[Federal Register Volume 77, Number 142 (Tuesday, July 24, 2012)]
[Rules and Regulations]
[Pages 43151-43155]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17860]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 362
RIN 3064-AD88
Permissible Investments for Federal and State Savings
Associations: Corporate Debt Securities
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: This final rule amends FDIC regulations to prohibit any
insured savings association from acquiring or retaining a corporate
debt security unless it determines, prior to acquiring such security
and periodically thereafter, that the issuer has adequate capacity to
meet all financial commitments under the security for the projected
life of the investment. An issuer would satisfy this requirement if,
based on the assessment of the savings association, the issuer presents
a low risk of default and is likely to make full and timely repayment
of principal and interest.
This final rule adopts the proposed creditworthiness standard with
the clarifying revision described below. In the final rule, the phrase
``projected life of the investment'' has been revised to ``projected
life of the security'' to more closely track the language in the Office
of the Comptroller of the Currency's (``OCC'') final rule.\1\ The
clarifying revision addresses ambiguities in the proposed rule and
harmonizes the final rule with the final rule adopted by the OCC
regarding permissible investments for national banks.\2\
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\1\ 77 FR 35253. (June 13, 2012).
\2\ Id. at 35257.
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DATES: Effective Date: The final rule is effective on July 21, 2012.
FOR FURTHER INFORMATION CONTACT: Kyle Hadley, Chief, Examination
Support Section, (202) 898-6532, Division of Risk Management
Supervision; Eric Reither, Capital Markets Specialist, (202) 898-3707,
Division of Risk
[[Page 43152]]
Management Supervision; Suzanne Dawley, Senior Attorney, Bank
Activities Section, (202) 898-6509; or Rachel Jones, Attorney, Bank
Activities Section, (202) 898-6858.
SUPPLEMENTARY INFORMATION:
I. Background
Under section 28(d) (``Section 28(d)'') of the Federal Deposit
Insurance Act (``FDI Act''), federal and state savings associations
generally are prohibited from acquiring or retaining, either directly
or through a subsidiary, a corporate debt security that is rated below
investment grade. Section 939(a) (``Section 939(a)'') of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'')
amends Section 28(d) by replacing the investment-grade standard with a
requirement that any corporate debt security investment held by a
savings association must satisfy standards of creditworthiness
established by the FDIC. This amendment is effective for all savings
associations on July 21, 2012.
On December 15, 2011, the FDIC issued a notice of proposed
rulemaking (``NPR'' or ``Proposed Rule''), seeking comment on a
proposal to amend the FDIC's regulations in accordance with the
requirements of Section 28(d). Specifically, the proposed rule would
amend 12 CFR Part 362 to prohibit any insured savings association from
acquiring or retaining a corporate debt security unless it determines,
prior to acquiring such security and periodically thereafter, that the
issuer has adequate capacity to meet all financial commitments under
the security for the projected life of the investment. An issuer would
satisfy this requirement if, based on the assessment of the savings
association, the issuer presents a low risk of default and is likely to
make full and timely repayment of principal and interest.
This final rule adopts the proposed creditworthiness standard with
the clarifying revision described below. In the final rule, the phrase
``projected life of the investment'' has been revised to ``projected
life of the security'' to more closely track the language in the Office
of the Comptroller of the Currency's (``OCC'') final rule.\3\ The
clarifying revision addresses ambiguities in the proposed rule and
harmonizes the final rule with the final rule adopted by the OCC
regarding permissible investments for national banks.\4\
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\3\ 77 F.R. 35253. (June 13, 2012).
\4\ Id. at 35257.
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Section 553(d)(3) of the Administrative Procedure Act (``APA'')
provides that, for good cause found and published with the rule, an
agency does not have to comply with the requirement that a substantive
rule be published not less than 30 days before its effective date. The
final rule will be effective on July 21, 2012. Consequently, the final
rule's publication will be less than 30 days before its effective date.
The FDIC invokes this good cause exception to the 30 day publication
requirement because the statutory amendment \5\ that this rule
implements is effective on July 21, 2012. On that date savings
associations will be prohibited from acquiring or retaining a corporate
debt security that does not meet the creditworthiness standard
established by the FDIC. As a result, until the FDIC establishes that
standard, savings associations would not be able to comply with the
statute. However, in order to allow saving associations sufficient time
to fully develop their processes for making creditworthiness
determinations, the FDIC is allowing institutions until January 1, 2013
to comply with this final rule.
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\5\ Section 939(a) of the Dodd Frank Wall Street Reform and
Consumer Protection Act.
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Under Section 28(d)(1) of the FDI Act, federal and state savings
associations generally are prohibited from acquiring or retaining,
either directly or through a subsidiary, a corporate debt security that
is not ``of investment grade.'' \6\ Section 28(d)(4) defines investment
grade as follows: ``Any corporate debt security is not of `investment
grade' unless that security, when acquired by the savings association
or subsidiary, was rated in one of the four highest ratings categories
by at least one nationally recognized statistical rating organization''
(each, an ``NRSRO'').\7\
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\6\ Section 28(d)(1) of the FDI Act, 12 U.S.C. 1831e(d)(1).
Under Section 28(d)(2), the investment-grade requirement does not
apply to a corporate debt security acquired or retained by a
``qualified affiliate'' of a savings association, defined as, (i) in
the case of a stock savings association, an affiliate other than a
subsidiary or an insured depository institution; and (ii) in the
case of a mutual savings association, a subsidiary other than an
insured depository institution, so long as all of the savings
association's investments in and extensions of credit to the
subsidiary are deducted from the capital of the savings association.
\7\ 12 U.S.C. 1831e(d)(4).
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Consistent with the requirements of Section 28(d), section
362.11(b)(1) of the FDIC's regulations generally prohibits a state
savings association from acquiring or retaining a corporate debt
security that is not of investment grade.\8\ Under 12 CFR 362.10(b),
the term ``corporate debt securities that are not of investment grade''
is defined, in a manner consistent with Section 28(d), as, ``any
corporate security that when acquired was not rated among the four
highest rating categories by at least one nationally recognized
statistical rating organization.'' \9\
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\8\ 12 CFR 362.11(b).
\9\ Id. at 362.10(b). Under section 28(d)(4)(C) of the FDI Act,
however, this term does not include any obligation issued or
guaranteed by a corporation that may be held by a federal savings
association without limitation as a percentage of assets under
section 5(c)(1)(D), (E), or (F) of the Home Owners Loan Act
(``HOLA'').
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The FDIC currently may require a state savings association to take
corrective measures in the event a corporate debt security experiences
a downgrade (to non-investment grade status) following acquisition. For
example, a savings association may be required to reduce the level of
non-investment grade corporate debt security investments as a
percentage of tier 1 or total capital, write-down the value of the
security to reflect an impairment, or divest the security. The FDIC
addresses nonconforming investments on a case-by-case basis through the
examination process, and in view of the risk profile of the savings
association and size and composition of its investment portfolio.
Section 939(a)(2) of the Dodd-Frank Act amends Section 28(d) by (a)
removing references to NRSRO credit ratings, including the investment-
grade standard under paragraph (1) and the definition of ``investment
grade'' under paragraph (4); and (b) inserting in paragraph (1) a
reference to ``standards of creditworthiness established by the
[FDIC]''. Section 939(a) is effective on July 21, 2012, and, therefore,
as of this date federal and state savings associations will be
permitted to invest only in corporate debt securities that satisfy
creditworthiness standards established by the FDIC.\10\
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\10\ See section 939(g) of the Dodd-Frank Act.
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On December 15, 2011, the FDIC issued the Proposed Rule to seek
comment on a proposal to amend the FDIC's regulations in accordance
with the requirements of Section 28(d). Specifically, the NPR proposed
to amend 12 CFR part 362 to prohibit any insured savings association
from acquiring or retaining a corporate debt security unless it
determines, prior to acquiring such security and periodically
thereafter, that the issuer has adequate capacity to meet all financial
commitments under the security for the projected life of the
investment. For purposes of the NPR, an issuer would satisfy this
requirement if, based on the assessment of the savings association, the
issuer presents a low risk of default and is likely to make full and
timely repayment of principal and interest. In addition, on December
15, 2011, the FDIC proposed guidance to assist
[[Page 43153]]
savings associations in meeting due diligence requirements in assessing
credit risk for portfolio investments.
The FDIC received five comments on the proposed rule and guidance
document from bank trade groups, a bank, and an individual. The
commenters generally supported the NPR and stated that it presented a
workable alternative to the use of credit ratings. The commenters also
raised specific issues, which are addressed in more detail below.
After considering the comments, the FDIC has decided to finalize
the proposed creditworthiness standard, with the clarifying revision
described below. Additionally, to assist savings associations in making
these creditworthiness determinations, the FDIC is publishing a final
guidance document today in this issue of the Federal Register.The final
guidance document reflects the clarifying revisions in the final rule,
but otherwise remains unchanged from the proposal.
The final rule revises the proposed creditworthiness standard to
address ambiguities in the proposed rule and harmonize the final rule
with a final rule adopted by the OCC regarding permissible investments
for national banks.\11\ In the final rule, the phrase ``projected life
of the investment'' has been revised to ``projected life of the
security'' to more closely track the language in the OCC's final rule.
This revision also clarifies that, for purposes of the final rule,
federal and state savings associations are required to evaluate the
credit risk of a security through its maturity or projected maturity
date.
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\11\ 77 FR 35253, 35257.
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II. Description of the Final Rule
In accordance with the requirements of Section 939(a), the final
rule amends sections 362.9 and 362.11(b)(1) of the FDIC's regulations.
In section 362.11(b)(1), the final rule replaces the investment-grade
standard, applicable to permissible corporate debt securities
investments of a state savings association, with a requirement,
applicable to federal and state savings associations, that prior to
acquiring a corporate debt security and periodically thereafter, the
savings association must determine that the issuer has adequate
capacity to meet all financial commitments under the security for the
projected life of the security. An issuer satisfies this requirement if
the savings association appropriately determines that the obligor
presents low default risk and is likely to make timely payments of
principal and interest. The FDIC notes that, in addition to the
requirements of the final rule, any savings association investment in a
corporate debt security must be consistent with safety and soundness
principles.
In determining whether an issuer has an adequate financial capacity
to satisfy all financial commitments under a security for the projected
life of the security, the FDIC expects savings associations to consider
a number of factors commensurate with the risk profile and nature of
the issuer. Although savings associations are permitted to consider an
external credit assessment for purposes of such determination, they
must supplement any external credit assessment with due diligence
processes and analyses that are appropriate for the size and complexity
of the security. A security rated in the top four rating categories by
an NRSRO is not automatically deemed to satisfy the creditworthiness
standard. The more complex a security's structure, the greater the
expectations, even when the credit quality is perceived to be very
high.
Comments from industry associations expressed concern regarding the
scope and depth of the proposed due diligence requirements,
particularly for smaller institutions. The FDIC believes that the
proposed standard of creditworthiness and associated due diligence
requirements are consistent with those under the ratings-based standard
and existing due diligence requirements and guidance. Under the
existing ratings-based standard set forth in part 362, savings
associations are expected to avoid sole reliance on a credit rating to
evaluate the credit risk of a security, and consistently have been
advised through guidance and other supervisory materials to supplement
any use of credit ratings with additional research on the credit risk
of a particular security. Accordingly, the FDIC does not expect the
final rule to materially change the investment risk-management
practices of most savings associations or the scope of permissible
corporate debt securities investments under part 362.
Also, in today's Federal Register, the FDIC is publishing a final
guidance document to assist savings associations in determining whether
a corporate debt security is permissible for investment under part 362,
and to further explain the FDIC's expectations with regard to
regulatory due diligence requirements. The final guidance document
reflects the clarifying revisions in the final rule, but otherwise
remains unchanged from the proposed guidance document. The final
guidance document describes the factors savings associations should
consider in evaluating the creditworthiness of an issuer; particularly
the issuer's capacity to satisfy all financial commitments under the
security for the projected life of the security. While the guidance
explains the FDIC's expectations in more detail, the FDIC's regulations
require savings associations to understand and evaluate the risks of
purchasing investment securities. Savings associations should not
purchase securities for which they do not understand the relevant
risks.
The FDIC is not revising its current supervisory practice with
respect to nonconforming corporate debt securities investments. That
is, if a security acquired in compliance with the final rule
experiences credit impairment or other deterioration following its
acquisition, the FDIC may require a savings association to take
corrective measures on a case-by-case basis.
In addition to the revisions described above, the final rule makes
conforming, technical amendments to section 362.9 of the FDIC's
regulations to expand the scope of the rule to federal savings
associations \12\ and reflect the abolishment of the Office of Thrift
Supervision under section 313 of the Dodd-Frank Act.
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\12\ Currently, section 362.11(b) applies only to insured state
savings associations.
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Effective Date
In the NPR, the FDIC proposed an effective date of July 21, 2012,
in accordance with the requirements of section 939(a) of the Dodd-Frank
Act. However, industry commenters expressed concern that savings
associations would not have sufficient time to develop processes for
making creditworthiness determinations on new securities purchased
before the effective date of this final rule. These commenters
suggested that the FDIC adopt a one-year transition period before the
FDIC requires compliance with the rule. One commenter also requested an
additional year beyond the transition period to allow for review of
existing securities held by the institution. The FDIC recognizes that
it may take time for some savings associations to develop the systems
and processes necessary to make creditworthiness determinations under
the new standard. Therefore, the FDIC is providing a transition period
until January 1, 2013, to allow savings associations to come into
compliance with this final rule. However, as proposed, the final rule
is effective as of July 21, 2012.
The final rule does not grandfather any corporate debt securities
acquired
[[Page 43154]]
before the effective date and, therefore, savings associations are
permitted to retain only those securities for which the savings
association determines that (as of the effective date and periodically
thereafter) the issuer has adequate capacity to satisfy all financial
commitments under the security for the projected life of the security.
This treatment for previously acquired securities is consistent with
the requirements of Section 28(d) and the final rule, which prohibit a
savings association from acquiring or retaining any corporate debt
security that does not satisfy the creditworthiness standard described
in this final rule. Accordingly, the final rule seeks to emphasize that
savings associations must periodically re-evaluate the likelihood of
repayment for securities retained in their investment portfolios in
view of any changes in economic conditions that may affect a security's
credit risk. Savings associations will still have until the end of the
transition period, January 1, 2013, to evaluate their existing holdings
and ensure that they meet the revised standard.
III. Implementation Guidance
Together with this final rule, the FDIC is publishing guidance for
savings associations' investment activities. This final guidance
document reflects the FDIC's expectations for savings associations as
they review their systems and consider any changes necessary to comply
with the provisions for assessing credit risk in this final rule. The
guidance describes factors institutions should consider with respect to
certain types of investment securities to assess creditworthiness and
to continue conducting their activities in a safe and sound manner.
As noted above, FDIC regulations require that savings associations
conduct their investment activities in a manner that is consistent with
safe and sound practices. Neither the final rules, nor the final
guidance document, change this requirement. The FDIC expects savings
associations to continue to follow safe and sound practices in their
investment activities.
IV. Regulatory Analyses
A. Administrative Procedure Act (APA)
Section 553(d)(3) of the APA (5 U.S.C. 500 et seq.) provides that,
for good cause found and published with the rule, an agency does not
have to comply with the requirement that a substantive rule be
published not less than 30 days before its effective date. The final
rule will be effective on July 21, 2012. Consequently, the final rule's
publication will be less than 30 days before its effective date. The
FDIC invokes this good cause exception to the 30 day publication
requirement because the statutory amendment \13\ that this rule
implements is effective on July 21, 2012. On that date savings
associations will be prohibited from acquiring or retaining a corporate
debt security that does not meet the creditworthiness standard
established by the FDIC. As a result, until the FDIC establishes that
standard, savings associations would not be able to comply with the
statute. However, in order to allow saving associations sufficient time
to fully develop their processes for making creditworthiness
determinations, the FDIC is allowing institutions until January 1, 2013
to comply with this final rule.
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\13\ Section 939(a) of the Dodd Frank Wall Street Reform and
Consumer Protection Act.
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B. Paperwork Reduction Act (PRA)
No new collection of information pursuant to the PRA (44 U.S.C.
3501 et seq.) is contained in this final rule.
C. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act
(RFA),\14\ the regulatory flexibility analysis otherwise required under
section 604 of the RFA is not required if an agency certifies that the
rule will not have a significant economic impact on a substantial
number of small entities (defined for purposes of the RFA to include
banks with assets less than or equal to $175 million) \15\ and
publishes its certification and a short, explanatory statement in the
Federal Register along with its rule. For the reasons provided below,
the FDIC certifies that the Final Rule does not have a significant
economic impact on a substantial number of small entities. Accordingly,
a regulatory flexibility analysis is not required.
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\14\ 5 U.S.C. 605(b).
\15\ 5 U.S.C. 601 et seq.
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As discussed in this Final Rule, Section 28(d) of the FDI Act, as
amended by Section 939(a) of the Dodd-Frank Act, prohibits federal and
state savings associations from acquiring or retaining a corporate debt
security that does not meet FDIC's standards of creditworthiness. In
accordance with the requirements of amended Section 28(d), this final
rule prohibits savings associations from investing in a corporate debt
security unless the savings association determines that the issuer has
adequate capacity to meet all financial commitments under the security
for the projected life of the security. Consequently, this final rule
only impacts savings associations that hold corporate debt security
investments.
In determining whether this final rule has a significant economic
impact on a substantial number of small savings associations, the FDIC
reviewed the March 2012 Reports of Condition and Income (Call Report)
data to evaluate the number of savings associations with corporate debt
securities. There are 1044 insured state and federal savings
associations. Of these 1044 insured savings associations, 356 reported
investments in other domestic debt securities on the Call Report, where
thrifts report their investment in corporate bonds.\16\ Even assuming
the entire amount of other domestic debt securities listed on the Call
Report represents investment in corporate debt securities, other
domestic debt securities represents only 0.97 percent of the aggregate
total assets of the 1044 savings associations.
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\16\ This line item is where the dollar exposure to corporate
debt securities, along with other forms of investment, should be
slotted according to the Call Report instructions. This line may
also include investments in instruments other than corporate debt
securities, this limited granularity does not permit a precise
understanding of the exposure to corporate debt securities.
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Moreover, only savings associations with total assets of $175
million or less apply for purposes of the RFA analysis. When applying
this additional size criterion, only 80 institutions list other
domestic debt securities in their Call Report. For these smaller
savings institutions, the total amount listed as investment in other
domestic debt securities represents only 0.45 percent of the total
assets. And only eight of these smaller thrifts have concentrations in
other domestic debt securities that exceed 50 percent of their tier 1
capital. Due to the small investment in corporate debt securities on
small savings associations' balance sheets and due to the existing need
to do due diligence relating to any investment in order to assure that
a savings association is operating in a safe and sound manner, the
additional compliance burden does not result in a significant economic
impact on a substantial number of small savings associations.
C. Small Business Regulatory Enforcement Fairness Act (SBREFA)
The Office of Management and Budget has determined that the Final
Rule is not a ``major rule'' within the meaning of the relevant
sections of the Small Business Regulatory Enforcement Fairness Act of
1996 (SBREFA) (5 U.S.C. 801, et seq.). As required by SBREFA, the FDIC
will file the appropriate
[[Page 43155]]
reports with Congress and the Government Accountability Office so that
the final rule may be reviewed.
D. Plain Language
Each Federal banking agency, such as the FDIC, is required to use
plain language in all proposed and final rules published after January
1, 2000. (12 U.S.C. 4809) In addition, in 1998, the President issued a
memorandum directing each agency in the Executive branch, to use plain
language for all new proposed and final rulemaking documents issued on
or after January 1, 1999. The FDIC sought to present the Proposed Rule
in a simple and straightforward manner. The FDIC received no comments
on the use of plain language, and the Final Rule is identical to the
Proposed Rule except for a clarifying revision.
List of Subjects in 12 CFR Part 362
Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, Banking,
Investments, Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation amends part 362 of chapter III of title 12, Code
of Federal Regulations as follows:
PART 362--ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS
ASSOCIATIONS
0
1. The authority citation for part 362 continues to read as follows:
Authority: 12 U.S.C. 1816, 1818, 1819(a) (Tenth), 1828(j),
1828(m), 1828a, 1831a, 1831e, 1831w, 1843(l).
0
2. Amend Sec. 362.9 by revising paragraph (a) to read as follows:
Sec. 362.9 Purpose and scope.
(a) This subpart, along with the notice and application procedures
in subpart H of part 303 of this chapter, implements the provisions of
section 28(a) of the Federal Deposit Insurance Act (12 U.S.C. 1831e(a))
that restrict and prohibit insured state savings associations and their
service corporations from engaging in activities and investments of a
type that are not permissible for a Federal savings association and
their service corporations. This subpart also implements the provision
of section 28(d) of the Federal Deposit Insurance Act (12 U.S.C.
1831e(d)) that restricts state and federal savings associations from
investing in certain corporate debt securities. The phrase ``activity
permissible for a Federal savings association'' means any activity
authorized for a Federal savings association under any statute
including the Home Owners' Loan Act (HOLA) (12 U.S.C. 1464 et seq.), as
well as activities recognized as permissible for a Federal savings
association in regulations issued by the Office of the Comptroller of
the Currency (OCC) or in bulletins, orders or written interpretations
issued by the OCC, or by the former Office of Thrift Supervision until
modified, terminated, set aside, or superseded by the OCC.
* * * * *
0
3. Amend Sec. 362.11 by revising the section heading, removing the
last sentence of paragraph (b)(1), and adding two sentences in its
place to read as follows:
Sec. 362.11 Activities of insured savings associations.
* * * * *
(b) * * *
(1) * * * On and after July 21, 2012, an insured savings
association directly or through a subsidiary (other than, in the case
of a mutual savings association, a subsidiary that is a qualified
affiliate), shall not acquire or retain a corporate debt security
unless the savings association, prior to acquiring the security and
periodically thereafter, determines that the issuer of the security has
adequate capacity to meet all financial commitments under the security
for the projected life of the security. Saving associations have until
January 1, 2013 to come into compliance with this treatment of
corporate debt securities.
* * * * *
By order of the Board of Directors.
Dated at Washington, DC, this 18th day of July, 2012.
Federal Deposit Insurance Corporation
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2012-17860 Filed 7-20-12; 11:15 am]
BILLING CODE 6714-01-P