidiary listed:
    (A) The name and charter number of the parent national bank;
    (B) The name (include any ``dba'' (doing business as), abbreviated 
names, or trade names used to identify the operating subsidiary when it 
does business directly with consumers), mailing address (include the 
street address or post office box, city, state, and zip code), e-mail 
address (if any), and telephone number of the operating subsidiary;
    (C) The principal place of business of the operating subsidiary, if 
different from the address provided pursuant to paragraph (e)(6)(ii)(B) 
of this section; and
    (D) The lines of business in which the operating subsidiary is doing 
business directly with consumers by designating the appropriate code 
contained in appendix B (NAICS Activity Codes for Commonly Reported 
Activities) to the

[[Page 151]]

Instructions for Preparation of Report of Changes in Organizational 
Structure, Form FR Y-10, a copy of which is set forth on the OCC's Web 
site at http://www.occ.gov. If the operating subsidiary is engaged in an 
activity not set forth in this list, a national bank shall report the 
code 0000 and provide a brief description of the activity.
    (iii) Filing time frames and availability of information. Each 
national bank's Annual Report on Operating Subsidiaries shall contain 
information current as of December 31st for the year prior to the year 
the report is filed. The national bank shall submit its first Annual 
Report on Operating Subsidiaries (for information as of December 31, 
2004) to the OCC on or before January 31, 2005, and on or before January 
31st each year thereafter. The national bank may submit the Annual 
Report on Operating Subsidiaries electronically or in another format 
prescribed by the OCC. The OCC will make available to the public the 
information contained in the Annual Report on Operating Subsidiaries on 
its Web site at http://www.occ.gov.

[65 FR 12911, Mar. 10, 2000, as amended at 66 FR 49097, Sept. 26, 2001; 
66 FR 62914, Dec. 4, 2001; 68 FR 70131, Dec. 17, 2003; 69 FR 64481, Nov. 
5, 2004]



Sec. 5.35  Bank service companies.

    (a) Authority. 12 U.S.C. 93a and 1861-1867.
    (b) Licensing requirements. Except where otherwise provided, a 
national bank shall submit a notice and obtain prior OCC approval to 
invest in the equity of a bank service company or to perform new 
activities in an existing bank service company.
    (c) Scope. This section describes the procedures and requirements 
regarding OCC review and approval of a notice to invest in a bank 
service company.
    (d) Definitions--(1) Bank service company means a corporation or 
limited liability company organized to provide services authorized by 
the Bank Service Company Act, 12 U.S.C. 1861 et seq., all of whose 
capital stock is owned by one or more insured banks in the case of a 
corporation, or all of the members of which are one or more insured 
banks in the case of a limited liability company.
    (2) Limited liability company means any non-corporate company, 
partnership, trust, or similar business entity organized under the law 
of a State (as defined in section 3 of the Federal Deposit Insurance 
Act) which provides that a member or manager of such company is not 
personally liable for a debt, obligation, or liability of the company 
solely by reason of being, or acting as, a member or manager of such 
company.
    (3) Depository institution, for purposes of this section, means an 
insured bank, a financial institution subject to examination by the 
Office of Thrift Supervision, or the National Credit Union 
Administration Board, or a financial institution whose accounts or 
deposits are insured or guaranteed under state law and eligible to be 
insured by the Federal Deposit Insurance Corporation or the National 
Credit Union Administration Board.
    (4) Invest includes making any advance of funds to a bank service 
company, whether by the purchase of stock, the making of a loan, or 
otherwise, except a payment for rent earned, goods sold and delivered, 
or services rendered before the payment was made.
    (5) Principal investor means the insured bank that has the largest 
amount invested in the equity of a bank service company. In any case 
where two or more insured banks have equal amounts invested, the bank 
service company shall designate one of the banks as its principal 
investor.
    (e) Standards and requirements. A national bank may invest in a bank 
service company that conducts activities described in paragraphs (f)(3) 
and (f)(4) of this section, and activities (other than taking deposits) 
permissible for the national bank and other state and national bank 
shareholders or members in the bank service company.
    (f) Procedures--(1) OCC notice and approval required. Except as 
provided in paragraphs (f)(2) and (f)(4) of this section, a national 
bank that intends to make an investment in a bank service company, or to 
perform new activities in an existing bank service company, must submit 
a notice to and receive prior approval from the OCC. The OCC approves or 
denies a proposed investment within 60 days after the filing is

[[Page 152]]

received by the OCC, unless the OCC notifies the bank prior to that date 
that the filing presents a significant supervisory or compliance 
concern, or raises a significant legal or policy issue. The notice must 
include the information required by paragraph (g) of this section.
    (2) Notice process only for certain activities. A national bank that 
is ``well capitalized'' and ``well managed'' as defined in Sec. 5.34(d) 
may invest in a bank service company, or perform a new activity in an 
existing bank service company, by providing the appropriate district 
office written notice within 10 days after the investment, if the bank 
service company engages only in the activities listed in Sec. 
5.34(e)(5)(v). No prior OCC approval is required. The written notice 
must include a complete description of the bank's investment in the bank 
service company and of the activity conducted and a representation and 
undertaking that the activity will be conducted in accordance with OCC 
guidance. To the extent the notice relates to the initial affiliation of 
the bank with a company engaged in insurance activities, the bank should 
describe the type of insurance activity that the company is engaged in 
and has present plans to conduct. The bank must also list for each state 
the lines of business for which the company holds, or will hold, an 
insurance license, indicating the state where the company holds a 
resident license or charter, as applicable. Any bank receiving approval 
under this paragraph is deemed to have agreed that the bank service 
company will conduct the activity in a manner consistent with the 
published OCC guidance.
    (3) Investments requiring no approval. A national bank does not need 
OCC approval to invest in a bank service company, or to perform a new 
activity in an existing bank service company, if the bank service 
company will provide the following services only for depository 
institutions: check and deposit posting and sorting; computation and 
posting of interest and other credits and charges; preparation and 
mailing of checks, statements, notices, and similar items; or any other 
clerical, bookkeeping, accounting, statistical, or similar function.
    (4) Federal Reserve approval. A national bank also may, with the 
approval of the Board of Governors of the Federal Reserve System 
(Federal Reserve Board), invest in the equity of a bank service company 
that provides any other service (except deposit taking) that the Federal 
Reserve Board has determined, by regulation, to be permissible for a 
bank holding company under 12 U.S.C. 1843(c)(8).
    (5) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to a request for approval to invest in a 
bank service corporation. However, if the OCC concludes that an 
application presents significant and novel policy, supervisory, or legal 
issues, the OCC may determine that any or all parts of Sec. Sec. 5.8, 
5.10, and 5.11 apply.
    (g) Required information. A notice required under paragraph (f)(1), 
of this section must contain the following:
    (1) The name and location of the bank service company;
    (2) A complete description of the activities the bank service 
company will conduct. To the extent the notice relates to the initial 
affiliation of the bank with a company engaged in insurance activities, 
the bank should describe the type of insurance activity that the company 
is engaged in and has present plans to conduct. The bank must also list 
for each state the lines of business for which the company holds, or 
will hold, an insurance license, indicating the state where the company 
holds a resident license or charter, as applicable;
    (3) Information demonstrating that the bank will comply with the 
investment limitations of paragraph (i) of this section;
    (4) Information demonstrating that the bank service company and all 
banks investing in the bank service company are located in the same 
state, unless the Federal Reserve Board has approved an exception to 
this requirement under the authority of 12 U.S.C. 1864(b); and
    (5) Information demonstrating that the bank service company will 
conduct these activities only at locations in a state where the 
investing bank could be authorized to perform the activities directly.

[[Page 153]]

    (h) Examination and supervision. Each bank service company in which 
a national bank is the principal investor is subject to examination and 
supervision by the OCC in the same manner and to the same extent as that 
national bank. OCC authority under this paragraph is subject to the 
limitations and requirements of section 45 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831v) and section 115 of the Gramm-Leach-
Bliley Act (12 U.S.C. 1820a).
    (i) Investment and other limitations--(1) Investment limitations. A 
bank may not invest more than ten percent of its capital and surplus in 
a bank service company. In addition, the bank's total investments in all 
bank service companies may not exceed five percent of the bank's total 
assets.
    (2) Other limitations. Except as provided in paragraph (f)(4) of 
this section, a bank service company shall only conduct activities that 
the national bank could conduct directly. If the bank service company 
has both national and state bank shareholders or members, the activities 
conducted must also be permissible for the state bank shareholders or 
members.

[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999; 65 
FR 12913, Mar. 10, 2000]



Sec. 5.36  Other equity investments.

    (a) Authority. 12 U.S.C. 1 et seq., 24(Seventh), and 93a.
    (b) Scope. National banks are permitted to make various types of 
equity investments pursuant to 12 U.S.C. 24(Seventh) and other statutes. 
These investments are in addition to those subject to Sec. Sec. 5.34, 
5.35, and 5.37. This section describes the procedure governing the 
filing of the notice that the OCC requires in connection with certain of 
these investments. Other investments authorized under this section may 
be reviewed on a case-by-case basis by the OCC.
    (c) Definitions. For purposes of this Sec. 5.36:
    (1) Enterprise means any corporation, limited liability company, 
partnership, trust, or similar business entity.
    (2) Well capitalized means the capital level described in 12 CFR 
6.4(b)(1).
    (3) Well managed has the meaning set forth in Sec. 5.34(d)(3).
    (d) Procedure. (1) A national bank must provide the appropriate 
district office with written notice within ten days after making an 
equity investment in the following:
    (i) An agricultural credit corporation;
    (ii) A savings association eligible to be acquired under section 13 
of the Federal Deposit Insurance Act (12 U.S.C. 1823); and
    (iii) Any other equity investment that may be authorized by statute 
after February 12, 1990, if not covered by other applicable OCC 
regulation.
    (2) The written notice required by paragraph (c)(1) of this section 
must include a description, and the amount, of the bank's investment.
    (3) The OCC reserves the right to require additional information as 
necessary.
    (e) Non-controlling investments. A national bank may make a non-
controlling investment, directly or through its operating subsidiary, in 
an enterprise that engages in the activities described in paragraph 
(e)(2) of this section by filing a written notice. The written notice 
must be filed with the appropriate district office no later than 10 days 
after making the investment and must:
    (1) Describe the structure of the investment and the activity or 
activities conducted by the enterprise in which the bank is investing. 
To the extent the notice relates to the initial affiliation of the bank 
with a company engaged in insurance activities, the bank should describe 
the type of insurance activity that the company is engaged in and has 
present plans to conduct. The bank must also list for each state the 
lines of business for which the company holds, or will hold, an 
insurance license, indicating the state where the company holds a 
resident license or charter, as applicable;
    (2) State which paragraphs of Sec. 5.34(e)(5)(v) describe the 
activity or activities, or state that, and describe how, the activity is 
substantively the same as that contained in published OCC precedent 
approving a non-controlling investment by a national bank or its 
operating subsidiary, state that

[[Page 154]]

the activity will be conducted in accordance with the same terms and 
conditions applicable to the activity covered by the precedent, and 
provide the citation to the applicable precedent;
    (3) Certify that the bank is well managed and well capitalized at 
the time of the investment;
    (4) Describe how the bank has the ability to prevent the enterprise 
from engaging in activities that are not set forth in Sec. 
5.34(e)(5)(v) or not contained in published OCC precedent approving a 
non-controlling investment by a national bank or its operating 
subsidiary, or how the bank otherwise has the ability to withdraw its 
investment;
    (5) Certify that the bank will account for its investment under this 
section under the equity or cost method of accounting;
    (6) Describe how the investment is convenient and useful to the bank 
in carrying out its business and not a mere passive investment unrelated 
to the bank's banking business;
    (7) Certify that the bank's loss exposure is limited, as a legal and 
accounting matter, and the bank does not have open-ended liability for 
the obligations of the enterprise; and
    (8) Certify that the enterprise in which the bank is investing 
agrees to be subject to OCC supervision and examination, subject to the 
limitations and requirements of section 45 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831v) and section 115 of the Gramm-Leach-
Bliley Act (12 U.S.C. 1820a).
    (f) Non-controlling investments by Federal branches. A Federal 
branch that satisfies the well capitalized and well managed standards in 
12 CFR 4.7(b)(1)(iii) and Sec. 5.34(d)(3)(ii) may make a non-
controlling investment in accordance with paragraph (e) of this section 
in the same manner and subject to the same conditions and requirements 
as a national bank, and subject to any additional requirements that may 
apply under 12 CFR 28.10(c).
    (g) Exceptions to rules of general applicability. Sections 5.8, 5.9, 
5.10, and 5.11 of this part do not apply to filings for other equity 
investments.

[61 FR 60363, Nov. 27, 1996, as amended at 65 FR 12913, Mar. 10, 2000; 
65 FR 41560, July 6, 2000; 68 FR 70698, Dec. 19, 2003]



Sec. 5.37  Investment in bank premises.

    (a) Authority. 12 U.S.C. 29, 93a, and 371d.
    (b) Scope. This section sets forth the procedures governing OCC 
review and approval of applications by national banks to invest in bank 
premises or in certain bank premises related investments, loans, or 
indebtedness, as described in paragraph (d)(1)(i) of this section.
    (c) Definition--Bank premises for purposes of this section includes 
the following:
    (1) Premises that are owned and occupied (or to be occupied, if 
under construction) by the bank, its branches, or its consolidated 
subsidiaries;
    (2) Capitalized leases and leasehold improvements, vaults, and fixed 
machinery and equipment;
    (3) Remodeling costs to existing premises;
    (4) Real estate acquired and intended, in good faith, for use in 
future expansion; or
    (5) Parking facilities that are used by customers or employees of 
the bank, its branches, and its consolidated subsidiaries.
    (d) Procedure--(1) Application. (i) A national bank shall submit an 
application to the appropriate supervisory office to invest in bank 
premises, or in the stock, bonds, debentures, or other such obligations 
of any corporation holding the premises of the bank, or to make loans to 
or upon the security of the stock of such corporation, if the aggregate 
of all such investments and loans, together with the indebtedness 
incurred by any such corporation that is an affiliate of the bank, as 
defined in 12 U.S.C. 221a, will exceed the amount of the capital stock 
of the bank.
    (ii) The application must include:
    (A) A description of the bank's present investment in bank premises;
    (B) The investment in bank premises that the bank intends to make, 
and the business reason for making the investment; and
    (C) The amount by which the bank's aggregate investment will exceed 
the amount of the bank's capital stock.

[[Page 155]]

    (2) Approval. An application for national bank investment in bank 
premises or in certain bank premises' related investments, loans or 
indebtedness, as described in paragraph (d)(1)(i) of this section, is 
deemed approved as of the 30th day after the filing is received by the 
OCC, unless the OCC notifies the bank prior to that date that the filing 
presents a significant supervisory, or compliance concern, or raises a 
significant legal or policy issue. An approval for a specified amount 
under this section remains valid up to that amount until the OCC 
notifies the bank otherwise.
    (3) Notice process. Notwithstanding paragraph (d)(1)(i) of this 
section, a bank that is rated 1 or 2 under the Uniform Financial 
Institutions Rating System (CAMELS) may make an aggregate investment in 
bank premises up to 150 percent of the bank's capital and surplus 
without the OCC's prior approval, provided that the bank is well 
capitalized as defined in 12 CFR part 6 and will continue to be well 
capitalized after the investment or loan is made. However, the bank 
shall notify the appropriate supervisory office in writing of the 
investment within 30 days after the investment or loan is made. The 
written notice must include a description of the bank's investment.
    (4) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to this section. However, if the OCC 
concludes that an application presents significant and novel policy, 
supervisory, or legal issues, the OCC may determine that any or all 
parts of Sec. Sec. 5.8, 5.10, and 5.11 apply.

[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999]



Sec. 5.39  Financial subsidiaries.

    (a) Authority. 12 U.S.C. 93a and section 121 of Public Law 106-102, 
113 Stat. 1338, 1373.
    (b) Approval requirements. A national bank must file a notice as 
prescribed in this section prior to acquiring a financial subsidiary or 
engaging in activities authorized pursuant to section 5136A(a)(2)(A)(i) 
of the Revised Statutes (12 U.S.C. 24a) through a financial subsidiary. 
When a financial subsidiary proposes to conduct a new activity permitted 
under Sec. 5.34, the bank shall follow the procedures in Sec. 
5.34(e)(5) instead of paragraph (i) of this section.
    (c) Scope. This section sets forth authorized activities, approval 
procedures, and, where applicable, conditions for national banks 
engaging in activities through a financial subsidiary.
    (d) Definitions. For purposes of this Sec. 5.39:
    (1) Affiliate has the meaning set forth in section 2 of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841), except that the term 
``affiliate'' for purposes of paragraph (h)(5) of this section shall 
have the meaning set forth in sections 23A or 23B of the Federal Reserve 
Act (12 U.S.C. 371c and 371c-1), as applicable.
    (2) Appropriate Federal banking agency has the meaning set forth in 
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
    (3) Company has the meaning set forth in section 2 of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841), and includes a limited 
liability company (LLC).
    (4) Control has the meaning set forth in section 2 of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841).
    (5) Eligible debt means unsecured long-term debt that is:
    (i) Not supported by any form of credit enhancement, including a 
guaranty or standby letter of credit; and
    (ii) Not held in whole or in any significant part by any affiliate, 
officer, director, principal shareholder, or employee of the bank or any 
other person acting on behalf of or with funds from the bank or an 
affiliate of the bank.
    (6) Financial subsidiary means any company that is controlled by one 
or more insured depository institutions, other than a subsidiary that:
    (i) Engages solely in activities that national banks may engage in 
directly and that are conducted subject to the same terms and conditions 
that govern the conduct of these activities by national banks; or
    (ii) A national bank is specifically authorized to control by the 
express terms of a Federal statute (other than section 5136A of the 
Revised Statutes), and not by implication or interpretation, such as by 
section 25 of the Federal Reserve Act (12 U.S.C. 601-604a),

[[Page 156]]

section 25A of the Federal Reserve Act (12 U.S.C. 611-631), or the Bank 
Service Company Act (12 U.S.C. 1861 et seq.)
    (7) Insured depository institution has the meaning set forth in 
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
    (8) Long term debt means any debt obligation with an initial 
maturity of 360 days or more.
    (9) Subsidiary has the meaning set forth in section 2 of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841).
    (10) Tangible equity has the meaning set forth in 12 CFR 6.2(g).
    (11) Well capitalized with respect to a depository institution means 
the capital level designated as ``well capitalized'' by the 
institution's appropriate Federal banking agency pursuant to section 38 
of the Federal Deposit Insurance Act (12 U.S.C. 1831o).
    (12) Well managed means:
    (i) Unless otherwise determined in writing by the appropriate 
Federal banking agency, the institution has received a composite rating 
of 1 or 2 under the Uniform Financial Institutions Rating System (or an 
equivalent rating under an equivalent rating system) in connection with 
the most recent examination or subsequent review of the depository 
institution and, at least a rating of 2 for management, if such a rating 
is given; or
    (ii) In the case of any depository institution that has not been 
examined by its appropriate Federal banking agency, the existence and 
use of managerial resources that the appropriate Federal banking agency 
determines are satisfactory.
    (e) Authorized activities. A financial subsidiary may engage only in 
the following activities:
    (1) Activities that are financial in nature and activities 
incidental to a financial activity, authorized pursuant to 
5136A(a)(2)(A)(i) of the Revised Statutes (12 U.S.C. 24a) (to the extent 
not otherwise permitted under paragraph (e)(2) of this section), 
including:
    (i) Lending, exchanging, transferring, investing for others, or 
safeguarding money or securities;
    (ii) Engaging as agent or broker in any state for purposes of 
insuring, guaranteeing, or indemnifying against loss, harm, damage, 
illness, disability, death, defects in title, or providing annuities as 
agent or broker;
    (iii) Providing financial, investment, or economic advisory 
services, including advising an investment company as defined in section 
3 of the Investment Company Act (15 U.S.C. 80a-3);
    (iv) Issuing or selling instruments representing interests in pools 
of assets permissible for a bank to hold directly;
    (v) Underwriting, dealing in, or making a market in securities;
    (vi) Engaging in any activity that the Board of Governors of the 
Federal Reserve System has determined, by order or regulation in effect 
on November 12, 1999, to be so closely related to banking or managing or 
controlling banks as to be a proper incident thereto (subject to the 
same terms and conditions contained in the order or regulation, unless 
the order or regulation is modified by the Board of Governors of the 
Federal Reserve System);
    (vii) Engaging, in the United States, in any activity that a bank 
holding company may engage in outside the United States and the Board of 
Governors of the Federal Reserve System has determined, under 
regulations prescribed or interpretations issued pursuant to section 
4(c)(13) of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(c)(13)) 
as in effect on November 11, 1999, to be usual in connection with the 
transaction of banking or other financial operations abroad; and
    (viii) Activities that the Secretary of the Treasury in consultation 
with the Board of Governors of the Federal Reserve System, as provided 
in section 5136A of the Revised Statutes, determines to be financial in 
nature or incidental to a financial activity; and
    (2) Activities that may be conducted by an operating subsidiary 
pursuant to Sec. 5.34.
    (f) Impermissible activities. A financial subsidiary may not engage 
as principal in the following activities:
    (1) Insuring, guaranteeing, or indemnifying against loss, harm, 
damage, illness, disability or death, or defects in title (except to the 
extent permitted under sections 302 or 303(c) of the Gramm-Leach-Bliley 
Act (GLBA)), 113 Stat. 1407-1409, (15 U.S.C. 6712 or 15 U.S.C. 6713) or 
providing or issuing annuities the income of which is subject

[[Page 157]]

to tax treatment under section 72 of the Internal Revenue Code (26 
U.S.C. 72);
    (2) Real estate development or real estate investment, unless 
otherwise expressly authorized by law; and
    (3) Activities authorized for bank holding companies by section 
4(k)(4)(H) or (I) (12 U.S.C. 1843) of the Bank Holding Company Act, 
except activities authorized under section 4(k)(4)(H) that may be 
permitted in accordance with section 122 of the GLBA, 113 Stat. 1381.
    (g) Qualifications. A national bank may, directly or indirectly, 
control a financial subsidiary or hold an interest in a financial 
subsidiary only if:
    (1) The national bank and each depository institution affiliate of 
the national bank are well capitalized and well managed;
    (2) The aggregate consolidated total assets of all financial 
subsidiaries of the national bank do not exceed the lesser of 45 percent 
of the consolidated total assets of the parent bank or $50 billion (or 
such greater amount as is determined according to an indexing mechanism 
jointly established by regulation by the Secretary of the Treasury and 
the Board of Governors of the Federal Reserve System); and
    (3) If the national bank is one of the 100 largest insured banks, 
determined on the basis of the bank's consolidated total assets at the 
end of the calendar year, the bank has at least one issue of outstanding 
eligible debt that is currently rated in one of the three highest 
investment grade rating categories by a nationally recognized 
statistical rating organization. If the national bank is one of the 
second 50 largest insured banks, it may either satisfy this requirement 
or satisfy alternative criteria the Secretary of the Treasury and the 
Board of Governors of the Federal Reserve System establish jointly by 
regulation. This paragraph (g)(3) does not apply if the financial 
subsidiary is engaged solely in activities in an agency capacity.
    (h) Safeguards. The following safeguards apply to a national bank 
that establishes or maintains a financial subsidiary:
    (1) For purposes of determining regulatory capital:
    (i) The national bank must deduct the aggregate amount of its 
outstanding equity investment, including retained earnings, in its 
financial subsidiaries from its total assets and tangible equity and 
deduct such investment from its total risk-based capital (this deduction 
shall be made equally from Tier 1 and Tier 2 capital); and
    (ii) The national bank may not consolidate the assets and 
liabilities of a financial subsidiary with those of the bank;
    (2) Any published financial statement of the national bank shall, in 
addition to providing information prepared in accordance with generally 
accepted accounting principles, separately present financial information 
for the bank in the manner provided in paragraph (h)(1) of this section;
    (3) The national bank must have reasonable policies and procedures 
to preserve the separate corporate identity and limited liability of the 
bank and the financial subsidiaries of the bank;
    (4) The national bank must have procedures for identifying and 
managing financial and operational risks within the bank and the 
financial subsidiary that adequately protect the national bank from such 
risks;
    (5) Sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c 
and 371c-1) apply to transactions involving a financial subsidiary in 
the following manner:
    (i) A financial subsidiary shall be deemed to be an affiliate of the 
bank and shall not be deemed to be a subsidiary of the bank;
    (ii) The restrictions contained in section 23A(a)(1)(A) of the 
Federal Reserve Act shall not apply with respect to covered transactions 
between a bank and any individual financial subsidiary of the bank;
    (iii) The bank's investment in the financial subsidiary shall not 
include retained earnings of the financial subsidiary;
    (iv) Any purchase of, or investment in, the securities of a 
financial subsidiary of a bank by an affiliate of the bank will be 
considered to be a purchase of or investment in such securities by the 
bank; and

[[Page 158]]

    (v) Any extension of credit by an affiliate of a bank to a financial 
subsidiary of the bank may be considered an extension of credit by the 
bank to the financial subsidiary if the Board of Governors of the 
Federal Reserve System determines that such treatment is necessary or 
appropriate to prevent evasions of the Federal Reserve Act and the GLBA.
    (6) A financial subsidiary shall be deemed a subsidiary of a bank 
holding company and not a subsidiary of the bank for purposes of the 
anti-tying prohibitions set forth in 12 U.S.C. 1971 et seq.
    (i) Procedures to engage in activities through a financial 
subsidiary. A national bank that intends, directly or indirectly, to 
acquire control of, or hold an interest in, a financial subsidiary, or 
to commence a new activity in an existing financial subsidiary, must 
obtain OCC approval through the procedures set forth in paragraph (i)(1) 
or (i)(2) of this section.
    (1) Certification with subsequent notice. (i) At any time, a 
national bank may file a ``Financial Subsidiary Certification'' with the 
appropriate district office listing the bank's depository institution 
affiliates and certifying that the bank and each of those affiliates is 
well capitalized and well managed.
    (ii) Thereafter, at such time as the bank seeks OCC approval to 
acquire control of, or hold an interest in, a new financial subsidiary, 
or commence a new activity authorized under section 5136A(a)(2)(A)(i) of 
the Revised Statutes (12 U.S.C. 24a) in an existing subsidiary, the bank 
may file a written notice with the appropriate district office at the 
time of acquiring control of, or holding an interest in, a financial 
subsidiary, or commencing such activity in an existing subsidiary. The 
written notice must be labeled ``Financial Subsidiary Notice'' and must:
    (A) State that the bank's Certification remains valid;
    (B) Describe the activity or activities conducted by the financial 
subsidiary. To the extent the notice relates to the initial affiliation 
of the bank with a company engaged in insurance activities, the bank 
should describe the type of insurance activity that the company is 
engaged in and has present plans to conduct. The bank must also list for 
each state the lines of business for which the company holds, or will 
hold, an insurance license, indicating the state where the company holds 
a resident license or charter, as applicable;
    (C) Cite the specific authority permitting the activity to be 
conducted by the financial subsidiary. (Where the authority relied on is 
an agency order or interpretation under section 4(c)(8) or 4(c)(13), 
respectively, of the Bank Holding Company Act of 1956, a copy of the 
order or interpretation should be attached);
    (D) Certify that the bank will be well capitalized after making 
adjustments required by paragraph (h)(1) of this section;
    (E) Demonstrate the aggregate consolidated total assets of all 
financial subsidiaries of the national bank do not exceed the lesser of 
45 percent of the bank's consolidated total assets or $50 billion (or 
the increased level established by the indexing mechanism); and
    (F) If applicable, certify that the bank meets the eligible debt 
requirement in paragraph (g)(3) of this section.
    (2) Combined certification and notice. A national bank may file a 
combined certification and notice with the appropriate district office 
at least five business days prior to acquiring control of, or holding an 
interest in, a financial subsidiary, or commencing a new activity 
authorized pursuant to section 5136A(a)(2)(A)(i) of the Revised Statutes 
in an existing subsidiary. The written notice must be labeled 
``Financial Subsidiary Certification and Notice'' and must:
    (i) List the bank's depository institution affiliates and certify 
that the bank and each depository institution affiliate of the bank is 
well capitalized and well managed;
    (ii) Describe the activity or activities to be conducted in the 
financial subsidiary. To the extent the notice relates to the initial 
affiliation of the bank with a company engaged in insurance activities, 
the bank should describe the type of insurance activity that the company 
is engaged in and has present plans to conduct. The bank must also list 
for each state the lines of business for which the company

[[Page 159]]

holds, or will hold, an insurance license, indicating the state where 
the company holds a resident license or charter, as applicable;
    (iii) Cite the specific authority permitting the activity to be 
conducted by the financial subsidiary. (Where the authority relied on is 
an agency order or interpretation under section 4(c)(8) or 4(c)(13), 
respectively, of the Bank Holding Company Act of 1956, a copy of the 
order or interpretation should be attached);
    (iv) Certify that the bank will remain well capitalized after making 
the adjustments required by paragraph (h)(1) of this section;
    (v) Demonstrate the aggregate consolidated total assets of all 
financial subsidiaries of the national bank do not exceed the lesser of 
45% of the bank's consolidated total assets or $50 billion (or the 
increased level established by the indexing mechanism); and
    (vi) If applicable, certify that the bank meets the eligible debt 
requirement in paragraph (g)(3) of this section.
    (3) Exceptions to rules of general applicability. Sections 5.8, 
5.10, 5.11, and 5.13 do not apply to activities authorized under this 
section.
    (4) Community Reinvestment Act (CRA). A national bank may not apply 
under this paragraph (i) to commence a new activity authorized under 
section 5136A(a)(2)(A)(i) of the Revised Statutes (12 U.S.C. 24a), or 
directly or indirectly acquire control of a company engaged in any such 
activity, if the bank or any of its insured depository institution 
affiliates received a CRA rating of less than ``satisfactory record of 
meeting community credit needs'' on its most recent CRA examination 
prior to when the bank would file a notice under this section.
    (j) Failure to continue to meet certain qualification requirements--
(1) Qualifications and safeguards. A national bank, or, as applicable, 
its affiliated depository institutions, must continue to satisfy the 
qualification requirements set forth in paragraphs (g)(1) and (2) of 
this section and the safeguards in paragraphs (h)(1), (2), (3) and (4) 
of this section following its acquisition of control of, or an interest 
in, a financial subsidiary. A national bank that fails to continue to 
satisfy these requirements will be subject to the following procedures 
and requirements:
    (i) The OCC shall give notice to the national bank and, in the case 
of an affiliated depository institution to that depository institution's 
appropriate Federal banking agency, promptly upon determining that the 
national bank, or, as applicable, its affiliated depository institution, 
does not continue to meet the requirements in paragraph (g)(1) or (2) of 
this section or the safeguards in paragraph (h)(1), (2), (3), or (4) of 
this section. The bank shall be deemed to have received such notice 
three business days after mailing of the letter by the OCC;
    (ii) Not later than 45 days after receipt of the notice under 
paragraph (j)(1)(i) of this section, or any additional time as the OCC 
may permit, the national bank shall execute an agreement with the OCC to 
comply with the requirements in paragraphs (g)(1) and (2) and (h)(1), 
(2), (3), and (4) of this section;
    (iii) The OCC may impose limitations on the conduct or activities of 
the national bank or any subsidiary of the national bank as the OCC 
determines appropriate under the circumstances and consistent with the 
purposes of section 5136A of the Revised Statutes; and
    (iv) The OCC may require a national bank to divest control of a 
financial subsidiary if the national bank does not correct the 
conditions giving rise to the notice within 180 days after receipt of 
the notice provided under paragraph (j)(1)(i) of this section.
    (2) Eligible debt rating requirement. A national bank that does not 
continue to meet the qualification requirement set forth in paragraph 
(g)(3) of this section, applicable where the bank's financial subsidiary 
is engaged in activities other than solely in an agency capacity, may 
not directly or through a subsidiary, purchase or acquire any additional 
equity capital of any such financial subsidiary until the bank meets the 
requirement in paragraph (g)(3) of this section. For purposes of this 
paragraph (j)(2), the term ``equity capital'' includes, in addition to 
any equity investment, any debt instrument issued

[[Page 160]]

by the financial subsidiary if the instrument qualifies as capital of 
the subsidiary under federal or state law, regulation, or interpretation 
applicable to the subsidiary.
    (k) Examination and supervision. A financial subsidiary is subject 
to examination and supervision by the OCC, subject to the limitations 
and requirements of section 45 of the Federal Deposit Insurance Act (12 
U.S.C. 1831v) and section 115 of the GLBA (12 U.S.C. 1820a).

[65 FR 12914, Mar. 10, 2000]



          Subpart D_Other Changes in Activities and Operations



Sec. 5.40  Change in location of main office.

    (a) Authority 12 U.S.C. 30, 93a, and 2901 through 2907.
    (b) Licensing requirements. A national bank shall give prior notice 
to the OCC to relocate its main office within city, town, or village 
limits to an authorized branch location. A national bank shall submit an 
application and obtain prior OCC approval to relocate its main office to 
any other location in the city, town, or village, or within 30 miles of 
the limits of the city, town, or village in which the main office of the 
bank is located.
    (c) Scope. This section describes OCC procedures and approval 
standards for an application or a notice by a national bank to change 
the location of its main office.
    (d) Procedure--(1) Main office relocation to an authorized branch 
location within city, town, or village limits. A national bank may 
change the location of its main office to an authorized branch location 
(approved or existing branch site) within the limits of the same city, 
town, or village. The national bank shall submit a notice to the 
appropriate district office before the relocation. The notice must 
include the new address of the main office and the effective date of the 
relocation.
    (2) To any other location. To relocate its main office to any other 
location, a national bank shall file an application to relocate with the 
appropriate district office. If relocating the main office outside the 
limits of its city, town, or village, a national bank shall also:
    (i) Obtain the approval of shareholders owning two-thirds of the 
voting stock of the bank; and
    (ii) Amend its articles of association.
    (3) Establishment of a branch at site of former main office. A 
national bank desiring to establish a branch at its former main office 
location shall obtain OCC approval pursuant to the standards of Sec. 
5.30.
    (4) Expedited review. A main office relocation application submitted 
by an eligible bank under paragraph (d)(2) of this section is deemed 
approved by the OCC as of the 15th day after the close of the public 
comment period or the 45th day after the filing is received by the OCC, 
whichever is later, unless the OCC notifies the bank prior to that time 
that the filing is not eligible for expedited review, or the expedited 
review period is extended, under Sec. 5.13(a)(2).
    (5) Exceptions to rules of general applicability. (i) Sections 5.8, 
5.9, 5.10, and 5.11 do not apply to a main office relocation to an 
authorized branch location within the limits of the city, town, or 
village as described in paragraph (d)(1) of this section. However, if 
the OCC concludes that the notice under paragraph (d)(1) of this section 
presents a significant and novel policy, supervisory, or legal issue, 
the OCC may determine that any or all parts of Sec. Sec. 5.8, 5.9, 
5.10, and 5.11 apply.
    (ii) The comment period on any application filed under paragraph 
(d)(2) of this section to engage in a short-distance relocation of a 
main office is 15 days.
    (e) Expiration of approval. Approval expires if the national bank 
has not opened its main office at the relocated site within 18 months of 
the date of approval.



Sec. 5.42  Corporate title.

    (a) Authority. 12 U.S.C. 21a, 30, and 93a.
    (b) Scope. This section describes the method by which a national 
bank may change its corporate title.
    (c) Standards. A national bank may change its corporate title 
provided that

[[Page 161]]

the new title includes the word ``national'' and complies with other 
applicable Federal laws, including 18 U.S.C. 709, regarding false 
advertising and the misuse of names to indicate a Federal agency, and 
any applicable OCC guidance.
    (d) Procedures--(1) Notice process. A national bank shall promptly 
notify the appropriate district office if it changes its corporate 
title. The notice must contain the old and new titles and the effective 
date of the change.
    (2) Amendment to articles of association. A national bank whose 
corporate title is specified in its articles of association shall amend 
its articles, in accordance with the procedures of 12 U.S.C. 21a, to 
change its title.
    (3) Exceptions to rules of general applicability. Sections 5.8, 5.9, 
5.10, 5.11, and 5.13(a) do not apply to a national bank's change of 
corporate title. However, if the OCC concludes that the application 
presents a significant and novel policy, supervisory, or legal issue, 
the OCC may determine that any or all parts of Sec. Sec. 5.8, 5.9, 
5.10, 5.11, and 5.13(a) apply.



Sec. 5.46  Changes in permanent capital.

    (a) Authority. 12 U.S.C. 21a, 51, 51a, 51b, 51b-1, 52, 56, 57, 59, 
60, and 93a.
    (b) Licensing requirements. A national bank shall submit an 
application and obtain OCC approval to decrease its permanent capital. 
Generally, a national bank need only submit a notice to increase its 
permanent capital, although, in certain circumstances, a national bank 
shall be required to submit an application and obtain OCC approval.
    (c) Scope. This section describes procedures and standards relating 
to a transaction resulting in a change in a national bank's permanent 
capital.
    (d) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to changes in a national bank's permanent 
capital.
    (e) Definitions. For the purposes of this section the following 
definitions apply:
    (1) Capital plan means a plan describing the manner and schedule by 
which a national bank will attain specified capital levels or ratios, 
including a plan to achieve minimum capital ratios filed with the 
appropriate district office under 12 CFR 3.7 and a capital restoration 
plan filed with the OCC under 12 U.S.C. 1831o and 12 CFR 6.5.
    (2) Capital stock means the total amount of common stock and 
preferred stock.
    (3) Capital surplus means the total of:
    (i) The amount paid in on capital stock in excess of the par or 
stated value;
    (ii) Direct capital contributions representing the amounts paid in 
to the national bank other than for capital stock;
    (iii) The amount transferred from undivided profits required by 12 
U.S.C. 60; and
    (iv) The amount transferred from undivided profits reflecting stock 
dividends.
    (4) Permanent capital means the sum of capital stock and capital 
surplus.
    (f) Policy. In determining whether to approve a proposed change to a 
national bank's permanent capital, the OCC considers whether the change 
is:
    (1) Consistent with law, regulation, and OCC policy thereunder;
    (2) Provides an adequate capital structure; and
    (3) If appropriate, complies with the bank's capital plan.
    (g) Increases in permanent capital--(1) Prior approval--(i) 
Criteria. A national bank need not obtain prior OCC approval to increase 
its permanent capital unless the bank is:
    (A) Required to receive OCC approval pursuant to letter, order, 
directive, written agreement or otherwise;
    (B) Selling common or preferred stock for consideration other than 
cash; or
    (C) Receiving a material noncash contribution to capital surplus.
    (ii) Application and letter of notification. A national bank that 
proposes to increase its permanent capital and that must receive OCC 
approval under paragraph (g)(1)(i) of this section shall file an 
application under paragraph (i)(1) of this section and a letter of 
notification under paragraph (i)(3) of this section. A national bank not 
required to obtain prior approval under paragraph (g)(1)(i)

[[Page 162]]

of this section for an increase in capital shall file only the letter of 
notification under paragraph (i)(3) of this section.
    (2) Preferred stock. Notwithstanding paragraph (g)(1)(i) of this 
section, in the case of a sale of preferred stock, the national bank 
shall also submit provisions in the articles of association concerning 
preferred stock dividends, voting and conversion rights, retirement of 
the stock, and rights to exercise control over management to the 
appropriate district office prior to the sale of the preferred stock. 
The provisions will be deemed approved by the OCC within 30 days of its 
receipt, unless the OCC notifies the applicant otherwise, including a 
statement of the reason for the delay.
    (h) Decreases in permanent capital. A national bank shall submit an 
application and obtain prior approval under paragraph (i)(1) or (i)(2) 
of this section for any reduction of its permanent capital.
    (i) Procedures--(1) Prior approval. A national bank proposing to 
make a change in its permanent capital that requires prior OCC approval 
under paragraphs (g) or (h) of this section shall submit an application 
to the appropriate district office. The application must:
    (i) Describe the type and amount of the proposed change in permanent 
capital and explain the reason for the change;
    (ii) In the case of a reduction in capital, provide a schedule 
detailing the present and proposed capital structure;
    (iii) In the case of a material noncash contribution to capital, 
provide a description of the method of valuing the contribution; and
    (iv) State if the bank is subject to a capital plan with the OCC and 
how the proposed change would conform to a capital plan or if a capital 
plan is otherwise required in connection with the proposed change in 
permanent capital.
    (2) Expedited review. An eligible bank's application is deemed 
approved by the OCC 30 days after the date the OCC receives the 
application described in paragraph (i)(1) of this section, unless the 
OCC notifies the bank prior to that date that the application is not 
eligible for expedited review under Sec. 5.13(a)(2). A bank seeking to 
decrease its capital may request OCC approval for up to four consecutive 
quarters. An eligible bank may decrease its capital pursuant to such a 
plan only if the bank maintains its eligible bank status before and 
after each decrease in its capital.
    (3) Letter of notification. After a bank completes an increase in 
capital it shall submit a letter of notification to the appropriate 
district office in order to obtain a certification from the OCC. The 
proposed change is deemed approved by the OCC and certified seven days 
after the date on which the OCC receives the letter of notification. The 
letter of notification must be acknowledged before a notary public by 
the bank's president, vice president, or cashier and contain:
    (i) A description of the transaction, unless already provided 
pursuant to paragraph (i)(1) of this section;
    (ii) The amount, including the par value of the stock, and effective 
date of the increase;
    (iii) A certification that the funds have been paid in, if 
applicable;
    (iv) A certified copy of the amendment to the articles of 
association, if required; and
    (v) A statement that the bank has complied with all laws, 
regulations and conditions imposed by the OCC.
    (4) Notice process. A national bank that decreases its capital in 
accordance with paragraphs (i)(1) or (i)(2) of this section shall notify 
the appropriate district office following the completion of the 
transaction.
    (5) Expiration of approval. Approval expires if a national bank has 
not completed its change in permanent capital within one year of the 
date of approval.
    (j) Offers and sales of stock. A national bank shall comply with the 
Securities Offering Disclosure Rules in 12 CFR part 16 for offers and 
sales of common and preferred stock.
    (k) Shareholder approval. A national bank shall obtain the necessary 
shareholder approval required by statute for any change in its permanent 
capital.



Sec. 5.47  Subordinated debt as capital.

    (a) Authority. 12 U.S.C. 93a.
    (b) Licensing requirements. A national bank does not need prior OCC 
approval

[[Page 163]]

to issue subordinated debt, or to prepay subordinated debt (including 
payment pursuant to an acceleration clause or redemption prior to 
maturity) provided the bank remains an eligible bank after the 
transaction, unless the OCC has previously notified the bank that prior 
approval is required, or unless prior approval is required by law. No 
prior approval is required for the bank to count the subordinated debt 
as Tier 2 or Tier 3 capital. However, a bank issuing subordinated debt 
shall notify the OCC after issuance if the debt is to be counted as Tier 
2 or Tier 3 capital.
    (c) Scope. This section sets forth the procedures for OCC review and 
approval of an application to issue or prepay subordinated debt.
    (d) Definitions--(1) Capital plan means a plan describing the means 
and schedule by which a national bank will attain specified capital 
levels or ratios, including a plan to achieve minimum capital ratios 
filed with the appropriate district office under 12 CFR 3.7 and a 
capital restoration plan filed with the OCC under 12 U.S.C. 1831o and 12 
CFR 6.5.
    (2) Tier 2 capital has the same meaning as set forth in 12 CFR 
3.2(d).
    (3) Tier 3 capital has the same meaning as set forth in 12 CFR part 
3, appendix B, section 2(d).
    (e) Qualification as regulatory capital. (1) A national bank's 
subordinated debt qualifies as Tier 2 capital if the subordinated debt 
meets the requirements in 12 CFR part 3, appendix A, section 2(b)(4), 
and complies with the ``OCC Guidelines for Subordinated Debt'' in the 
Manual.
    (2) A national bank's subordinated debt qualifies as Tier 3 capital 
if the subordinated debt meets the requirements in 12 CFR part 3, 
section 2(d) of Appendix B.
    (3) If the OCC notifies a national bank that it must obtain OCC 
approval before issuing subordinated debt, the subordinated debt will 
not qualify as Tier 2 or Tier 3 capital until the bank obtains OCC 
approval for its inclusion in capital.
    (f) Prior approval procedure--(1) Application. A national bank 
required to obtain OCC approval before issuing or prepaying subordinated 
debt shall submit an application to the appropriate district office. The 
application must include:
    (i) A description of the terms and amount of the proposed issuance 
or prepayment;
    (ii) A statement of whether the bank is subject to a capital plan or 
required to file a capital plan with the OCC and, if so, how the 
proposed change conforms to the capital plan;
    (iii) A copy of the proposed subordinated note format and note 
agreement; and
    (iv) A statement of whether the subordinated debt issue complies 
with all laws, regulations, and the ``OCC Guidelines for Subordinated 
Debt'' in the Manual.
    (2) Approval--(i) General. The application is deemed approved by the 
OCC as of the 30th day after the filing is received by the OCC, unless 
the OCC notifies the bank prior to that date that the filing presents a 
significant supervisory, or compliance concern, or raises a significant 
legal or policy issue.
    (ii) Tier 2 and Tier 3 capital. When the OCC notifies the bank that 
the OCC approves the bank's application to issue or prepay the 
subordinated debt, it also notifies the bank whether the subordinated 
debt qualifies as Tier 2 or Tier 3 capital.
    (iii) Expiration of approval. Approval expires if a national bank 
does not complete the sale of the subordinated debt within one year of 
approval.
    (g) Notice procedure. If a national bank is not required to obtain 
approval before issuing subordinated debt, the bank shall notify the 
appropriate district office in writing within ten days after issuing 
subordinated debt that is to be counted as Tier 2 or Tier 3 capital. The 
notice must include:
    (1) The terms of the issuance;
    (2) The amount and date of receipt of funds;
    (3) A copy of the final subordinated note format and note agreement; 
and
    (4) A statement that the issue complies with all laws, regulations, 
and the ``OCC Guidelines for Subordinated Debt Instruments'' in the 
Manual.
    (h) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do

[[Page 164]]

not apply to the issuance of subordinated debt.
    (i) Issuance of subordinated debt. A national bank shall comply with 
the Securities Offering Disclosure Rules in 12 CFR part 16 when issuing 
subordinated debt even if the bank is not required to obtain prior 
approval to issue subordinated debt.



Sec. 5.48  Voluntary liquidation.

    (a) Authority. 12 U.S.C. 93a, 181, and 182.
    (b) Licensing requirements. A national bank considering going into 
voluntary liquidation shall notify the OCC. The bank shall also file a 
notice with the OCC once a liquidation plan is definite.
    (c) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to a voluntary liquidation. However, if the 
OCC concludes that the notice presents significant and novel policy, 
supervisory or legal issues, the OCC may determine that any or all parts 
of Sec. Sec. 5.8, 5.10, and 5.11 apply.
    (d) Standards. A national bank may liquidate in accordance with the 
terms of 12 U.S.C. 181 and 182.
    (e) Procedure--(1) Notice of voluntary liquidation. When the 
shareholders of a solvent national bank have voted to voluntarily 
liquidate, the bank shall file a notice with the appropriate district 
office and publish public notice in accordance with 12 U.S.C. 182.
    (2) Report of condition. The liquidating bank shall submit reports 
of the condition of its commercial, trust, and other departments to the 
appropriate district office by filing the quarterly Consolidated Reports 
of Condition and Income (Call Reports).
    (3) Report of progress. The liquidating agent or committee shall 
submit a ``Report of Progress of Liquidation'' annually to the 
appropriate district office until the liquidation is complete.
    (f) Expedited liquidations in connection with acquisitions--(1) 
General. When an acquiring depository institution in a business 
combination purchases all the assets, and assumes all the liabilities, 
including contingent liabilities, of a target national bank, the 
acquiring depository institution may dissolve the target national bank 
immediately after the combination. However, if any liabilities will 
remain in the target national bank, then the standard liquidation 
procedures apply.
    (2) Procedure. After its shareholders have voted to liquidate and 
the national bank has notified the appropriate district office of its 
plans, the bank may surrender its charter and dissolve immediately, if:
    (i) The acquiring depository institution certifies to the OCC that 
it has purchased all the assets and assumed all the liabilities, 
including contingent liabilities, of the national bank in liquidation; 
and
    (ii) The acquiring depository institution and the national bank in 
liquidation have published notice that the bank will dissolve after the 
purchase and assumption to the acquiror. This is included in the notice 
and publication for the purchase and assumption required under the Bank 
Merger Act, 12 U.S.C. 1828(c).
    (g) National bank as acquiror. If another national bank plans to 
acquire a national bank in liquidation through merger or through the 
purchase of the assets and the assumption of the liabilities of the bank 
in liquidation, the acquiring bank shall comply with the Bank Merger 
Act, 12 U.S.C. 1828(c), and Sec. 5.33.



Sec. 5.50  Change in bank control; reporting of stock loans.

    (a) Authority. 12 U.S.C. 93a and 1817(j).
    (b) Licensing requirements. Any person seeking to acquire control of 
a national bank shall provide 60 days prior written notice of a change 
in control to the OCC, except where otherwise provided in this section.
    (c) Scope--(1) General. This section describes the procedures and 
standards governing OCC review of notices for a change in control of a 
national bank and reports of stock loans.
    (2) Exempt transactions. The following transactions are not subject 
to the requirements of this section:
    (i) The acquisition of additional shares of a national bank by a 
person who:
    (A) Has, continuously since March 9, 1979, (or since that 
institution commenced business, if later) held power to vote 25 percent 
or more of the voting securities of that bank; or

[[Page 165]]

    (B) Under paragraph (f)(2)(ii) of this section, would be presumed to 
have controlled that bank continuously since March 9, 1979, if the 
transaction will not result in that person's direct or indirect 
ownership or power to vote 25 percent or more of any class of voting 
securities of the national bank; or, in other cases, where the OCC 
determines that the person has controlled the bank continuously since 
March 9, 1979;
    (ii) Unless the OCC otherwise provides in writing, the acquisition 
of additional shares of a national bank by a person who has lawfully 
acquired and maintained continuous control of the bank under paragraph 
(f) of this section after complying with the procedures and filing the 
notice required by this section;
    (iii) A transaction subject to approval under section 3 of the Bank 
Holding Company Act, 12 U.S.C. 1842, section 18 of Federal Deposit 
Insurance Act, 12 U.S.C. 1828, or section 10 of the Home Owners' Loan 
Act, 12 U.S.C. 1467a;
    (iv) Any transaction described in section 2(a)(5) or 3(a) (A) or (B) 
of the Bank Holding Company Act, 12 U.S.C. 1841(a)(5) and 1842(a) (A) 
and (B), by a person described in those provisions;
    (v) A customary one-time proxy solicitation or receipt of pro rata 
stock dividends; and
    (vi) The acquisition of shares of a foreign bank that has a 
Federally licensed branch in the United States. This exemption does not 
extend to the reports and information required under paragraph (h) of 
this section.
    (3) Prior notice exemption. The following transactions are not 
subject to the prior notice requirements of this section but are 
otherwise subject to this section, including filing a notice and paying 
the appropriate filing fee, within 90 calendar days after the 
transaction occurs:
    (i) The acquisition of control as a result of acquisition of voting 
shares of a national bank through testate or intestate succession;
    (ii) The acquisition of control as a result of acquisition of voting 
shares of a national bank as a bona fide gift;
    (iii) The acquisition of voting shares of a national bank resulting 
from a redemption of voting securities;
    (iv) The acquisition of control of a national bank as a result of 
actions by third parties (including the sale of securities) that are not 
within the control of the acquiror; and
    (v) The acquisition of control as a result of the acquisition of 
voting shares of a national bank in satisfaction of a debt previously 
contracted in good faith.
    (A) ``Good faith'' means that a person must either make or acquire a 
loan secured by voting securities of a national bank in advance of any 
known default. A person who purchases a previously defaulted loan 
secured by voting securities of a national bank may not rely on this 
paragraph (c)(3)(v) to foreclose on that loan, seize or purchase the 
underlying collateral, and acquire control of the national bank without 
complying with the prior notice requirements of this section.
    (B) To ensure compliance with this section, the acquiror of a 
defaulted loan secured by a controlling amount of a national bank's 
voting securities shall file a notice prior to the time the loan is 
acquired unless the acquiror can demonstrate to the satisfaction of the 
OCC that the voting securities are not the anticipated source of 
repayment for the loan.
    (d) Definitions. As used in this section:
    (1) Acquisition includes a purchase, assignment, transfer, or pledge 
of voting securities, or an increase in percentage ownership of a 
national bank resulting from a redemption of voting securities.
    (2) Acting in concert means:
    (i) Knowing participation in a joint activity or parallel action 
towards a common goal of acquiring control whether or not pursuant to an 
express agreement; or
    (ii) A combination or pooling of voting or other interests in the 
securities of an issuer for a common purpose pursuant to any contract, 
understanding, relationship, agreement, or other arrangement, whether 
written or otherwise.

[[Page 166]]

    (3) Control means the power, directly or indirectly, to direct the 
management or policies of a national bank or to vote 25 percent or more 
of any class of voting securities of a national bank.
    (4) Notice means a filing by a person in accordance with paragraph 
(f) of this section.
    (5) Person means an individual or a corporation, partnership, trust, 
association, joint venture, pool, syndicate, sole proprietorship, 
unincorporated organization, or any other form of entity, and includes 
voting trusts and voting agreements and any group of persons acting in 
concert.
    (6) Voting securities means:
    (i) Shares of common or preferred stock, or similar interests, if 
the shares or interests, by statute, charter, or in any manner, allow 
the holder to vote for or select directors (or persons exercising 
similar functions) of the issuing national bank, or to vote on or to 
direct the conduct of the operations or other significant policies of 
the issuing national bank. However, preferred stock or similar interests 
are not voting securities if:
    (A) Any voting rights associated with the shares or interests are 
limited solely to voting rights customarily provided by statute 
regarding matters that would significantly affect the rights or 
preference of the security or other interest. This includes the issuance 
of additional amounts of classes of senior securities, the modification 
of the terms of the security or interest, the dissolution of the issuing 
national bank, or the payment of dividends by the issuing national bank 
when preferred dividends are in arrears;
    (B) The shares or interests are a passive investment or financing 
device and do not otherwise provide the holder with control over the 
issuing national bank; and
    (C) The shares or interests do not allow the holder by statute, 
charter, or in any manner, to select or to vote for the selection of 
directors (or persons exercising similar functions) of the issuing 
national bank.
    (ii) Securities, other instruments, or similar interests that are 
immediately convertible, at the option of the owner or holder thereof, 
into voting securities.
    (e) Policy--(1) General. The OCC seeks to enhance and maintain 
public confidence in the banking system by preventing a change in 
control of a national bank that could have serious adverse effects on a 
bank's financial stability or management resources, the interests of the 
bank's customers, the Federal deposit insurance fund, or competition.
    (2) Acquisitions subject to the Bank Holding Company Act. (i) If 
corporations, partnerships, certain trusts, associations, and similar 
organizations, that are not already bank holding companies, are not 
required to secure prior Federal Reserve Board approval to acquire 
control of a bank under section 3 of the Bank Holding Company Act, 12 
U.S.C. 1842, they are subject to the notice requirements of this 
section.
    (ii) Certain transactions, including foreclosures by depository 
institutions and other institutional lenders, fiduciary acquisitions by 
depository institutions, and increases of majority holdings by bank 
holding companies, are described in sections 2(a)(5)(D) and 3(a) (A) and 
(B) of the Bank Holding Company Act, 12 U.S.C. 1841(a)(5)(D) and 12 
U.S.C. 1842(a) (A) and (B), but do not require the Federal Reserve 
Board's prior approval. For purposes of this section, they are 
considered subject to section 3 of the Bank Holding Company Act, 12 
U.S.C 1842, and do not require either a prior or subsequent notice to 
the OCC under this section.
    (3) Assessing financial condition. In assessing the financial 
condition of the acquiring person, the OCC weighs any debt servicing 
requirements in light of the acquiring person's overall financial 
strength; the institution's earnings performance, asset condition, 
capital adequacy, and future prospects; and the likelihood of the 
acquiring party making unreasonable demands on the resources of the 
institution.
    (f) Procedures--(1) Exceptions to rules of general applicability. 
Sections 5.8(a), 5.9, 5.10, 5.11, and 5.13(a) through (f) do not apply 
to filings under this section.
    (2) Who must file. (i) Any person seeking to acquire the power, 
directly or indirectly, to direct the management or policies, or to vote 
25 percent or more

[[Page 167]]

of a class of voting securities of a national bank, shall file a notice 
with the OCC 60 days prior to the proposed acquisition, unless the 
acquisition is exempt under paragraph (c)(2) of this section.
    (ii) The OCC presumes, unless rebutted, that an acquisition or other 
disposition of voting securities through which any person proposes to 
acquire ownership of, or the power to vote, ten percent or more of a 
class of voting securities of a national bank is an acquisition by a 
person of the power to direct the bank's management or policies if:
    (A) The securities to be acquired or voted are subject to the 
registration requirements of section 12 of the Securities Exchange Act 
of 1934, 15 U.S.C. 78l; or
    (B) Immediately after the transaction no other person will own or 
have the power to vote a greater proportion of that class of voting 
securities.
    (iii) Other transactions resulting in a person's control of less 
than 25 percent of a class of voting securities of a national bank are 
not deemed by the OCC to result in control for purposes of this section.
    (iv) If two or more persons, not acting in concert, each propose to 
acquire simultaneously equal percentages of ten percent or more of a 
class of a national bank's voting securities, and either the 
acquisitions are of a class of securities subject to the registration 
requirements of section 12 of the Securities Exchange Act of 1934, 15 
U.S.C. 78l, or immediately after the transaction no other shareholder of 
the national bank would own or have the power to vote a greater 
percentage of the class, each of the acquiring persons shall either file 
a notice or rebut the presumption of control.
    (v) An acquiring person may seek to rebut the presumption 
established in paragraph (f)(2)(ii) of this section by presenting 
relevant information in writing to the appropriate district office. The 
OCC shall respond in writing to any person that seeks to rebut the 
presumption of control. No rebuttal filing is effective unless the OCC 
indicates in writing that the information submitted has been found to be 
sufficient to rebut the presumption of control.
    (3) Filings. (i) The OCC does not accept a notice of a change in 
control unless it is technically complete, i.e., the information 
provided is responsive to every item listed in the notice form and is 
accompanied by the appropriate fee.
    (A) The notice must contain personal and biographical information, 
detailed financial information, details of the proposed change in 
control, information on any structural or managerial changes 
contemplated for the institution, and other relevant information 
required by the OCC. The OCC may waive any of the informational 
requirements of the notice if the OCC determines that it is in the 
public interest.
    (B) When the acquiring person is an individual, or group of 
individuals acting in concert, the requirement to provide personal 
financial data may be satisfied with a current statement of assets and 
liabilities and an income summary, together with a statement of any 
material changes since the date of the statement or summary. However, 
the OCC may require additional information, if appropriate.
    (ii) The OCC has 60 days from the date it declares the notice to be 
technically complete to review the notice.
    (A) When the OCC declares a notice technically complete, the 
appropriate district office sends a letter of acknowledgment to the 
applicant indicating the technically complete date.
    (B) As set forth in paragraph (g) of this section, the applicant 
shall publish an announcement within 10 days of filing the notice with 
the OCC. The publication of the announcement triggers a 20-day public 
comment period. The OCC may waive or shorten the public comment period 
if an emergency exists. The OCC also may shorten the comment period for 
other good cause. The OCC may act on a proposed change in control prior 
to the expiration of the public comment period if the OCC makes a 
written determination that an emergency exists.
    (C) An applicant shall notify the OCC immediately of any material 
changes in a notice submitted to the OCC, including changes in financial 
or other

[[Page 168]]

conditions, that may affect the OCC's decision on the filing.
    (iii) Within the 60-day period, the OCC may inform the applicant 
that the acquisition has been disapproved, has not been disapproved, or 
that the OCC will extend the 60-day review period. The applicant may 
request a hearing by the OCC within 10 days of receipt of a disapproval 
(see 12 CFR part 19, subpart H, for hearing initiation procedures). 
Following final agency action under 12 CFR part 19, further review by 
the courts is available.
    (4) Disapproval of notice. The OCC may disapprove a notice if it 
finds that any of the following factors exist:
    (i) The proposed acquisition of control would result in a monopoly 
or would be in furtherance of any combination or conspiracy to 
monopolize or to attempt to monopolize the business of banking in any 
part of the United States;
    (ii) The effect of the proposed acquisition of control in any 
section of the country may be substantially to lessen competition or to 
tend to create a monopoly or the proposed acquisition of control would 
in any other manner be in restraint of trade, and the anticompetitive 
effects of the proposed acquisition of control are not clearly 
outweighed in the public interest by the probable effect of the 
transaction in meeting the convenience and needs of the community to be 
served;
    (iii) The financial condition of any acquiring person is such as 
might jeopardize the financial stability of the bank or prejudice the 
interests of the depositors of the bank;
    (iv) The competence, experience, or integrity of any acquiring 
person, or of any of the proposed management personnel, indicates that 
it would not be in the interest of the depositors of the bank, or in the 
interest of the public, to permit that person to control the bank;
    (v) An acquiring person neglects, fails, or refuses to furnish the 
OCC all the information it requires; or
    (vi) The OCC determines that the proposed transaction would result 
in an adverse effect on the Bank Insurance Fund or the Savings 
Association Insurance Fund.
    (5) Disapproval notification. If the OCC disapproves a notice, it 
mails a written notification to the proposed acquiring person within 
three days after the decision containing a statement of the basis for 
disapproval.
    (g) Disclosure--(1) Announcement. The applicant shall publish an 
announcement in a newspaper of general circulation in the community 
where the affected national bank is located within ten days of filing. 
The OCC may authorize a delayed announcement if an immediate 
announcement would not be in the public interest.
    (i) In addition to the information required by Sec. 5.8(b), the 
announcement must include the name of the national bank named in the 
notice and the comment period (i.e., 20 days from the date of the 
announcement). The announcement also must state that the public portion 
of the notice is available upon request.
    (ii) Notwithstanding any other provisions of this paragraph (g), if 
the OCC determines in writing that an emergency exists and that the 
announcement requirements of this paragraph (g) would seriously threaten 
the safety and soundness of the national bank to be acquired, including 
situations where the OCC must act immediately in order to prevent the 
probable failure of a national bank, the OCC may waive or shorten the 
publication requirement.
    (2) Release of information. (i) Upon the request of any person, the 
OCC releases the information provided in the public portion of the 
notice and makes it available for public inspection and copying as soon 
as possible after a notice has been filed. In certain circumstances the 
OCC may determine that the release of the information would not be in 
the public interest. In addition, the OCC makes a public announcement of 
a technically complete notice, the disposition of the notice, and the 
consummation date of the transaction, if applicable, in the OCC's 
``Weekly Bulletin.''
    (ii) The OCC handles requests for the non-public portion of the 
notice as requests under the Freedom of Information Act, 5 U.S.C. 552, 
and other applicable law.
    (h) Reporting of stock loans--(1) Requirements. (i) Any foreign 
bank, or any

[[Page 169]]

affiliate thereof, shall file a consolidated report with the appropriate 
district office of the national bank if the foreign bank or any 
affiliate thereof, has credit outstanding to any person or group of 
persons that, in the aggregate, is secured, directly or indirectly, by 
25 percent or more of any class of voting securities of the same 
national bank.
    (ii) The foreign bank, or any affiliate thereof, shall also file a 
copy of the report with its appropriate district office if that office 
is different from the national bank's appropriate district office. If 
the foreign bank, or any affiliate thereof, is not supervised by the 
OCC, it shall file a copy of the report filed with the OCC with its 
appropriate Federal banking agency.
    (iii) Any shares of the national bank held by the foreign bank, or 
any affiliate thereof, as principal must be included in the calculation 
of the number of shares in which the foreign bank or any affiliate 
thereof has a security interest for purposes of paragraph (h)(1)(i) of 
this section.
    (2) Definitions. For purposes of this paragraph (h):
    (i) Foreign bank and affiliate have the same meanings as in section 
1 of the International Banking Act of 1978, 12 U.S.C. 3101.
    (ii) Credit outstanding includes any loan or extension of credit; 
the issuance of a guarantee, acceptance, or letter of credit, including 
an endorsement or standby letter of credit; and any other type of 
transaction that extends credit or financing to a person or group of 
persons.
    (iii) Group of persons includes any number of persons that a foreign 
bank, or an affiliate thereof, has reason to believe:
    (A) Are acting together, in concert, or with one another to acquire 
or control shares of the same insured national bank, including an 
acquisition of shares of the same national bank at approximately the 
same time under substantially the same terms; or
    (B) Have made, or propose to make, a joint filing under 15 U.S.C. 
78m regarding ownership of the shares of the same depository 
institution.
    (3) Exceptions. Compliance with paragraph (h)(1) of this section is 
not required if:
    (i) The person or group of persons referred to in paragraph (h)(1) 
of this section has disclosed the amount borrowed and the security 
interest therein to the appropriate district office in connection with a 
notice filed under this section or any other application filed with the 
appropriate district office as a substitute for a notice under this 
section, such as for a national bank charter; or
    (ii) The transaction involves a person or group of persons that has 
been the owner or owners of record of the stock for a period of one year 
or more or, if the transaction involves stock issued by a newly 
chartered bank, before the bank's opening.
    (4) Report requirements. (i) The consolidated report must indicate 
the number and percentage of shares securing each applicable extension 
of credit, the identity of the borrower, and the number of shares held 
as principal by the foreign bank and any affiliate thereof.
    (ii) The foreign bank and all affiliates thereof shall file the 
consolidated report in writing within 30 days of the date on which the 
foreign bank or affiliate thereof first believes that the security for 
any outstanding credit consists of 25 percent or more of any class of 
voting securities of a national bank.
    (5) Other reporting requirements. A foreign bank or any affiliate 
thereof, supervised by the OCC and required to report credit outstanding 
secured by the shares of a depository institution to another Federal 
banking agency also shall file a copy of the report with its appropriate 
district office.



Sec. 5.51  Changes in directors and senior executive officers.

    (a) Authority. 12 U.S.C. 1831i.
    (b) Scope. This section describes the circumstances when a national 
bank must notify the OCC of a change in its directors and senior 
executive officers, and the OCC's authority to disapprove those notices.
    (c) Definitions--(1) Director means a person who serves on the board 
of directors of a national bank except:
    (i) A director of a foreign bank that operates a Federal branch; and

[[Page 170]]

    (ii) An advisory director who does not have the authority to vote on 
matters before the board of directors and provides solely general policy 
advice to the board of directors.
    (2) National bank, as defined in Sec. 5.3(j), includes a Federal 
branch for purposes of this section only.
    (3) Senior executive officer means the chief executive officer, 
chief operating officer, chief financial officer, chief lending officer, 
chief investment officer, and any other individual the OCC identifies to 
the national bank who exercises significant influence over, or 
participates in, major policy making decisions of the bank without 
regard to title, salary, or compensation. The term also includes 
employees of entities retained by a national bank to perform such 
functions in lieu of directly hiring the individuals, and, with respect 
to a Federal branch operated by a foreign bank, the individual 
functioning as the chief managing official of the Federal branch.
    (4) Technically complete notice means a notice that provides all the 
information requested in paragraph (e)(2) of this section, including 
complete explanations where material issues arise regarding the 
competence, experience, character, or integrity of proposed directors or 
senior executive officers, and any additional information that the OCC 
may request following a determination that the original submission of 
the notice was not technically complete.
    (5) Technically complete notice date means the date on which the OCC 
has received a technically complete notice.
    (6) Troubled condition means a national bank that:
    (i) Has a composite rating of 4 or 5 under the Uniform Financial 
Institutions Rating System (CAMELS);
    (ii) Is subject to a cease and desist order, a consent order, or a 
formal written agreement, unless otherwise informed in writing by the 
OCC; or
    (iii) Is informed in writing by the OCC that as a result of an 
examination it has been designated in ``troubled condition'' for 
purposes of this section.
    (d) Prior notice. A national bank shall provide written notice to 
the OCC at least 90 days before adding or replacing any member of its 
board of directors, employing any person as a senior executive officer 
of the national bank, or changing the responsibilities of any senior 
executive officer so that the person would assume a different executive 
officer position, if:
    (1) The national bank is not in compliance with minimum capital 
requirements applicable to such institution, as prescribed in 12 CFR 
part 3, or is otherwise in troubled condition; or
    (2) The OCC determines, in connection with the review by the agency 
of the plan required under section 38 of the Federal Deposit Insurance 
Act, 12 USC 1831o, or otherwise, that such prior notice is appropriate.
    (e) Procedures--(1) Filing notice. A national bank shall file a 
notice with its appropriate supervisory office. When a national bank 
files a notice, the individual to whom the filing pertains shall attest 
to the validity of the information pertaining to that individual. The 
90-day review period begins on the technically complete notice date.
    (2) Content of notice. A notice must contain the identity, personal 
history, business background, and experience of each person whose 
designation as a director or senior executive officer is subject to this 
section. The notice must include:
    (i) A description of his or her material business activities and 
affiliations during the five years preceding the date of the notice;
    (ii) A description of any material pending legal or administrative 
proceedings to which he or she is a party;
    (iii) Any criminal indictment or conviction by a state or Federal 
court; and
    (iv) Legible fingerprints of the person, except that fingerprints 
are not required for any person who, within the three years immediately 
preceding the date of the present notice, has been subject to a notice 
filed with the OCC pursuant to section 32 of the FDIA, 12 U.S.C. 1831i, 
or this section and has previously submitted fingerprints.
    (3) Requests for additional information. Following receipt of a 
technically complete notice, the OCC may request additional information, 
in writing where feasible, and may specify a time period during which 
the information must be provided.

[[Page 171]]

    (4) Notice of disapproval. The OCC may disapprove an individual 
proposed as a member of the board of directors or as a senior executive 
officer if the OCC determines on the basis of the individual's 
competence, experience, character, or integrity that it would not be in 
the best interests of the depositors of the national bank or the public 
to permit the individual to be employed by, or associated with, the 
national bank. The OCC sends a notice of disapproval to both the 
national bank and the disapproved individual stating the basis for 
disapproval.
    (5) Notice of intent not to disapprove. An individual proposed as a 
member of the board of directors or as a senior executive officer may 
begin service before the expiration of the review period if the OCC 
notifies the national bank that the OCC does not disapprove the proposed 
director or senior executive officer.
    (6) Waiver of prior notice. (i) A national bank may send a letter to 
the appropriate supervisory office requesting a waiver of the prior 
notice requirement. The OCC may waive the prior notice requirement but 
not the filing required under this section. The OCC may grant a waiver 
if it finds that delay could harm the national bank or the public 
interest, or that other extraordinary circumstances justify waiving the 
prior notice requirement. The length of any waiver depends on the 
circumstances in each case. If the OCC grants a waiver, the national 
bank shall file the required notice within the time period specified in 
the waiver, and the proposed individual may assume the position on an 
interim basis until the individual and the national bank receive a 
notice of disapproval or, if an appeal has been filed, until a notice of 
disapproval has been upheld on appeal as set forth in paragraph (f) of 
this section. If the required notice is not filed within the time period 
specified in the waiver, the proposed individual shall resign his or her 
position. Thereafter, the individual may assume the position on a 
permanent basis only after the national bank receives a notice of intent 
not to disapprove, after the review period elapses, or after a notice of 
disapproval has been overturned on appeal as set forth in paragraph (f) 
of this section. A waiver does not affect the OCC's authority to issue a 
notice of disapproval within 30 days of the expiration of such waiver.
    (ii) In the case of the election at a meeting of the shareholders of 
a new director not proposed by management, a waiver is granted 
automatically and the elected individual may begin service as a 
director. However, under these circumstances, the national bank shall 
file the required notice with the appropriate supervisory office as soon 
as practical, but not later than seven days from the date the individual 
is notified of the election. The individual's continued service is 
subject to the conditions specified in paragraph (e)(6)(i) of this 
section.
    (7) Commencement of service. An individual proposed as a member of 
the board of directors or as a senior executive officer may assume the 
office following the end of the review period, which begins on the 
technically complete notice date, unless:
    (i) The OCC issues a notice of disapproval during the review period; 
or
    (ii) The national bank does not provide additional information 
within the time period required by the OCC pursuant to paragraph (e)(3) 
of this section and the OCC deems the notice to be abandoned pursuant to 
Sec. 5.13(c).
    (8) Exceptions to rules of general applicability. Sections 5.8, 
5.10, 5.11, and 5.13 (a) through (f) do not apply to a notice for a 
change in directors and senior executive officers.
    (f) Appeal--(1) If the national bank, the proposed individual, or 
both, disagree with a disapproval, they may seek review by appealing the 
disapproval to the Comptroller, or an authorized delegate, within 15 
days of the receipt of the notice of disapproval. The national bank or 
the individual may appeal on the grounds that the reasons for 
disapproval are contrary to fact or insufficient to justify disapproval. 
The appellant shall submit all documents and written arguments that the 
appellant wishes to be considered in support of the appeal.
    (2) The Comptroller, or an authorized delegate, may designate an 
appellate official who was not previously involved in the decision 
leading to the appeal at issue. The Comptroller, an

[[Page 172]]

authorized delegate, or the appellate official considers all information 
submitted with the original notice, the material before the OCC official 
who made the initial decision, and any information submitted by the 
appellant at the time of the appeal.
    (3) The Comptroller, an authorized delegate, or the appellate 
official shall independently determine whether the reasons given for the 
disapproval are contrary to fact or insufficient to justify the 
disapproval. If either is determined to be the case, the Comptroller, an 
authorized delegate, or the appellate official may reverse the 
disapproval.
    (4) Upon completion of the review, the Comptroller, an authorized 
delegate, or the appellate official shall notify the appellant in 
writing of the decision. If the original decision is reversed, the 
individual may assume the position in the bank for which he or she was 
proposed.

[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999]



Sec. 5.52  Change of address.

    (a) Authority. 12 U.S.C. 93a, 161, and 481.
    (b) Scope. This section describes the obligation of a national bank 
to notify the OCC of any change in its address. However, no notice is 
required if the change in address results from a transaction approved 
under this part.
    (c) Notice process. Any national bank with a change in the address 
of its main office or in its post office box shall send a written notice 
to the appropriate district office.
    (d) Exceptions to rules of general applicability. Sections 5.8, 5.9, 
5.10, 5.11, and 5.13 do not apply to changes in a national bank's 
address.



Sec. 5.53  Change in asset composition.

    (a) Authority. 12 U.S.C. 93a, 1818.
    (b) Scope. This section requires a national bank to obtain the 
approval of the OCC before changing the composition of all, or 
substantially all, of its assets through sales or other dispositions, 
or, having sold or disposed of all, or substantially all, of its assets, 
through subsequent purchases or other acquisitions or other expansions 
of its operations. This section does not apply to a change in 
composition of all, or substantially all, of a bank's assets that the 
bank undertakes in response to direction from the OCC (e.g., in an 
enforcement action pursuant to 12 U.S.C. 1818) or as part of a voluntary 
liquidation pursuant to 12 U.S.C. 181 and 182 and 12 CFR 5.48, if the 
liquidating bank has stipulated in its notice of liquidation to the OCC 
that its liquidation will be completed, the bank dissolved and its 
charter returned to the OCC within one year of the date it filed this 
notice, unless the OCC extends the time period. This section does not 
apply to changes in asset composition that occur as a result of a bank's 
ordinary and ongoing business of originating and securitizing loans.
    (c) Approval requirement. (1) A national bank must file an 
application and obtain the prior written approval of the OCC before 
changing the composition of all, or substantially all, of its assets (i) 
through sales or other dispositions, or, (ii) having sold or disposed of 
all or substantially all of its assets, through subsequent purchases or 
other acquisitions or other expansions of its operations.
    (2) In determining whether to approve an application under paragraph 
(c)(1) of this section, the OCC will consider the purpose of the 
transaction, its impact on the safety and soundness of the bank, and any 
effect on the bank's customers. The OCC may deny the application if the 
transaction would have a negative effect in any of these respects. The 
OCC's review of any change in asset composition through purchase or 
other acquisition or other expansions of its operations under paragraph 
(c)(1)(ii) of this section will include, in addition to the foregoing 
factors, the factors governing the organization of a bank under Sec. 
5.20.
    (d) Exceptions to Rules of General Applicability. Sections 5.8, 
5.10, and 5.11 do not apply with respect to applications filed pursuant 
to this section. However, if the OCC concludes that an application 
presents significant or novel policy, supervisory, or legal issues, the 
OCC may determine that some or all of the provisions of Sec. Sec. 5.8, 
5.10, and 5.11 apply.

[69 FR 50297, Aug. 16, 2004]

[[Page 173]]



                     Subpart E_Payment of Dividends



Sec. 5.60  Authority, scope, and exceptions to rules of general applicability.

    (a) Authority. 12 U.S.C. 56, 60, and 93a.
    (b) Scope. Except as otherwise provided, the restrictions in this 
subpart apply to the declaration and payment of all dividends by a 
national bank, including dividends paid in property. However, the 
provisions contained in Sec. 5.64 do not apply to dividends paid in 
stock of the bank.
    (c) Exceptions to the rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to this subpart.



Sec. 5.61  Definitions.

    For the purposes of subpart E, the following definitions apply:
    (a) Capital stock, capital surplus, and permanent capital have the 
same meaning as set forth in Sec. 5.46.
    (b) Retained net income means the net income of a specified period 
less the total amount of all dividends declared in that period.



Sec. 5.62  Date of declaration of dividend.

    A national bank shall use the date a dividend is declared for the 
purposes of determining compliance with this subpart.



Sec. 5.63  Capital limitation under 12 U.S.C. 56.

    (a) General limitation. Except as provided by 12 U.S.C. 59 and Sec. 
5.46, a national bank may not withdraw, or permit to be withdrawn, 
either in the form of a dividend or otherwise, any portion of its 
permanent capital. Further, a national bank may not declare a dividend 
in excess of undivided profits.
    (b) Preferred stock. The provisions of 12 U.S.C. 56 do not apply to 
dividends on preferred stock. However, if the undivided profits of the 
national bank are not sufficient to cover a proposed dividend on 
preferred stock, the proposed dividend constitutes a reduction in 
capital subject to 12 U.S.C. 59 and Sec. 5.46.



Sec. 5.64  Earnings limitation under 12 U.S.C. 60.

    (a) Transfers to capital surplus. Subject to the restrictions in 12 
U.S.C. 56 and this subpart, the directors of a national bank may declare 
and pay dividends as frequently and of such amount of undivided profits 
as they judge prudent. However, a national bank may not declare a 
dividend unless capital surplus equals or exceeds the capital stock of 
the bank, except:
    (1) In the case of an annual dividend, the bank may declare a 
dividend if the bank transfers 10 percent of its net income for the 
preceding four quarters to capital surplus; or
    (2) In the case of a quarterly or semiannual dividend, or any other 
special dividend, the bank may declare a dividend if the bank transfers 
10 percent of its net income for the preceding two quarters to capital 
surplus.
    (b) Earnings limitation. For purposes of 12 U.S.C. 60, a national 
bank may not declare a dividend if the total amount of all dividends 
(common and preferred), including the proposed dividend, declared by the 
national bank in any calendar year exceeds the total of the national 
bank's retained net income of that year to date, combined with its 
retained net income of the preceding two years, unless the dividend is 
approved by the OCC. A national bank shall submit a request for OCC 
approval of a dividend under 12 U.S.C. 60 to the appropriate supervisory 
office.
    (c) Surplus surplus. Any amount in capital surplus in excess of 
capital stock required by 12 U.S.C. 60(a) (referred to as ``surplus 
surplus'') may be transferred to undivided profits and available as 
dividends, provided:
    (1) The bank can demonstrate that the surplus came from earnings of 
prior periods, excluding the effect of any stock dividend; and
    (2) The board of directors of the bank approves the transfer of the 
surplus surplus from capital surplus to undivided profits.

[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999]



Sec. 5.65  Restrictions on undercapitalized institutions.

    Notwithstanding any other provision in this subpart, a national bank 
may not declare or pay any dividend if, after making the dividend, the 
national bank would be ``undercapitalized'' as defined in 12 CFR part 6.

[[Page 174]]



Sec. 5.66  Dividends payable in property other than cash.

    In addition to cash dividends, directors of a national bank may 
declare dividends payable in property, with the approval of the OCC. 
Even though the property distributed has been previously charged down or 
written off entirely, the dividend is equivalent to a cash dividend in 
an amount equal to the actual current value of the property. Before the 
dividend is declared, the bank should show the excess of the actual 
value over book value on the books of the national bank as a recovery, 
and the dividend should then be declared in the amount of the full book 
value (equivalent to the actual current value) of the property being 
distributed.



Sec. 5.67  Fractional shares.

    To avoid complicated recordkeeping in connection with fractional 
shares, a national bank issuing additional stock by stock dividend, upon 
consolidation or merger, or otherwise, may adopt arrangements such as 
the following to preclude the issuance of fractional shares. The bank 
may:
    (a) Issue scripts or warrants for trading;
    (b) Make reasonable arrangements to provide those to whom fractional 
shares would otherwise be issued an opportunity to realize at a fair 
price upon the fraction not being issued through its sale, or the 
purchase of the additional fraction required for a full share, if there 
is an established and active market in the national bank's stock;
    (c) Remit the cash equivalent of the fraction not being issued to 
those to whom fractional shares would otherwise be issued. The cash 
equivalent is based on the market value of the stock, if there is an 
established and active market in the national bank's stock. In the 
absence of such a market, the cash equivalent is based on a reliable and 
disinterested determination as to the fair market value of the stock if 
such stock is available; or
    (d) Sell full shares representing all the fractions at public 
auction, or to the highest bidder after having solicited and received 
sealed bids from at least three licensed stock brokers. The national 
bank shall distribute the proceeds of the sale pro rata to shareholders 
who otherwise would be entitled to the fractional shares.



                 Subpart F_Federal Branches and Agencies



Sec. 5.70  Federal branches and agencies.

    (a) Authority. 12 U.S.C. 93a and 3101 et seq.
    (b) Scope. This subpart describes the filing requirements for 
corporate activities and transactions involving Federal branches and 
agencies of foreign banks. Substantive rules and policies for specific 
applications are contained in 12 CFR part 28.
    (c) Definitions. For purposes of this subpart:
    (1) To establish a Federal branch or agency means to:
    (i) Open and conduct business through an initial or additional 
Federal branch or agency;
    (ii) Acquire directly, through merger, consolidation, or similar 
transaction with another foreign bank, the operations of a Federal 
branch or agency that is open and conducting business;
    (iii) Acquire a Federal branch or agency through the acquisition of 
a foreign bank subsidiary that will cease to operate in the same 
corporate form following the acquisition;
    (iv) Convert a state branch or state agency operated by a foreign 
bank, or a commercial lending company controlled by a foreign bank, into 
a Federal branch or agency;
    (v) Relocate a Federal branch or agency within a state or from one 
state to another; or
    (vi) Convert a Federal agency or a limited Federal branch into a 
Federal branch.
    (2) Federal branch includes a limited Federal branch unless 
otherwise provided.
    (d) Filing requirements--(1) General. Unless otherwise provided in 
12 CFR part 28, a Federal branch or agency shall comply with the 
applicable requirements of this part.
    (2) Applications. A foreign bank shall submit an application and 
obtain prior approval from the OCC before it:
    (i) Establishes a Federal branch or agency; or

[[Page 175]]

    (ii) Exercises fiduciary powers at a Federal branch. A foreign bank 
may submit an application to exercise fiduciary powers at the time of 
filing an application for a Federal branch license or at any subsequent 
date.

[61 FR 60363, Nov. 27, 1996, as amended at 68 FR 70698, Dec. 19, 2003]



PART 6_PROMPT CORRECTIVE ACTION--Table of Contents




                      Subpart A_Capital Categories

Sec.
6.1 Authority, purpose, scope, and other supervisory authority.
6.2 Definitions.
6.3 Notice of capital category.
6.4 Capital measures and capital category definitions.
6.5 Capital restoration plans.
6.6 Mandatory and discretionary supervisory actions under section 38.

          Subpart B_Directives To Take Prompt Corrective Action

6.20 Scope.
6.21 Notice of intent to issue a directive.
6.22 Response to notice.
6.23 Decision and issuance of a prompt corrective action directive.
6.24 Request for modification or rescission of directive.
6.25 Enforcement of directive.

    Authority: 12 U.S.C. 93a, 1831o.

    Source: 57 FR 44891, Sept. 29, 1992, unless otherwise noted.



                      Subpart A_Capital Categories



Sec. 6.1  Authority, purpose, scope, and other supervisory authority.

    (a) Authority. This part is issued by the Office of the Comptroller 
of the Currency (OCC) pursuant to section 38 (section 38) of the Federal 
Deposit Insurance Act (FDI Act) as added by section 131 of the Federal 
Deposit Insurance Corporation Improvement Act of 1991 (Pub. L. 102-242, 
105 Stat. 2236 (1991)) (12 U.S.C. 1831o).
    (b) Purpose. Section 38 of the FDI Act establishes a framework of 
supervisory actions for insured depository institutions that are not 
adequately capitalized. The principal purpose of this subpart is to 
define, for insured national banks, the capital measures and capital 
levels, and for insured federal branches, comparable asset-based 
measures and levels, that are used for determining the supervisory 
actions authorized under section 38 of the FDI Act. This part 6 also 
establishes procedures for submission and review of capital restoration 
plans and for issuance and review of directives and orders pursuant to 
section 38.
    (c) Scope. This subpart implements the provisions of section 38 of 
the FDI Act as they apply to insured national banks and insured federal 
branches. Certain of these provisions also apply to officers, directors 
and employees of these insured institutions. Other provisions apply to 
any company that controls an insured national bank or insured federal 
branch and to the affiliates of an insured national bank or insured 
federal branch.
    (d) Other supervisory authority. Neither section 38 nor this part in 
any way limits the authority of the OCC under any other provision of law 
to take supervisory actions to address unsafe or unsound practices, 
deficient capital levels, violations of law, unsafe or unsound 
conditions, or other practices. Action under section 38 of the FDI Act 
and this part may be taken independently of, in conjunction with, or in 
addition to any other enforcement action available to the OCC, including 
issuance of cease and desist orders, capital directives, approval or 
denial of applications or notices, assessment of civil money penalties, 
or any other actions authorized by law.
    (e) Disclosure of capital categories. The assignment of an insured 
national bank or insured federal branch under this subpart within a 
particular capital category is for purposes of implementing and applying 
the provisions of section 38. Unless permitted by the OCC or otherwise 
required by law, no bank may state in any advertisement or promotional 
material its capital category under this subpart or that the OCC or any 
other federal banking agency has assigned the bank to a particular 
capital category.



Sec. 6.2  Definitions.

    For purposes of section 38 and this part, the definitions related to 
capital in part 3 of this chapter shall apply. In addition, except as 
modified in this

[[Page 176]]

section or unless the context otherwise requires, the terms used in this 
subpart have the same meanings as set forth in section 38 and section 3 
of the FDI Act.
    (a) Bank means all insured national banks and all insured federal 
branches, except where otherwise provided in this subpart.
    (b)(1) Control has the same meaning assigned to it in section 2 of 
the Bank Holding Company Act (12 U.S.C. 1841), and the term controlled 
shall be construed consistently with the term control.
    (2) Exclusion for fiduciary ownership. No insured depository 
institution or company controls another insured depository institution 
or company by virtue of its ownership or control of shares in a 
fiduciary capacity. Shares shall not be deemed to have been acquired in 
a fiduciary capacity if the acquiring insured depository institution or 
company has sole discretionary authority to exercise voting rights with 
respect thereto.
    (3) Exclusion for debts previously contracted. No insured depository 
institution or company controls another insured depository institution 
or company by virtue of its ownership or control of shares acquired in 
securing or collecting a debt previously contracted in good faith, until 
two years after the date of acquisition. The two-year period may be 
extended at the discretion of the appropriate federal banking agency for 
up to three one-year periods.
    (c) Controlling person means any person having control of an insured 
depository institution and any company controlled by that person.
    (d) Leverage ratio means the ratio of Tier 1 capital to adjusted 
total assets, as calculated in accordance with the OCC's Minimum Capital 
Ratios in part 3 of this chapter.
    (e) Management fee means any payment of money or provision of any 
other thing of value to a company or individual for the provision of 
management services or advice to the bank or related overhead expenses, 
including payments related to supervisory, executive, managerial, or 
policymaking functions, other than compensation to an individual in the 
individual's capacity as an officer or employee of the bank.
    (f) Risk-weighted assets means total risk weighted assets, as 
calculated in accordance with the OCC's Minimum Capital Ratios in part 3 
of this chapter.
    (g) Tangible equity means the amount of Tier 1 capital elements in 
the OCC's Risk-Based Capital Guidelines (appendix A to part 3 of this 
chapter) plus the amount of outstanding cumulative perpetual preferred 
stock (including related surplus) minus all intangible assets except 
mortgage servicing assets to the extent permitted in Tier 1 capital 
under section 2(c)(2) in appendix A to part 3 of this chapter.
    (h) Tier 1 capital means the amount of Tier 1 capital as defined in 
the OCC's Minimum Capital Ratios in part 3 of this chapter.
    (i) Tier 1 risk-based capital ratio means the ratio of Tier 1 
capital to risk weighted assets, as calculated in accordance with the 
OCC's Minimum Capital Ratios in part 3 of this chapter.
    (j) Total assets means quarterly average total assets as reported in 
a bank's Consolidated Reports of Condition and Income (Call Report), 
minus intangible assets as provided in the definition of tangible 
equity. The OCC reserves the right to require a bank to compute and 
maintain its capital ratios on the basis of actual, rather than average, 
total assets when computing tangible equity.
    (k) Total risk-based capital ratio means the ratio of qualifying 
total capital to risk-weighted assets, as calculated in accordance with 
the OCC's Minimum Capital Ratios in part 3 of this chapter.

[57 FR 44891, Sept. 29, 1992, as amended at 60 FR 39229, Aug. 1, 1995; 
63 FR 42674, Aug. 10, 1998]



Sec. 6.3  Notice of capital category.

    (a) Effective date of determination of capital category. A bank 
shall be deemed to be within a given capital category for purposes of 
section 38 of the FDI Act and this part as of the date the bank is 
notified of, or is deemed to have notice of, its capital category 
pursuant to paragraph (b) of this section.
    (b) Notice of capital category. A bank shall be deemed to have been 
notified of its capital levels and its capital category as of the most 
recent date:

[[Page 177]]

    (1) A Consolidated Report of Condition and Income (Call Report) is 
required to be filed with the OCC;
    (2) A final report of examination is delivered to the bank; or
    (3) Written notice is provided by the OCC to the bank of its capital 
category for purposes of section 38 of the FDI Act and this part or that 
the bank's capital category has changed as provided in paragraph (c) of 
this section or Sec. 6.1 of this subpart and subpart M of part 19 of 
this chapter.
    (c) Adjustments to reported capital levels and capital category--(1) 
Notice of adjustment by bank. A bank shall provide the OCC with written 
notice that an adjustment to the bank's capital category may have 
occurred no later than 15 calendar days following the date that any 
material event has occurred that would cause the bank to be placed in a 
lower capital category from the category assigned to the bank for 
purposes of section 38 and this part on the basis of the bank's most 
recent Call Report or report of examination.
    (2) Determination to change capital category. After receiving notice 
pursuant to paragraph (c)(1) of this section, the OCC shall determine 
whether to change the capital category of the bank and shall notify the 
bank of the OCC's determination.



Sec. 6.4  Capital measures and capital category definitions.

    (a) Capital measures. For purposes of section 38 and this part, the 
relevant capital measures shall be:
    (1) The total risk-based capital ratio;
    (2) The Tier 1 risk-based capital ratio;
    (3) The leverage ratio.
    (b) Capital categories. For purposes of the provisions of section 38 
and this part, a bank shall be deemed to be:
    (1) Well capitalized if the bank:
    (i) Has a total risk-based capital ratio of 10.0 percent or greater; 
and
    (ii) Has a Tier 1 risk-based capital ratio of 6.0 percent or 
greater; and
    (iii) Has a leverage ratio of 5.0 percent or greater; and
    (iv) Is not subject to any written agreement, order or capital 
directive, or prompt corrective action directive issued by the OCC 
pursuant to section 8 of the FDI Act, the International Lending 
Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act, 
or any regulation thereunder, to meet and maintain a specific capital 
level for any capital measure.
    (2) Adequately capitalized if the bank:
    (i) Has a total risk-based capital ratio of 8.0 percent or greater; 
and
    (ii) Has a Tier 1 risk-based capital ratio of 4.0 percent or 
greater; and
    (iii) Has:
    (A) A leverage ratio of 4.0 percent or greater; or
    (B) A leverage ratio of 3.0 percent or greater if the bank is rated 
1 in the most recent examination of the bank; and
    (iv) Does not meet the definition of a well capitalized bank.
    (3) Undercapitalized if the bank:
    (i) Has a total risk-based capital ratio that is less than 8.0 
percent; or
    (ii) Has a Tier 1 risk-based capital ratio that is less than 4.0 
percent; or
    (iii) (A) Except as provided in paragraph (b)(3)(iii) (B) of this 
section, has a leverage ratio that is less than 4.0 percent; or
    (B) If the bank is rated 1 in the most recent examination of the 
bank, has a leverage ratio that is less than 3.0 percent.
    (4) Significantly undercapitalized if the bank has:
    (i) A total risk-based capital ratio that is less than 6.0 percent; 
or
    (ii) A Tier 1 risk-based capital ratio that is less than 3.0 
percent; or
    (iii) A leverage ratio that is less than 3.0 percent.
    (5) Critically undercapitalized if the bank has a ratio of tangible 
equity to total assets that is equal to or less than 2.0 percent.
    (c) Capital categories for insured federal branches. For purposes of 
the provisions of section 38 of the FDI Act and this part, an insured 
federal branch shall be deemed to be:
    (1) Well capitalized if the insured federal branch:
    (i) Maintains the pledge of assets required under 12 CFR 347.210; 
and
    (ii) Maintains the eligible assets prescribed under 12 CFR 347.211 
at 108 percent or more of the preceding quarter's average book value of 
the insured branch's third-party liabilities; and

[[Page 178]]

    (iii) Has not received written notification from:
    (A) The OCC to increase its capital equivalency deposit pursuant to 
Sec. 28.6(a) of this chapter, or to comply with asset maintenance 
requirements pursuant to Sec. 28.9 of this chapter; or
    (B) The FDIC to pledge additional assets pursuant to 12 CFR 346.19 
or to maintain a higher ratio of eligible assets pursuant to 12 CFR 
346.20.
    (2) Adequately Capitalized if the insured federal branch:
    (i) Maintains the pledge of assets prescribed under 12 CFR 346.19; 
and
    (ii) Maintains the eligible assets prescribed under 12 CFR 346.20 at 
106 percent or more of the preceding quarter's average book value of the 
insured branch's third-party liabilities; and
    (iii) Does not meet the definition of a well capitalized insured 
federal branch.
    (3) Undercapitalized if the insured federal branch:
    (i) Fails to maintain the pledge of assets required under 12 CFR 
346.19; or
    (ii) Fails to maintain the eligible assets prescribed under 12 CFR 
346.20 at 106 percent or more of the preceding quarter's average book 
value of the insured branch's third-party liabilities.
    (4) Significantly undercapitalized if it fails to maintain the 
eligible assets prescribed under 12 CFR 346.20 at 104 percent or more of 
the preceding quarter's average book value of the insured federal 
branch's third-party liabilities.
    (5) Critically undercapitalized if it fails to maintain the eligible 
assets prescribed under 12 CFR 346.20 at 102 percent or more of the 
preceding quarter's average book value of the insured federal branch's 
third-party liabilities.
    (d) Reclassification based on supervisory criteria other than 
capital. The OCC may reclassify a well capitalized bank as adequately 
capitalized and may require an adequately capitalized or an 
undercapitalized bank to comply with certain mandatory or discretionary 
supervisory actions as if the bank were in the next lower capital 
category (except that the OCC may not reclassify a significantly 
undercapitalized bank as critically undercapitalized) (each of these 
actions are hereinafter referred to generally as reclassifications) in 
the following circumstances:
    (1) Unsafe or unsound condition. The OCC has determined, after 
notice and opportunity for hearing pursuant to subpart M of part 19 of 
this chapter, that the bank is in unsafe or unsound condition; or
    (2) Unsafe or unsound practice. The OCC has determined, after notice 
and opportunity for hearing pursuant to subpart M of part 19 of this 
chapter, that in the most recent examination of the bank, the bank 
received, and has not corrected a less-than-satisfactory rating for any 
of the categories of asset quality, management, earnings, or liquidity.

[57 FR 44891, Sept. 29, 1992, as amended at 68 FR 70131, Dec. 17, 2003]



Sec. 6.5  Capital restoration plans.

    (a) Schedule for filing plan--(1) In general. A bank shall file a 
written capital restoration plan with the OCC within 45 days of the date 
that the bank receives notice or is deemed to have notice that the bank 
is undercapitalized, significantly undercapitalized, or critically 
undercapitalized, unless the OCC notifies the bank in writing that the 
plan is to be filed within a different period. An adequately capitalized 
bank that has been required pursuant to Sec. 6.4 and subpart M of part 
19 of this chapter to comply with supervisory actions as if the bank 
were undercapitalized is not required to submit a capital restoration 
plan solely by virtue of the reclassification.
    (2) Additional capital restoration plans. Notwithstanding paragraph 
(a)(1) of this section, a bank that has already submitted and is 
operating under a capital restoration plan approved under section 38 and 
this subpart is not required to submit an additional capital restoration 
plan based on a revised calculation of its capital measures or a 
reclassification of the institution under Sec. 6.4 and subpart M of 
part 19 of this chapter unless the OCC notifies the bank that it must 
submit a new or revised capital plan. A bank that is notified that it 
must submit a new or revised capital restoration plan shall file the 
plan in writing with the OCC within 45 days of receiving such notice, 
unless the OCC notifies the bank in writing that the plan must be filed 
within a different period.

[[Page 179]]

    (b) Contents of plan. All financial data submitted in connection 
with a capital restoration plan shall be prepared in accordance with the 
instructions provided on the Call Report, unless the OCC instructs 
otherwise. The capital restoration plan shall include all of the 
information required to be filed under section 38(e)(2) of the FDI Act. 
A bank that is required to submit a capital restoration plan as the 
result of a reclassification of the bank, pursuant to Sec. 6.4 and 
subpart M of part 19 of this chapter, shall include a description of the 
steps the bank will take to correct the unsafe or unsound condition or 
practice. No plan shall be accepted unless it includes any performance 
guarantee described in section 38(e)(2)(C) of that Act by each company 
that controls the bank.
    (c) Review of capital restoration plans. Within 60 days after 
receiving a capital restoration plan under this subpart, the OCC shall 
provide written notice to the bank of whether the plan has been 
approved. The OCC may extend the time within which notice regarding 
approval of a plan shall be provided.
    (d) Disapproval of capital restoration plan. If a capital 
restoration plan is not approved by the OCC, the bank shall submit a 
revised capital restoration plan within the time specified by the OCC. 
Upon receiving notice that its capital restoration plan has not been 
approved, any undercapitalized bank (as defined in Sec. 6.4) shall be 
subject to all of the provisions of section 38 and this part applicable 
to significantly undercapitalized institutions. These provisions shall 
be applicable until such time as a new or revised capital restoration 
plan submitted by the bank has been approved by the OCC.
    (e) Failure to submit a capital restoration plan. A bank that is 
undercapitalized (as defined in Sec. 6.4) and that fails to submit a 
written capital restoration plan within the period provided in this 
section shall, upon the expiration of that period, be subject to all of 
the provisions of section 38 and this part applicable to significantly 
undercapitalized banks.
    (f) Failure to implement a capital restoration plan. Any 
undercapitalized bank that fails, in any material respect, to implement 
a capital restoration plan shall be subject to all of the provisions of 
section 38 and this part applicable to significantly undercapitalized 
banks.
    (g) Amendment of capital restoration plan. A bank that has submitted 
an approved capital restoration plan may, after prior written notice to 
and approval by the OCC, amend the plan to reflect a change in 
circumstance. Until such time as a proposed amendment has been approved, 
the bank shall implement the capital restoration plan as approved prior 
to the proposed amendment.
    (h) Notice to FDIC. Within 45 days of the effective date of OCC 
approval of a capital restoration plan, or any amendment to a capital 
restoration plan, the OCC shall provide a copy of the plan or amendment 
to the Federal Deposit Insurance Corporation.
    (i) Performance guarantee by companies that control a bank--(1) 
Limitation on liability--(i) Amount limitation. The aggregate liability 
under the guarantee provided under section 38 and this subpart for all 
companies that control a specific bank that is required to submit a 
capital restoration plan under this subpart shall be limited to the 
lesser of:
    (A) An amount equal to 5.0 percent of the bank's total assets at the 
time the bank was notified or deemed to have notice that the bank was 
undercapitalized; or
    (B) The amount necessary to restore the relevant capital measures of 
the bank to the levels required for the bank to be classified as 
adequately capitalized, as those capital measures and levels are defined 
at the time that the bank initially fails to comply with a capital 
restoration plan under this subpart.
    (ii) Limit on duration. The guarantee and limit of liability under 
section 38 and this subpart shall expire after the OCC notifies the bank 
that it has remained adequately capitalized for each of four consecutive 
calendar quarters. The expiration or fulfillment by a company of a 
guarantee of a capital restoration plan shall not limit the liability of 
the company under any guarantee required or provided in connection with 
any capital restoration plan

[[Page 180]]

filed by the same bank after expiration of the first guarantee.
    (iii) Collection on guarantee. Each company that controls a given 
bank shall be jointly and severally liable for the guarantee for such 
bank as required under section 38 and this subpart, and the OCC may 
require payment of the full amount of that guarantee from any or all of 
the companies issuing the guarantee.
    (2) Failure to provide guarantee. In the event that a bank that is 
controlled by any company submits a capital restoration plan that does 
not contain the guarantee required under section 38(e)(2) of the FDI 
Act, the bank shall, upon submission of the plan, be subject to the 
provisions of section 38 and this part that are applicable to banks that 
have not submitted an acceptable capital restoration plan.
    (3) Failure to perform guarantee. Failure by any company that 
controls a bank to perform fully its guarantee of any capital plan shall 
constitute a material failure to implement the plan for purposes of 
section 38(f) of the FDI Act. Upon such failure, the bank shall be 
subject to the provisions of section 38 and this part that are 
applicable to banks that have failed in a material respect to implement 
a capital restoration plan.
    (j) Enforcement of capital restoration plan. The failure of a bank 
to implement, in any material respect, a capital restoration plan 
required under section 38 and this section shall subject the bank to the 
assessment of civil money penalties pursuant to section 8(i)(2)(A) of 
the FDI Act.



Sec. 6.6  Mandatory and discretionary supervisory actions under section 38.

    (a) Mandatory supervisory actions--(1) Provisions applicable to all 
banks. All banks are subject to the restrictions contained in section 
38(d) of the FDI Act on payment of capital distributions and management 
fees.
    (2) Provisions applicable to undercapitalized, significantly 
undercapitalized, and critically undercapitalized banks. Immediately 
upon receiving notice or being deemed to have notice, as provided in 
Sec. 6.3, that the bank is undercapitalized, significantly 
undercapitalized, or critically undercapitalized, the bank shall become 
subject to the provisions of section 38 of the FDI Act--
    (i) Restricting payment of capital distributions and management fees 
(section 38(d));
    (ii) Requiring that the OCC monitor the condition of the bank 
(section 38(e)(1));
    (iii) Requiring submission of a capital restoration plan within the 
schedule established in this subpart (section 38(e)(2));
    (iv) Restricting the growth of the bank's assets (section 38(e)(3)); 
and
    (v) Requiring prior approval of certain expansion proposals (section 
38(e)(4)).
    (3) Additional provisions applicable to significantly 
undercapitalized, and critically undercapitalized banks. In addition to 
the provisions of section 38 of the FDI Act described in paragraph 
(a)(2) of this section, immediately upon receiving notice or being 
deemed to have notice, as provided in this subpart, that the bank is 
significantly undercapitalized, or critically undercapitalized or that 
the bank is subject to the provisions applicable to institutions that 
are significantly undercapitalized because it has failed to submit or 
implement, in any material respect, an acceptable capital restoration 
plan, the bank shall become subject to the provisions of section 38 of 
the FDI Act that restrict compensation paid to senior executive officers 
of the institution (section 38(f)(4)).
    (4) Additional provisions applicable to critically undercapitalized 
banks. In addition to the provisions of section 38 of the FDI Act 
described in paragraphs (a) (2) and (3) of this section, immediately 
upon receiving notice or being deemed to have notice, as provided in 
Sec. 6.3, that the bank is critically undercapitalized, the bank shall 
become subject to the provisions of section 38 of the FDI Act--
    (i) Restricting the activities of the bank (section 38(h)(1)); and
    (ii) Restricting payments on subordinated debt of the bank (section 
38(h)(2)).
    (b) Discretionary supervisory actions. In taking any action under 
section 38 that is within the OCC's discretion to take in connection 
with a bank that is

[[Page 181]]

deemed to be undercapitalized, significantly undercapitalized, or 
critically undercapitalized, or has been reclassified as 
undercapitalized or significantly undercapitalized; an officer or 
director of such bank; or a company that controls such bank, the OCC 
shall follow the procedures for issuing directives under subpart B of 
this part and subpart N of part 19 of this chapter, unless otherwise 
provided in section 38 or this part.



          Subpart B_Directives To Take Prompt Corrective Action



Sec. 6.20  Scope.

    The rules and procedures set forth in this subpart apply to insured 
national banks, insured federal branches and senior executive officers 
and directors of banks that are subject to the provisions of section 38 
of the Federal Deposit Insurance Act (section 38) and subpart A of this 
part.



Sec. 6.21  Notice of intent to issue a directive.

    (a) Notice of intent to issue a directive--(1) In general. The OCC 
shall provide an undercapitalized, significantly undercapitalized, or 
critically undercapitalized bank prior written notice of the OCC's 
intention to issue a directive requiring such bank or company to take 
actions or to follow proscriptions described in section 38 that are 
within the OCC's discretion to require or impose under section 38 of the 
FDI Act, including section 38 (e)(5), (f)(2), (f)(3), or (f)(5). The 
bank shall have such time to respond to a proposed directive as provided 
under Sec. 6.22.
    (2) Immediate issuance of final directive. If the OCC finds it 
necessary in order to carry out the purposes of section 38 of the FDI 
Act, the OCC may, without providing the notice prescribed in paragraph 
(a)(1) of this section, issue a directive requiring a bank immediately 
to take actions or to follow proscriptions described in section 38 that 
are within the OCC's discretion to require or impose under section 38 of 
the FDI Act, including section 38 (e)(5), (f)(2), (f)(3), or (f)(5). A 
bank that is subject to such an immediately effective directive may 
submit a written appeal of the directive to the OCC. Such an appeal must 
be received by the OCC within 14 calendar days of the issuance of the 
directive, unless the OCC permits a longer period. The OCC shall 
consider any such appeal, if filed in a timely matter, within 60 days of 
receiving the appeal. During such period of review, the directive shall 
remain in effect unless the OCC, in its sole discretion, stays the 
effectiveness of the directive.
    (b) Contents of notice. A notice of intention to issue a directive 
shall include:
    (1) A statement of the bank's capital measures and capital levels;
    (2) A description of the restrictions, prohibitions or affirmative 
actions that the OCC proposes to impose or require;
    (3) The proposed date when such restrictions or prohibitions would 
be effective or the proposed date for completion of such affirmative 
actions; and
    (4) The date by which the bank subject to the directive may file 
with the OCC a written response to the notice.



Sec. 6.22  Response to notice.

    (a) Time for response. A bank may file a written response to a 
notice of intent to issue a directive within the time period set by the 
OCC. The date shall be at least 14 calendar days from the date of the 
notice unless the OCC determines that a shorter period is appropriate in 
light of the financial condition of the bank or other relevant 
circumstances.
    (b) Content of response. The response should include:
    (1) An explanation why the action proposed by the OCC is not an 
appropriate exercise of discretion under section 38;
    (2) Any recommended modification of the proposed directive; and
    (3) Any other relevant information, mitigating circumstances, 
documentation, or other evidence in support of the position of the bank 
regarding the proposed directive.
    (c) Failure to file response. Failure by a bank to file with the 
OCC, within the specified time period, a written response to a proposed 
directive shall constitute a waiver of the opportunity to respond and 
shall constitute consent to the issuance of the directive.

[[Page 182]]



Sec. 6.23  Decision and issuance of a prompt corrective action directive.

    (a) OCC consideration of response. After considering the response, 
the OCC may:
    (1) Issue the directive as proposed or in modified form;
    (2) Determine not to issue the directive and so notify the bank; or
    (3) Seek additional information or clarification of the response 
from the bank, or any other relevant source.
    (b) [Reserved]



Sec. 6.24  Request for modification or rescission of directive.

    Any bank that is subject to a directive under this subpart may, upon 
a change in circumstances, request in writing that the OCC reconsider 
the terms of the directive, and may propose that the directive be 
rescinded or modified. Unless otherwise ordered by the OCC, the 
directive shall continue in place while such request is pending before 
the OCC.



Sec. 6.25  Enforcement of directive.

    (a) Judicial remedies. Whenever a bank fails to comply with a 
directive issued under section 38, the OCC may seek enforcement of the 
directive in the appropriate United States district court pursuant to 
section 8(i)(1) of the FDI Act.
    (b) Administrative remedies. Pursuant to section 8(i)(2)(A) of the 
FDI Act, the OCC may assess a civil money penalty against any bank that 
violates or otherwise fails to comply with any final directive issued 
under section 38 and against any institution-affiliated party who 
participates in such violation or noncompliance.
    (c) Other enforcement action. In addition to the actions described 
in paragraphs (a) and (b) of this section, the OCC may seek enforcement 
of the provisions of section 38 or this part through any other judicial 
or administrative proceeding authorized by law.



PART 7_BANK ACTIVITIES AND OPERATIONS--Table of Contents




                          Subpart A_Bank Powers

Sec.
7.1000 National bank ownership of property.
7.1001 National bank acting as general insurance agent.
7.1002 National bank acting as finder.
7.1003 Money lent at banking offices or at other than banking offices.
7.1004 Loans originating at other than banking offices.
7.1005 Credit decisions at other than banking offices.
7.1006 Loan agreement providing for a share in profits, income, or 
          earnings or for stock warrants.
7.1007 Acceptances.
7.1008 Preparing income tax returns for customers or public.
7.1009 National bank holding collateral stock as nominee.
7.1010 Postal service by national bank.
7.1011 National bank acting as payroll issuer.
7.1012 Messenger service.
7.1014 Sale of money orders at nonbanking outlets.
7.1015 Receipt of stock from a small business investment company.
7.1016 Independent undertakings to pay against documents.
7.1017 National bank as guarantor or surety on indemnity bond.
7.1018 Automatic payment plan account.
7.1020 Purchase of open accounts.
7.1021 National bank participation in financial literacy programs.

                      Subpart B_Corporate Practices

7.2000 Corporate governance procedures.
7.2001 Notice of shareholders' meetings.
7.2002 Director or attorney as proxy.
7.2003 Annual meeting for election of directors.
7.2004 Honorary directors or advisory boards.
7.2005 Ownership of stock necessary to qualify as director.
7.2006 Cumulative voting in election of directors.
7.2007 Filling vacancies and increasing board of directors other than by 
          shareholder action.
7.2008 Oath of directors.
7.2009 Quorum of the board of directors; proxies not permissible.
7.2010 Directors' responsibilities.
7.2011 Compensation plans.
7.2012 President as director; chief executive officer.
7.2013 Fidelity bonds covering officers and employees.
7.2014 Indemnification of institution-affiliated parties.
7.2015 Cashier.
7.2016 Restricting transfer of stock and record dates.
7.2017 Facsimile signatures on bank stock certificates.
7.2018 Lost stock certificates.

[[Page 183]]

7.2019 Loans secured by a bank's own shares.
7.2020 Acquisition and holding of shares as treasury stock.
7.2021 Preemptive rights.
7.2022 Voting trusts.
7.2023 Reverse stock splits.
7.2024 Staggered terms for national bank directors and size of bank 
          board.

                        Subpart C_Bank Operations

7.3000 Bank hours and closings.
7.3001 Sharing space and employees.

                          Subpart D_Preemption

7.4000 Visitorial powers.
7.4001 Charging interest at rates permitted competing institutions; 
          charging interest to corporate borrowers.
7.4002 National bank charges.
7.4003 Establishment and operation of a remote service unit by a 
          national bank.
7.4004 Establishment and operation of a deposit production office by a 
          national bank.
7.4005 Combination of loan production office, deposit production office, 
          and remote service unit.
7.4006 Applicability of State law to national bank operating 
          subsidiaries.
7.4007 Deposit-taking.
7.4008 Lending.
7.4009 Applicability of state law to national bank operations.

                     Subpart E_Electronic Activities

7.5000 Scope.
7.5001 Electronic activities that are part of, or incidental to, the 
          business of banking.
7.5002 Furnishing of products and services by electronic means and 
          facilities.
7.5003 Composite authority to engage in electronic activities.
7.5004 Sale of excess electronic capacity and by-products.
7.5005 National bank acting as digital certification authority.
7.5006 Data processing.
7.5007 Correspondent services.
7.5008 Location of national bank conducting electronic activities.
7.5009 Location under 12 U.S.C. 85 of national banks operating 
          exclusively through the Internet.
7.5010 Shared electronic space.

    Authority: 12 U.S.C. 1 et seq., 71, 71a, 92, 92a, 93, 93a, 481, 484, 
and 1818.

    Source: 61 FR 4862, Feb. 9, 1996, unless otherwise noted.



                          Subpart A_Bank Powers



Sec. 7.1000  National bank ownership of property.

    (a) Investment in real estate necessary for the transaction of 
business--(1) General. Under 12 U.S.C. 29(First), a national bank may 
invest in real estate that is necessary for the transaction of its 
business.
    (2) Type of real estate. For purposes of 12 U.S.C. 29(First), this 
real estate includes:
    (i) Premises that are owned and occupied (or to be occupied, if 
under construction) by the bank, its branches, or its consolidated 
subsidiaries;
    (ii) Real estate acquired and intended, in good faith, for use in 
future expansion;
    (iii) Parking facilities that are used by customers or employees of 
the bank, its branches, and its consolidated subsidiaries;
    (iv) Residential property for the use of bank officers or employees 
who are:
    (A) Located in remote areas where suitable housing at a reasonable 
price is not readily available; or
    (B) Temporarily assigned to a foreign country, including foreign 
nationals temporarily assigned to the United States; and
    (v) Property for the use of bank officers, employees, or customers, 
or for the temporary lodging of such persons in areas where suitable 
commercial lodging is not readily available, provided that the purchase 
and operation of the property qualifies as a deductible business expense 
for Federal tax purposes.
    (3) Permissible means of holding. A national bank may acquire and 
hold real estate under this paragraph (a) by any reasonable and prudent 
means, including ownership in fee, a leasehold estate, or in an interest 
in a cooperative. The bank may hold this real estate directly or through 
one or more subsidiaries. The bank may organize a bank premises 
subsidiary as a corporation, partnership, or similar entity (e.g., a 
limited liability company).
    (b) Fixed assets. A national bank may own fixed assets necessary for 
the transaction of its business, such as fixtures, furniture, and data 
processing equipment.

[[Page 184]]

    (c) Investment in bank premises--(1) Investment limitation; 
approval. 12 U.S.C. 371d governs when OCC approval is required for 
national bank investment in bank premises. A bank may seek approval from 
the OCC in accordance with the procedures set forth in 12 CFR 5.37.
    (2) Option to purchase. An unexercised option to purchase bank 
premises or stock in a corporation holding bank premises is not an 
investment in bank premises. A national bank must receive OCC approval 
to exercise the option if the price of the option and the bank's other 
investments in bank premises exceed the amount of the bank's capital 
stock.
    (d) Other real property--(1) Lease financing of public facilities. A 
national bank may purchase or construct a municipal building, school 
building, or other similar public facility and, as holder of legal 
title, lease the facility to a municipality or other public authority 
having resources sufficient to make all rental payments as they become 
due. The lease agreement must provide that the lessee will become the 
owner of the building or facility upon the expiration of the lease.
    (2) Purchase of employee's residence. To facilitate the efficient 
use of bank personnel, a national bank may purchase the residence of an 
employee who has been transferred to another area in order to spare the 
employee a loss in the prevailing real estate market. The bank must 
arrange for early divestment of title to such property.

[61 FR 4862, Feb. 9, 1996, as amended at 61 FR 60387, Nov. 27, 1996]



Sec. 7.1001  National bank acting as general insurance agent.

    Pursuant to 12 U.S.C. 92, a national bank may act as an agent for 
any fire, life, or other insurance company in any place the population 
of which does not exceed 5,000 inhabitants. This provision is applicable 
to any office of a national bank when the office is located in a 
community having a population of less than 5,000, even though the 
principal office of such bank is located in a community whose population 
exceeds 5,000.



Sec. 7.1002  National bank acting as finder.

    (a) General. It is part of the business of banking under 12 U.S.C. 
24(Seventh) for a national bank to act as a finder, bringing together 
interested parties to a transaction.
    (b) Permissible finder activities. A national bank that acts as a 
finder may identify potential parties, make inquiries as to interest, 
introduce or arrange contacts or meetings of interested parties, act as 
an intermediary between interested parties, and otherwise bring parties 
together for a transaction that the parties themselves negotiate and 
consummate. The following list provides examples of permissible finder 
activities. This list is illustrative and not exclusive; the OCC may 
determine that other activities are permissible pursuant to a national 
bank's authority to act as a finder.
    (1) Communicating information about providers of products and 
services, and proposed offering prices and terms to potential markets 
for these products and services;
    (2) Communicating to the seller an offer to purchase or a request 
for information, including forwarding completed applications, 
application fees, and requests for information to third-party providers;
    (3) Arranging for third-party providers to offer reduced rates to 
those customers referred by the bank;
    (4) Providing administrative, clerical, and record keeping functions 
related to the bank's finder activity, including retaining copies of 
documents, instructing and assisting individuals in the completion of 
documents, scheduling sales calls on behalf of sellers, and conducting 
market research to identify potential new customers for retailers;
    (5) Conveying between interested parties expressions of interest, 
bids, offers, orders, and confirmations relating to a transaction;
    (6) Conveying other types of information between potential buyers, 
sellers, and other interested parties; and
    (7) Establishing rules of general applicability governing the use 
and operation of the finder service, including rules that:

[[Page 185]]

    (i) Govern the submission of bids and offers by buyers, sellers, and 
other interested parties that use the finder service and the 
circumstances under which the finder service will pair bids and offers 
submitted by buyers, sellers, and other interested parties; and
    (ii) Govern the manner in which buyers, sellers, and other 
interested parties may bind themselves to the terms of a specific 
transaction.
    (c) Limitation. The authority to act as a finder does not enable a 
national bank to engage in brokerage activities that have not been found 
to be permissible for national banks.
    (d) Advertisement and fee. Unless otherwise prohibited by Federal 
law, a national bank may advertise the availability of, and accept a fee 
for, the services provided pursuant to this section.

[67 FR 35004, May 17, 2002]



Sec. 7.1003  Money lent at banking offices or at other than banking offices.

    (a) General. For purposes of what constitutes a branch within the 
meaning of 12 U.S.C. 36(j) and 12 CFR 5.30, ``money'' is deemed to be 
``lent'' only at the place, if any, where the borrower in-person 
receives loan proceeds directly from bank funds:
    (1) From the lending bank or its operating subsidiary; or
    (2) At a facility that is established by the lending bank or its 
operating subsidiary.
    (b) Receipt of bank funds representing loan proceeds. Loan proceeds 
directly from bank funds may be received by a borrower in person at a 
place that is not the bank's main office and is not licensed as a branch 
without violating 12 U.S.C. 36, 12 U.S.C. 81 and 12 CFR 5.30, provided 
that a third party is used to deliver the funds and the place is not 
established by the lending bank or its operating subsidiary. A third 
party includes a person who satisfies the requirements of Sec. 
7.1012(c)(2), or one who customarily delivers loan proceeds directly 
from bank funds under accepted industry practice, such as an attorney or 
escrow agent at a real estate closing.



Sec. 7.1004  Loans originating at other than banking offices.

    (a) General. A national bank may use the services of, and compensate 
persons not employed by, the bank for originating loans.
    (b) Approval. An employee or agent of a national bank or of its 
operating subsidiary may originate a loan at a site other than the main 
office or a branch office of the bank. This action does not violate 12 
U.S.C. 36 and 12 U.S.C. 81 if the loan is approved and made at the main 
office or a branch office of the bank or at an office of the operating 
subsidiary located on the premises of, or contiguous to, the main office 
or branch office of the bank.



Sec. 7.1005  Credit decisions at other than banking offices.

    A national bank and its operating subsidiary may make a credit 
decision regarding a loan application at a site other than the main 
office or a branch office of the bank without violating 12 U.S.C. 36 and 
12 U.S.C. 81, provided that ``money'' is not deemed to be ``lent'' at 
those other sites within the meaning of Sec. 7.1003.



Sec. 7.1006  Loan agreement providing for a share in profits, income, or earnings or for stock warrants.

    A national bank may take as consideration for a loan a share in the 
profit, income, or earnings from a business enterprise of a borrower. A 
national bank also may take as consideration for a loan a stock warrant 
issued by a business enterprise of a borrower, provided that the bank 
does not exercise the warrant. The share or stock warrant may be taken 
in addition to, or in lieu of, interest. The borrower's obligation to 
repay principal, however, may not be conditioned upon the value of the 
profit, income, or earnings of the business enterprise or upon the value 
of the warrant received.



Sec. 7.1007  Acceptances.

    A national bank is not limited in the character of acceptances it 
may make in financing credit transactions. Bankers' acceptances may be 
used for such purpose, since the making of acceptances is an essential 
part of banking authorized by 12 U.S.C. 24.

[[Page 186]]



Sec. 7.1008  Preparing income tax returns for customers or public.

    A national bank may assist its customers in preparing their tax 
returns, either gratuitously or for a fee.

[68 FR 70131, Dec. 17, 2003]



Sec. 7.1009  National bank holding collateral stock as nominee.

    A national bank that accepts stock as collateral for a loan may have 
such stock transferred to the bank's name as nominee.



Sec. 7.1010  Postal service by national bank.

    (a) General. A national bank may maintain and operate a postal 
substation on banking premises and receive income from it. The services 
performed by the substation are those permitted under applicable rules 
of the United States Postal Service and may include meter stamping of 
letters and packages, and the sale of related insurance. The bank may 
advertise, develop, and extend the services of the substation for the 
purpose of attracting customers to the bank.
    (b) Postal regulations. A national bank operating a postal 
substation shall do so in accordance with the rules and regulations of 
the United States Postal Service. The national bank shall keep the books 
and records of the substation separate from those of other banking 
operations. Under 39 U.S.C. 404 and any regulations issued pursuant 
thereto, the United States Postal Service may inspect the books and 
records of the substation.



Sec. 7.1011  National bank acting as payroll issuer.

    A national bank may disburse to an employee of a customer payroll 
funds deposited with the bank by that customer. The bank may disburse 
those funds by direct payment to the employee, by crediting an account 
in the employee's name at the disbursing bank, or by forwarding funds to 
another institution in which an employee maintains an account.



Sec. 7.1012  Messenger service.

    (a) Definition. For purposes of this section, a ``messenger 
service'' means any service, such as a courier service or armored car 
service, used by a national bank and its customers to pick up from, and 
deliver to, specific customers at locations such as their homes or 
offices, items relating to transactions between the bank and those 
customers.
    (b) Pick-up and delivery of items constituting nonbranching 
activities. Pursuant to 12 U.S.C. 24 (Seventh), a national bank may 
establish and operate a messenger service, or use, with its customers, a 
third party messenger service. The bank may use the messenger service to 
transport items relevant to the bank's transactions with its customers 
without regard to the branching limitations set forth in 12 U.S.C. 36, 
provided the service does not engage in branching functions within the 
meaning of 12 U.S.C. 36(j). In establishing or using such a facility, 
the national bank may establish terms, conditions, and limitations 
consistent with this section and appropriate to assure compliance with 
safe and sound banking practices.
    (c) Pick-up and delivery of items constituting branching functions 
by a messenger service established by a third party. (1) Pursuant to 12 
U.S.C. 24 (Seventh), a national bank and its customers may use a 
messenger service to pick up from, and deliver to customers items that 
relate to branching functions within the meaning of 12 U.S.C. 36, 
provided the messenger service is established and operated by a third 
party. In using such a facility, a national bank may establish terms, 
conditions, and limitations, consistent with this section and 
appropriate to assure compliance with safe and sound banking practices.
    (2) The OCC reviews whether a messenger service is established by a 
third party on a case-by-case basis, considering all of the 
circumstances. However, a messenger service is clearly established by a 
third party if:
    (i) A party other than the national bank owns or rents the messenger 
service and its facilities and employs the persons who provide the 
service;
    (ii)(A) The messenger service retains the discretion to determine in 
its own business judgment which customers and geographic areas it will 
serve; or

[[Page 187]]

    (B) If the messenger service and the bank are under common ownership 
or control, the messenger service actually provides its services to the 
general public, including other depository institutions, and retains the 
discretion to determine in its own business judgment which customers and 
geographic areas it will serve;
    (iii) The messenger service maintains ultimate responsibility for 
scheduling, movement, and routing;
    (iv) The messenger service does not operate under the name of the 
bank, and the bank and the messenger service do not advertise, or 
otherwise represent, that the bank itself is providing the service, 
although the bank may advertise that its customers may use one or more 
third party messenger services to transact business with the bank;
    (v) The messenger service assumes responsibility for the items 
during transit and for maintaining adequate insurance covering thefts, 
employee fidelity, and other in-transit losses; and
    (vi) The messenger service acts as the agent for the customer when 
the items are in transit. The bank deems items intended for deposit to 
be deposited when credited to the customer's account at the bank's main 
office, one of its branches, or another permissible facility, such as a 
back office facility that is not a branch. The bank deems items 
representing withdrawals to be paid when the items are given to the 
messenger service.
    (3) A national bank may defray all or part of the costs incurred by 
a customer in transporting items through a messenger service. Payment of 
those costs may only cover expenses associated with each transaction 
involving the customer and the messenger service. The national bank may 
impose terms, conditions, and limitations that it deems appropriate with 
respect to the payment of such costs.
    (d) Pickup and delivery of items pertaining to branching activities 
where the messenger service is established by the national bank. A 
national bank may establish and operate a messenger service to transport 
items relevant to the bank's transactions with its customers if such 
transactions constitute one or more branching functions within the 
meaning of 12 U.S.C. 36(j), provided the bank receives approval to 
establish a branch pursuant to 12 CFR 5.30.

[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60098, Nov. 4, 1999]



Sec. 7.1014  Sale of money orders at nonbanking outlets.

    A national bank may designate bonded agents to sell the bank's money 
orders at nonbanking outlets. The responsibility of both the bank and 
its agent should be defined in a written agreement setting forth the 
duties of both parties and providing for remuneration of the agent. The 
bank's agents need not report on sales and transmit funds from the 
nonbanking outlets more frequently than at the end of the third business 
day following receipt of the funds.



Sec. 7.1015  Receipt of stock from a small business investment company.

    A national bank may purchase the stock of a small business 
investment company (SBIC) (see 15 U.S.C. 682(b)), and may receive the 
benefits of such stock ownership (e.g., stock dividends). The receipt 
and retention of a dividend by a national bank from an SBIC in the form 
of stock of a corporate borrower of the SBIC is not a purchase of stock 
within the meaning of 12 U.S.C. 24 (Seventh).



Sec. 7.1016  Independent undertakings to pay against documents.

    (a) General authority. A national bank may issue and commit to issue 
letters of credit and other independent undertakings within the scope of 
the applicable laws or rules of practice recognized by law.\1\ Under 
such letters of credit

[[Page 188]]

and other independent undertakings, the bank's obligation to honor 
depends upon the presentation of specified documents and not upon 
nondocumentary conditions or resolution of questions of fact or law at 
issue between the applicant and the beneficiary. A national bank may 
also confirm or otherwise undertake to honor or purchase specified 
documents upon their presentation under another person's independent 
undertaking within the scope of such laws or rules.
---------------------------------------------------------------------------

    \1\ Examples of such laws or rules of practice include: The 
applicable version of Article 5 of the Uniform Commercial Code (UCC) 
(1962, as amended 1990) or revised Article 5 of the UCC (as amended 
1995) (available from West Publishing Co., 1/800/328-4880); the Uniform 
Customs and Practice for Documentary Credits (International Chamber of 
Commerce (ICC) Publication No. 500) (available from ICC Publishing, 
Inc., 212/206-1150; http://www.iccwbo.org); the International Standby 
Practices (ISP98) (ICC Publication No. 590) (available from the 
Institute of International Banking Law & Practice, 301/869-9840; http://
www.iiblp.org); the United Nations Convention on Independent Guarantees 
and Stand-by Letters of Credit (adopted by the U.N. General Assembly in 
1995 and signed by the U.S. in 1997) (available from the U.N. Commission 
on International Trade Law, 212/963-5353); and the Uniform Rules for 
Bank-to-Bank Reimbursements Under Documentary Credits (ICC Publication 
No. 525) (available from ICC Publishing, Inc., 212/206-1150; http://
www.iccwbo.org); as any of the foregoing may be amended from time to 
time.
---------------------------------------------------------------------------

    (b) Safety and soundness considerations--(1) Terms. As a matter of 
safe and sound banking practice, banks that issue independent 
undertakings should not be exposed to undue risk. At a minimum, banks 
should consider the following:
    (i) The independent character of the undertaking should be apparent 
from its terms (such as terms that subject it to laws or rules providing 
for its independent character);
    (ii) The undertaking should be limited in amount;
    (iii) The undertaking should:
    (A) Be limited in duration; or
    (B) Permit the bank to terminate the undertaking either on a 
periodic basis (consistent with the bank's ability to make any necessary 
credit assessments) or at will upon either notice or payment to the 
beneficiary; or
    (C) Entitle the bank to cash collateral from the applicant on demand 
(with a right to accelerate the applicant's obligations, as 
appropriate); and
    (iv) The bank either should be fully collateralized or have a post-
honor right of reimbursement from the applicant or from another issuer 
of an independent undertaking. Alternatively, if the bank's undertaking 
is to purchase documents of title, securities, or other valuable 
documents, the bank should obtain a first priority right to realize on 
the documents if the bank is not otherwise to be reimbursed.
    (2) Additional considerations in special circumstances. Certain 
undertakings require particular protections against credit, operational, 
and market risk:
    (i) In the event that the undertaking is to honor by delivery of an 
item of value other than money, the bank should ensure that market 
fluctuations that affect the value of the item will not cause the bank 
to assume undue market risk;
    (ii) In the event that the undertaking provides for automatic 
renewal, the terms for renewal should be consistent with the bank's 
ability to make any necessary credit assessments prior to renewal;
    (iii) In the event that a bank issues an undertaking for its own 
account, the underlying transaction for which it is issued must be 
within the bank's authority and comply with any safety and soundness 
requirements applicable to that transaction.
    (3) Operational expertise. The bank should possess operational 
expertise that is commensurate with the sophistication of its 
independent undertaking activities.
    (4) Documentation. The bank must accurately reflect the bank's 
undertakings in its records, including any acceptance or deferred 
payment or other absolute obligation arising out of its contingent 
undertaking.
    (c) Coverage. An independent undertaking within the meaning of this 
section is not subject to the provisions of Sec. 7.1017.

[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60099, Nov. 4, 1999; 68 
FR 70131, Dec. 17, 2003]



Sec. 7.1017  National bank as guarantor or surety on indemnity bond.

    A national bank may lend its credit, bind itself as a surety to 
indemnify another, or otherwise become a guarantor (including, pursuant 
to 12 CFR 28.4, guaranteeing the deposits and other liabilities of its 
Edge corporations and Agreement corporations and of its corporate 
instrumentalities in foreign countries), if:
    (a) The bank has a substantial interest in the performance of the 
transaction involved (for example, a bank, as fiduciary, has a 
sufficient interest in

[[Page 189]]

the faithful performance by a cofiduciary of its duties to act as surety 
on the bond of such cofiduciary); or
    (b) The transaction is for the benefit of a customer and the bank 
obtains from the customer a segregated deposit that is sufficient in 
amount to cover the bank's total potential liability. A segregated 
deposit under this section includes collateral:
    (1) In which the bank has perfected its security interest (for 
example, if the collateral is a printed security, the bank must have 
obtained physical control of the security, and, if the collateral is a 
book entry security, the bank must have properly recorded its security 
interest); and
    (2) That has a market value, at the close of each business day, 
equal to the bank's total potential liability and is composed of:
    (i) Cash;
    (ii) Obligations of the United States or its agencies;
    (iii) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest; or
    (iv) Notes, drafts, or bills of exchange or bankers' acceptances 
that are eligible for rediscount or purchase by a Federal Reserve Bank; 
or
    (3) That has a market value, at the close of each business day, 
equal to 110 percent of the bank's total potential liability and is 
composed of obligations of a State or political subdivision of a State.

[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60099, Nov. 4, 1999]



Sec. 7.1018  Automatic payment plan account.

    A national bank may, for the benefit and convenience of its savings 
depositors, adopt an automatic payment plan under which a savings 
account will earn dividends at the current rate paid on regular savings 
accounts. The depositor, upon reaching a previously designated age, 
receives his or her accumulated savings and earned interest in 
installments of equal amounts over a specified period.



Sec. 7.1020  Purchase of open accounts.

    (a) General. The purchase of open accounts is a part of the business 
of banking and within the power of a national bank.
    (b) Export transactions. A national bank may purchase open accounts 
in connection with export transactions; the accounts should be protected 
by insurance such as that provided by the Foreign Credit Insurance 
Association and the Export-Import Bank.



Sec. 7.1021  National bank participation in financial literacy programs.

    A national bank may participate in a financial literacy program on 
the premises of, or at a facility used by, a school. The school premises 
or facility will not be considered a branch of the bank if:
    (a) The bank does not establish and operate the school premises or 
facility on which the financial literacy program is conducted; and
    (b) The principal purpose of the financial literacy program is 
educational. For example, a program is educational if it is designed to 
teach students the principles of personal economics or the benefits of 
saving for the future, and is not designed for the purpose of profit-
making.

[66 FR 34791, July 2, 2001]



                      Subpart B_Corporate Practices



Sec. 7.2000  Corporate governance procedures.

    (a) General. A national bank proposing to engage in a corporate 
governance procedure shall comply with applicable Federal banking 
statutes and regulations, and safe and sound banking practices.
    (b) Other sources of guidance. To the extent not inconsistent with 
applicable Federal banking statutes or regulations, or bank safety and 
soundness, a national bank may elect to follow the corporate governance 
procedures of the law of the state in which the main office of the bank 
is located, the law of the state in which the holding company of the 
bank is incorporated, the Delaware General Corporation Law, Del. Code 
Ann. tit. 8 (1991, as amended 1994, and as amended thereafter), or the 
Model Business Corporation Act (1984, as amended 1994, and as amended 
thereafter). A national bank shall designate in its bylaws the body of 
law selected

[[Page 190]]

for its corporate governance procedures.
    (c) No-objection procedures. The OCC also considers requests for its 
staff's position on the ability of a national bank to engage in a 
particular corporate governance procedure in accordance with the no-
objection procedures set forth in Banking Circular 205 or any 
subsequently published agency procedures.\2\ Requests should demonstrate 
how the proposed practice is not inconsistent with applicable Federal 
statutes or regulations, and is consistent with safe and sound banking 
practices.
---------------------------------------------------------------------------

    \2\ Available upon request from the OCC Communications Division, 250 
E Street, SW., Washington, DC 20219, (202) 874-4700.
---------------------------------------------------------------------------



Sec. 7.2001  Notice of shareholders' meetings.

    A national bank must mail shareholders notice of the time, place, 
and purpose of all shareholders' meetings at least 10 days prior to the 
meeting by first class mail, unless the OCC determines that an emergency 
circumstance exists. Where a national bank is a wholly-owned subsidiary, 
the sole shareholder is permitted to waive notice of the shareholder's 
meeting. The articles of association, bylaws, or law applicable to a 
national bank may require a longer period of notice.



Sec. 7.2002  Director or attorney as proxy.

    Any person or group of persons, except the bank's officers, clerks, 
tellers, or bookkeepers, may be designated to act as proxy. The bank's 
directors or attorneys may act as proxy if they are not also employed as 
an officer, clerk, teller or bookkeeper of the bank.



Sec. 7.2003  Annual meeting for election of directors.

    When the day fixed for the regular annual meeting of the 
shareholders falls on a legal holiday in the state in which the bank is 
located, the shareholders' meeting shall be held, and the directors 
elected, on the next following banking day.



Sec. 7.2004  Honorary directors or advisory boards.

    A national bank may appoint honorary or advisory members of a board 
of directors to act in advisory capacities without voting power or power 
of final decision in matters concerning the business of the bank. Any 
listing of honorary or advisory directors must distinguish between them 
and the bank's board of directors or indicate their advisory status.



Sec. 7.2005  Ownership of stock necessary to qualify as director.

    (a) General. A national bank director must own a qualifying equity 
interest in a national bank or a company that has control of a national 
bank. The director must own the qualifying equity interest in his or her 
own right and meet a certain minimum threshold ownership.
    (b) Qualifying equity interest--(1) Minimum required equity 
interest. For purposes of this section, a qualifying equity interest 
includes common or preferred stock of the bank or of a company that 
controls the bank that has not less than an aggregate par value of 
$1,000, an aggregate shareholders' equity of $1,000, or an aggregate 
fair market value of $1,000.
    (i) The value of the common or preferred stock held by a national 
bank director is valued as of the date purchased or the date on which 
the individual became a director, whichever value is greater.
    (ii) In the case of a company that owns more than one national bank, 
a director may use his or her equity interest in the controlling company 
to satisfy, in whole or in part, the equity interest requirement for any 
or all of the controlled national banks.
    (iii) Upon request, the OCC may consider whether other interests in 
a company controlling a national bank constitute an interest equivalent 
to $1,000 par value of national bank stock.
    (2) Joint ownership and tenancy in common. Shares held jointly or as 
a tenant in common are qualifying shares held by a director in his or 
her own right only to the extent of the aggregate value of the shares 
which the director

[[Page 191]]

would be entitled to receive on dissolution of the joint tenancy or 
tenancy in common.
    (3) Shares in a living trust. Shares deposited by a person in a 
living trust (inter vivos trust) as to which the person is a trustee and 
retains an absolute power of revocation are shares owned by the person 
in his or her own right.
    (4) Other arrangements--(i) Shares held through retirement plans and 
similar arrangements. A director may hold his or her qualifying interest 
through a profit-sharing plan, individual retirement account, retirement 
plan, or similar arrangement, if the director retains beneficial 
ownership and legal control over the shares.
    (ii) Shares held subject to buyback agreements. A director may 
acquire and hold his or her qualifying interest pursuant to a stock 
repurchase or buyback agreement with a transferring shareholder under 
which the director purchases the qualifying shares subject to an 
agreement that the transferring shareholder will repurchase the shares 
when, for any reason, the director ceases to serve in that capacity. The 
agreement may give the transferring shareholder a right of first refusal 
to repurchase the qualifying shares if the director seeks to transfer 
ownership of the shares to a third person.
    (iii) Assignment of right to dividends or distributions. A director 
may assign the right to receive all dividends or distributions on his or 
her qualifying shares to another, including a transferring shareholder, 
if the director retains beneficial ownership and legal control over the 
shares.
    (iv) Execution of proxy. A director may execute a revocable or 
irrevocable proxy authorizing another, including a transferring 
shareholder, to vote his or her qualifying shares, provided the director 
retains beneficial ownership and legal control over the shares.
    (c) Non-qualifying ownership. The following are not shares held by a 
director in his or her own right:
    (1) Shares pledged by the holder to secure a loan. However, all or 
part of the funds used to purchase the required qualifying equity 
interest may be borrowed from any party, including the bank or its 
affiliates;
    (2) Shares purchased subject to an absolute option vested in the 
seller to repurchase the shares within a specified period; and
    (3) Shares deposited in a voting trust where the depositor 
surrenders:
    (i) Legal ownership (depositor ceases to be registered owner of the 
stock);
    (ii) Power to vote the stock or to direct how it shall be voted; or
    (iii) Power to transfer legal title to the stock.

[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60099, Nov. 4, 1999]



Sec. 7.2006  Cumulative voting in election of directors.

    When electing directors, a shareholder shall have as many votes as 
the number of directors to be elected multiplied by the number of the 
shareholder's shares. The shareholder may cast all these votes for one 
candidate, or distribute the votes among as many candidates as the 
shareholder chooses. If, after the first ballot, subsequent ballots are 
necessary to elect directors, a shareholder may not vote shares that he 
or she has already fully cumulated and voted in favor of a successful 
candidate.



Sec. 7.2007  Filling vacancies and increasing board of directors other than by shareholder action.

    (a) Increasing board of directors. If authorized by the bank's 
articles of association, between shareholder meetings a majority of the 
board of directors may increase the number of the bank's directors 
within the limits specified in 12 U.S.C. 71a. The board of directors may 
increase the number of directors only by up to two directors, when the 
number of directors last elected by shareholders was 15 or fewer, and by 
up to four directors, when the number of directors last elected by 
shareholders was 16 or more.
    (b) Vacancies. If a vacancy occurs on the board of directors, 
including a vacancy resulting from an increase in the number of 
directors, the vacancy may be filled by the shareholders, a majority of 
the board of directors remaining in office, or, if the directors 
remaining in office constitute fewer than a quorum, by an affirmative 
vote of a

[[Page 192]]

majority of all the directors remaining in office.



Sec. 7.2008  Oath of directors.

    (a) Administration of the oath. A notary public, including one who 
is a director but not an officer of the national bank, may administer 
the oath of directors. Any person, other than an officer of the bank, 
having an official seal and authorized by the state to administer oaths, 
may also administer the oath.
    (b) Execution of the oath. Each director attending the organization 
meeting shall execute either a joint or individual oath. A director not 
attending the organization meeting (the first meeting after the election 
of the directors) shall execute the individual oath. A director shall 
take another oath upon re-election, notwithstanding uninterupted 
service. Appropriate sample oaths are located in the ``Comptroller's 
Corporate Manual''.
    (c) Filing and recordkeeping. A national bank must file the original 
executed oaths of directors with the OCC and retain a copy in the bank's 
records in accordance with the Comptroller's Corporate Manual filing and 
recordkeeping instructions for executed oaths of directors.

[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60099, Nov. 4, 1999]



Sec. 7.2009  Quorum of the board of directors; proxies not permissible.

    A national bank shall provide in its articles of association or 
bylaws that for the transaction of business, a quorum of the board of 
directors is at least a majority of the entire board then in office. A 
national bank director may not vote by proxy.



Sec. 7.2010  Directors' responsibilities.

    The business and affairs of the bank shall be managed by or under 
the direction of the board of directors. The board of directors should 
refer to OCC published guidance for additional information regarding 
responsibilities of directors.



Sec. 7.2011  Compensation plans.

    Consistent with safe and sound banking practices and the 
compensation provisions of 12 CFR part 30, a national bank may adopt 
compensation plans, including, among others, the following:
    (a) Bonus and profit-sharing plans. A national bank may adopt a 
bonus or profit-sharing plan designed to ensure adequate remuneration of 
bank officers and employees.
    (b) Pension plans. A national bank may provide employee pension 
plans and make reasonable contributions to the cost of the pension plan.
    (c) Employee stock option and stock purchase plans. A national bank 
may provide employee stock option and stock purchase plans.



Sec. 7.2012  President as director; chief executive officer.

    Pursuant to 12 U.S.C. 76, the president of a national bank must be a 
member of the board of directors, but a director other than the 
president may be elected chairman of the board. A person other than the 
president may serve as chief executive officer, and this person is not 
required to be a director of the bank.



Sec. 7.2013  Fidelity bonds covering officers and employees.

    (a) Adequate coverage. All officers and employees of a national bank 
must have adequate fidelity coverage. The failure of directors to 
require bonds with adequate sureties and in sufficient amount may make 
the directors liable for any losses that the bank sustains because of 
the absence of such bonds. Directors should not serve as sureties on 
such bonds.
    (b) Factors. The board of directors should determine the amount of 
such coverage, premised upon a consideration of factors, including:
    (1) Internal auditing safeguards employed;
    (2) Number of employees;
    (3) Amount of deposit liabilities; and
    (4) Amount of cash and securities normally held by the bank.



Sec. 7.2014  Indemnification of institution-affiliated parties.

    (a) Administrative proceedings or civil actions initiated by Federal 
banking agencies. A national bank may only

[[Page 193]]

make or agree to make indemnification payments to an institution-
affiliated party with respect to an administrative proceeding or civil 
action initiated by any Federal banking agency, that are reasonable and 
consistent with the requirements of 12 U.S.C. 1828(k) and the 
implementing regulations thereunder. The term ``institution-affiliated 
party'' has the same meaning as set forth at 12 U.S.C. 1813(u).
    (b) Administrative proceeding or civil actions not initiated by a 
Federal banking agency--(1) General. In cases involving an 
administrative proceeding or civil action not initiated by a Federal 
banking agency, a national bank may indemnify an institution-affiliated 
party for damages and expenses, including the advancement of expenses 
and legal fees, in accordance with the law of the state in which the 
main office of the bank is located, the law of the state in which the 
bank's holding company is incorporated, or the relevant provisions of 
the Model Business Corporation Act (1984, as amended 1994, and as 
amended thereafter), or Delaware General Corporation Law, Del. Code Ann. 
tit. 8 (1991, as amended 1994, and as amended thereafter), provided such 
payments are consistent with safe and sound banking practices. A 
national bank shall designate in its bylaws the body of law selected for 
making indemnification payments under this paragraph.
    (2) Insurance premiums. A national bank may provide for the payment 
of reasonable premiums for insurance covering the expenses, legal fees, 
and liability of institution-affiliated parties to the extent that the 
expenses, fees, or liability could be indemnified under paragraph (b)(1) 
of this section.



Sec. 7.2015  Cashier.

    A national bank's bylaws, board of directors, or a duly designated 
officer may assign some or all of the duties previously performed by the 
bank's cashier to its president, chief executive officer, or any other 
officer.



Sec. 7.2016  Restricting transfer of stock and record dates.

    (a) Conditions for stock transfer. Under 12 U.S.C. 52, a national 
bank may impose conditions upon the transfer of its stock reasonably 
calculated to simplify the work of the bank with respect to stock 
transfers, voting at shareholders' meetings, and related matters and to 
protect it against fraudulent transfers.
    (b) Record dates. A national bank may close its stock records for a 
reasonable period to ascertain shareholders for voting purposes. The 
board of directors may fix a record date for determining the 
shareholders entitled to notice of, and to vote at, any meeting of 
shareholders. The record date should be in reasonable proximity to the 
date that notice is given to the shareholders of the meeting.



Sec. 7.2017  Facsimile signatures on bank stock certificates.

    The president and cashier, or other officers authorized by the 
bank's bylaws, shall sign each national bank stock certificate. The 
signatures may be manual or facsimile, including electronic means of 
signature. Each certificate must be sealed with the seal of the 
association.



Sec. 7.2018  Lost stock certificates.

    If a national bank does not provide for replacing lost, stolen, or 
destroyed stock certificates in its articles of association or bylaws, 
the bank may adopt procedures in accordance with Sec. 7.2000.



Sec. 7.2019  Loans secured by a bank's own shares.

    (a) Permitted agreements, relating to bank shares. A national bank 
may require a borrower holding shares of the bank to execute agreements:
    (1) Not to pledge, give away, transfer, or otherwise assign such 
shares;
    (2) To pledge such shares at the request of the bank when necessary 
to prevent loss; and
    (3) To leave such shares in the bank's custody.
    (b) Use of capital notes and debentures. A national bank may not 
make loans secured by a pledge of the bank's own capital notes and 
debentures. Such notes and debentures must be subordinated to the claims 
of depositors and other creditors of the issuing bank, and are, 
therefore, capital instruments within the purview of 12 U.S.C. 83.

[[Page 194]]



Sec. 7.2020  Acquisition and holding of shares as treasury stock.

    (a) Acquisition of outstanding shares. Pursuant to 12 U.S.C. 59, 
including the requirements for prior approval by the bank's shareholders 
and the OCC imposed by that statute, a national bank may acquire its 
outstanding shares and hold them as treasury stock, if the acquisition 
and retention of the shares is, and continues to be, for a legitimate 
corporate purpose.
    (b) Legitimate corporate purpose. Examples of legitimate corporate 
purposes include the acquisition and holding of treasury stock to:
    (1) Have shares available for use in connection with employee stock 
option, bonus, purchase, or similar plans;
    (2) Sell to a director for the purpose of acquiring qualifying 
shares;
    (3) Purchase a director's qualifying shares upon the cessation of 
the director's service in that capacity if there is no ready market for 
the shares;
    (4) Reduce the number of shareholders in order to qualify as a 
Subchapter S corporation; and
    (5) Reduce costs associated with shareholder communications and 
meetings.
    (c) Prohibition. It is not a legitimate corporate purpose to acquire 
or hold treasury stock on speculation about changes in its value.

[64 FR 60099, Nov. 4, 1999]



Sec. 7.2021  Preemptive rights.

    A national bank in its articles of association must grant or deny 
preemptive rights to the bank's shareholders. Any amendment to a 
national bank's articles of association which modifies such preemptive 
rights must be approved by a vote of the holders of two-thirds of the 
bank's outstanding voting shares.



Sec. 7.2022  Voting trusts.

    The shareholders of a national bank may establish a voting trust 
under the applicable law of a state selected by the participants and 
designated in the trust agreement, provided the implementation of the 
trust is consistent with safe and sound banking practices.



Sec. 7.2023  Reverse stock splits.

    (a) Authority to engage in reverse stock splits. A national bank may 
engage in a reverse stock split if the transaction serves a legitimate 
corporate purpose and provides adequate dissenting shareholders' rights.
    (b) Legitimate corporate purpose. Examples of legitimate corporate 
purposes include a reverse stock split to:
    (1) Reduce the number of shareholders in order to qualify as a 
Subchapter S corporation; and
    (2) Reduce costs associated with shareholder communications and 
meetings.

[64 FR 60099, Nov. 4, 1999]



Sec. 7.2024  Staggered terms for national bank directors and size of bank board.

    (a) Staggered terms. Any national bank may adopt bylaws that provide 
for staggering the terms of its directors. National banks shall provide 
the OCC with copies of any bylaws so amended.
    (b) Maximum term. Any national bank director may hold office for a 
term that does not exceed three years.
    (c) Number of directors. A national bank's board of directors shall 
consist of no fewer than 5 and no more than 25 members. A national bank 
may, after notice to the OCC, increase the size of its board of 
directors above the 25 member limit. A national bank seeking to increase 
the number of its directors must notify the OCC any time the proposed 
size would exceed 25 directors. The bank's notice shall specify the 
reason(s) for the increase in the size of the board of directors beyond 
the statutory limit.

[68 FR 70131, Dec. 17, 2003]



                        Subpart C_Bank Operations



Sec. 7.3000  Bank hours and closings.

    (a) Bank hours. A national bank's board of directors should review 
its banking hours, and, independently of any other bank, take 
appropriate action to establish a schedule of banking hours.
    (b) Emergency closings. Pursuant to 12 U.S.C. 95(b)(1), the 
Comptroller of the Currency (Comptroller), a state, or a

[[Page 195]]

legally authorized state official may declare a day a legal holiday if 
emergency conditions exist. That day is a legal holiday for national 
banks or their offices in the affected geographic area (i.e., throughout 
the country, in a state, or in part of a state). Emergency conditions 
include natural disasters and civil and municipal emergencies (e.g., 
severe flooding, or a power emergency declared by a local power company 
or government requesting that businesses in the affected area close). 
The Comptroller issues a proclamation authorizing the emergency closing 
in accordance with 12 U.S.C. 95 at the time of the emergency condition, 
or soon thereafter. When the Comptroller, a State, or a legally 
authorized State official declares a legal holiday due to emergency 
conditions, a national bank may temporarily limit or suspend operations 
at its affected offices. Alternatively, the national bank may continue 
its operations unless the Comptroller by written order directs 
otherwise.
    (c) Ceremonial closings. A state or a legally authorized state 
official may declare a day a legal holiday for ceremonial reasons. When 
a state or a legally authorized state official declares a day to be a 
legal holiday for ceremonial reasons, a national bank may choose to 
remain open or to close.
    (d) Liability. A national bank should assure that all liabilities or 
other obligations under the applicable law due to the bank's closing are 
satisfied.

[61 FR 4862, Feb. 9, 1996, as amended at 66 FR 34791, July 2, 2001]



Sec. 7.3001  Sharing space and employees.

    (a) Sharing space. A national bank may:
    (1) Lease excess space on bank premises to one or more other 
businesses (including other banks and financial institutions);
    (2) Share space jointly held with one or more other businesses; or
    (3) Offer its services in space owned or leased to other businesses.
    (b) Sharing employees. When sharing space with other businesses as 
described in paragraph (a) of this section, a national bank may provide, 
under one or more written agreements among the bank, the other 
businesses, and their employees, that:
    (1) A bank employee may act as agent for the other business; or
    (2) An employee of the other business may act as agent for the bank.
    (c) Supervisory conditions. When a national bank engages in 
arrangements of the types listed in paragraphs (a) and (b) of this 
section, the bank shall ensure that:
    (1) The other business is conspicuously, accurately, and separately 
identified;
    (2) Shared employees clearly and fully disclose the nature of their 
agency relationship to customers of the bank and of the other businesses 
so that customers will know the identity of the bank or business that is 
providing the product or service;
    (3) The arrangement does not constitute a joint venture or 
partnership with the other business under applicable state law;
    (4) All aspects of the relationship between the bank and the other 
business are conducted at arm's length, unless a special arrangement is 
warranted because the other business is a subsidiary of the bank;
    (5) Security issues arising from the activities of the other 
business on the premises are addressed;
    (6) The activities of the other business do not adversely affect the 
safety and soundness of the bank;
    (7) The shared employees or the entity for which they perform 
services are duly licensed or meet qualification requirements of 
applicable statutes and regulations pertaining to agents or employees of 
such other business; and
    (8) The assets and records of the parties are segregated.
    (d) Other legal requirements. When entering into arrangements, of 
the types described in paragraphs (a) and (b) of this section, and in 
conducting operations pursuant to those arrangements the bank must 
ensure that each arrangement complies with 12 U.S.C. 29 and 36 and with 
any other applicable laws and regulations. If the arrangement involves 
an affiliate or a shareholder, director, officer or employee of the 
bank:

[[Page 196]]

    (1) The bank must ensure compliance with all applicable statutory 
and regulatory provisions governing bank transactions with these persons 
or entities;
    (2) The parties must comply with all applicable fiduciary duties; 
and
    (3) The parties, if they are in competition with each other, must 
consider limitations, if any, imposed by applicable antitrust laws.



                          Subpart D_Preemption



Sec. 7.4000  Visitorial powers.

    (a) General rule. (1) Only the OCC or an authorized representative 
of the OCC may exercise visitorial powers with respect to national 
banks, except as provided in paragraph (b) of this section. State 
officials may not exercise visitorial powers with respect to national 
banks, such as conducting examinations, inspecting or requiring the 
production of books or records of national banks, or prosecuting 
enforcement actions, except in limited circumstances authorized by 
federal law. However, production of a bank's records (other than non-
public OCC information under 12 CFR part 4, subpart C) may be required 
under normal judicial procedures.
    (2) For purposes of this section, visitorial powers include:
    (i) Examination of a bank;
    (ii) Inspection of a bank's books and records;
    (iii) Regulation and supervision of activities authorized or 
permitted pursuant to federal banking law; and
    (iv) Enforcing compliance with any applicable federal or state laws 
concerning those activities.
    (3) Unless otherwise provided by Federal law, the OCC has exclusive 
visitorial authority with respect to the content and conduct of 
activities authorized for national banks under Federal law.
    (b) Exceptions to the general rule. Under 12 U.S.C. 484, the OCC's 
exclusive visitorial powers are subject to the following exceptions:
    (1) Exceptions authorized by Federal law. National banks are subject 
to such visitorial powers as are provided by Federal law. Examples of 
laws vesting visitorial power in other governmental entities include 
laws authorizing state or other Federal officials to:
    (i) Inspect the list of shareholders, provided that the official is 
authorized to assess taxes under state authority (12 U.S.C. 62; this 
section also authorizes inspection of the shareholder list by 
shareholders and creditors of a national bank);
    (ii) Review, at reasonable times and upon reasonable notice to a 
bank, the bank's records solely to ensure compliance with applicable 
state unclaimed property or escheat laws upon reasonable cause to 
believe that the bank has failed to comply with those laws (12 U.S.C. 
484(b));
    (iii) Verify payroll records for unemployment compensation purposes 
(26 U.S.C. 3305(c));
    (iv) Ascertain the correctness of Federal tax returns (26 U.S.C. 
7602);
    (v) Enforce the Fair Labor Standards Act (29 U.S.C. 211); and
    (vi) Functionally regulate certain activities, as provided under the 
Gramm-Leach-Bliley Act, Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
    (2) Exception for courts of justice. National banks are subject to 
such visitorial powers as are vested in the courts of justice. This 
exception pertains to the powers inherent in the judiciary and does not 
grant state or other governmental authorities any right to inspect, 
superintend, direct, regulate or compel compliance by a national bank 
with respect to any law, regarding the content or conduct of activities 
authorized for national banks under Federal law.
    (3) Exception for Congress. National banks are subject to such 
visitorial powers as shall be, or have been, exercised or directed by 
Congress or by either House thereof or by any committee of Congress or 
of either House duly authorized.
    (c) Report of examination. The report of examination made by an OCC 
examiner is designated solely for use in the supervision of the bank. 
The bank's copy of the report is the property of the OCC and is loaned 
to the bank and any holding company thereof solely for its confidential 
use. The bank's directors, in keeping with their responsibilities both 
to depositors and to shareholders, should thoroughly review the

[[Page 197]]

report. The report may be made available to other persons only in 
accordance with the rules on disclosure in 12 CFR part 4.

[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60100, Nov. 4, 1999; 69 
FR 1904, Jan. 13, 2004]



Sec. 7.4001  Charging interest at rates permitted competing institutions; charging interest to corporate borrowers.

    (a) Definition. The term ``interest'' as used in 12 U.S.C. 85 
includes any payment compensating a creditor or prospective creditor for 
an extension of credit, making available of a line of credit, or any 
default or breach by a borrower of a condition upon which credit was 
extended. It includes, among other things, the following fees connected 
with credit extension or availability: numerical periodic rates, late 
fees, creditor-imposed not sufficient funds (NSF) fees charged when a 
borrower tenders payment on a debt with a check drawn on insufficient 
funds, overlimit fees, annual fees, cash advance fees, and membership 
fees. It does not ordinarily include appraisal fees, premiums and 
commissions attributable to insurance guaranteeing repayment of any 
extension of credit, finders' fees, fees for document preparation or 
notarization, or fees incurred to obtain credit reports.
    (b) Authority. A national bank located in a state may charge 
interest at the maximum rate permitted to any state-chartered or 
licensed lending institution by the law of that state. If state law 
permits different interest charges on specified classes of loans, a 
national bank making such loans is subject only to the provisions of 
state law relating to that class of loans that are material to the 
determination of the permitted interest. For example, a national bank 
may lawfully charge the highest rate permitted to be charged by a state-
licensed small loan company, without being so licensed, but subject to 
state law limitations on the size of loans made by small loan companies.
    (c) Effect on state definitions of interest. The Federal definition 
of the term ``interest'' in paragraph (a) of this section does not 
change how interest is defined by the individual states (nor how the 
state definition of interest is used) solely for purposes of state law. 
For example, if late fees are not ``interest'' under state law where a 
national bank is located but state law permits its most favored lender 
to charge late fees, then a national bank located in that state may 
charge late fees to its intrastate customers. The national bank may also 
charge late fees to its interstate customers because the fees are 
interest under the Federal definition of interest and an allowable 
charge under state law where the national bank is located. However, the 
late fees would not be treated as interest for purposes of evaluating 
compliance with state usury limitations because state law excludes late 
fees when calculating the maximum interest that lending institutions may 
charge under those limitations.
    (d) Usury. A national bank located in a state the law of which 
denies the defense of usury to a corporate borrower may charge a 
corporate borrower any rate of interest agreed upon by a corporate 
borrower.

[61 FR 4862, Feb. 9, 1996, as amended at 66 FR 34791, July 2, 2001]



Sec. 7.4002  National bank charges.

    (a) Authority to impose charges and fees. A national bank may charge 
its customers non-interest charges and fees, including deposit account 
service charges.
    (b) Considerations. (1) All charges and fees should be arrived at by 
each bank on a competitive basis and not on the basis of any agreement, 
arrangement, undertaking, understanding, or discussion with other banks 
or their officers.
    (2) The establishment of non-interest charges and fees, their 
amounts, and the method of calculating them are business decisions to be 
made by each bank, in its discretion, according to sound banking 
judgment and safe and sound banking principles. A national bank 
establishes non-interest charges and fees in accordance with safe and 
sound banking principles if the bank employs a decision-making process 
through which it considers the following factors, among others:
    (i) The cost incurred by the bank in providing the service;

[[Page 198]]

    (ii) The deterrence of misuse by customers of banking services;
    (iii) The enhancement of the competitive position of the bank in 
accordance with the bank's business plan and marketing strategy; and
    (iv) The maintenance of the safety and soundness of the institution.
    (c) Interest. Charges and fees that are ``interest'' within the 
meaning of 12 U.S.C. 85 are governed by Sec. 7.4001 and not by this 
section.
    (d) State law. The OCC applies preemption principles derived from 
the United States Constitution, as interpreted through judicial 
precedent, when determining whether State laws apply that purport to 
limit or prohibit charges and fees described in this section.
    (e) National bank as fiduciary. This section does not apply to 
charges imposed by a national bank in its capacity as a fiduciary, which 
are governed by 12 CFR part 9.

[66 FR 34791, July 2, 2001]



Sec. 7.4003  Establishment and operation of a remote service unit by a national bank.

    A remote service unit (RSU) is an automated facility, operated by a 
customer of a bank, that conducts banking functions, such as receiving 
deposits, paying withdrawals, or lending money. A national bank may 
establish and operate an RSU pursuant to 12 U.S.C. 24(Seventh). An RSU 
includes an automated teller machine, automated loan machine, and 
automated device for receiving deposits. An RSU may be equipped with a 
telephone or televideo device that allows contact with bank personnel. 
An RSU is not a ``branch'' within the meaning of 12 U.S.C. 36(j), and is 
not subject to state geographic or operational restrictions or licensing 
laws.

[64 FR 60100, Nov. 4, 1999]



Sec. 7.4004  Establishment and operation of a deposit production office by a national bank.

    (a) General rule. A national bank or its operating subsidiary may 
engage in deposit production activities at a site other than the main 
office or a branch of the bank. A deposit production office (DPO) may 
solicit deposits, provide information about deposit products, and assist 
persons in completing application forms and related documents to open a 
deposit account. A DPO is not a branch within the meaning of 12 U.S.C. 
36(j) and 12 CFR 5.30(d)(1) so long as it does not receive deposits, pay 
withdrawals, or make loans. All deposit and withdrawal transactions of a 
bank customer using a DPO must be performed by the customer, either in 
person at the main office or a branch office of the bank, or by mail, 
electronic transfer, or a similar method of transfer.
    (b) Services of other persons. A national bank may use the services 
of, and compensate, persons not employed by the bank in its deposit 
production activities.

[64 FR 60100, Nov. 4, 1999]



Sec. 7.4005  Combination of loan production office, deposit production office, and remote service unit.

    A location at which a national bank operates a loan production 
office (LPO), a deposit production office (DPO), and a remote service 
unit (RSU) is not a ``branch'' within the meaning of 12 U.S.C. 36(j) by 
virtue of that combination. Since an LPO, DPO, or RSU is not, 
individually, a branch under 12 U.S.C. 36(j), any combination of these 
facilities at one location does not create a branch.

[64 FR 60100, Nov. 4, 1999]



Sec. 7.4006  Applicability of State law to national bank operating subsidiaries.

    Unless otherwise provided by Federal law or OCC regulation, State 
laws apply to national bank operating subsidiaries to the same extent 
that those laws apply to the parent national bank.

[66 FR 34791, July 2, 2001]



Sec. 7.4007  Deposit-taking.

    (a) Authority of national banks. A national bank may receive 
deposits and engage in any activity incidental to receiving deposits, 
including issuing evidence of accounts, subject to such terms, 
conditions, and limitations prescribed by the Comptroller of the 
Currency and any other applicable Federal law.

[[Page 199]]

    (b) Applicability of state law. (1) Except where made applicable by 
Federal law, state laws that obstruct, impair, or condition a national 
bank's ability to fully exercise its Federally authorized deposit-taking 
powers are not applicable to national banks.
    (2) A national bank may exercise its deposit-taking powers without 
regard to state law limitations concerning:
    (i) Abandoned and dormant accounts;\3\
---------------------------------------------------------------------------

    \3\ This does not apply to state laws of the type upheld by the 
United States Supreme Court in Anderson Nat'l Bank v. Luckett, 321 U.S. 
233 (1944), which obligate a national bank to ``pay [deposits] to the 
persons entitled to demand payment according to the law of the state 
where it does business.'' Id. at 248-249.
---------------------------------------------------------------------------

    (ii) Checking accounts;
    (iii) Disclosure requirements;
    (iv) Funds availability;
    (v) Savings account orders of withdrawal;
    (vi) State licensing or registration requirements (except for 
purposes of service of process); and
    (vii) Special purpose savings services; \4\
---------------------------------------------------------------------------

    \4\ State laws purporting to regulate national bank fees and charges 
are addressed in 12 CFR 7.4002.
---------------------------------------------------------------------------

    (c) State laws that are not preempted. State laws on the following 
subjects are not inconsistent with the deposit-taking powers of national 
banks and apply to national banks to the extent that they only 
incidentally affect the exercise of national banks' deposit-taking 
powers:
    (1) Contracts;
    (2) Torts;
    (3) Criminal law; \5\
---------------------------------------------------------------------------

    \5\ But see the distinction drawn by the Supreme Court in Easton v. 
Iowa, 188 U.S. 220, 238 (1903) between ``crimes defined and punishable 
at common law or by the general statutes of a state and crimes and 
offences cognizable under the authority of the United States.'' The 
Court stated that ``[u]ndoubtedly a state has the legitimate power to 
define and punish crimes by general laws applicable to all persons 
within its jurisdiction * * *. But it is without lawful power to make 
such special laws applicable to banks organized and operating under the 
laws of the United States.'' Id. at 239 (holding that Federal law 
governing the operations of national banks preempted a state criminal 
law prohibiting insolvent banks from accepting deposits).
---------------------------------------------------------------------------

    (4) Rights to collect debts;
    (5) Acquisition and transfer of property;
    (6) Taxation;
    (7) Zoning; and
    (8) Any other law the effect of which the OCC determines to be 
incidental to the deposit-taking operations of national banks or 
otherwise consistent with the powers set out in paragraph (a) of this 
section.

[69 FR 1916, Jan. 13, 2004]



Sec. 7.4008  Lending.

    (a) Authority of national banks. A national bank may make, sell, 
purchase, participate in, or otherwise deal in loans and interests in 
loans that are not secured by liens on, or interests in, real estate, 
subject to such terms, conditions, and limitations prescribed by the 
Comptroller of the Currency and any other applicable Federal law.
    (b) Standards for loans. A national bank shall not make a consumer 
loan subject to this Sec. 7.4008 based predominantly on the bank's 
realization of the foreclosure or liquidation value of the borrower's 
collateral, without regard to the borrower's ability to repay the loan 
according to its terms. A bank may use any reasonable method to 
determine a borrower's ability to repay, including, for example, the 
borrower's current and expected income, current and expected cash flows, 
net worth, other relevant financial resources, current financial 
obligations, employment status, credit history, or other relevant 
factors.
    (c) Unfair and deceptive practices. A national bank shall not engage 
in unfair or deceptive practices within the meaning of section 5 of the 
Federal Trade Commission Act, 15 U.S.C. 45(a)(1), and regulations 
promulgated thereunder in connection with loans made under this Sec. 
7.4008.
    (d) Applicability of state law. (1) Except where made applicable by 
Federal law, state laws that obstruct, impair, or condition a national 
bank's ability to fully exercise its Federally authorized non-real 
estate lending powers are not applicable to national banks.

[[Page 200]]

    (2) A national bank may make non-real estate loans without regard to 
state law limitations concerning:
    (i) Licensing, registration (except for purposes of service of 
process), filings, or reports by creditors;
    (ii) The ability of a creditor to require or obtain insurance for 
collateral or other credit enhancements or risk mitigants, in 
furtherance of safe and sound banking practices;
    (iii) Loan-to-value ratios;
    (iv) The terms of credit, including the schedule for repayment of 
principal and interest, amortization of loans, balance, payments due, 
minimum payments, or term to maturity of the loan, including the 
circumstances under which a loan may be called due and payable upon the 
passage of time or a specified event external to the loan;
    (v) Escrow accounts, impound accounts, and similar accounts;
    (vi) Security property, including leaseholds;
    (vii) Access to, and use of, credit reports;
    (viii) Disclosure and advertising, including laws requiring specific 
statements, information, or other content to be included in credit 
application forms, credit solicitations, billing statements, credit 
contracts, or other credit-related documents;
    (ix) Disbursements and repayments; and
    (x) Rates of interest on loans.\6\
---------------------------------------------------------------------------

    \6\ The limitations on charges that comprise rates of interest on 
loans by national banks are determined under Federal law. See 12 U.S.C. 
85; 12 CFR 7.4001. State laws purporting to regulate national bank fees 
and charges that do not constitute interest are addressed in 12 CFR 
7.4002.
---------------------------------------------------------------------------

    (e) State laws that are not preempted. State laws on the following 
subjects are not inconsistent with the non-real estate lending powers of 
national banks and apply to national banks to the extent that they only 
incidentally affect the exercise of national banks' non-real estate 
lending powers:
    (1) Contracts;
    (2) Torts;
    (3) Criminal law;\7\
---------------------------------------------------------------------------

    \7\ See supra note 5 regarding the distinction drawn by the Supreme 
Court in Easton v. Iowa, 188 U.S. 220, 238 (1903) between ``crimes 
defined and punishable at common law or by the general statutes of a 
state and crimes and offences cognizable under the authority of the 
United States.''
---------------------------------------------------------------------------

    (4) Rights to collect debts;
    (5) Acquisition and transfer of property;
    (6) Taxation;
    (7) Zoning; and
    (8) Any other law the effect of which the OCC determines to be 
incidental to the non-real estate lending operations of national banks 
or otherwise consistent with the powers set out in paragraph (a) of this 
section.

[69 FR 1916, Jan. 13, 2004]



Sec. 7.4009  Applicability of state law to national bank operations.

    (a) Authority of national banks. A national bank may exercise all 
powers authorized to it under Federal law, including conducting any 
activity that is part of, or incidental to, the business of banking, 
subject to such terms, conditions, and limitations prescribed by the 
Comptroller of the Currency and any applicable Federal law.
    (b) Applicability of state law. Except where made applicable by 
Federal law, state laws that obstruct, impair, or condition a national 
bank's ability to fully exercise its powers to conduct activities 
authorized under Federal law do not apply to national banks.
    (c) Applicability of state law to particular national bank 
activities. (1) The provisions of this section govern with respect to 
any national bank power or aspect of a national bank's operations that 
is not covered by another OCC regulation specifically addressing the 
applicability of state law.
    (2) State laws on the following subjects are not inconsistent with 
the powers of national banks and apply to national banks to the extent 
that they only incidentally affect the exercise of national bank powers:
    (i) Contracts;
    (ii) Torts;
    (iii) Criminal law \8\
---------------------------------------------------------------------------

    \8\ 8 Id.
---------------------------------------------------------------------------

    (iv) Rights to collect debts;
    (v) Acquisition and transfer of property;
    (vi) Taxation;
    (vii) Zoning; and

[[Page 201]]

    (viii) Any other law the effect of which the OCC determines to be 
incidental to the exercise of national bank powers or otherwise 
consistent with the powers set out in paragraph (a) of this section.

[69 FR 1917, Jan. 13, 2004]



                     Subpart E_Electronic Activities

    Source: 67 FR 35004, May 17, 2002, unless otherwise noted.



Sec. 7.5000  Scope.

    This subpart applies to a national bank's use of technology to 
deliver services and products consistent with safety and soundness.



Sec. 7.5001  Electronic activities that are part of, or incidental to, the business of banking.

    (a) Purpose. This section identifies the criteria that the OCC uses 
to determine whether an electronic activity is authorized as part of, or 
incidental to, the business of banking under 12 U.S.C. 24 (Seventh) or 
other statutory authority.
    (b) Restrictions and conditions on electronic activities. The OCC 
may determine that activities are permissible under 12 U.S.C. 24 
(Seventh) or other statutory authority only if they are subject to 
standards or conditions designed to provide that the activities function 
as intended and are conducted safely and soundly, in accordance with 
other applicable statutes, regulations, or supervisory policies.
    (c) Activities that are part of the business of banking. (1) An 
activity is authorized for national banks as part of the business of 
banking if the activity is described in 12 U.S.C. 24 (Seventh) or other 
statutory authority. In determining whether an electronic activity is 
part of the business of banking, the OCC considers the following 
factors:
    (i) Whether the activity is the functional equivalent to, or a 
logical outgrowth of, a recognized banking activity;
    (ii) Whether the activity strengthens the bank by benefiting its 
customers or its business;
    (iii) Whether the activity involves risks similar in nature to those 
already assumed by banks; and
    (iv) Whether the activity is authorized for state-chartered banks.
    (2) The weight accorded each factor set out in paragraph (c)(1) of 
this section depends on the facts and circumstances of each case.
    (d) Activities that are incidental to the business of banking. (1) 
An electronic banking activity is authorized for a national bank as 
incidental to the business of banking if it is convenient or useful to 
an activity that is specifically authorized for national banks or to an 
activity that is otherwise part of the business of banking. In 
determining whether an activity is convenient or useful to such 
activities, the OCC considers the following factors:
    (i) Whether the activity facilitates the production or delivery of a 
bank's products or services, enhances the bank's ability to sell or 
market its products or services, or improves the effectiveness or 
efficiency of the bank's operations, in light of risks presented, 
innovations, strategies, techniques and new technologies for producing 
and delivering financial products and services; and
    (ii) Whether the activity enables the bank to use capacity acquired 
for its banking operations or otherwise avoid economic loss or waste.
    (2) The weight accorded each factor set out in paragraph (d)(1) of 
this section depends on the facts and circumstances of each case.



Sec. 7.5002  Furnishing of products and services by electronic means and facilities.

    (a) Use of electronic means and facilities. A national bank may 
perform, provide, or deliver through electronic means and facilities any 
activity, function, product, or service that it is otherwise authorized 
to perform, provide, or deliver, subject to Sec. 7.5001(b) and 
applicable OCC guidance. The following list provides examples of 
permissible activities under this authority. This list is illustrative 
and not exclusive; the OCC may determine that other activities are 
permissible pursuant to this authority.
    (1) Acting as an electronic finder by:

[[Page 202]]

    (i) Establishing, registering, and hosting commercially enabled web 
sites in the name of sellers;
    (ii) Establishing hyperlinks between the bank's site and a third-
party site, including acting as a ``virtual mall'' by providing a 
collection of links to web sites of third-party vendors, organized by-
product type and made available to bank customers;
    (iii) Hosting an electronic marketplace on the bank's Internet web 
site by providing links to the web sites of third-party buyers or 
sellers through the use of hypertext or other similar means;
    (iv) Hosting on the bank's servers the Internet web site of:
    (A) A buyer or seller that provides information concerning the 
hosted party and the products or services offered or sought and allows 
the submission of interest, bids, offers, orders and confirmations 
relating to such products or services; or
    (B) A governmental entity that provides information concerning the 
services or benefits made available by the governmental entity, assists 
persons in completing applications to receive such services or benefits 
and permits persons to transmit their applications for such services or 
benefits;
    (v) Operating an Internet web site that permits numerous buyers and 
sellers to exchange information concerning the products and services 
that they are willing to purchase or sell, locate potential counter-
parties for transactions, aggregate orders for goods or services with 
those made by other parties, and enter into transactions between 
themselves;
    (vi) Operating a telephone call center that provides permissible 
finder services; and
    (vii) Providing electronic communications services relating to all 
aspects of transactions between buyers and sellers;
    (2) Providing electronic bill presentment services;
    (3) Offering electronic stored value systems; and
    (4) Safekeeping for personal information or valuable confidential 
trade or business information, such as encryption keys.
    (b) Applicability of guidance and requirements not affected. When a 
national bank performs, provides, or delivers through electronic means 
and facilities an activity, function, product, or service that it is 
otherwise authorized to perform, provide, or deliver, the electronic 
activity is not exempt from the regulatory requirements and supervisory 
guidance that the OCC would apply if the activity were conducted by non-
electronic means or facilities.
    (c) State laws. As a general rule, and except as provided by Federal 
law, State law is not applicable to a national bank's conduct of an 
authorized activity through electronic means or facilities if the State 
law, as applied to the activity, would be preempted pursuant to 
traditional principles of Federal preemption derived from the Supremacy 
Clause of the U.S. Constitution and applicable judicial precedent. 
Accordingly, State laws that stand as an obstacle to the ability of 
national banks to exercise uniformly their Federally authorized powers 
through electronic means or facilities, are not applicable to national 
banks.



Sec. 7.5003  Composite authority to engage in electronic activities.

    Unless otherwise prohibited by Federal law, a national bank may 
engage in an electronic activity that is comprised of several component 
activities if each of the component activities is itself part of or 
incidental to the business of banking or is otherwise permissible under 
Federal law.



Sec. 7.5004  Sale of excess electronic capacity and by-products.

    (a) A national bank may, in order to optimize the use of the bank's 
resources or avoid economic loss or waste, market and sell to third 
parties electronic capacities legitimately acquired or developed by the 
bank for its banking business.
    (b) With respect to acquired equipment or facilities, legitimate 
excess electronic capacity that may be sold to others can arise in a 
variety of situations, including the following:
    (1) Due to the characteristics of the desired equipment or 
facilities available in the market, the capacity of the most practical 
optimal equipment or

[[Page 203]]

facilities available to meet the bank's requirements exceeds its present 
needs;
    (2) The acquisition and retention of additional capacity, beyond 
present needs, reasonably may be necessary for planned future expansion 
or to meet the expected future banking needs during the useful life of 
the equipment;
    (3) Requirements for capacity fluctuate because a bank engages in 
batch processing of banking transactions or because a bank must have 
capacity to meet peak period demand with the result that the bank has 
periods when its capacity is underutilized; and
    (4) After the initial acquisition of capacity thought to be fully 
needed for banking operations, the bank experiences either a decline in 
level of the banking operations or an increase in the efficiency of the 
banking operations using that capacity.
    (c) Types of electronic capacity in equipment or facilities that 
banks may have legitimately acquired and that may be sold to third 
parties if excess to the bank's needs for banking purposes include:
    (1) Data processing services;
    (2) Production and distribution of non-financial software;
    (3) Providing periodic back-up call answering services;
    (4) Providing full Internet access;
    (5) Providing electronic security system support services;
    (6) Providing long line communications services; and
    (7) Electronic imaging and storage.
    (d) A national bank may sell to third parties electronic by-products 
legitimately acquired or developed by the bank for its banking business. 
Examples of electronic by-products that banks may have legitimately 
acquired that may be sold to third parties if excess to the bank's needs 
include:
    (1) Software acquired (not merely licensed) or developed by the bank 
for banking purposes or to support its banking business; and
    (2) Electronic databases, records, or media (such as electronic 
images) developed by the bank for or during the performance of its 
permissible data processing activities.



Sec. 7.5005  National bank acting as digital certification authority.

    (a) It is part of the business of banking under 12 U.S.C. 
24(Seventh) for a national bank to act as a certificate authority and to 
issue digital certificates verifying the identity of persons associated 
with a particular public/private key pair. As part of this service, the 
bank may also maintain a listing or repository of public keys.
    (b) A national bank may issue digital certificates verifying 
attributes in addition to identity of persons associated with a 
particular public/private key pair where the attribute is one for which 
verification is part of or incidental to the business of banking. For 
example, national banks may issue digital certificates verifying certain 
financial attributes of a customer as of the current or a previous date, 
such as account balance as of a particular date, lines of credit as of a 
particular date, past financial performance of the customer, and 
verification of customer relationship with the bank as of a particular 
date.
    (c) When a national bank issues a digital certificate relating to 
financial capacity under this section, the bank shall include in that 
certificate an express disclaimer stating that the bank does not thereby 
promise or represent that funds will be available or will be advanced 
for any particular transaction.



Sec. 7.5006  Data processing.

    (a) Eligible activities. It is part of the business of banking under 
12 U.S.C. 24(Seventh) for a national bank to provide data processing, 
and data transmission services, facilities (including equipment, 
technology, and personnel), data bases, advice and access to such 
services, facilities, data bases and advice, for itself and for others, 
where the data is banking, financial, or economic data, and other types 
of data if the derivative or resultant product is banking, financial, or 
economic data. For this purpose, economic data includes anything of 
value in banking and financial decisions.
    (b) Other data. A national bank also may perform the activities 
described in paragraph (a) of this section for itself and others with 
respect to additional

[[Page 204]]

types of data to the extent convenient or useful to provide the data 
processing services described in paragraph (a), including where 
reasonably necessary to conduct those activities on a competitive basis. 
The total revenue attributable to the bank's data processing activities 
under this section must be derived predominantly from processing the 
activities described in paragraph (a) of this section.



Sec. 7.5007  Correspondent services.

    It is part of the business of banking for a national bank to offer 
as a correspondent service to any of its affiliates or to other 
financial institutions any service it may perform for itself. The 
following list provides examples of electronic activities that banks may 
offer correspondents under this authority. This list is illustrative and 
not exclusive; the OCC may determine that other activities are 
permissible pursuant to this authority.
    (a) The provision of computer networking packages and related 
hardware;
    (b) Data processing services;
    (c) The sale of software that performs data processing functions;
    (d) The development, operation, management, and marketing of 
products and processing services for transactions conducted at 
electronic terminal devices;
    (e) Item processing services and related software;
    (f) Document control and record keeping through the use of 
electronic imaging technology;
    (g) The provision of Internet merchant hosting services for resale 
to merchant customers;
    (h) The provision of communication support services through 
electronic means; and
    (i) Digital certification authority services.



Sec. 7.5008  Location of a national bank conducting electronic activities.

    A national bank shall not be considered located in a State solely 
because it physically maintains technology, such as a server or 
automated loan center, in that state, or because the bank's products or 
services are accessed through electronic means by customers located in 
the state.



Sec. 7.5009  Location under 12 U.S.C. 85 of national banks operating exclusively through the Internet.

    For purposes of 12 U.S.C. 85, the main office of a national bank 
that operates exclusively through the Internet is the office identified 
by the bank under 12 U.S.C. 22(Second) or as relocated under 12 U.S.C. 
30 or other appropriate authority.



Sec. 7.5010  Shared electronic space.

    National banks that share electronic space, including a co-branded 
web site, with a bank subsidiary, affiliate, or another third-party must 
take reasonable steps to clearly, conspicuously, and understandably 
distinguish between products and services offered by the bank and those 
offered by the bank's subsidiary, affiliate, or the third-party.



PART 8_ASSESSMENT OF FEES--Table of Contents




Sec.
8.1 Scope and application.
8.2 Semiannual assessment.
8.6 Fees for special examinations and investigations.
8.7 Payment of interest on delinquent assessments and examination and 
          investigation fees.
8.8 Notice of Comptroller of the Currency fees.

    Authority: 12 U.S.C. 93a, 481, 482, 1867, 3102, and 3108; and 15 
U.S.C. 78c and 78l.



Sec. 8.1  Scope and application.

    The assessments contained in this part are made pursuant to the 
authority contained in 12 U.S.C. 93a, 481, 482, 1867, 3102, and 3108; 
and 15 U.S.C. 78c and 78l.

[70 FR 69643, Nov. 17, 2005]



Sec. 8.2  Semiannual assessment.

    (a) Each national bank shall pay to the Comptroller of the Currency 
a semiannual assessment fee, due by March 31 and September 30 of each 
year, for the six month period beginning on January 1 and July 1 before 
each payment date. The Comptroller of the Currency will calculate the 
amount due under this section and provide a notice of assessments to 
each national

[[Page 205]]

bank no later than 7 business days prior to March 31 and September 30 of 
each year. The semiannual assessment will be calculated as follows:

------------------------------------------------------------------------
 If the bank's total assets          The semiannual assessment is:
 (consolidated domestic and  -------------------------------------------
 foreign subsidiaries) are:   This amount--       Plus        Of excess
-----------------------------------------------------------    over--
    Over--     But not over--  Base amount      Marginal   -------------
--------------               ---------------     rates
              ---------------               ---------------   Column E
   Column A       Column B       Column C       Column D
------------------------------------------------------------------------
   Million        Million     .............  .............     Million
          $0             $2             X1              0
           2             20             X2             Y1             $2
          20            100             X3             Y2             20
         100            200             X4             Y3            100
         200          1,000             X5             Y4            200
       1,000          2,000             X6             Y5          1,000
       2,000          6,000             X7             Y6          2,000
       6,000         20,000             X8             Y7          6,000
      20,000         40,000             X9             Y8         20,000
      40,000   .............           X10             Y9         40,000
------------------------------------------------------------------------

    (1) Every national bank falls into one of the ten asset-size 
brackets denoted by Columns A and B. A bank's semiannual assessment is 
composed of two parts. The first part is the calculation of a base 
amount of the assessment, which is computed on the assets of the bank up 
to the lower endpoint (Column A) of the bracket in which it falls. This 
base amount of the assessment is calculated by the OCC in Column C.
    (2) The second part is the calculation of assessments due on the 
remaining assets of the bank in excess of Column E. The excess is 
assessed at the marginal rate shown in Column D.
    (3) The total semiannual assessment is the amount in Column C, plus 
the amount of the bank's assets in excess of Column E times the marginal 
rate in Column D: Assessments = C+[(Assets-E) x D].
    (4) Each year, the OCC may index the marginal rates in Column D to 
adjust for the percent change in the level of prices, as measured by 
changes in the Gross Domestic Product Implicit Price Deflator (GDPIPD) 
for each June-to-June period. The OCC may at its discretion adjust 
marginal rates by amounts less than the percentage change in the GDPIPD. 
The OCC will also adjust the amounts in Column C to reflect any change 
made to the marginal rate.
    (5) The specific marginal rates and complete assessment schedule 
will be published in the ``Notice of Comptroller of the Currency Fees,'' 
provided for at Sec. 8.8 of this part. Each semiannual assessment is 
based upon the total assets shown in the national bank's most recent 
``Consolidated Reports of Condition and Income'' (Call Report) preceding 
the payment date. Each bank subject to the jurisdiction of the 
Comptroller of the Currency on the date of the second or fourth 
quarterly Call Report required by the Office under 12 U.S.C. 161 is 
subject to the full assessment for the next six month period.
    (6)(i) Notwithstanding any other provision of this part, the OCC may 
reduce the semiannual assessment for each non-lead bank by a percentage 
that it will specify in the Notice of Comptroller of the Currency Fees 
described in Sec. 8.8.
    (ii) For purposes of this paragraph (a)(6):
    (A) Lead bank means the largest national bank controlled by a 
company, based on a comparison of the total assets held by each national 
bank controlled by that company as reported in each bank's Call Report 
filed for the quarter immediately preceding the payment of a semiannual 
assessment.
    (B) Non-lead bank means a national bank that is not the lead bank 
controlled by a company that controls two or more national banks.
    (C) Control and company have the same meanings as these terms have 
in sections 2(a)(2) and 2(b), respectively, of the Bank Holding Company 
Act of 1956 (12 U.S.C. 1841(a)(2) and (b)).

[[Page 206]]

    (b)(1) Each Federal branch and each Federal agency shall pay to the 
Comptroller of the Currency a semiannual assessment fee, due by March 31 
and September 30 of each year, for the six month period beginning on 
January 1 and July 1 before each payment date. The Comptroller of the 
Currency will calculate the amount due under this section and provide a 
notice of assessments to each national bank no later than 7 business 
days prior to March 31 and September 30 of each year.
    (2) The amount of the semiannual assessment paid by each Federal 
branch and Federal agency shall be computed at the same rate as provided 
in the Table in 12 CFR 8.2(a); however, only the total domestic assets 
of the Federal branch or Federal agency shall be subject to assessment.
    (3) Each semiannual assessment of each Federal branch or Federal 
agency is based upon the total assets shown in the Federal branch's Call 
Report most recently preceding the payment date. Each Federal branch or 
Federal agency subject to the jurisdiction of the OCC on the date of the 
second and fourth Call Reports is subject to the full assessment for the 
next six-month period.
    (4)(i) Notwithstanding any other provision of this part, the OCC may 
reduce the semiannual assessment for each non-lead Federal branch or 
agency by an amount that it will specify in the Notice of Comptroller of 
the Currency Fees described in Sec. 8.8.
    (ii) For purposes of this paragraph (b)(4):
    (A) Lead Federal branch or agency means the largest Federal branch 
or agency of a foreign bank, based on a comparison of the total assets 
held by each Federal branch or agency of that foreign bank as reported 
in each Federal branch's or agency's Call Report filed for the quarter 
immediately preceding the payment of a semiannual assessment.
    (B) Non-lead Federal branch or agency means a Federal branch or 
Federal agency that is not the lead Federal branch or agency of a 
foreign bank that controls two or more Federal branches or agencies.
    (c) Additional assessment for independent credit card banks--(1) 
General rule. In addition to the assessment calculated according to 
paragraph (a) of this section, each independent credit card bank will 
pay an assessment based on receivables attributable to credit card 
accounts owned by the bank. This assessment will be computed by adding 
to its asset-based assessment an additional amount determined by its 
level of receivables attributable. The dollar amount of the additional 
assessment will be published in the ``Notice of Comptroller of the 
Currency Notice of Fees,'' described at Sec. 8.8.
    (2) Credit card banks affiliated with full-service national banks. 
The OCC will assess an independent credit card bank in accordance with 
paragraph (c)(1) of this section, notwithstanding that the bank is 
affiliated with a full-service national bank, if the OCC concludes that 
the affiliation is intended to evade this part.
    (3) Definitions. For purposes of this paragraph (c), the following 
definitions apply:
    (i) Affiliate has the same meaning as this term has in 12 U.S.C. 
221a(b).
    (ii) Engaged primarily in card operations means a bank described in 
section 2(c)(2)(F) of the Bank Holding Company Act (12 U.S.C. 
1841(c)(2)(F)) or whose ratio of total gross receivables attributable to 
the bank's balance sheet assets exceeds 50%.
    (iii) Full-service national bank is a national bank that generates 
more than 50% of its interest and non-interest income from activities 
other than credit card operations or trust activities and is authorized 
according to its charter to engage in all types of permissible banking 
activities.
    (iv) Independent credit card bank is a national bank that engages 
primarily in credit card operations and is not affiliated with a full-
service national bank.
    (v) Receivables attributable is the total amount of outstanding 
balances due on credit card accounts owned by an independent credit card 
bank (the receivables attributable to those accounts) on the last day of 
the assessment period, minus receivables retained on the bank's balance 
sheet as of that day.
    (4) Reports of receivables attributable. Independent credit card 
banks will report receivables attributable data to

[[Page 207]]

the OCC semiannually at a time specified by the OCC.
    (d) Surcharge based on the condition of the bank. Subject to any 
limit that the OCC prescribes in the Notice of the Comptroller of the 
Currency Fees, the OCC shall apply a surcharge to the semiannual 
assessment computed in accordance with paragraphs (a) through (c) of 
this section. This surcharge will be determined by multiplying the 
semiannual assessment computed in accordance with paragraphs (a) through 
(c) of this section by--
    (1) 1.5, in the case of any bank that receives a composite rating of 
3 under the Uniform Financial Institutions Rating System (UFIRS) and any 
Federal branch or agency that receives a composite rating of 3 under the 
ROCA rating system (which rates risk management, operational controls, 
compliance, and asset quality) at its most recent examination; and
    (2) 2.0, in the case of any bank that receives a composite UFIRS 
rating of 4 or 5 and any Federal branch or agency that receives a 
composite rating of 4 or 5 under the ROCA rating system at its most 
recent examination.

[44 FR 20065, Apr. 4, 1979, as amended at 49 FR 26205, June 27, 1984; 49 
FR 50602, Dec. 31, 1984; 53 FR 48627, Dec. 1, 1988; 55 FR 49842, Nov. 
30, 1990; 57 FR 22416, May 28, 1992; 61 FR 64002, Dec. 2, 1996; 62 FR 
54745, Oct. 21, 1997; 62 FR 64137, Dec. 4, 1997; 66 FR 29893, June 1, 
2001; 66 FR 57647, Nov. 16, 2001; 66 FR 58786, Nov. 23, 2001; 67 FR 
57509, Sept. 11, 2002; 67 FR 62873, Oct. 9, 2002; 70 FR 69643, Nov. 17, 
2005]



Sec. 8.6  Fees for special examinations and investigations.

    (a) Fees. Pursuant to the authority contained in 12 U.S.C. 481 and 
482, the Office of the Comptroller of the Currency assesses a fee for:
    (1) Examining the fiduciary activities of national banks and related 
entities;
    (2) Conducting special examinations and investigations of national 
banks and Federal branches or Federal agencies of foreign banks;
    (3) Conducting special examinations and investigations of an entity 
with respect to its performance of activities described in section 7(c) 
of the Bank Service Company Act (12 U.S.C. 1867(c)), if the OCC 
determines that assessment of the fee is warranted with regard to a 
particular bank because of the high risk or unusual nature of the 
activities performed; the significance to the bank's operations and 
income of the activities performed; or the extent to which the bank has 
sufficient systems, controls, and personnel to adequately monitor, 
measure, and control risks arising from such activities;
    (4) Conducting special examinations and investigations of affiliates 
of national banks and Federal branches or Federal agencies of foreign 
banks; and
    (5) Conducting examinations and investigations made pursuant to 12 
CFR part 5, Rules, Policies, and Procedures for Corporate Activities.
    (b) Notice of Comptroller of the Currency Fees. The OCC publishes 
the fee schedule for fiduciary activities, special examinations and 
investigations, examinations of affiliates and examinations related to 
corporate activities in the Notice of Comptroller of the Currency Fees 
described in Sec. 8.8.
    (c) Additional assessments on trust banks--(1) Independent trust 
banks. The assessment of independent trust banks will include a 
fiduciary and related asset component, in addition to the assessment 
calculated according to Sec. 8.2 of this part, as follows:
    (i) Minimum fee. All independent trust banks will pay a minimum fee, 
to be provided in the Notice of Comptroller of the Currency Fees.
    (ii) Additional amount for independent trust banks with fiduciary 
and related assets in excess of $1 billion. Independent trust banks with 
fiduciary and related assets in excess of $1 billion will pay an amount 
that exceeds the minimum fee. The amount to be paid will be calculated 
by multiplying the amount of fiduciary and related assets by a rate or 
rates provided by the OCC in the Notice of Comptroller of the Currency 
Fees.
    (iii) Surcharge based on the condition of the bank. Subject to any 
limit that the OCC prescribes in the Notice of the Comptroller of the 
Currency Fees, the OCC shall adjust the semiannual assessment computed 
in accordance with paragraphs (c)(1)(i) and (ii) of this section by 
multiplying that figure by 1.5 for each independent trust bank that 
receives a composite rating of 3 under the Uniform Financial 
Institutions

[[Page 208]]

Rating System (UFIRS) at its most recent examination and by 2.0 for each 
bank that receives a composite UFIRS rating of 4 or 5 at such 
examination.
    (2) Trust banks affiliated with full-service national banks. The OCC 
will assess a trust bank in accordance with paragraph (c)(1) of this 
section, notwithstanding that the bank is affiliated with a full-service 
national bank, if the OCC concludes that the affiliation is intended to 
evade the assessment regulation.
    (3) Definitions. For purposes of this paragraph (c) of this section, 
the following definitions apply:
    (i) Affiliate has the same meaning as this term has in 12 U.S.C. 
221a(b);
    (ii) Full-service national bank is a national bank that generates 
more than 50% of its interest and non-interest income from activities 
other than credit card operations or trust activities and is authorized 
according to its charter to engage in all types of permissible banking 
activities.
    (iii) Independent trust bank is a national bank that has trust 
powers, does not primarily offer full-service banking, and is not 
affiliated with a full-service national bank; and
    (iv) Fiduciary and related assets are those assets reported on 
Schedule RC-T of FFIEC Forms 031 and 041, Line 9 (columns A and B) and 
Line 10 (column B), any successor form issued by the FFIEC, and any 
other fiduciary and related assets defined in the Notice of Comptroller 
of the Currency Fees.

[59 FR 59642, Nov. 18, 1994, as amended at 65 FR 75862, Dec. 5, 2000; 66 
FR 23153, May 8, 2001; 66 FR 29894, June 1, 2001; 67 FR 37665, May 30, 
2002; 70 FR 69643, Nov. 17, 2005]



Sec. 8.7  Payment of interest on delinquent assessments and examination and investigation fees.

    (a) Each national bank, each Federal branch, and each Federal agency 
shall pay to the Comptroller of the Currency interest on its delinquent 
payments of semiannual assessments. In addition, each national bank and 
each entity with a trust department examined by the Comptroller of the 
Currency and each institution that is the subject of a special 
examination or investigation conducted by the Comptroller of the 
Currency shall pay to the Comptroller of the Currency interest on its 
delinquent payments of examination and investigation fees. Semiannual 
assessment payments will be considered delinquent if they are received 
after the time for payment specified in Sec. 8.2. Examination and 
investigation fees will be considered delinquent if not received by the 
Comptroller of the Currency within 30 calendar days of the invoice date.
    (b) In the event that an entity that is required to make semiannual 
assessment payments or trust examination fee payments believes that the 
notice of assessments prepared by the Comptroller of the Currency 
contains an error of miscalculation, the entity may provide the 
Comptroller of the Currency with a written request for a revised 
assessment notice and a refund of any overpayments. Any such request for 
a revised notice and refund must be made after timely payment of the 
semiannual assessment under the dates specified in Sec. 8.2.
    (1) Refund the amount of the overpayment or
    (2) Provide notice of its unwillingness to accept the request for a 
revised notice of assessments. In the latter instance, the Comptroller 
of the Currency and the entity claiming the overpayment shall thereafter 
attempt to reach agreement on the amount, if any, to be refunded; the 
Comptroller of the Currency shall refund this amount within 30 calendar 
days of such agreement.

The Comptroller of the Currency shall be considered delinquent if it 
fails to return an overpayment in accordance with the time limitations 
specified in this paragraph (b). The Comptroller of the Currency shall 
pay interest on any such delinquent payments.
    (c) Interest on delinquent payments, as described in paragraphs (a) 
and (b) of this section, will be assessed beginning the first calendar 
day on which payment is considered delinquent, and on each calendar day 
thereafter up to and including the day payment is received. Interest 
will be simple interest, calculated for each day payment is delinquent 
by multiplying the daily equivalent of the applicable interest rate by

[[Page 209]]

the amount delinquent. The rate of interest will be the United States 
Treasury Department's current value of funds rate (the ``TFRM rate''); 
that rate is issued under the Treasury Fiscal Requirements Manual and is 
published quarterly in the Federal Register. The interest rates 
applicable to a delinquent payment will be determined as follows:
    (1) For delinquent days occurring from January 1 to March 31, the 
rate will be the TFRM rate that is published the preceding December for 
the first quarter of the ensuing year.
    (2) For delinquent days occurring from April 1 to June 30, the rate 
will be the TFRM rate that is published the preceding March for the 
second quarter of that year.
    (3) For delinquent days occurring from July 1 to September 30, the 
rate will be the TFRM rate that is published the preceding June for the 
third quarter of that year.
    (4) For delinquent days occurring from October 1 to December 31, the 
rate will be the TFRM rate that is published the preceding September for 
the fourth quarter of that year.

[48 FR 30599, July 1, 1983. Redesignated and amended at 49 FR 50605, 
Dec. 31, 1984; 70 FR 69643, Nov. 17, 2005]



Sec. 8.8  Notice of Comptroller of the Currency fees.

    (a) December notice of fees. A ``Notice of Comptroller of the 
Currency Fees'' shall be published no later than the first business day 
in December of each year for fees to be charged by the Office during the 
upcoming year. These fees will be effective January 1 of that upcoming 
year.
    (b) Interim notice of Comptroller of the Currency fees. The OCC may 
issue an ``Interim Notice of Comptroller of the Currency Fees'' or issue 
an amended ``Notice of Comptroller of the Currency Fees'' from time to 
time throughout the year as necessary. Interim or amended notices will 
be effective 30 days after issuance.

[55 FR 49842, Nov. 30, 1990, as amended at 70 FR 69644, Nov. 17, 2005]



PART 9_FIDUCIARY ACTIVITIES OF NATIONAL BANKS--Table of Contents




                               Regulations

Sec.
9.1 Authority, purpose, and scope.
9.2 Definitions.
9.3 Approval requirements.
9.4 Administration of fiduciary powers.
9.5 Policies and procedures.
9.6 Review of fiduciary accounts.
9.7 Multi-state fiduciary operations.
9.8 Recordkeeping.
9.9 Audit of fiduciary activities.
9.10 Fiduciary funds awaiting investment or distribution.
9.11 Investment of fiduciary funds.
9.12 Self-dealing and conflicts of interest.
9.13 Custody of fiduciary assets.
9.14 Deposit of securities with state authorities.
9.15 Fiduciary compensation.
9.16 Receivership or voluntary liquidation of bank.
9.17 Surrender or revocation of fiduciary powers.
9.18 Collective investment funds.
9.20 Transfer agents.

                             Interpretations

9.100 Acting as indenture trustee and creditor.
9.101 Providing investment advice for a fee.

    Authority: 12 U.S.C. 24 (Seventh), 92a, and 93a; 15 U.S.C. 78q, 78q-
1, and 78w.

    Source: 61 FR 68554, Dec. 30, 1996, unless otherwise noted.

                               Regulations



Sec. 9.1  Authority, purpose, and scope.

    (a) Authority. The Office of the Comptroller of the Currency (OCC) 
issues this part pursuant to its authority under 12 U.S.C. 24 (Seventh), 
92a, and 93a, and 15 U.S.C. 78q, 78q-1, and 78w.
    (b) Purpose. The purpose of this part is to set forth the standards 
that apply to the fiduciary activities of national banks.
    (c) Scope. This part applies to all national banks that act in a 
fiduciary capacity, as defined in Sec. 9.2(e). This part also applies 
to all Federal branches of foreign banks to the same extent as it 
applies to national banks.



Sec. 9.2  Definitions.

    For the purposes of this part, the following definitions apply:

[[Page 210]]

    (a) Affiliate has the same meaning as in 12 U.S.C. 221a(b).
    (b) Applicable law means the law of a state or other jurisdiction 
governing a national bank's fiduciary relationships, any applicable 
Federal law governing those relationships, the terms of the instrument 
governing a fiduciary relationship, or any court order pertaining to the 
relationship.
    (c) Custodian under a uniform gifts to minors act means a fiduciary 
relationship established pursuant to a state law substantially similar 
to the Uniform Gifts to Minors Act or the Uniform Transfers to Minors 
Act as published by the American Law Institute.
    (d) Fiduciary account means an account administered by a national 
bank acting in a fiduciary capacity.
    (e) Fiduciary capacity means: trustee, executor, administrator, 
registrar of stocks and bonds, transfer agent, guardian, assignee, 
receiver, or custodian under a uniform gifts to minors act; investment 
adviser, if the bank receives a fee for its investment advice; any 
capacity in which the bank possesses investment discretion on behalf of 
another; or any other similar capacity that the OCC authorizes pursuant 
to 12 U.S.C. 92a.
    (f) Fiduciary officers and employees means all officers and 
employees of a national bank to whom the board of directors or its 
designee has assigned functions involving the exercise of the bank's 
fiduciary powers.
    (g) Fiduciary powers means the authority the OCC permits a national 
bank to exercise pursuant to 12 U.S.C. 92a.
    (h) Guardian means the guardian or conservator, by whatever name 
used by state law, of the estate of a minor, an incompetent person, an 
absent person, or a person over whose estate a court has taken 
jurisdiction, other than under bankruptcy or insolvency laws.
    (i) Investment discretion means, with respect to an account, the 
sole or shared authority (whether or not that authority is exercised) to 
determine what securities or other assets to purchase or sell on behalf 
of the account. A bank that delegates its authority over investments and 
a bank that receives delegated authority over investments are both 
deemed to have investment discretion.
    (j) Trust office means an office of a national bank, other than a 
main office or a branch, at which the bank engages in one or more of the 
activities specified in Sec. 9.7(d). Pursuant to 12 U.S.C. 36(j), a 
trust office is not a ``branch'' for purposes of 12 U.S.C. 36, unless it 
is also an office at which deposits are received, or checks paid, or 
money lent.
    (k) Trust representative office means an office of a national bank, 
other than a main office, branch, or trust office, at which the bank 
performs activities ancillary to its fiduciary business, but does not 
engage in any of the activities specified in Sec. 9.7(d). Examples of 
ancillary activities include advertising, marketing, and soliciting for 
fiduciary business; contacting existing or potential customers, 
answering questions, and providing information about matters related to 
their accounts; acting as a liaison between the trust office and the 
customer (e.g., forwarding requests for distribution or changes in 
investment objectives, or forwarding forms and funds received from the 
customer); inspecting or maintaining custody of fiduciary assets or 
holding title to real property. This list is illustrative and not 
comprehensive. Other activities may also be ``ancillary activities'' for 
the purposes of this definition. Pursuant to 12 U.S.C. 36(j), a trust 
representative office is not a ``branch'' for purposes of 12 U.S.C. 36, 
unless it is also an office at which deposits are received, or checks 
paid, or money lent.

[61 FR 68554, Dec.30, 1996, as amended at 66 FR 34797, July 2, 2001]



Sec. 9.3  Approval requirements.

    (a) A national bank may not exercise fiduciary powers unless it 
obtains prior approval from the OCC to the extent required under 12 CFR 
5.26.
    (b) A national bank that has obtained the OCC s approval to exercise 
fiduciary powers is not required to obtain the OCC s prior approval to 
engage in any of the activities specified in Sec. 9.7(d) in a new state 
or to conduct, in a new state, activities that are ancillary to its 
fiduciary business. Instead, the national bank must follow the notice 
procedures prescribed by 12 CFR 5.26(e).

[[Page 211]]

    (c) A person seeking approval to organize a special-purpose national 
bank limited to fiduciary powers shall file an application with the OCC 
pursuant to 12 CFR 5.20.

[61 FR 68554, Dec. 30, 1996, as amended at 66 FR 34798, July 2, 2001]



Sec. 9.4  Administration of fiduciary powers.

    (a) Responsibilities of the board of directors. A national bank's 
fiduciary activities shall be managed by or under the direction of its 
board of directors. In discharging its responsibilities, the board may 
assign any function related to the exercise of fiduciary powers to any 
director, officer, employee, or committee thereof.
    (b) Use of other personnel. The national bank may use any qualified 
personnel and facilities of the bank or its affiliates to perform 
services related to the exercise of its fiduciary powers, and any 
department of the bank or its affiliates may use fiduciary officers, 
employees, and facilities to perform services unrelated to the exercise 
of fiduciary powers, to the extent not prohibited by applicable law.
    (c) Agency agreements. Pursuant to a written agreement, a national 
bank exercising fiduciary powers may perform services related to the 
exercise of fiduciary powers for another bank or other entity, and may 
purchase services related to the exercise of fiduciary powers from 
another bank or other entity.
    (d) Bond requirement. A national bank shall ensure that all 
fiduciary officers and employees are adequately bonded.



Sec. 9.5  Policies and procedures.

    A national bank exercising fiduciary powers shall adopt and follow 
written policies and procedures adequate to maintain its fiduciary 
activities in compliance with applicable law. Among other relevant 
matters, the policies and procedures should address, where appropriate, 
the bank's:
    (a) Brokerage placement practices;
    (b) Methods for ensuring that fiduciary officers and employees do 
not use material inside information in connection with any decision or 
recommendation to purchase or sell any security;
    (c) Methods for preventing self-dealing and conflicts of interest;
    (d) Selection and retention of legal counsel who is readily 
available to advise the bank and its fiduciary officers and employees on 
fiduciary matters; and
    (e) Investment of funds held as fiduciary, including short-term 
investments and the treatment of fiduciary funds awaiting investment or 
distribution.



Sec. 9.6  Review of fiduciary accounts.

    (a) Pre-acceptance review. Before accepting a fiduciary account, a 
national bank shall review the prospective account to determine whether 
it can properly administer the account.
    (b) Initial post-acceptance review. Upon the acceptance of a 
fiduciary account for which a national bank has investment discretion, 
the bank shall conduct a prompt review of all assets of the account to 
evaluate whether they are appropriate for the account.
    (c) Annual review. At least once during every calendar year, a bank 
shall conduct a review of all assets of each fiduciary account for which 
the bank has investment discretion to evaluate whether they are 
appropriate, individually and collectively, for the account.



Sec. 9.7  Multi-state fiduciary operations.

    (a) Acting in a fiduciary capacity in more than one state. Pursuant 
to 12 U.S.C. 92a and this section, a national bank may act in a 
fiduciary capacity in any state. If a national bank acts, or proposes to 
act, in a fiduciary capacity in a particular state, the bank may act in 
the following specific capacities:
    (1) Any of the eight fiduciary capacities expressly listed in 12 
U.S.C. 92a(a), unless the state prohibits its own state banks, trust 
companies, and other corporations that compete with national banks in 
that state from acting in that capacity; and
    (2) Any other fiduciary capacity the state permits for its own state 
banks, trust companies, or other corporations that compete with national 
banks in that state.
    (b) Serving customers in other states. While acting in a fiduciary 
capacity in one state, a national bank may market its fiduciary services 
to, and act as fiduciary for, customers located in any state, and it may 
act as fiduciary for

[[Page 212]]

relationships that include property located in other states. The bank 
may use a trust representative office for this purpose.
    (c) Offices in more than one state. A national bank with fiduciary 
powers may establish trust offices or trust representative offices in 
any state.
    (d) Determination of the state referred to in 12 U.S.C. 92a. For 
each fiduciary relationship, the state referred to in section 92a is the 
state in which the bank acts in a fiduciary capacity for that 
relationship. A national bank acts in a fiduciary capacity in the state 
in which it accepts the fiduciary appointment, executes the documents 
that create the fiduciary relationship, and makes discretionary 
decisions regarding the investment or distribution of fiduciary assets. 
If these activities take place in more than one state, then the state in 
which the bank acts in a fiduciary capacity for section 92a purposes is 
the state that the bank designates from among those states.
    (e) Application of state law--(1) State laws used in section 92a. 
The state laws that apply to a national bank's fiduciary activities by 
virtue of 12 U.S.C. 92a are the laws of the state in which the bank acts 
in a fiduciary capacity.
    (2) Other state laws. Except for the state laws made applicable to 
national banks by virtue of 12 U.S.C. 92a, state laws limiting or 
establishing preconditions on the exercise of fiduciary powers are not 
applicable to national banks.

[66 FR 34798, July 2, 2001]



Sec. 9.8  Recordkeeping.

    (a) Documentation of accounts. A national bank shall adequately 
document the establishment and termination of each fiduciary account and 
shall maintain adequate records for all fiduciary accounts.
    (b) Retention of records. A national bank shall retain records 
described in paragraph (a) of this section for a period of three years 
from the later of the termination of the account or the termination of 
any litigation relating to the account.
    (c) Separation of records. A national bank shall ensure that records 
described in paragraph (a) of this section are separate and distinct 
from other records of the bank.



Sec. 9.9  Audit of fiduciary activities.

    (a) Annual audit. At least once during each calendar year, a 
national bank shall arrange for a suitable audit (by internal or 
external auditors) of all significant fiduciary activities, under the 
direction of its fiduciary audit committee, unless the bank adopts a 
continuous audit system in accordance with paragraph (b) of this 
section. The bank shall note the results of the audit (including 
significant actions taken as a result of the audit) in the minutes of 
the board of directors.
    (b) Continuous audit. In lieu of performing annual audits under 
paragraph (a) of this section, a national bank may adopt a continuous 
audit system under which the bank arranges for a discrete audit (by 
internal or external auditors) of each significant fiduciary activity 
(i.e., on an activity-by-activity basis), under the direction of its 
fiduciary audit committee, at an interval commensurate with the nature 
and risk of that activity. Thus, certain fiduciary activities may 
receive audits at intervals greater or less than one year, as 
appropriate. A bank that adopts a continuous audit system shall note the 
results of all discrete audits performed since the last audit report 
(including significant actions taken as a result of the audits) in the 
minutes of the board of directors at least once during each calendar 
year .
    (c) Fiduciary audit committee. A national bank's fiduciary audit 
committee must consist of a committee of the bank's directors or an 
audit committee of an affiliate of the bank. However, in either case, 
the committee:
    (1) Must not include any officers of the bank or an affiliate who 
participate significantly in the administration of the bank's fiduciary 
activities; and
    (2) Must consist of a majority of members who are not also members 
of any committee to which the board of directors has delegated power to 
manage and control the fiduciary activities of the bank.

[[Page 213]]



Sec. 9.10  Fiduciary funds awaiting investment or distribution.

    (a) In general. With respect to a fiduciary account for which a 
national bank has investment discretion or discretion over 
distributions, the bank may not allow funds awaiting investment or 
distribution to remain uninvested and undistributed any longer than is 
reasonable for the proper management of the account and consistent with 
applicable law. With respect to a fiduciary account for which a national 
bank has investment discretion, the bank shall obtain for funds awaiting 
investment or distribution a rate of return that is consistent with 
applicable law.
    (b) Self-deposits--(1) In general. A national bank may deposit funds 
of a fiduciary account that are awaiting investment or distribution in 
the commercial, savings, or another department of the bank, unless 
prohibited by applicable law. To the extent that the funds are not 
insured by the Federal Deposit Insurance Corporation, the bank shall set 
aside collateral as security, under the control of appropriate fiduciary 
officers and employees, in accordance with paragraph (b)(2) of this 
section. The market value of the collateral set aside must at all times 
equal or exceed the amount of the uninsured fiduciary funds.
    (2) Acceptable collateral. A national bank may satisfy the 
collateral requirement of paragraph (b)(1) of this section with any of 
the following:
    (i) Direct obligations of the United States, or other obligations 
fully guaranteed by the United States as to principal and interest;
    (ii) Securities that qualify as eligible for investment by national 
banks pursuant to 12 CFR part 1;
    (iii) Readily marketable securities of the classes in which state 
banks, trust companies, or other corporations exercising fiduciary 
powers are permitted to invest fiduciary funds under applicable state 
law;
    (iv) Surety bonds, to the extent they provide adequate security, 
unless prohibited by applicable law; and
    (v) Any other assets that qualify under applicable state law as 
appropriate security for deposits of fiduciary funds.
    (c) Affiliate deposits. A national bank, acting in its fiduciary 
capacity, may deposit funds of a fiduciary account that are awaiting 
investment or distribution with an affiliated insured depository 
institution, unless prohibited by applicable law. A national bank may 
set aside collateral as security for a deposit by or with an affiliate 
of fiduciary funds awaiting investment or distribution, unless 
prohibited by applicable law.



Sec. 9.11  Investment of fiduciary funds.

    A national bank shall invest funds of a fiduciary account in a 
manner consistent with applicable law.



Sec. 9.12  Self-dealing and conflicts of interest.

    (a) Investments for fiduciary accounts--(1) In general. Unless 
authorized by applicable law, a national bank may not invest funds of a 
fiduciary account for which a national bank has investment discretion in 
the stock or obligations of, or in assets acquired from: the bank or any 
of its directors, officers, or employees; affiliates of the bank or any 
of their directors, officers, or employees; or individuals or 
organizations with whom there exists an interest that might affect the 
exercise of the best judgment of the bank.
    (2) Additional securities investments. If retention of stock or 
obligations of the bank or its affiliates in a fiduciary account is 
consistent with applicable law, the bank may:
    (i) Exercise rights to purchase additional stock (or securities 
convertible into additional stock) when offered pro rata to 
stockholders; and
    (ii) Purchase fractional shares to complement fractional shares 
acquired through the exercise of rights or the receipt of a stock 
dividend resulting in fractional share holdings.
    (b) Loans, sales, or other transfers from fiduciary accounts--(1) In 
general. A national bank may not lend, sell, or otherwise transfer 
assets of a fiduciary account for which a national bank has investment 
discretion to the bank or any of its directors, officers, or employees, 
or to affiliates of the bank or any of their directors, officers, or 
employees, or to individuals or organizations with whom there exists an 
interest that

[[Page 214]]

might affect the exercise of the best judgment of the bank, unless:
    (i) The transaction is authorized by applicable law;
    (ii) Legal counsel advises the bank in writing that the bank has 
incurred, in its fiduciary capacity, a contingent or potential 
liability, in which case the bank, upon the sale or transfer of assets, 
shall reimburse the fiduciary account in cash at the greater of book or 
market value of the assets;
    (iii) As provided in Sec. 9.18(b)(8)(iii) for defaulted 
investments; or
    (iv) Required in writing by the OCC.
    (2) Loans of funds held as trustee. Notwithstanding paragraph (b)(1) 
of this section, a national bank may not lend to any of its directors, 
officers, or employees any funds held in trust, except with respect to 
employee benefit plans in accordance with the exemptions found in 
section 408 of the Employee Retirement Income Security Act of 1974 (29 
U.S.C. 1108).
    (c) Loans to fiduciary accounts. A national bank may make a loan to 
a fiduciary account and may hold a security interest in assets of the 
account if the transaction is fair to the account and is not prohibited 
by applicable law.
    (d) Sales between fiduciary accounts. A national bank may sell 
assets between any of its fiduciary accounts if the transaction is fair 
to both accounts and is not prohibited by applicable law.
    (e) Loans between fiduciary accounts. A national bank may make a 
loan between any of its fiduciary accounts if the transaction is fair to 
both accounts and is not prohibited by applicable law.



Sec. 9.13  Custody of fiduciary assets.

    (a) Control of fiduciary assets. A national bank shall place assets 
of fiduciary accounts in the joint custody or control of not fewer than 
two of the fiduciary officers or employees designated for that purpose 
by the board of directors. A national bank may maintain the investments 
of a fiduciary account off-premises, if consistent with applicable law 
and if the bank maintains adequate safeguards and controls.
    (b) Separation of fiduciary assets. A national bank shall keep the 
assets of fiduciary accounts separate from the assets of the bank. A 
national bank shall keep the assets of each fiduciary account separate 
from all other accounts or shall identify the investments as the 
property of a particular account, except as provided in Sec. 9.18.



Sec. 9.14  Deposit of securities with state authorities.

    (a) In general. If state law requires corporations acting in a 
fiduciary capacity to deposit securities with state authorities for the 
protection of private or court trusts, then before a national bank acts 
as a private or court-appointed trustee in that state, it shall make a 
similar deposit with state authorities. If the state authorities refuse 
to accept the deposit, the bank shall deposit the securities with the 
Federal Reserve Bank of the district in which the national bank is 
located, to be held for the protection of private or court trusts to the 
same extent as if the securities had been deposited with state 
authorities.
    (b) Acting in a fiduciary capacity in more than one state. If a 
national bank acts in a fiduciary capacity in more than one state, the 
bank may compute the amount of securities that are required to be 
deposited for each state on the basis of the amount of assets for which 
the bank is acting in a fiduciary capacity at offices located in that 
state. If state law requires a deposit of securities on a basis other 
than assets (e.g., a requirement to deposit a fixed amount or an amount 
equal to a percentage of capital), the bank may compute the amount of 
deposit required in that state on a pro-rated basis, according to the 
proportion of fiduciary assets for which the bank is acting in a 
fiduciary capacity at offices located in that state.

[61 FR 68554, Dec. 30, 1996, as amended at 66 FR 34798, July 2, 2001]



Sec. 9.15  Fiduciary compensation.

    (a) Compensation of bank. If the amount of a national bank's 
compensation for acting in a fiduciary capacity is not set or governed 
by applicable law, the bank may charge a reasonable fee for its 
services.
    (b) Compensation of co-fiduciary officers and employees. A national 
bank may not permit any officer or employee to retain any compensation 
for

[[Page 215]]

acting as a co-fiduciary with the bank in the administration of a 
fiduciary account, except with the specific approval of the bank's board 
of directors.



Sec. 9.16  Receivership or voluntary liquidation of bank.

    If the OCC appoints a receiver for an uninsured national bank, or if 
a national bank places itself in voluntary liquidation, the receiver or 
liquidating agent shall promptly close or transfer to a substitute 
fiduciary all fiduciary accounts, in accordance with OCC instructions 
and the orders of the court having jurisdiction.



Sec. 9.17  Surrender or revocation of fiduciary powers.

    (a) Surrender. In accordance with 12 U.S.C. 92a(j), a national bank 
seeking to surrender its fiduciary powers shall file with the OCC a 
certified copy of the resolution of its board of directors evidencing 
that intent. If, after appropriate investigation, the OCC is satisfied 
that the bank has been discharged from all fiduciary duties, the OCC 
will provide written notice that the bank is no longer authorized to 
exercise fiduciary powers.
    (b) Revocation. If the OCC determines that a national bank has 
unlawfully or unsoundly exercised, or has failed for a period of five 
consecutive years to exercise its fiduciary powers, the Comptroller may, 
in accordance with the provisions of 12 U.S.C. 92a(k), revoke the bank's 
fiduciary powers.



Sec. 9.18  Collective investment funds.

    (a) In general. Where consistent with applicable law, a national 
bank may invest assets that it holds as fiduciary in the following 
collective investment funds: \1\
---------------------------------------------------------------------------

    \1\ In determining whether investing fiduciary assets in a 
collective investment fund is proper, the bank may consider the fund as 
a whole and, for example, shall not be prohibited from making that 
investment because any particular asset is nonincome producing.
---------------------------------------------------------------------------

    (1) A fund maintained by the bank, or by one or more affiliated 
banks,\2\ exclusively for the collective investment and reinvestment of 
money contributed to the fund by the bank, or by one or more affiliated 
banks, in its capacity as trustee, executor, administrator, guardian, or 
custodian under a uniform gifts to minors act.
---------------------------------------------------------------------------

    \2\ A fund established pursuant to this paragraph (a)(1) that 
includes money contributed by entities that are affiliates under 12 
U.S.C. 221a(b), but are not members of the same affiliated group, as 
defined at 26 U.S.C. 1504, may fail to qualify for tax-exempt status 
under the Internal Revenue Code. See 26 U.S.C. 584.
---------------------------------------------------------------------------

    (2) A fund consisting solely of assets of retirement, pension, 
profit sharing, stock bonus or other trusts that are exempt from Federal 
income tax.
    (i) A national bank may invest assets of retirement, pension, profit 
sharing, stock bonus, or other trusts exempt from Federal income tax and 
that the bank holds in its capacity as trustee in a collective 
investment fund established under paragraph (a)(1) or (a)(2) of this 
section.
    (ii) A national bank may invest assets of retirement, pension, 
profit sharing, stock bonus, or other employee benefit trusts exempt 
from Federal income tax and that the bank holds in any capacity 
(including agent), in a collective investment fund established under 
this paragraph (a)(2) if the fund itself qualifies for exemption from 
Federal income tax.
    (b) Requirements. A national bank administering a collective 
investment fund authorized under paragraph (a) of this section shall 
comply with the following requirements:
    (1) Written plan. The bank shall establish and maintain each 
collective investment fund in accordance with a written plan (Plan) 
approved by a resolution of the bank's board of directors or by a 
committee authorized by the board. The bank shall make a copy of the 
Plan available for public inspection at its main office during all 
banking hours, and shall provide a copy of the Plan to any person who 
requests it. The Plan must contain appropriate provisions, not 
inconsistent with this part, regarding the manner in which the bank will 
operate the fund, including provisions relating to:
    (i) Investment powers and policies with respect to the fund;
    (ii) Allocation of income, profits, and losses;

[[Page 216]]

    (iii) Fees and expenses that will be charged to the fund and to 
participating accounts;
    (iv) Terms and conditions governing the admission and withdrawal of 
participating accounts;
    (v) Audits of participating accounts;
    (vi) Basis and method of valuing assets in the fund;
    (vii) Expected frequency for income distribution to participating 
accounts;
    (viii) Minimum frequency for valuation of fund assets;
    (ix) Amount of time following a valuation date during which the 
valuation must be made;
    (x) Bases upon which the bank may terminate the fund; and
    (xi) Any other matters necessary to define clearly the rights of 
participating accounts.
    (2) Fund management. A bank administering a collective investment 
fund shall have exclusive management thereof, except as a prudent person 
might delegate responsibilities to others.\3\
---------------------------------------------------------------------------

    \3\ If a fund, the assets of which consist solely of Individual 
Retirement Accounts, Keogh Accounts, or other employee benefit accounts 
that are exempt from taxation, is registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the fund will not be 
deemed in violation of this paragraph (b)(2) as a result of its 
compliance with section 10(c) of the Investment Company Act of 1940 (15 
U.S.C. 80a-10(c)).
---------------------------------------------------------------------------

    (3) Proportionate interests. Each participating account in a 
collective investment fund must have a proportionate interest in all the 
fund's assets.
    (4) Valuation--(i) Frequency of valuation. A bank administering a 
collective investment fund shall determine the value of the fund's 
readily marketable assets at least once every three months. A bank shall 
determine the value of the fund's assets that are not readily marketable 
at least once a year.
    (ii) Method of valuation--(A) In general. Except as provided in 
paragraph (b)(4)(ii)(B) of this section, a bank shall value each fund 
asset at market value as of the date set for valuation, unless the bank 
cannot readily ascertain market value, in which case the bank shall use 
a fair value determined in good faith.
    (B) Short-term investment funds. A bank may value a fund's assets on 
a cost, rather than market value, basis for purposes of admissions and 
withdrawals, if the Plan requires the bank to:
    (1) Maintain a dollar-weighted average portfolio maturity of 90 days 
or less;
    (2) Accrue on a straight-line basis the difference between the cost 
and anticipated principal receipt on maturity; and
    (3) Hold the fund's assets until maturity under usual circumstances.
    (5) Admission and withdrawal of accounts--(i) In general. A bank 
administering a collective investment fund shall admit an account to or 
withdraw an account from the fund only on the basis of the valuation 
described in paragraph (b)(4) of this section.
    (ii) Prior request or notice. A bank administering a collective 
investment fund may admit an account to or withdraw an account from a 
collective investment fund only if the bank has approved a request for 
or a notice of intention of taking that action on or before the 
valuation date on which the admission or withdrawal is based. No 
requests or notices may be canceled or countermanded after the valuation 
date.
    (iii) Prior notice period for withdrawals from funds with assets not 
readily marketable. A bank administering a collective investment fund 
described in paragraph (a)(2) of this section that is invested primarily 
in real estate or other assets that are not readily marketable, may 
require a prior notice period, not to exceed one year, for withdrawals.
    (iv) Method of distributions. A bank administering a collective 
investment fund shall make distributions to accounts withdrawing from 
the fund in cash, ratably in kind, a combination of cash and ratably in 
kind, or in any other manner consistent with applicable law in the state 
in which the bank maintains the fund.
    (v) Segregation of investments. If an investment is withdrawn in 
kind from a collective investment fund for the benefit of all 
participants in the fund at the time of the withdrawal but the 
investment is not distributed ratably in

[[Page 217]]

kind, the bank shall segregate and administer it for the benefit ratably 
of all participants in the collective investment fund at the time of 
withdrawal.
    (6) Audits and financial reports--(i) Annual audit. At least once 
during each 12-month period, a bank administering a collective 
investment fund shall arrange for an audit of the collective investment 
fund by auditors responsible only to the board of directors of the 
bank.\4\
---------------------------------------------------------------------------

    \4\ If a fund, the assets of which consist solely of Individual 
Retirement Accounts, Keogh Accounts, or other employee benefit accounts 
that are exempt from taxation, is registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the fund will not be 
deemed in violation of this paragraph (b)(6)(i) as a result of its 
compliance with section 10(c) of the Investment Company Act of 1940 (15 
U.S.C. 80a-10(c)), if the bank has access to the audit reports of the 
fund.
---------------------------------------------------------------------------

    (ii) Financial report. At least once during each 12-month period, a 
bank administering a collective investment fund shall prepare a 
financial report of the fund based on the audit required by paragraph 
(b)(6)(i) of this section. The report must disclose the fund's fees and 
expenses in a manner consistent with applicable law in the state in 
which the bank maintains the fund. This report must contain a list of 
investments in the fund showing the cost and current market value of 
each investment, and a statement covering the period after the previous 
report showing the following (organized by type of investment):
    (A) A summary of purchases (with costs);
    (B) A summary of sales (with profit or loss and any other investment 
changes);
    (C) Income and disbursements; and
    (D) An appropriate notation of any investments in default.
    (iii) Limitation on representations. A bank may include in the 
financial report a description of the fund's value on previous dates, as 
well as its income and disbursements during previous accounting periods. 
A bank may not publish in the financial report any predictions or 
representations as to future performance. In addition, with respect to 
funds described in paragraph (a)(1) of this section, a bank may not 
publish the performance of individual funds other than those 
administered by the bank or its affiliates.
    (iv) Availability of the report. A bank administering a collective 
investment fund shall provide a copy of the financial report, or shall 
provide notice that a copy of the report is available upon request 
without charge, to each person who ordinarily would receive a regular 
periodic accounting with respect to each participating account. The bank 
may provide a copy of the financial report to prospective customers. In 
addition, the bank shall provide a copy of the report upon request to 
any person for a reasonable charge.
    (7) Advertising restriction. A bank may not advertise or publicize 
any fund authorized under paragraph (a)(1) of this section, except in 
connection with the advertisement of the general fiduciary services of 
the bank.
    (8) Self-dealing and conflicts of interest. A national bank 
administering a collective investment fund must comply with the 
following (in addition to Sec. 9.12):
    (i) Bank interests. A bank administering a collective investment 
fund may not have an interest in that fund other than in its fiduciary 
capacity. If, because of a creditor relationship or otherwise, the bank 
acquires an interest in a participating account, the participating 
account must be withdrawn on the next withdrawal date. However, a bank 
may invest assets that it holds as fiduciary for its own employees in a 
collective investment fund.
    (ii) Loans to participating accounts. A bank administering a 
collective investment fund may not make any loan on the security of a 
participant's interest in the fund. An unsecured advance to a fiduciary 
account participating in the fund until the time of the next valuation 
date does not constitute the acquisition of an interest in a 
participating account by the bank.
    (iii) Purchase of defaulted investments. A bank administering a 
collective investment fund may purchase for its own account any 
defaulted investment held by the fund (in lieu of segregating the 
investment in accordance with paragraph (b)(5)(v) of this section) if, 
in the judgment of the bank, the cost of segregating the investment is 
excessive

[[Page 218]]

in light of the market value of the investment. If a bank elects to 
purchase a defaulted investment, it shall do so at the greater of market 
value or the sum of cost and accrued unpaid interest.
    (9) Management fees. A bank administering a collective investment 
fund may charge a reasonable fund management fee only if:
    (i) The fee is permitted under applicable law (and complies with fee 
disclosure requirements, if any) in the state in which the bank 
maintains the fund; and
    (ii) The amount of the fee does not exceed an amount commensurate 
with the value of legitimate services of tangible benefit to the 
participating fiduciary accounts that would not have been provided to 
the accounts were they not invested in the fund.
    (10) Expenses. A bank administering a collective investment fund may 
charge reasonable expenses incurred in operating the collective 
investment fund, to the extent not prohibited by applicable law in the 
state in which the bank maintains the fund. However, a bank shall absorb 
the expenses of establishing or reorganizing a collective investment 
fund.
    (11) Prohibition against certificates. A bank administering a 
collective investment fund may not issue any certificate or other 
document representing a direct or indirect interest in the fund, except 
to provide a withdrawing account with an interest in a segregated 
investment.
    (12) Good faith mistakes. The OCC will not deem a bank's mistake 
made in good faith and in the exercise of due care in connection with 
the administration of a collective investment fund to be a violation of 
this part if, promptly after the discovery of the mistake, the bank 
takes whatever action is practicable under the circumstances to remedy 
the mistake.
    (c) Other collective investments. In addition to the collective 
investment funds authorized under paragraph (a) of this section, a 
national bank may collectively invest assets that it holds as fiduciary, 
to the extent not prohibited by applicable law, as follows:
    (1) Single loans or obligations. In the following loans or 
obligations, if the bank's only interest in the loans or obligations is 
its capacity as fiduciary:
    (i) A single real estate loan, a direct obligation of the United 
States, or an obligation fully guaranteed by the United States, or a 
single fixed amount security, obligation, or other property, either 
real, personal, or mixed, of a single issuer; or
    (ii) A variable amount note of a borrower of prime credit, if the 
bank uses the note solely for investment of funds held in its fiduciary 
accounts.
    (2) Mini-funds. In a fund maintained by the bank for the collective 
investment of cash balances received or held by a bank in its capacity 
as trustee, executor, administrator, guardian, or custodian under a 
uniform gifts to minors act, that the bank considers too small to be 
invested separately to advantage. The total assets in the fund must not 
exceed $1,000,000 and the number of participating accounts must not 
exceed 100.
    (3) Trust funds of corporations and closely-related settlors. In any 
investment specifically authorized by the instrument creating the 
fiduciary account or a court order, in the case of trusts created by a 
corporation, including its affiliates and subsidiaries, or by several 
individual settlors who are closely related.
    (4) Other authorized funds. In any collective investment authorized 
by applicable law, such as investments pursuant to a state pre-need 
funeral statute.
    (5) Special exemption funds. In any other manner described by the 
bank in a written plan approved by the OCC.\5\ In order to obtain a 
special exemption, a bank shall submit to the OCC a written plan that 
sets forth:
---------------------------------------------------------------------------

    \5\ Any institution that must comply with this section in order to 
receive favorable tax treatment under 26 U.S.C. 584 (namely, any 
corporate fiduciary) may seek OCC approval of special exemption funds in 
accordance with this paragraph (c)(5).
---------------------------------------------------------------------------

    (i) The reason that the proposed fund requires a special exemption;
    (ii) The provisions of the proposed fund that are inconsistent with 
paragraphs (a) and (b) of this section;
    (iii) The provisions of paragraph (b) of this section for which the 
bank seeks an exemption; and

[[Page 219]]

    (iv) The manner in which the proposed fund addresses the rights and 
interests of participating accounts.

[61 FR 68554, Dec. 30, 1996, as amended at 68 FR 70131, Dec. 17, 2003]



Sec. 9.20  Transfer agents.

    (a) The rules adopted by the Securities and Exchange Commission 
(SEC) pursuant to section 17A of the Securities Exchange Act of 1934 (15 
U.S.C. 78q-1) prescribing procedures for registration of transfer agents 
for which the SEC is the appropriate regulatory agency (17 CFR 
240.17Ac2-1) apply to the domestic activities of national bank transfer 
agents. References to the ``Commission'' are deemed to refer to the 
``OCC.''
    (b) The rules adopted by the SEC pursuant to section 17A of the 
Securities Exchange Act of 1934 prescribing operational and reporting 
requirements for transfer agents (17 CFR 240.17Ac2-2, and 240.17Ad-1 
through 240.17Ad-17) apply to the domestic activities of national bank 
transfer agents.

[61 FR 68554, Dec. 30, 1996, as amended at 68 FR 70131, Dec. 17, 2003]

                             Interpretations



Sec. 9.100  Acting as indenture trustee and creditor.

    With respect to a debt securities issuance, a national bank may act 
both as indenture trustee and as creditor until 90 days after default, 
if the bank maintains adequate controls to manage the potential 
conflicts of interest.



Sec. 9.101  Providing investment advice for a fee.

    (a) In general. The term ``fiduciary capacity'' at Sec. 9.2(e) is 
defined to include ``investment adviser, if the bank receives a fee for 
its investment advice.'' In other words, if a bank is providing 
investment advice for a fee, then it is acting in a fiduciary capacity. 
For purposes of that definition, ``investment adviser'' generally means 
a national bank that provides advice or recommendations concerning the 
purchase or sale of specific securities, such as a national bank engaged 
in portfolio advisory and management activities (including acting as 
investment adviser to a mutual fund). Additionally, the qualifying 
phrase ``if the bank receives a fee for its investment advice'' excludes 
those activities in which the investment advice is merely incidental to 
other services.
    (b) Specific activities--(1) Full-service brokerage. Engaging in 
full-service brokerage may entail providing investment advice for a fee, 
depending upon the commission structure and specific facts. Full-service 
brokerage involves investment advice for a fee if a non-bank broker 
engaged in that activity is considered an investment adviser under the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.).
    (2) Activities not involving investment advice for a fee. The 
following activities generally do not entail providing investment advice 
for a fee:
    (i) Financial advisory and counseling activities, including 
strategic planning of a financial nature, merger and acquisition 
advisory services, advisory and structuring services related to project 
finance transactions, and providing market economic information to 
customers in general;
    (ii) Client-directed investment activities (i.e., the bank has no 
investment discretion) where investment advice and research may be made 
available to the client, but the fee does not depend on the provision of 
investment advice;
    (iii) Investment advisory activities incidental to acting as a 
municipal securities dealer;
    (iv) Real estate management services provided to other financial 
institutions;
    (v) Real estate consulting services, including acting as a finder in 
locating, analyzing, and making recommendations regarding the purchase 
of property, and making recommendations concerning the sale of property;
    (vi) Advisory activities concerning bridge loans;
    (vii) Advisory activities for homeowners' associations;
    (viii) Advisory activities concerning tax planning and structuring; 
and
    (ix) Investment advisory activities authorized by the OCC under 12 
U.S.C. 24(Seventh) as incidental to the business of banking.

[63 FR 6473, Feb. 9, 1998]

[[Page 220]]



PART 10_MUNICIPAL SECURITIES DEALERS--Table of Contents




Sec.
10.1 Scope.
10.2 Filing requirements.

    Authority: 5 U.S.C. 93a, 481, and 1818; 15 U.S.C. 78o-4(c)(5) and 
78q-78w.

    Source: 63 FR 29094, May 28, 1998, unless otherwise noted.



Sec. 10.1  Scope.

    This part applies to:
    (a) Any national bank, District bank, and separately identifiable 
department or division of either (collectively, a national bank) that 
acts as a municipal securities dealer, as that term is defined in 
section 3(a)(30) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(30)); and
    (b) Any person who is associated or to be associated with a national 
bank in the capacity of a municipal securities principal or a municipal 
securities representative, as those terms are defined in Rule G-3 of the 
Municipal Securities Rulemaking Board (MSRB).\1\
---------------------------------------------------------------------------

    \1\ The MSRB rules may be obtained by contacting the Municipal 
Securities Rulemaking Board at 1150 18th Street, NW., Suite 400, 
Washington, DC 20036-3816.
---------------------------------------------------------------------------



Sec. 10.2  Filing requirements.

    (a) A national bank shall use Form MSD-4 (Uniform Application for 
Municipal Securities Principal or Municipal Securities Representative 
Associated with a Bank Municipal Securities Dealer) for obtaining the 
information required by MSRB Rule G-7(b)(i)-(x) from a person identified 
in Sec. 10.1(b). A national bank receiving a completed MSD-4 form from 
a person identified in Sec. 10.1(b) must submit this form to the OCC 
before permitting the person to be associated with it as a municipal 
securities principal or a municipal securities representative.
    (b) A national bank must submit Form MSD-5 (Uniform Termination 
Notice for Municipal Securities Principal or Municipal Securities 
Representative Associated with a Bank Municipal Securities Dealer) to 
the OCC within 30 days of terminating a person's association with the 
bank as a municipal securities principal or municipal securities 
representative.
    (c) Forms MSD-4 and MSD-5, with instructions, may be obtained by 
contacting the OCC at 250 E Street, SW., Washington, DC 20219, 
Attention: Bank Dealer Activities.

[63 FR 29094, May 28, 1998, as amended at 63 FR 71343, Dec. 24, 1998]



PART 11_SECURITIES EXCHANGE ACT DISCLOSURE RULES--Table of Contents




Sec.
11.1 Authority and OMB control number.
11.2 Reporting requirements for registered national banks.
11.3 Filing requirements and inspection of documents.
11.4 Filing fees.

    Authority: 12 U.S.C. 93a; 15 U.S.C. 78l, 78m, 78n, 78p, 78w, 7241, 
7242, 7243, 7244, 7261, 7262, 7264, and 7265.

    Source: 57 FR 46084, Oct. 7, 1992; 57 FR 54499, Nov. 19, 1992.



Sec. 11.1  Authority and OMB control number.

    (a) Authority. The Office of the Comptroller of the Currency (OCC) 
is vested with the powers, functions, and duties otherwise vested in the 
Securities and Exchange Commission (Commission) to administer and 
enforce the provisions of sections 12, 13, 14(a), 14(c), 14(d), 14(f), 
and 16 of the Securities Exchange Act of 1934, as amended (1934 Act) (15 
U.S.C. 78l, 78m, 78n(a), 78n(c), 78n(d), 78n(f), and 78p), regarding 
national banks and banks chartered in the District of Columbia with one 
or more classes of securities subject to the registration provisions of 
sections 12(b) and (g) of the 1934 Act (registered national banks). 
Further, the OCC has general rulemaking authority under 12 U.S.C. 93a, 
to promulgate rules and regulations concerning the activities of 
national banks and banks chartered in the District of Columbia.
    (b) OMB control number. The collection of information contained in 
this part was approved by the Office of Management and Budget under OMB 
control number 1557-0106.

[57 FR 46084, Oct. 7, 1992; 57 FR 54499, Nov. 19, 1992, as amended at 60 
FR 57332, Nov. 15, 1995]

[[Page 221]]



Sec. 11.2  Reporting requirements for registered national banks.

    (a) Filing, disclosure and other requirements--(1) General. Except 
as otherwise provided in this section, a national bank whose securities 
are subject to registration pursuant to section 12(b) or section 12(g) 
of the 1934 Act (15 U.S.C. 78l(b) and (g)) shall comply with the rules, 
regulations, and forms adopted by the Securities and Exchange Commission 
(Commission) pursuant to:
    (i) Sections 10A(m), 12, 13, 14(a), 14(c), 14(d), 14(f), and 16 of 
the 1934 Act (15 U.S.C. 78f(m), 78l, 78m, 78n(a), (c), (d) and (f), and 
78p); and
    (ii) Sections 302, 303, 304, 306, 401(b), 404, 406, and 407 of the 
Sarbanes-Oxley Act of 2002 (codified at 15 U.S.C. 7241, 7242, 7243, 
7244, 7261, 7262, 7264, and 7265).
    (2) [Reserved]
    (b) References to the Commission. Any references to the ``Securities 
and Exchange Commission'' or the ``Commission'' in the rules, 
regulations and forms described in paragraph (a)(1) of this section 
shall with respect to securities issued by registered national banks be 
deemed to refer to the OCC unless the context otherwise requires.

[68 FR 68492, Dec. 9, 2003]



Sec. 11.3  Filing requirements and inspection of documents.

    (a) Filing requirements--(1) General. Except as otherwise provided 
in this section, all papers required to be filed with the OCC pursuant 
to the 1934 Act or regulations thereunder shall be submitted in 
quadruplicate to the Securities and Corporate Practices Division, Office 
of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 
20219. Material may be filed by delivery to the OCC through the mail, by 
fax (202-874-5279), or otherwise.
    (2) Statements filed pursuant to section 16(a) of the 1934 Act. 
Statements required under section 16(a) of the 1934 Act shall be filed 
electronically, as directed by the OCC.
    (3) Date of filing. (i) General. The date on which papers are 
actually received by the OCC shall be the date of filing, if the person 
or bank filing the papers has complied with all applicable requirements.
    (ii) Electronic filings. An electronic filing of a statement 
required under section 16(a) of the 1934 Act that is submitted by direct 
transmission on or before 10 p.m. Eastern Standard Time or Eastern 
Daylight Savings Time, whichever is currently in effect, shall be deemed 
filed on the same business day.
    (4) Mandatory compliance date. Compliance with paragraph (a)(2) of 
this section and any applicable requirements that such statements must 
be posted on a registered national bank's Web site are mandatory for 
statements required to be filed on or after January 1, 2004.
    (b) Copies of registration statements, definitive proxy solicitation 
materials, reports, and annual reports to shareholders required by this 
part (exclusive of exhibits) are available from the Disclosure Officer, 
Communications Division, Office of the Comptroller of the Currency, at 
the address listed in paragraph (a) of this section.

[60 FR 57332, Nov. 15, 1995, as amended at 68 FR 54984, Sept. 22, 2003; 
70 FR 46404, Aug. 10, 2005]



Sec. 11.4  Filing fees.

    (a) The OCC may require filing fees to accompany certain filings 
made under this part before it will accept the filing. The OCC provides 
an applicable fee schedule for such filings in the ``Notice of 
Comptroller of the Currency Fees'' described in 12 CFR 8.8.
    (b) Fees must be paid by check payable to the Comptroller of the 
Currency.

[57 FR 46084, Oct. 7, 1992; 57 FR 54499, Nov. 19, 1992, as amended at 60 
FR 57332, Nov. 15, 1995]



PART 12_RECORDKEEPING AND CONFIRMATION REQUIREMENTS FOR SECURITIES TRANSACTIONS--Table of Contents




Sec.
12.1 Authority, purpose, and scope.
12.2 Definitions.
12.3 Recordkeeping.
12.4 Content and time of notification.
12.5 Notification by agreement; alternative forms and times of 
          notification.
12.6 Fees.
12.7 Securities trading policies and procedures.
12.8 Waivers.
12.9 Settlement of securities transactions.

[[Page 222]]

                             Interpretations

12.101 National bank disclosure of remuneration for mutual fund 
          transactions.
12.102 National bank use of electronic communications as customer 
          notifications.

    Authority: 12 U.S.C. 24, 92a, and 93a.

    Source: 61 FR 63965, Dec. 2, 1996, unless otherwise noted.



Sec. 12.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 24, 92a, 
and 93a.
    (b) Purpose. This part establishes rules, policies, and procedures 
applicable to recordkeeping and confirmation requirements for certain 
securities transactions effected by national banks for customers.
    (c) Scope--(1) General. Any security transaction effected for a 
customer by a national bank is subject to this part, except as provided 
by paragraph (c)(2) of this section. This part applies to a national 
bank effecting transactions in government securities. This part also 
applies to municipal securities transactions by a national bank that is 
not registered as a ``municipal securities dealer'' with the Securities 
and Exchange Commission. See 15 U.S.C. 78c(a)(30) and 78o-4. This part, 
as well as 12 CFR part 9, applies to securities transactions effected by 
a national bank as fiduciary.
    (2) Exceptions--(i) Small number of transactions. The requirements 
of Sec. Sec. 12.3(a)(2) through (4) and 12.7(a)(1) through (3) do not 
apply to a national bank having an average of fewer than 200 securities 
transactions per year for customers over the prior three calendar year 
period. The calculation of this average does not include transactions in 
government securities.
    (ii) Government securities. The recordkeeping requirements of Sec. 
12.3 do not apply to national banks effecting fewer than 500 government 
securities brokerage transactions per year. This exception does not 
apply to government securities dealer transactions by national banks. 
See 17 CFR 404.4(a).
    (iii) Municipal securities. This part does not apply to transactions 
in municipal securities conducted by a national bank registered with the 
Securities and Exchange Commission as a ``municipal securities dealer'' 
as defined in title 15 U.S.C. 78c(a)(30). See 15 U.S.C. 78o-4.
    (iv) Foreign branches. This part does not apply to securities 
transactions conducted by a foreign branch of a national bank.
    (v) Transactions effected by registered broker/dealers. This part 
does not apply to securities transactions effected by a broker or dealer 
registered with the Securities and Exchange Commission (SEC) where the 
SEC-registered broker or dealer directly provides the customer a 
confirmation; including, transactions effected by a national bank 
employee when acting as an employee of an SEC-registered broker/dealer.
    (3) Safe and sound operations. Notwithstanding paragraph (c)(2) of 
this section, every national bank conducting securities transactions for 
customers shall maintain effective systems of records and controls 
regarding their customer securities transactions to ensure safe and 
sound operations. The systems maintained must clearly and accurately 
reflect appropriate information and provide an adequate basis for an 
audit.



Sec. 12.2  Definitions.

    (a) Asset-backed security means a security that is primarily 
serviced by the cashflows of a discrete pool of receivables or other 
financial assets, either fixed or revolving, that by their terms convert 
into cash within a finite time period plus any rights or other assets 
designed to assure the servicing or timely distribution of proceeds to 
the security holders.
    (b) Collective investment fund means any fund established pursuant 
to 12 CFR 9.18.
    (c) Completion of the transaction means:
    (1) In the case of a customer who purchases a security through or 
from a national bank, except as provided in paragraph (c)(2) of this 
section, the time when the customer pays the bank any part of the 
purchase price, or, if payment is made by a bookkeeping entry, the time 
when the bank makes the bookkeeping entry for any part of the purchase 
price;
    (2) In the case of a customer who purchases a security through or 
from a national bank and who makes payment

[[Page 223]]

for the security prior to the time when payment is requested or 
notification is given that payment is due, the time when the bank 
delivers the security to or into the account of the customer;
    (3) In the case of a customer who sells a security through or to a 
national bank, except as provided in paragraph (c)(4) of this section, 
if the security is not in the custody of the bank at the time of sale, 
the time when the security is delivered to the bank, and if the security 
is in the custody of the bank at the time of sale, the time when the 
bank transfers the security from the account of the customer;
    (4) In the case of a customer who sells a security through or to a 
national bank and who delivers the security to the bank prior to the 
time when delivery is requested or notification is given that delivery 
is due, the time when the bank makes payment to or into the account of 
the customer.
    (d) Crossing of buy and sell orders means a security transaction in 
which the same bank acts as agent for both the buyer and the seller.
    (e) Customer means any person or account, including any agency, 
trust, estate, guardianship, or other fiduciary account for which a 
national bank makes or participates in making the purchase or sale of 
securities, but does not include a broker, dealer, bank acting as a 
broker or dealer, bank acting as the fiduciary of an account, bank as 
trustee acting as shareholder of record for the purchase or sale of 
securities, or issuer of securities that are the subject of the 
transaction.
    (f) Debt security means any security, such as a bond, debenture, 
note, or any other similar instrument that evidences a liability of the 
issuer (including any security of this type that is convertible into 
stock or a similar security) and fractional or participation interests 
in one or more of any of the foregoing. This definition does not include 
securities issued by an investment company registered under the 
Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq.
    (g) Government security means:
    (1) A security that is a direct obligation of, or obligation 
guaranteed as to principal and interest by, the United States;
    (2) A security that is issued or guaranteed by a corporation in 
which the United States has a direct or indirect interest and which is 
designated by the Secretary of the Treasury for exemption as necessary 
or appropriate in the public interest or for the protection of 
investors;
    (3) A security issued or guaranteed as to principal and interest by 
any corporation whose securities are designated, by statute specifically 
naming the corporation, to constitute exempt securities within the 
meaning of the laws administered by the Securities and Exchange 
Commission; or
    (4) Any put, call, straddle, option, or privilege on a security 
described in paragraph (g)(1), (2), or (3) of this section, other than a 
put, call, straddle, option, or privilege:
    (i) That is traded on one or more national securities exchanges; or
    (ii) For which quotations are disseminated through an automated 
quotation system operated by a registered securities association.
    (h) Investment discretion means that, with respect to an account, a 
bank directly or indirectly:
    (1) Is authorized to determine what securities or other property 
shall be purchased or sold by or for the account; or
    (2) Makes decisions as to what securities or other property shall be 
purchased or sold by or for the account even though some other person 
may have responsibility for these investment decisions.
    (i) Municipal security means:
    (1) A security that is a direct obligation of, or an obligation 
guaranteed as to principal or interest by, a State or any political 
subdivision, or any agency or instrumentality of a State or any 
political subdivision;
    (2) A security that is a direct obligation of, or an obligation 
guaranteed as to principal or interest by, any municipal corporate 
instrumentality of one or more States; or
    (3) A security that is an industrial development bond (as defined in 
section 103(c)(2) of the Internal Revenue Code of 1954 (26 U.S.C. 
103(c)(2) (1970)) (Code)) the interest on which is excludable from gross 
income under section 103(a)(1) of the Code (26 U.S.C. 103(a)(1))

[[Page 224]]

if, by reason of the application of paragraph (4) or (6) of section 
103(c) of the Code (26 U.S.C. 103(c)) (determined as if paragraphs 
(4)(A), (5), and (7) were not included in section 103(c) (26 U.S.C. 
103(c)), paragraph (1) of section 103(c) (26 U.S.C. 103(c)) does not 
apply to the security.
    (j) Periodic plan means:
    (1) A written authorization for a national bank to act as agent to 
purchase or sell for a customer a specific security or securities, in a 
specific amount (calculated in security units or dollars) or to the 
extent of dividends and funds available, at specific time intervals, and 
setting forth the commission or charges to be paid by the customer or 
the manner of calculating them. These plans include dividend 
reinvestment plans, automatic investment plans, and employee stock 
purchase plans.
    (2) Any prearranged, automatic transfer or ``sweep'' of funds from a 
deposit account to purchase a security, or any prearranged, automatic 
redemption or sale of a security with the funds being transferred into a 
deposit account (including cash management sweep services).
    (k) Security: (1) Means any note, stock, treasury stock, bond, 
debenture, certificate of interest or participation in any profit-
sharing agreement or in any oil, gas, or other mineral royalty or lease, 
any collateral-trust certificate, preorganization certificate or 
subscription, transferable share, investment contract, voting-trust 
certificate, and any put, call, straddle, option, or privilege on any 
security or group or index of securities (including any interest therein 
or based on the value thereof), or, in general, any instrument commonly 
known as a ``security''; or any certificate of interest or participation 
in, temporary or interim certificate for, receipt for, or warrant or 
right to subscribe to or purchase, any of the foregoing;
    (2) Does not mean currency; any note, draft, bill of exchange, or 
banker's acceptance which has a maturity at the time of issuance not 
exceeding nine months, exclusive of days of grace, or any renewal 
thereof, the maturity of which is likewise limited; a deposit or share 
account in a Federal or State chartered depository institution; a loan 
participation; a letter of credit or other form of bank indebtedness 
incurred in the ordinary course of business; units of a collective 
investment fund; interests in a variable amount note in accordance with 
12 CFR 9.18; U.S. Savings Bonds; or any other instrument the OCC 
determines does not constitute a security for purposes of this part.



Sec. 12.3  Recordkeeping.

    (a) General rule. A national bank effecting securities transactions 
for customers shall maintain the following records for at least three 
years:
    (1) Chronological records. An itemized daily record of each purchase 
and sale of securities maintained in chronological order, and including:
    (i) Account or customer name for which each transaction was 
effected;
    (ii) Description of the securities;
    (iii) Unit and aggregate purchase or sale price;
    (iv) Trade date; and
    (v) Name or other designation of the broker/dealer or other person 
from whom the securities were purchased or to whom the securities were 
sold;
    (2) Account records. Account records for each customer, reflecting:
    (i) Purchases and sales of securities;
    (ii) Receipts and deliveries of securities;
    (iii) Receipts and disbursements of cash; and
    (iv) Other debits and credits pertaining to transactions in 
securities;
    (3) Memorandum order. A separate memorandum (order ticket) of each 
order to purchase or sell securities (whether executed or canceled), 
including:
    (i) Account or customer name for which the transaction was effected;
    (ii) Type of order (market order, limit order, or subject to special 
instructions);
    (iii) Time the trader or other bank employee responsible for 
effecting the transaction received the order;
    (iv) Time the trader placed the order with the broker/dealer, or if 
there was no broker/dealer, time the order was executed or canceled;
    (v) Price at which the order was executed; and

[[Page 225]]

    (vi) Name of the broker/dealer utilized;
    (4) Record of broker/dealers. A record of all broker/dealers 
selected by the bank to effect securities transactions and the amount of 
commissions paid or allocated to each broker during the calendar year; 
and
    (5) Notifications. A copy of the written notification required by 
Sec. Sec. 12.4 and 12.5.
    (b) Manner of maintenance. The records required by this section must 
clearly and accurately reflect the information required and provide an 
adequate basis for the audit of the information. Record maintenance may 
include the use of automated or electronic records provided the records 
are easily retrievable, readily available for inspection, and capable of 
being reproduced in a hard copy.



Sec. 12.4  Content and time of notification.

    Unless a national bank elects to provide notification by one of the 
means specified in Sec. 12.5, a national bank effecting a securities 
transaction for a customer shall give or send to the customer either of 
the following types of notifications at or before completion of the 
transaction or, if the bank uses a registered broker/dealer's 
confirmation, within one business day from the bank's receipt of the 
registered broker/dealer's confirmation:
    (a) Written notification. A written notification disclosing:
    (1) Name of the bank;
    (2) Name of the customer;
    (3) Capacity in which the bank acts (i.e., as agent for the 
customer, as agent for both the customer and some other person, as 
principal for its own account, or in any other capacity);
    (4) Date and time of execution, or a statement that the bank will 
furnish the time of execution within a reasonable time upon written 
request of the customer, and the identity, price, and number of shares 
or units (or principal amount in the case of debt securities) of the 
security purchased or sold by the customer;
    (5) Amount of any remuneration that the customer has provided or is 
to provide any broker/dealer, directly or indirectly, in connection with 
the transaction;
    (6) (i) Amount of any remuneration that the bank has received or 
will receive from the customer, and the source and amount of any other 
remuneration that the bank has received or will receive in connection 
with the transaction; unless:
    (A) The bank and its customer have determined remuneration pursuant 
to a written agreement; or
    (B) In the case of government securities and municipal securities, 
the bank received the remuneration in other than an agency transaction.
    (ii) If the bank elects not to disclose the source and amount of 
remuneration it has or will receive from a party other than the customer 
pursuant to paragraph (a)(6)(i) of this section, the written 
notification must disclose whether the bank has received or will receive 
remuneration from a party other than the customer, and that the bank 
will furnish within a reasonable time the source and amount of this 
remuneration upon written request of the customer. This election is not 
available, however, if, with respect to a purchase, the bank was 
participating in a distribution of that security; or, with respect to a 
sale, the bank was participating in a tender offer for that security;
    (7) Name of the registered broker/dealer utilized; or where there is 
no registered broker/dealer, the name of the person from whom the 
security was purchased or to whom the security was sold, or a statement 
that the bank will furnish this information within a reasonable time 
upon written request from the customer;
    (8) In the case of any transaction in a debt security subject to 
redemption before maturity, a statement to the effect that the debt 
security may be redeemed in whole or in part before maturity, that the 
redemption could affect the yield represented and that additional 
information is available upon request;
    (9) In the case of a transaction in a debt security effected 
exclusively on the basis of a dollar price:
    (i) The dollar price at which the transaction was effected; and

[[Page 226]]

    (ii) The yield to maturity calculated from the dollar price, unless 
the transaction is for a debt security that either:
    (A) Has a maturity date that may be extended by the issuer thereof, 
with a variable interest payable thereon; or
    (B) Is an asset-backed security that represents an interest in or is 
secured by a pool of receivables or other financial assets that 
continuously are subject to prepayment;
    (10) In the case of a transaction in a debt security effected on the 
basis of yield:
    (i) The yield at which the transaction was effected, including the 
percentage amount and its characterization (e.g., current yield, yield 
to maturity, or yield to call) and if effected at yield to call, the 
type of call, the call date, and call price;
    (ii) The dollar price calculated from the yield at which the 
transaction was effected; and
    (iii) If effected on a basis other than yield to maturity and the 
yield to maturity is lower than the represented yield, the yield to 
maturity as well as the represented yield, unless the transaction is for 
a debt security that either:
    (A) Has a maturity date that may be extended by the issuer thereof, 
with a variable interest rate payable thereon; or
    (B) Is an asset-backed security that represents an interest in or is 
secured by a pool of receivables or other financial assets that 
continuously are subject to prepayment;
    (11) In the case of a transaction in a debt security that is an 
asset-backed security, which represents an interest in or is secured by 
a pool of receivables or other financial assets that continuously are 
subject to prepayment, a statement indicating that the actual yield of 
the asset-backed security may vary according to the rate at which the 
underlying receivables or other financial assets are prepaid and a 
statement that information concerning the factors that affect yield 
(including at a minimum estimated yield, weighted average life, and the 
prepayment assumptions underlying yield) will be furnished upon written 
request of the customer; and
    (12) In the case of a transaction in a debt security, other than a 
government security, that the security is unrated by a nationally 
recognized statistical rating organization, if that is the case; or
    (b) Copy of the registered broker/dealer's confirmation. A copy of 
the confirmation of a registered broker/dealer relating to the 
securities transaction and, if the customer or any other source will 
provide remuneration to the bank in connection with the transaction and 
a written agreement between the bank and the customer does not determine 
the remuneration, a statement of the source and amount of any 
remuneration that the customer or any other source is to provide the 
bank.



Sec. 12.5  Notification by agreement; alternative forms and times of notification.

    A national bank may elect to use the following notification 
procedures as an alternative to complying with Sec. 12.4:
    (a) Notification by agreement. A national bank effecting a 
securities transaction for an account in which the bank does not 
exercise investment discretion shall give or send written notification 
at the time and in the form agreed to in writing by the bank and 
customer, provided that the agreement makes clear the customer's right 
to receive the written notification pursuant to Sec. 12.4 (a) or (b) at 
no additional cost to the customer.
    (b) Trust transactions. A national bank effecting a securities 
transaction for an account in which the bank exercises investment 
discretion other than in an agency capacity shall give or send written 
notification within a reasonable time if a person having the power to 
terminate the account, or, if there is no such person, any person 
holding a vested beneficial interest in the account, requests written 
notification pursuant to Sec. 12.4 (a) or (b). Otherwise, notification 
is not required.
    (c) Agency transactions. (1) A national bank effecting a securities 
transaction for an account in which the bank exercises investment 
discretion in an agency capacity shall give or send, not less than once 
every three months, an itemized statement to each customer

[[Page 227]]

that specifies the funds and securities in the custody or possession of 
the bank at the end of the period and all debits, credits and 
transactions in the customer's account during the period.
    (2) If requested by the customer, the bank shall give or send 
written notification to the customer pursuant to Sec. 12.4 (a) or (b) 
within a reasonable time.
    (d) Collective investment fund transactions. A national bank 
effecting a securities transaction for a collective investment fund 
shall follow 12 CFR 9.18.
    (e) Periodic plan transactions. (1) A national bank effecting a 
securities transaction for a periodic plan (except for a cash management 
sweep service) shall give or send to its customer not less than once 
every three months, a written statement showing:
    (i) The customer's funds and securities in the custody or possession 
of the bank;
    (ii) All service charges and commissions paid by the customer in 
connection with the transaction; and
    (iii) All other debits and credits of the customer's account 
involved in the transaction.
    (2) A national bank effecting a securities transaction for a cash 
management sweep service or other periodic plan as defined in Sec. 
12.2(j)(2) shall