[Federal Register Volume 77, Number 169 (Thursday, August 30, 2012)]
[Proposed Rules]
[Pages 52887-52975]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17010]



[[Page 52887]]

Vol. 77

Thursday,

No. 169

August 30, 2012

Part III





Department of the Treasury





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Office of the Comptroller of the Currency





12 CFR Part 3





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Federal Reserve System

12 CFR Part 217





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Federal Deposit Insurance Corporation

12 CFR Part 324





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Regulatory Capital Rules: Standardized Approach for Risk-Weighted 
Assets; Market Discipline and Disclosure Requirements; Proposed Rule

Federal Register / Vol. 77 , No. 169 / Thursday, August 30, 2012 / 
Proposed Rules

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket ID OCC-2012-0009]
RIN 1557-AD46

FEDERAL RESERVE SYSTEM

12 CFR Part 217

[Regulations H, Q, and Y; Docket No. R-1442]
RIN 7100 AD 87

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 324

RIN 3064-AD96


Regulatory Capital Rules: Standardized Approach for Risk-Weighted 
Assets; Market Discipline and Disclosure Requirements

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

ACTION: Joint notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board 
of Governors of the Federal Reserve System (Board), and the Federal 
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are 
seeking comment on three notices of proposed rulemaking (NPRs) that 
would revise and replace the agencies' current capital rules.
    This NPR (Standardized Approach NPR) includes proposed changes to 
the agencies' general risk-based capital requirements for determining 
risk-weighted assets (that is, the calculation of the denominator of a 
banking organization's risk-based capital ratios). The proposed changes 
would revise and harmonize the agencies' rules for calculating risk-
weighted assets to enhance risk-sensitivity and address weaknesses 
identified over recent years, including by incorporating certain 
international capital standards of the Basel Committee on Banking 
Supervision (BCBS) set forth in the standardized approach of the 
``International Convergence of Capital Measurement and Capital 
Standards: A Revised Framework'' (Basel II), as revised by the BCBS 
between 2006 and 2009, and other proposals addressed in recent 
consultative papers of the BCBS.
    In this NPR, the agencies also propose alternatives to credit 
ratings for calculating risk-weighted assets for certain assets, 
consistent with section 939A of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (Dodd-Frank Act). The revisions include 
methodologies for determining risk-weighted assets for residential 
mortgages, securitization exposures, and counterparty credit risk. The 
changes in the Standardized Approach NPR are proposed to take effect on 
January 1, 2015, with an option for early adoption. The Standardized 
Approach NPR also would introduce disclosure requirements that would 
apply to top-tier banking organizations domiciled in the United States 
with $50 billion or more in total assets, including disclosures related 
to regulatory capital instruments. In connection with the proposed 
changes to the agencies' capital rules in this NPR, the agencies are 
also seeking comment on the two related NPRs published elsewhere in 
today's Federal Register. The two related NPR's are discussed further 
in the SUPPLEMENTARY INFORMATION.

DATES: Comments must be submitted on or before October 22, 2012.

ADDRESSES: Comments should be directed to:
    OCC: Because paper mail in the Washington, DC area and at the OCC 
is subject to delay, commenters are encouraged to submit comments by 
the Federal eRulemaking Portal or email, if possible. Please use the 
title ``Regulatory Capital Rules: Standardized Approach for Risk-
weighted Assets; Market Discipline and Disclosure Requirements'' to 
facilitate the organization and distribution of the comments. You may 
submit comments by any of the following methods:
     Federal eRulemaking Portal--``regulations.gov'': Go to 
http://www.regulations.gov. Click ``Advanced Search.'' Select 
``Document Type'' of ``Proposed Rule,'' and in ``By Keyword or ID'' 
box, enter Docket ID ``OCC-2012-0009,''and click ``Search.'' If 
proposed rules for more than one agency are listed, in the ``Agency'' 
column, locate the notice of proposed rulemaking for the OCC. Comments 
can be filtered by Agency using the filtering tools on the left side of 
the screen. In the ``Actions'' column, click on ``Submit a Comment'' or 
``Open Docket Folder'' to submit or view public comments and to view 
supporting and related materials for this rulemaking action.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting or viewing public comments, viewing other supporting and 
related materials, and viewing the docket after the close of the 
comment period.
     Email: regs.comments@occ.treas.gov.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3, 
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2012-0009.'' In general, OCC will enter all comments 
received into the docket and publish them on the Regulations.gov Web 
site without change, including any business or personal information 
that you provide such as name and address information, email addresses, 
or phone numbers. Comments received, including attachments and other 
supporting materials, are part of the public record and subject to 
public disclosure. Do not enclose any information in your comment or 
supporting materials that you consider confidential or inappropriate 
for public disclosure.
    You may review comments and other related materials that pertain to 
this notice by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov. Click ``Advanced search.'' Select ``Document 
Type'' of ``Public Submission'' and in ``By Keyword or ID'' box enter 
Docket ID ``OCC-2012-0009,'' and click ``Search.'' If comments from 
more than one agency are listed, the ``Agency'' column will indicate 
which comments were received by the OCC. Comments can be filtered by 
Agency using the filtering tools on the left side of the screen.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 250 E Street SW., Washington, DC 
20219. For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.
    Board: When submitting comments, please consider submitting your 
comments by email or fax because paper mail in the Washington, DC area 
and at the Board may be subject to delay. You may submit comments, 
identified by

[[Page 52889]]

Docket No. R-1442; RIN No. 7100 AD 87, by any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: regs.comments@federalreserve.gov. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Street NW., Washington, DC 20551) between 9 a.m. and 5 p.m. on 
weekdays.
    FDIC: You may submit comments by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW., Washington, DC 20429.
     Hand Delivered/Courier: The guard station at the rear of 
the 550 17th Street Building (located on F Street), on business days 
between 7:00 a.m. and 5:00 p.m.
     Email: comments@FDIC.gov.
     Instructions: Comments submitted must include ``FDIC'' and 
``RIN 3064-AD 96.'' Comments received will be posted without change to 
http://www.FDIC.gov/regulations/laws/federal/propose.html, including 
any personal information provided.

FOR FURTHER INFORMATION CONTACT: OCC: Margot Schwadron, Senior Risk 
Expert, (202) 874-6022, David Elkes, Risk Expert, (202) 874-3846, or 
Mark Ginsberg, Risk Expert, (202) 927-4580, or Ron Shimabukuro, Senior 
Counsel, Patrick Tierney, Counsel, or Carl Kaminski, Senior Attorney, 
Legislative and Regulatory Activities Division, (202) 874-5090, Office 
of the Comptroller of the Currency, 250 E Street SW., Washington, DC 
20219.
    Board: Anna Lee Hewko, Assistant Director, (202) 530-6260, Thomas 
Boemio, Manager, (202) 452-2982, or Constance M. Horsley, Manager, 
(202) 452-5239, Capital and Regulatory Policy, Division of Banking 
Supervision and Regulation; or Benjamin McDonough, Senior Counsel, 
(202) 452-2036, April C. Snyder, Senior Counsel, (202) 452-3099, or 
Christine Graham, Senior Attorney, (202) 452-3005, Legal Division, 
Board of Governors of the Federal Reserve System, 20th and C Streets 
NW., Washington, DC 20551. For the hearing impaired only, 
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
    FDIC: Bobby R. Bean, Associate Director, bbean@fdic.gov; Ryan 
Billingsley, Chief, Capital Policy Section, rbillingsley@fdic.gov; Karl 
Reitz, Chief, Capital Markets Strategies Section, kreitz@fdic.gov, 
Division of Risk Management Supervision; David Riley, Senior Policy 
Analyst, dariley@fdic.gov, Capital Markets Branch, Division of Risk 
Management Supervision, (202) 898-6888; or Mark Handzlik, Counsel, 
mhandzlik@fdic.gov, Michael Phillips, Counsel, mphillips@fdic.gov, Greg 
Feder, Counsel, gfeder@fdic.gov, or Ryan Clougherty, Senior Attorney, 
rclougherty@fdic.gov; Supervision Branch, Legal Division, Federal 
Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 
20429.

SUPPLEMENTARY INFORMATION: The Office of the Comptroller of the 
Currency (OCC), the Board of Governors of the Federal Reserve System 
(Board), and the Federal Deposit Insurance Corporation (FDIC) 
(collectively, the agencies) are seeking comment on three notices of 
proposed rulemaking (NPRs) that would revise and replace the agencies' 
current capital rules.
    This NPR (Standardized Approach NPR) includes proposed changes to 
the agencies' general risk-based capital requirements for determining 
risk-weighted assets (that is, the calculation of the denominator of a 
banking organization's risk-based capital ratios). The proposed changes 
would revise and harmonize the agencies' rules for calculating risk-
weighted assets to enhance risk-sensitivity and address weaknesses 
identified over recent years, including by incorporating certain 
international capital standards of the Basel Committee on Banking 
Supervision (BCBS) set forth in the standardized approach of the 
``International Convergence of Capital Measurement and Capital 
Standards: A Revised Framework'' (Basel II), as revised by the BCBS 
between 2006 and 2009, and other proposals addressed in recent 
consultative papers of the BCBS.
    In this NPR, the agencies also propose alternatives to credit 
ratings for calculating risk-weighted assets for certain assets, 
consistent with section 939A of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (Dodd-Frank Act). The revisions include 
methodologies for determining risk-weighted assets for residential 
mortgages, securitization exposures, and counterparty credit risk. The 
changes in this Standardized Approach NPR are proposed to take effect 
on January 1, 2015, with an option for early adoption. The Standardized 
Approach NPR also would introduce disclosure requirements that would 
apply to top-tier banking organizations domiciled in the United States 
with $50 billion or more in total assets, including disclosures related 
to regulatory capital instruments.
    In connection with the proposed changes to the agencies' capital 
rules in this NPR, the agencies are also seeking comment on the two 
related NPRs published elsewhere in today's Federal Register. In the 
notice titled ``Regulatory Capital Rules: Regulatory Capital, 
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital 
Adequacy, Prompt Corrective Action, and Transition Provisions'' (Basel 
III NPR), the agencies are proposing to revise their minimum risk-based 
capital requirements and criteria for regulatory capital, as well as 
establish a capital conservation buffer framework, consistent with 
Basel III.
    The proposals in this NPR and the Basel III NPR would apply to all 
banking organizations that are currently subject to minimum capital 
requirements (including national banks, state member banks, state 
nonmember banks, state and federal savings associations, and top-tier 
bank holding companies domiciled in the United States not subject to 
the Board's Small Bank Holding Company Policy Statement), as well as 
top-tier savings and loan holding companies domiciled in the United 
States (together, banking organizations).
    In the notice titled ``Regulatory Capital Rules: Advanced 
Approaches Risk-Based Capital Rule; Market Risk Capital Rule,'' 
(Advanced Approaches and Market Risk NPR) the agencies are proposing to 
revise the advanced approaches risk-based capital rules, which are 
applicable only to the largest internationally active banking 
organizations, consistent with Basel III

[[Page 52890]]

and other changes to the BCBS's capital standards.

Table of Contents \1\

    \1\ Sections marked with an asterisk generally would not apply 
to less complex banking organizations.
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I. Introduction and Overview. Overview of the proposed standardized 
approach for calculation of risk-weighted assets and summary of 
proposals contained in two other NPRs.
II. Standardized Approach for Risk-Weighted Assets
    A. Calculation of Standardized Total Risk-weighted Assets. A 
discussion of how a banking organization would determine risk-
weighted asset amounts.
    B. Risk-weighted Assets for General Credit Risk. A description 
of general credit risk exposures and the methodologies for 
calculating risk-weighted assets for such exposures.
    1. Exposures to Sovereigns. A description of the treatment of 
exposures to the U.S. government and other sovereigns.
    2. Exposures to Certain Supranational Entities and Multilateral 
Development Banks. A description of the treatment of exposures to 
Multilateral Development Banks and other supranational entities.
    3. Exposures to Government-sponsored Entities. A description of 
the treatment of exposures to government-sponsored entities (such as 
the Federal National Mortgage Association and the Federal Home Loan 
Mortgage Corporation).
    4. Exposures to Depository Institutions, Foreign Banks, and 
Credit Unions. A description of the treatment for exposures to U.S. 
depository institutions, foreign banks, and credit unions.
    5. Exposures to Public Sector Entities. A description of the 
treatment for exposures to Public Sector Entities, general 
obligation and revenue bonds.
    6. Corporate Exposures. A description of the treatment for 
corporate exposures.
    7. Residential Mortgage Exposures. A description of the more 
risk-sensitive treatment for first- and junior-lien residential 
mortgage exposures.
    8. Pre-sold Construction Loans and Statutory Multifamily 
Mortgages. A description of the treatment for pre-sold construction 
loans and statutory multifamily mortgages.
    9. High Volatility Commercial Real Estate Exposures. A 
description of the requirement to assign higher risk weights to 
certain commercial real estate exposures.
    10. Past Due Exposures. A description of the requirement to 
assign higher risk weights to certain past due loans.
    11. Other Assets. A description of the treatment for exposures 
that are not assigned to specific risk weight categories, including 
cash and gold bullion held by a banking organization.
    C. Off-balance Sheet Items. A discussion of the requirements for 
calculating the exposure amount of an off-balance sheet item.
    D. Over-the-Counter Derivative Contracts*. A discussion of the 
requirements for calculating risk-weighted asset amounts for 
exposures to over-the-counter (OTC) derivative contracts.
    E. Cleared Transactions.
    1. Overview. A discussion of the requirements for calculating 
risk-weighted asset amounts for derivatives and repo-style 
transactions that are cleared through central counterparties and for 
default fund contributions to central counterparties.
    2. Risk-weighted Asset Amount for Clearing Member Clients and 
Clearing Members. A description of the calculation of the trade 
exposure amount and the appropriate risk weight.
    3. Default Fund Contribution*. A description of the risk-based 
capital requirement for default fund contributions of clearing 
members.
    F. Credit Risk Mitigation.
    1. Guarantees and Credit Derivatives
    a. Eligibility Requirements. A description of the eligibility 
requirements for credit risk mitigation, including guarantees and 
credit derivatives.
    b. Substitution Approach. A description of the substitution 
approach for recognizing credit risk mitigation of guarantees and 
credit derivatives.
    c. Maturity Mismatch Haircut. An explanation of the requirement 
for adjusting the exposure amount of a credit risk mitigant to 
reflect any maturity mismatch between a hedged exposure and the 
credit risk mitigant.
    d. Adjustment for Credit Derivatives without Restructuring as a 
Credit Event*. A description of requirements to adjust the notional 
amount of a credit derivative that does not include restructuring as 
a credit event in its governing contracts.
    e. Currency Mismatch Adjustment*. A description of the 
requirement to adjust the notional amount of an eligible guarantee 
or eligible credit derivative that is denominated in a currency 
different from that in which the hedged exposure is denominated.
    f. Multiple Credit Risk Mitigants*. A description of the 
calculation of risk-weighted asset amounts when multiple credit risk 
mitigants cover a single exposure.
    2. Collateralized Transactions. A discussion of options and 
requirements for recognizing collateral credit risk mitigation, 
including eligibility criteria, risk management requirements, and 
methodologies for calculating exposure amount of eligible 
collateral.
    a. Eligible Collateral. A description of eligible collateral, 
including the definition of financial collateral.
    b. Risk Management Guidance for Recognizing Collateral. A 
description of the steps a banking organization should take to 
ensure the eligibility of collateral prior to recognizing the 
collateral for credit risk mitigation purposes.
    c. Simple Approach. A description of the approach to assign a 
risk weight to the collateralized portion of the exposure.
    d. Collateral Haircut Approach*. A description of how a banking 
organization would be permitted to use a collateral haircut approach 
with supervisory haircuts to recognize the risk mitigating effect of 
collateral that secures certain types of transactions.
    e. Standard Supervisory Haircuts*. A description of the standard 
supervisory market price volatility haircuts based on residual 
maturity and exposure type.
    f. Own Estimates of Haircuts*. A description of the qualitative 
and quantitative standards and requirements for a banking 
organization to use internally estimated haircuts.
    g. Simple Value-at-risk*. A description of an alternative that 
the agencies may consider to permit a banking organization estimate 
the exposure amount for transactions subject to certain netting 
agreements using a value-at-risk model.
    h. Internal Models Methodology*. A description of an alternative 
that the agencies may consider to permit a banking organization to 
use the internal models methodology to calculate the exposure amount 
for the counterparty credit exposure for OTC derivatives, eligible 
margin loans, and repo-style transactions.
    G. Unsettled Transactions*. A description of the methodology for 
calculating the risk-weighted asset amount for unsettled delivery-
versus-payment and payment-versus-payment transactions.
    H. Risk-weighted Assets for Securitization Exposures
    1. Overview of the Securitization Framework and Definitions. A 
description of the securitization framework designed to address the 
credit risk of exposures that involve the tranching of the credit 
risk of one or more underlying financial exposures under the 
proposal.
    2. Operational Requirements for Securitization Exposures. A 
description of operational and due diligence requirements for 
securitization exposures and eligibility of clean-up calls.
    a. Due Diligence Requirements. A description of the due 
diligence requirements that a banking organization would have to 
conduct and document prior to acquisition of exposures and 
periodically thereafter.
    b. Operational Requirements for Traditional Securitizations*. A 
description of the operational requirements for traditional 
securitizations.
    c. Operational Requirements for Synthetic Securitizations. A 
discussion of the operational requirements for synthetic 
securitizations.
    d. Clean-Up Calls. A discussion of the definition and 
eligibility of clean-up calls.
    3. Risk-weighted Asset Amounts for Securitization Exposures
    a. Exposure Amount of a Securitization Exposure. A description 
of the proposed methodology for calculating the exposure amount of a 
securitization exposure.

[[Page 52891]]

    b. Gains-On-Sale and Credit-enhancing Interest-only Strips. A 
description of proposed deduction requirements for gains-on-sale and 
credit-enhancing interest-only strips.
    c. Exceptions under the Securitization Framework. A description 
of exceptions to certain requirements under the proposed 
securitization framework.
    d. Overlapping Exposures. A description of the provisions to 
limit the double counting of risks associated with securitization 
exposures.
    e. Servicer Cash Advances. A description of the treatment for 
servicer cash advances.
    f. Implicit Support. A discussion of regulatory consequences 
where a banking organization provides implicit (non-contractual) 
support to a securitization transaction.
    4. Simplified Supervisory Formula Approach*. A discussion of the 
simplified supervisory formula methodology for calculating the risk-
weighted asset amounts of securitization exposures.
    5. Gross-up Approach. A description of the gross-up approach for 
calculating risk-weighted asset amounts for securitization 
exposures.
    6. Alternative Treatments for Certain Types of Securitization 
Exposures*. A description of requirements related to exposures to 
asset-backed commercial paper programs.
    7. Credit Risk Mitigation for Securitization Exposures. A 
discussion of the requirements for recognizing credit risk 
mitigation for securitization exposures.
    8. Nth-to-default Credit Derivatives*. A description of the 
requirements for calculating risk-weighted asset amounts for nth-to-
default credit derivatives.
    I. Equity Exposures. A description of the requirements for 
calculating risk-weighted asset amounts for equity exposures, 
including calculation of exposure amount, recognition of equity 
hedges, and methodologies for assigning risk weights to different 
categories of equity exposures.
    1. Introduction. A description of the treatment for equity 
exposures.
    2. Exposure Measurement. A description of how a banking 
organization would determine the adjusted carrying value for equity 
exposures.
    3. Equity Exposure Risk Weights. A description of how a banking 
organization would determine the risk-weighted asset amount for each 
equity exposure.
    4. Non-significant Equity Exposures. A description of the 
proposed treatment for non-significant equity exposures.
    5. Hedged Transactions*. A description of the proposed treatment 
for hedged transactions.
    6. Measures of Hedge Effectiveness*. A description of the 
measures of hedge effectiveness.
    7. Equity Exposures to Investment Funds
    a. Full Look-through Approach. A description of the proposed 
full look-through approach.
    b. Simple Modified Look-through Approach. A description of the 
simple modified look-through approach.
    c. Alternative Modified Look-through Approach. A description of 
the alternative modified look-through approach.
III. Insurance-Related Activities*. A discussion of the proposed 
treatment for certain instruments and exposures unique to insurance 
underwriting activities.
IV. Market Discipline and Disclosure Requirements*.
    A. Proposed Disclosure Requirements. A discussion of the 
proposed disclosure requirements for top-tier entities with $50 
billion or more in total assets that are not subject to the advanced 
approaches rule.
    B. Frequency of Disclosures. Describes the proposed frequency of 
required disclosures.
    C. Location of Disclosures and Audit Requirements. A description 
of the location of disclosures and audit requirements.
    D. Proprietary and Confidential Information. Describes the 
treatment of proprietary and confidential information as part of the 
proposed disclosure requirements.
    E. Specific Public Disclosure Requirements. A description of the 
specific public disclosure requirements in tables 14.1-14.10 of the 
proposal.
V. List of Acronyms That Appear in the Proposal
VI. Regulatory Flexibility Act Analysis
VII. Paperwork Reduction Act
VIII. Plain Language
IX. OCC Unfunded Mandates Reform Act of 1995 Determination
Addendum 1: Summary of this NPR as it would Generally Apply to 
Community Banking Organizations
Addendum 2: Definitions Used in the Proposal

I. Introduction and Overview

    The Office of the Comptroller of the Currency (OCC), Board of 
Governors of the Federal Reserve System (Board), and the Federal 
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are 
proposing comprehensive revisions to their regulatory capital framework 
through three concurrent notices of proposed rulemaking (NPRs). In this 
NPR (Standardized Approach NPR), the agencies are proposing to revise 
certain aspects of the general risk-based capital requirements that 
address the calculation of risk-weighted assets. The agencies believe 
the proposed changes included in this NPR would both enhance the 
overall risk-sensitivity of the calculation of a banking organization's 
total risk-weighted assets and be consistent with relevant provisions 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act).\2\ Although many of the proposed changes included in this 
NPR are not specifically included in the Basel capital framework, the 
agencies believe that these proposed changes are generally consistent 
with the goals of the international framework.
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    \2\ Public Law 111-203, 124 Stat. 1376 (2010).
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    This NPR contains a standardized approach for determining risk-
weighted assets. This NPR would apply to all banking organizations 
currently subject to minimum capital requirements, including national 
banks, state member banks, state nonmember banks, state and federal 
savings associations, top-tier bank holding companies domiciled in the 
United States not subject to the Board's Small Bank Holding Company 
Policy Statement (12 CFR part 225, appendix C), as well as top-tier 
savings and loan holding companies domiciled in the United States 
(together, banking organizations).\3\ The proposed effective date for 
the provisions of this NPR is January 1, 2015, with an option for early 
adoption.
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    \3\ Small bank holding companies would continue to be subject to 
the Small Bank Holding Company Policy Statement. The proposed rule's 
application to all savings and loan holding companies (including 
small savings and loan holding companies) is consistent with the 
transfer of supervisory responsibilities to the Board and the 
requirements of section 171 of the Dodd-Frank Act. Section 171 of 
the Dodd-Frank Act by its terms does not apply to small bank holding 
companies, but there is no exemption from the requirements of 
section 171 for small savings and loan holding companies. See 12 
U.S.C. 5371.
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    In a separate NPR (Basel III NPR), the agencies are proposing to 
revise their capital regulations to incorporate agreements reached by 
the Basel Committee on Banking Supervision (BCBS) in ``Basel III: A 
Global Regulatory Framework for More Resilient Banks and Banking 
Systems'' (Basel III). The Basel III NPR would revise the definition of 
regulatory capital and minimum capital ratios, establish capital 
buffers, create a supplementary leverage ratio for advanced approach 
banking organizations, and revise the agencies' Prompt Corrective 
Action (PCA) regulations.
    The agencies are proposing in a third NPR (Advanced Approaches and 
Market Risk NPR) to incorporate additional aspects of the Basel III 
framework into the advanced approaches risk-based capital rule 
(advanced approaches rule). Additionally, in the Advanced Approaches 
and Market Risk NPR, the Board proposes to apply the advanced 
approaches rule to savings and loan holding companies, and the Board, 
FDIC, and OCC propose to apply the market risk capital rule (market 
risk rule) to savings and loan holding companies and to state and 
federal

[[Page 52892]]

savings associations that meet the scope requirements of these rules, 
respectively. Thus, the Advanced Approaches and Market Risk NPR is 
applicable only to banking organizations that are or would be subject 
to the advanced approaches rule (advanced approaches banking 
organizations) or the market risk rule, and to savings and loan holding 
companies and state and federal savings associations that would be 
subject to the advanced approaches rule or market risk rule.
    All banking organizations, including organizations subject to the 
advanced approaches rule, should review both the Basel III NPR and the 
Standardized Approach NPR. The requirements proposed in the Basel III 
NPR and the Standardized Approach NPR are proposed to become the 
``generally applicable'' capital requirements for purposes of section 
171 of the Dodd-Frank Act because they would be the capital 
requirements for insured depository institutions under section 38 of 
the Federal Deposit Insurance Act, without regard to asset size or 
foreign financial exposure.\4\
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    \4\ 12 U.S.C. 1831o; 12 CFR part 6, 12 CFR part 165 (OCC); 12 
CFR 208.43 (Board), 12 CFR 325.105, 12 CFR 390.455 (FDIC).
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    The agencies believe that it is important to publish all of the 
proposed capital rules at the same time so that banking organizations 
can evaluate the overall potential impact of the proposals on their 
operations. The proposals are divided into three separate NPRs to 
reflect the distinct objectives of each proposal, to allow interested 
parties to better understand the various aspects of the overall capital 
framework, including which aspects of the proposals would apply to 
which banking organizations, and to help interested parties better 
focus their comments on areas of particular interest. Additionally, the 
agencies believe that separating the proposed requirements into three 
NPRs makes it easier for banking organizations of all sizes to more 
easily understand which proposed changes are related to the agencies' 
objective to improve the quality and increase the quantity of capital 
and which are related to the agencies' objective to enhance the overall 
risk-sensitivity of the calculation of a banking organization's total 
risk-weighted assets. The agencies believe that the proposed changes 
contained in the three NPRs will result in capital requirements that 
will improve institutions' ability to withstand periods of economic 
stress and better reflect their risk profiles. The agencies have 
carefully considered the potential impact of the three NPRs on all 
banking organizations, including community banking organizations, and 
sought to minimize the potential burden of these changes wherever 
possible.
    This NPR proposes new methodologies for determining risk-weighted 
assets in the agencies' general capital rules, incorporating elements 
of the Basel II standardized approach \5\ as modified by the 2009 
``Enhancements to the Basel II Framework'' (2009 Enhancements) \6\ and 
recent consultative papers published by the BCBS. This NPR also 
proposes alternative standards of creditworthiness consistent with 
section 939A of the Dodd-Frank Act.\7\ The proposed revisions in this 
NPR include revisions to recognition of credit risk mitigation, 
including a greater recognition of financial collateral and a wider 
range of eligible guarantors. They also include risk weighting of 
equity exposures and past due loans, operational requirements for 
securitization exposures, more favorable capital treatment for 
derivatives and repo-style transactions cleared through central 
counterparties, and disclosure requirements that would apply to top-
tier banking organizations with $50 billion or more in total assets 
that are not subject to the advanced approaches rule. In addition, the 
proposed risk weights for residential mortgage exposures in this NPR 
enhance risk-sensitivity for capital requirements associated with these 
exposures. Similarly, the proposals in this NPR would require a higher 
risk weighting for certain commercial real estate exposures that 
typically have higher credit risk. The agencies believe these proposals 
would more appropriately align capital requirements with these 
exposures and contribute to the resilience of both individual banking 
organizations and the banking system.
---------------------------------------------------------------------------

    \5\ See BCBS, ``International Convergence of Capital Measurement 
and Capital Standards: A Revised Framework,'' (June 2006), available 
at http://www.bis.org/publ/bcbs128.htm (Basel II).
    \6\ See BCBS, ``Enhancements to the Basel II Framework,'' (July 
2009), available at http://www.bis.org/publ/bcbs157.htm.
    \7\ Dodd-Frank Act, section 939A (15 U.S.C. 78o-7, note).
---------------------------------------------------------------------------

    Some of the proposed changes in this NPR are not specifically 
included in the Basel capital framework. However, the agencies believe 
that these proposed changes are generally consistent with the goals of 
that framework. For example, the Basel capital framework seeks to 
enhance the risk-sensitivity of the international risk-based capital 
requirements by mapping capital requirements for certain exposures to 
credit ratings provided by credit rating agencies. Instead of mapping 
risk weights to credit ratings, the agencies are proposing alternative 
standards of creditworthiness to assign risk weights to certain 
exposures, including exposures to sovereigns, companies, and 
securitization exposures, in a manner consistent with section 939A of 
the Dodd-Frank Act.\8\ These alternative creditworthiness standards and 
risk-based capital requirements have been designed to be consistent 
with safety and soundness while also exhibiting risk-sensitivity to the 
extent possible. Furthermore, these capital requirements are intended 
to be similar to those generated under the Basel framework.
---------------------------------------------------------------------------

    \8\ Section 939A of the Dodd-Frank Act provides that not later 
than 1 year after the date of enactment, each Federal agency shall 
review: (1) Any regulation issued by such agency that requires the 
use of an assessment of the credit-worthiness of a security or money 
market instrument; and (2) any references to or requirements in such 
regulations regarding credit ratings. Section 939A further provides 
that each such agency ``shall modify any such regulations identified 
by the review * * * to remove any reference to or requirement of 
reliance on credit ratings and to substitute in such regulations 
such standard of credit-worthiness as each respective agency shall 
determine as appropriate for such regulations.'' See 15 U.S.C. 78o-7 
note.
---------------------------------------------------------------------------

    Table 1 summarizes key proposed requirements in this NPR and 
illustrates how these changes compare to the agencies' general risk-
based capital rules.\9\ The remaining sections of this notice describe 
in detail each element of the proposal, how the proposal would differ 
from the current general risk-based capital rules, and examples for how 
a banking organization would calculate risk-weighted asset amounts.
---------------------------------------------------------------------------

    \9\ Banking organizations should refer to the Basel III NPR to 
see a complete table of the key provisions of the proposal.

[[Page 52893]]



 Table 1--Key Provisions of the Proposed Requirements as Compared to the
                    General Risk-Based Capital Rules
------------------------------------------------------------------------
  Aspect of proposed requirements            Proposed treatment
------------------------------------------------------------------------
                          Risk-weighted Assets
------------------------------------------------------------------------
Credit exposures to:
    U.S. government and its         Unchanged.
     agencies.
    U.S. government-sponsored
     entities.
    U.S. depository institutions
     and credit unions.
    U.S. public sector entities,
     such as states and
     municipalities (section 32 of
     subpart D).
Credit exposures to:
    Foreign sovereigns............  Introduces a more risk-sensitive
                                     treatment using the Country Risk
                                     Classification measure produced by
                                     the Organization for Economic Co-
                                     operation and Development.
    Foreign banks.................
    Foreign public sector entities
     (section 32 of subpart D).
Corporate exposures (section 32 of  Assigns a 100 percent risk weight to
 subpart D).                         corporate exposures, including
                                     exposures to securities firms.
Residential mortgage exposures      Introduces a more risk-sensitive
 (section 32 of subpart D).          treatment based on several
                                     criteria, including certain loan
                                     characteristics and the loan-to-
                                     value-ratio of the exposure.
High volatility commercial real     Applies a 150 percent risk weight to
 estate exposures (section 32 of     certain credit facilities that
 subpart D).                         finance the acquisition,
                                     development or construction of real
                                     property.
Past due exposures (section 32 of   Applies a 150 percent risk weight to
 subpart D).                         exposures that are not sovereign
                                     exposures or residential mortgage
                                     exposures and that are more than 90
                                     days past due or on nonaccrual.
Securitization exposures (sections  Maintains the gross-up approach for
 41-45 of subpart D).                securitization exposures.
                                    Replaces the current ratings-based
                                     approach with a formula-based
                                     approach for determining a
                                     securitization exposure's risk
                                     weight based on the underlying
                                     assets and exposure's relative
                                     position in the securitization's
                                     structure.
Equity exposures (sections 51-53    Introduces more risk-sensitive
 of subpart D).                      treatment for equity exposures.
Off-balance Sheet Items (section    Revises the measure of the
 33 of subpart D).                   counterparty credit risk of repo-
                                     style transactions.
                                    Raises the credit conversion factor
                                     for most short-term commitments
                                     from zero percent to 20 percent.
Derivative Contracts (section 34    Removes the 50 percent risk weight
 of subpart D).                      cap for derivative contracts.
Cleared Transactions (section 35    Provides preferential capital
 of subpart D).                      requirements for cleared derivative
                                     and repo-style transactions (as
                                     compared to requirements for non-
                                     cleared transactions) with central
                                     counterparties that meet specified
                                     standards. Also requires that a
                                     clearing member of a central
                                     counterparty calculate a capital
                                     requirement for its default fund
                                     contributions to that central
                                     counterparty.
Credit Risk Mitigation (section 36  Provides a more comprehensive
 of subpart D).                      recognition of collateral and
                                     guarantees.
Disclosure Requirements (sections   Introduces qualitative and
 61-63 of subpart D).                quantitative disclosure
                                     requirements, including regarding
                                     regulatory capital instruments, for
                                     banking organizations with total
                                     consolidated assets of $50 billion
                                     or more that are not subject to the
                                     separate advanced approaches
                                     disclosure requirements.
------------------------------------------------------------------------

    This NPR proposes that, beginning on January 1, 2015, a banking 
organization would be required to calculate risk-weighted assets using 
the methodologies described herein. Until then, the banking 
organization may calculate risk-weighted assets using the methodologies 
in the current general risk-based capital rules.
    Some of the proposed requirements in this NPR are not applicable to 
smaller, less complex banking organizations. To assist these banking 
organizations in rapidly identifying the elements of these proposals 
that would apply to them, this NPR and the Basel III NPR provide, as 
addenda to the corresponding preambles, a summary of the proposed 
changes in those NPRs as they would generally apply to smaller, less 
complex banking organizations. This NPR also contains a second addendum 
to the preamble, which directs the reader to the definitions proposed 
under the Basel III NPR because they are applicable to the Standardized 
Approach NPR as well.
    Question 1: The agencies seek comment on the advantages and 
disadvantages of the proposed standardized approach rule as it would 
apply to smaller and less complex banking organizations (community 
banking organizations). What specific changes, if any, to the rule 
would accomplish the agencies' goals of establishing improved risk-
sensitivity and quality of capital in an appropriate manner? For 
example, in which areas might the proposed standardized approach for 
calculating risk-weighted assets include simpler approaches for 
community banking organizations or longer transition periods? Provide 
specific suggestions.
    Question 2: The agencies also seek comment on the advantages and 
disadvantages of allowing certain community banking organizations to 
continue to calculate their risk-weighted assets based on the 
methodology in the current general risk-based capital rules, as 
modified to meet the new Basel III requirements and any changes 
required under U.S. law, and as incorporated into a comprehensive 
regulatory framework.
    For example, under this type of alternative approach, community 
banking organizations would be subject to the proposed new PCA 
thresholds, a capital conservation buffer, and other Basel III 
revisions to the capital framework including the definition of capital, 
as well as any changes related to section 939A of the Dodd-Frank Act.

[[Page 52894]]

As modified with these revisions, community banking organizations would 
continue using most of the same risk weights as under the current 
general risk-based capital rules, including for commercial and 
residential mortgage exposures.
    Under this approach, banking organizations other than community 
banking organizations would use the proposed standardized approach risk 
weights to calculate the denominator of the risk-based capital ratio. 
The agencies request comment on the criteria they should consider when 
determining which banking organizations, if any, should be permitted to 
continue to calculate their risk-weighted assets using the methodology 
in the current general risk-based capital rules (revised as described 
above). Which banking organizations, consistent with section 171 of the 
Dodd-Frank Act, should be required to use the standardized approach? 
\10\ What factors should the agencies consider in making this 
determination?
---------------------------------------------------------------------------

    \10\ Section 171 of the Dodd-Frank Act provides that all banking 
organizations must be subject to minimum capital requirements that 
cannot be less than the ``generally applicable risk-based capital 
rules'' established by the appropriate federal banking agency to 
apply to insured depository institutions under section 38 of the 
Federal Deposit Insurance Act, regardless of total consolidated 
asset size or foreign financial exposure; which shall serve as a 
floor for any capital requirements the agency may require.
---------------------------------------------------------------------------

II. Standardized Approach for Risk-weighted Assets

A. Calculation of Standardized Total Risk-weighted Assets

    Similar to the current general risk-based capital rules, under the 
proposal, a banking organization would calculate its total risk-
weighted assets by adding together its on- and off-balance sheet risk-
weighted asset amounts and making any relevant adjustments to 
incorporate required capital deductions.\11\ Banking organizations 
subject to the market risk rule would be required to supplement their 
total risk-weighted assets as provided by the market risk rule.\12\ 
Risk-weighted asset amounts generally would be determined by assigning 
on-balance sheet assets to broad risk-weight categories according to 
the counterparty, or, if relevant, the guarantor or collateral. 
Similarly, risk-weighted asset amounts for off-balance sheet items 
would be calculated using a two-step process: (1) Multiplying the 
amount of the off-balance sheet exposure by a credit conversion factor 
(CCF) to determine a credit equivalent amount, and (2) assigning the 
credit equivalent amount to a relevant risk-weight category.
---------------------------------------------------------------------------

    \11\ See generally 12 CFR part 3, appendix A, section III; 12 
CFR 167.6 (OCC); 12 CFR parts 208 and 225, appendix A, section III 
(Board); 12 CFR part 325, appendix A, sections II.C and II.D and 12 
CFR 390.466 (FDIC).
    \12\ The proposed rules would incorporate the market risk rule 
into the integrated regulatory framework as subpart F. See the 
Advanced Approaches and Market Risk NPR for further discussion.
---------------------------------------------------------------------------

    A banking organization would determine its standardized total risk-
weighted assets by calculating the sum of: (1) Its risk-weighted assets 
for general credit risk, cleared transactions, default fund 
contributions, unsettled transactions, securitization exposures, and 
equity exposures, each as defined below, plus (ii) market risk-weighted 
assets, if applicable, less (iii) the banking organization's allowance 
for loan and lease losses (ALLL) that is not included in tier 2 capital 
(as described in section 20 of the proposal). The sections below 
describe in more detail how a banking organization would determine the 
risk-weighted asset amounts for its exposures.

B. Risk-weighted Assets for General Credit Risk

    Under this NPR, total risk-weighted assets for general credit risk 
is the sum of the risk-weighted asset amounts as calculated under 
section 31(a) of the proposal. As proposed, general credit risk 
exposures would include a banking organization's on-balance sheet 
exposures, over-the-counter (OTC) derivative contracts, off-balance 
sheet commitments, trade and transaction-related contingencies, 
guarantees, repo-style transactions, financial standby letters of 
credit, forward agreements, or other similar transactions. General 
credit risk exposures would generally exclude unsettled transactions, 
cleared transactions, default fund contributions, securitization 
exposures, and equity exposures, each as the agencies propose to 
define. Section 32 describes the proposed risk weights that would apply 
to sovereign exposures; exposures to certain supranational entities and 
multilateral development banks (MDBs); exposures to government-
sponsored entities (GSEs); exposures to depository institutions, 
foreign banks, and credit unions; exposures to public sector entities 
(PSEs); corporate exposures; residential mortgage exposures; pre-sold 
residential construction loans; statutory multifamily mortgages; high 
volatility commercial real estate (HVCRE) exposures; past due 
exposures; and other assets (including cash, gold bullion, certain 
mortgage servicing assets (MSAs) and deferred tax assets (DTAs)).
    Generally, the exposure amount for the on-balance sheet component 
of an exposure is the banking organization's carrying value for the 
exposure as determined under generally accepted accounting principles 
(GAAP). The exposure amount for an off-balance sheet component of an 
exposure is typically determined by multiplying the notional amount of 
the off-balance sheet component by the appropriate CCF as determined 
under section 33. The exposure amount for an OTC derivative contract or 
cleared transaction that is a derivative would be determined under 
section 34 while exposure amounts for collateralized OTC derivative 
contracts, collateralized cleared transactions that are derivatives, 
repo-style transactions, and eligible margin loans would be determined 
under section 37 of the proposal.
1. Exposures to Sovereigns
    The agencies propose to retain the current rules' risk weights for 
exposures to and claims directly and unconditionally guaranteed by the 
U. S. government or its agencies.\13\ Accordingly, exposures to the U. 
S. government, its central bank, or a U.S. government agency and the 
portion of an exposure that is directly and unconditionally guaranteed 
by the U. S. government, the U.S. central bank, or a U.S. government 
agency would receive a zero percent risk weight.\14\ Consistent with 
the current risk-based capital rules, the portion of a deposit insured 
by the FDIC or the National Credit Union Administration also may be 
assigned a zero percent risk weight. An exposure conditionally 
guaranteed by the U.S. government, its central bank, or a U.S. 
government agency would receive a 20 percent risk weight.\15\
---------------------------------------------------------------------------

    \13\ A U.S. government agency would be defined in the proposal 
as an instrumentality of the U.S. government whose obligations are 
fully and explicitly guaranteed as to the timely payment of 
principal and interest by the full faith and credit of the U.S. 
government.
    \14\ Similar to the current general risk-based capital rules, a 
claim would not be considered unconditionally guaranteed by a 
central government if the validity of the guarantee is dependent 
upon some affirmative action by the holder or a third party. See 12 
CFR part 3, appendix A, section 1(c)(11) and 12 CFR 167.6 (OCC); 12 
CFR parts 208 and 225, appendix A, section III.C.1 (Board); 12 CFR 
part 325, appendix A, section II.C. (footnote 35) and 12 CFR 390.466 
(FDIC).
    \15\ Loss-sharing agreements entered into by the FDIC with 
acquirers of assets from failed institutions are considered 
conditional guarantees for risk-based capital purposes due to 
contractual conditions that acquirers must meet. The guaranteed 
portion of assets subject to a loss-sharing agreement may be 
assigned a 20 percent risk weight. Because the structural 
arrangements for these agreements vary depending on the specific 
terms of each agreement, institutions should consult with their 
primary federal supervisor to determine the appropriate risk-based 
capital treatment for specific loss-sharing agreements.

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

[[Page 52895]]

    The agencies' general risk-based capital rules generally assign 
risk weights to direct exposures to sovereigns and exposures directly 
guaranteed by sovereigns based on whether the sovereign is a member of 
the Organization for Economic Co-operation and Development (OECD) and, 
as applicable, whether the exposure is unconditionally or conditionally 
guaranteed by the sovereign.\16\
---------------------------------------------------------------------------

    \16\ 12 CFR part 3, appendix A, section 3 and 12 CFR 167.6 
(OCC); 12 CFR parts 208 and 225, appendix A, section III.C.1 
(Board); 12 CFR part 325, appendix A, section II.C and 12 CFR 
390.466 (FDIC).
---------------------------------------------------------------------------

    Under the proposal, a sovereign would be defined as a central 
government (including the U.S. government) or an agency, department, 
ministry, or central bank of a central government. The risk weight for 
a sovereign exposure would be determined using OECD Country Risk 
Classifications (CRCs) (the CRC methodology).\17\ The OECD's CRCs are 
an assessment of a country's credit risk, used to set interest rate 
charges for transactions covered by the OECD arrangement on export 
credits.
---------------------------------------------------------------------------

    \17\ For more information on the OECD country risk 
classification methodology, see OECD, ``Country Risk 
Classification,'' available at http://www.oecd.org/document/49/0,3746,en_2649_34169_1901105_1_1_1_1,00.html.
---------------------------------------------------------------------------

    The agencies believe that use of CRCs in the proposal is 
permissible under section 939A of the Dodd-Frank Act and that section 
939A was not intended to apply to assessments of creditworthiness of 
organizations such as the OECD. Section 939A is part of Subtitle C of 
Title IX of the Dodd-Frank Act, which, among other things, enhances 
regulation by the U.S. Securities and Exchange Commission (SEC) of 
credit rating agencies, including Nationally Recognized Statistical 
Rating Organizations (NRSROs) registered with the SEC. Section 939, in 
Subtitle C of Title IX, removes references to credit ratings and NRSROs 
from federal statutes. In the introductory ``findings'' section to 
Subtitle C, which is entitled ``Improvements to the Regulation of 
Credit Ratings Agencies,'' Congress characterized credit rating 
agencies as organizations that play a critical ``gatekeeper'' role in 
the debt markets and perform evaluative and analytical services on 
behalf of clients, and whose activities are fundamentally commercial in 
character.\18\ Furthermore, the legislative history of section 939A 
focuses on the conflicts of interest of credit rating agencies in 
providing credit ratings to their clients, and the problem of 
government ``sanctioning'' of the credit rating agencies' credit 
ratings by having them incorporated into federal regulations. The OECD 
is not a commercial entity that produces credit assessments for fee-
paying clients, nor does it provide the sort of evaluative and 
analytical services as credit rating agencies. Additionally, the 
agencies note that the use of the CRCs is limited in the proposal.
---------------------------------------------------------------------------

    \18\ See Dodd-Frank Act, section 931 (15 U.S.C. 78o-7 note).
---------------------------------------------------------------------------

    The CRC methodology, established in 1999, classifies countries into 
categories based on the application of two basic components: the 
country risk assessment model (CRAM), which is an econometric model 
that produces a quantitative assessment of country credit risk, and the 
qualitative assessment of the CRAM results, which integrates political 
risk and other risk factors not fully captured by the CRAM. The two 
components of the CRC methodology are combined and result in countries 
being classified into one of eight risk categories (0-7), with 
countries assigned to the zero category having the lowest possible risk 
assessment and countries assigned to the 7 category having the highest 
possible risk assessment.
    The OECD regularly updates CRCs for more than 150 countries and 
makes the assessments publicly available on its Web site.\19\ 
Accordingly, the agencies believe that the CRC approach should not 
represent undue burden to banking organizations. The use of the CRC 
methodology is consistent with the Basel II standardized approach, 
which, as an alternative to credit ratings, provides for risk weights 
to be assigned to sovereign exposures according to country risk scores 
provided by export credit agencies.
---------------------------------------------------------------------------

    \19\ See http://www.oecd.org/document/49/0,2340,en_2649_34171_1901105_1_1_1_1,00.html.
---------------------------------------------------------------------------

    The agencies recognize that CRCs have certain limitations. Although 
the OECD has published a general description of the methodology for CRC 
determinations, the methodology is largely principles-based and does 
not provide details regarding the specific information and data 
considered to support a CRC. Additionally, while the OECD reviews 
qualitative factors for each sovereign on a monthly basis, quantitative 
financial and economic information used to assign CRCs is available 
only annually in some cases, and payment performance is updated 
quarterly. Also, OECD-member sovereigns that are defined to be ``high-
income countries'' by the World Bank are assigned a CRC of zero, the 
most favorable classification.\20\ Despite these limitations, the 
agencies consider CRCs to be a reasonable alternative to credit ratings 
for sovereign exposures and the proposed CRC methodology to be more 
granular and risk-sensitive than the current risk-weighting methodology 
based on OECD membership.
---------------------------------------------------------------------------

    \20\ OECD, ``Premium and Related Conditions: Explanation of the 
Premium Rules of the Arrangement on Officially Supported Export 
Credits (the Knaepen Package),'' (July 6, 2004), available at http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=TD/PG(2004)10/FINAL&docLanguage=En.
---------------------------------------------------------------------------

    The agencies also propose to require a banking organization to 
apply a 150 percent risk weight to sovereign exposures immediately upon 
determining that an event of sovereign default has occurred or if an 
event of sovereign default has occurred during the previous five years. 
Sovereign default would be defined as a noncompliance by a sovereign 
with its external debt service obligations or the inability or 
unwillingness of a sovereign government to service an existing loan 
according to its original terms, as evidenced by failure to pay 
principal and interest timely and fully, arrearages, or restructuring. 
A default would include a voluntary or involuntary restructuring that 
results in a sovereign not servicing an existing obligation in 
accordance with the obligation's original terms.
    The agencies are proposing to map risk weights to CRCs in a manner 
consistent with the Basel II standardized approach, which provides risk 
weights for foreign sovereigns based on country risk scores. The 
proposed risk weights for sovereign exposures are set forth in table 2.

         Table 2--Proposed Risk Weights for Sovereign Exposures
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
    0-1.................................................               0
    2...................................................              20
    3...................................................              50
    4-6.................................................             100
    7...................................................             150
No CRC..................................................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    If a banking supervisor in a sovereign jurisdiction allows banking 
organizations in that jurisdiction to apply a lower risk weight to an 
exposure to that sovereign than table 2 provides, a U.S. banking 
organization would be able to assign the lower risk weight to an 
exposure to that sovereign, provided

[[Page 52896]]

the exposure is denominated in the sovereign's currency and the U.S. 
banking organization has at least an equivalent amount of liabilities 
in that foreign currency.
    Question 3: The agencies solicit comment on the proposed 
methodology for risk weighting sovereign exposures. Are there other 
alternative methodologies for risk weighting sovereign exposures that 
would be more appropriate? Provide specific examples and supporting 
data.
2. Exposures to Certain Supranational Entities and Multilateral 
Development Banks
    Under the general risk-based capital rules, exposures to certain 
supranational entities and multilateral development banks (MDB) receive 
a 20 percent risk weight. Consistent with the Basel framework's 
treatment of exposures to supranational entities, the agencies propose 
to apply a zero percent risk weight to exposures to the Bank for 
International Settlements, the European Central Bank, the European 
Commission, and the International Monetary Fund.
    Similarly, the agencies propose to apply a zero percent risk weight 
to exposures to an MDB in accordance with the Basel framework. The 
proposal would define an MDB to include the International Bank for 
Reconstruction and Development, the Multilateral Investment Guarantee 
Agency, 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 primary federal supervisor determines poses comparable credit risk.
    The agencies believe this treatment is appropriate in light of the 
generally high-credit quality of MDBs, their strong shareholder 
support, and a shareholder structure comprised of a significant 
proportion of sovereign entities with strong creditworthiness. 
Exposures to regional development banks and multilateral lending 
institutions that are not covered under the definition of MDB generally 
would be treated as corporate exposures.
3. Exposures to Government-Sponsored Entities
    The agencies are proposing to assign a 20 percent risk weight to 
exposures to GSEs that are not equity exposures and a 100 percent risk 
weight to preferred stock issued by a GSE. While this is consistent 
with the current treatment under the FDIC and Board's rules, it would 
represent a change to the OCC's general risk-based capital rules for 
national banks, which currently allow a banking organization to apply a 
20 percent risk weight to GSE preferred stock.\21\
---------------------------------------------------------------------------

    \21\ 12 CFR part 3, appendix A section 3(a)(2)(vii), and 2 CFR 
part 167.6(a)(1)(ii)(F) (OCC); 12 CFR part 208, and 225, appendix A, 
section III.C.2.b (Board); 12 CFR part 325, appendix A, section 
II.C, and 12 CFR part 390.466(a)(1)(ii)(F) (FDIC). GSEs include the 
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National 
Mortgage Association (FNMA), the Farm Credit System, and the Federal 
Home Loan Bank System.
---------------------------------------------------------------------------

    Although the GSEs currently are in the conservatorship of the 
Federal Housing Finance Agency and receive capital support from the 
U.S. Treasury, they remain privately-owned corporations, and their 
obligations do not have the explicit guarantee of the full faith and 
credit of the United States. The agencies have long held the view that 
obligations of the GSEs should not be accorded the same treatment as 
obligations that carry the explicit guarantee of the U.S. government. 
Therefore, the agencies propose to continue to apply a 20 percent risk 
weight to debt exposures to GSEs.
4. Exposures to Depository Institutions, Foreign Banks, and Credit 
Unions
    The general risk-based capital rules assign a 20 percent risk 
weight to all exposures to U.S. depository institutions and foreign 
banks incorporated in an OECD country. Short-term exposures to foreign 
banks incorporated in a non-OECD country receive a 20 percent risk 
weight and long-term exposures to such entities receive a 100 percent 
risk weight. The Basel II standardized approach allows for risk weights 
for a claim on a bank to be one risk weight category higher than the 
risk weight assigned to the sovereign exposures of a bank's home 
country. As described below, the agencies' propose treatment for 
depository institutions, foreign banks, and credit unions that is 
consistent with this approach.
    Under the proposal, exposures to U.S. depository institutions and 
credit unions would be assigned a 20 percent risk weight.\22\ For 
exposures to foreign banks, the proposal would include risk weights 
based on the CRC applicable to the entity's home country, in accordance 
with table 3.\23\ Specifically, an exposure to a foreign bank would 
receive a risk weight one category higher than the risk weight assigned 
to a direct exposure to the entity's home country, as illustrated in 
table 3. Exposures to a foreign bank in a country that does not have a 
CRC would receive a 100 percent risk weight. A banking organization 
would be required to assign a 150 percent risk weight to an exposure to 
a foreign bank immediately upon determining that an event of sovereign 
default has occurred in the bank's home country, or if an event of 
sovereign default has occurred in the foreign bank's home country 
during the previous five years.
---------------------------------------------------------------------------

    \22\ A depository institution is defined in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(c)(1)). Under this 
proposal, a credit union refers to an insured credit union as 
defined under the Federal Credit Union Act (12 U.S.C. 1752(7)).
    \23\ Foreign bank means a foreign bank as defined in section 
211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2), 
that is not a depository institution. For purposes of this proposal, 
home country means the country where an entity is incorporated, 
chartered, or similarly established.

      Table 3--Proposed Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
    0-1.................................................              20
    2...................................................              50
    3...................................................             100
    4-7.................................................             150
    No CRC..............................................             100
    Sovereign Default...................................             150
------------------------------------------------------------------------

    Exposures to a depository institution or foreign bank that are 
includable in the regulatory capital of that entity would receive a 
risk weight of 100 percent, unless the exposure is (i) An equity 
exposure, (ii) a significant investment in the capital of an 
unconsolidated financial institution in the form of common stock under 
section 22 of the proposal, (iii) an exposure that is deducted from 
regulatory capital under section 22 of the proposal, or (iv) an 
exposure that is subject to the 150 percent risk weight under section 
32 of the proposal.
    In 2011, the BCBS revised certain aspects of the Basel capital 
framework to address potential adverse effects of the framework on 
trade finance in low income countries.\24\ In particular, the

[[Page 52897]]

framework was revised to remove the sovereign floor for trade finance-
related claims on banking organizations under the Basel II standardized 
approach.\25\ The proposed requirements would incorporate this revision 
and permit a banking organization to assign a 20 percent risk weight to 
self-liquidating, trade-related contingent items that arise from the 
movement of goods and that have a maturity of three months or less.
---------------------------------------------------------------------------

    \24\ See BCBS, ``Treatment of Trade Finance under the Basel 
Capital Framework,'' (October 2011), available at http://www.bis.org/publ/bcbs205.pdf. ``Low income country'' is a 
designation used by the World Bank to classify economies (see World 
Bank, ``How We Classify Countries,'' available at http://data.worldbank.org/about/country-classifications).
    \25\ The BCBS indicated that it removed the sovereign floor for 
such exposures to make access to trade finance instruments easier 
and less expensive for low income countries. Absent removal of the 
floor, the risk weight assigned to these exposures, where the 
issuing banking organization is incorporated in a low income 
country, typically would be 100 percent.
---------------------------------------------------------------------------

    The Basel capital framework treats exposures to securities firms 
that meet certain requirements like exposures to depository 
institutions. However, the agencies do not believe that the risk 
profile of these firms is sufficiently similar to depository 
institutions to justify that treatment. Accordingly, the agencies 
propose to require banking organizations to treat exposures to 
securities firms as corporate exposures, which parallels the treatment 
of bank holding companies and savings and loan holding companies, as 
described in section II.B.6 of this preamble.
5. Exposures to Public Sector Entities
    The agencies' general risk-based capital rules assign a 20 percent 
risk weight to general obligations of states and other political 
subdivisions of OECD countries.\26\ However, exposures that rely on 
repayment from specific projects (for example, revenue bonds) are 
assigned a risk weight of 50 percent. Other exposures to state and 
political subdivisions of OECD countries (including industrial revenue 
bonds) and exposures to political subdivisions of non-OECD countries 
receive a risk weight of 100 percent. The risk weights assigned to 
revenue obligations are higher than the risk weight assigned to general 
obligations because repayment of revenue obligations depends on 
specific projects, which present more risk relative to a general 
repayment obligation of a state or political subdivision of a 
sovereign.
---------------------------------------------------------------------------

    \26\ Political subdivisions of the United States would include a 
state, county, city, town or other municipal corporation, a public 
authority, and generally any publicly owned entity that is an 
instrument of a state or municipal corporation.
---------------------------------------------------------------------------

    The agencies are proposing to apply the same risk weights to 
exposures to U.S. states and municipalities as the general risk-based 
capital rules apply. Under the proposal, these political subdivisions 
would be included in the definition of public sector entity PSE. 
Consistent with both the current rules and the Basel capital framework, 
the agencies propose to define a PSE as a state, local authority, or 
other governmental subdivision below the level of a sovereign. This 
definition would not include government-owned commercial companies that 
engage in activities involving trade, commerce, or profit that are 
generally conducted or performed in the private sector.
    Under the proposal, a banking organization would assign a 20 
percent risk weight to a general obligation exposure to a PSE that is 
organized under the laws of the United States or any state or political 
subdivision thereof and a 50 percent risk weight to a revenue 
obligation exposure to such a PSE. A general obligation would be 
defined as a bond or similar obligation that is backed by the full 
faith and credit of a PSE. A revenue obligation would be defined as a 
bond or similar obligation that is an obligation of a PSE, but which 
the PSE is committed to repay with revenues from a specific project 
financed rather than general tax funds.
    Similar to the Basel framework's use of home country risk weights 
to assign a risk weight to a PSE exposure, the agencies propose to 
require a banking organization to apply a risk weight to an exposure to 
a non-U.S. PSE based on (1) the CRC applicable to the PSE's home 
country and (2) whether the exposure is a general obligation or a 
revenue obligation, in accordance with table 4.
    The risk weights assigned to revenue obligations would be higher 
than the risk weights assigned to a general obligation issued by the 
same PSE, as set forth in table 4. Similar to exposures to a foreign 
bank, exposures to a non-U.S. PSE in a country that does not have a CRC 
rating would receive a 100 percent risk weight. Exposures to a non-U.S. 
PSE in a country that has defaulted on any outstanding sovereign 
exposure or that has defaulted on any sovereign exposure during the 
previous five years would receive a 150 percent risk weight. Table 4 
illustrates the proposed risk weights for exposures to non-U.S. PSEs.

  Table 4--Proposed Risk Weights for Exposures to Non-U.S. PSE General
                   Obligations and Revenue Obligations
                              [In percent]
------------------------------------------------------------------------
                                     Risk weight for    Risk weight for
                                    exposures to  non- exposures to  non-
                                    U.S. PSE  general  U.S. PSE  revenue
                                        obligations        obligations
------------------------------------------------------------------------
Sovereign CRC:
    0-1...........................                 20                 50
    2.............................                 50                100
    3.............................                100                100
    4-7...........................                150                150
No CRC............................                100                100
Sovereign Default.................                150                150
------------------------------------------------------------------------

    In certain cases, under the general risk-based capital rules, the 
agencies have allowed a banking organization to rely on the risk weight 
that a foreign banking supervisor allows to assign to PSEs in that 
supervisor's country. Consistent with that approach, the agencies 
propose to allow a banking organization to apply a risk weight to an 
exposure to a non-U.S. PSE according to the risk weight that the 
foreign banking organization supervisor allows to assign to it. In no 
event, however, may the risk weight for an exposure to a non-U.S. PSE 
be lower than the risk weight assigned to direct exposures to that 
PSE's home country.
    Question 4: The agencies request comment on the proposed treatment 
of exposures to PSEs.

[[Page 52898]]

6. Corporate Exposures
    Under the agencies' general risk-based capital rules, credit 
exposures to companies that are not depository institutions or 
securitization vehicles generally are assigned to the 100 percent risk 
weight category. A 20 percent risk weight is assigned to claims on, or 
guaranteed by, a securities firm incorporated in an OECD country, that 
satisfy certain conditions.
    The proposed requirements would be generally consistent with the 
general risk-based capital rules and require banking organizations to 
assign a 100 percent risk weight to all corporate exposures. The 
proposal would define a corporate exposure as an exposure to a company 
that is not an exposure to a sovereign, the Bank for International 
Settlements, the European Central Bank, the European Commission, the 
International Monetary Fund, an MDB, a depository institution, a 
foreign bank, or a credit union, a PSE, a GSE, a residential mortgage 
exposure, a pre-sold construction loan, a statutory multifamily 
mortgage, an HVCRE exposure, a cleared transaction, a default fund 
contribution, a securitization exposure, an equity exposure, or an 
unsettled transaction. In contrast to the agencies' general risk-based 
capital rules, securities firms would be subject to the same treatment 
as corporate exposures.
    The agencies evaluated a number of alternatives to credit ratings 
to provide a more granular risk weight treatment for corporate 
exposures.\27\ However, each of these alternatives was viewed as either 
having significant drawbacks, being too operationally complex, or as 
not being sufficiently developed to be proposed in this NPR.
---------------------------------------------------------------------------

    \27\ See, for example, 76 FR 73526 (Nov. 29, 2011) and 76 FR 
73777 (Nov. 29, 2011).
---------------------------------------------------------------------------

7. Residential Mortgage Exposures
    The general risk-based capital rules assign exposures secured by 
one-to-four family residential properties to either the 50 percent or 
the 100 percent risk-weight category. Exposures secured by a first lien 
on a one-to-four family residential property that meet certain 
prudential underwriting criteria and that are paying according to their 
terms generally receive a 50 percent risk weight.\28\ The Basel II 
standardized approach similarly applies a broad treatment to 
residential mortgages, assigning a risk weight of 35 percent for most 
first-lien residential mortgage exposures that meet certain prudential 
criteria, such as the existence of a substantial margin of additional 
security over the amount of the loan.
---------------------------------------------------------------------------

    \28\ See 12 CFR part 3, appendix A, section 3(c)(iii) and 12 CFR 
part 167.6(a)(1)(iii) (OCC); 12 CFR parts 208 and 225, appendix A, 
section III.C.3 (Board); 12 CFR part 325, appendix A, section II.C.3 
and 12 CFR 390.461 (definition of ``qualifying mortgage loan'') 
(FDIC).
---------------------------------------------------------------------------

    During the recent market turmoil, the U.S. housing market 
experienced significant deterioration and unprecedented levels of 
mortgage loan defaults and home foreclosures. The causes for the 
significant increase in loan defaults and home foreclosures included 
inadequate underwriting standards; the proliferation of high-risk 
mortgage products, such as so-called pay-option adjustable rate 
mortgages, which provide for negative amortization and significant 
payment shock to the borrower; the practice of issuing mortgage loans 
to borrowers with unverified or undocumented income; and a precipitous 
decline in housing prices coupled with a rise in unemployment. Given 
the characteristics of the U.S. residential mortgage market and this 
recent experience, the agencies believe that a wider range of risk 
weights based on key risk factors is more appropriate for the U.S. 
residential mortgage market. Therefore, the agencies are proposing a 
risk-weight framework that is different from both the general risk-
based capital rules and the Basel capital framework.
a. Categorization of Residential Mortgage Exposures; Loan-to-Value.
    The proposed definition of a residential mortgage exposure would be 
an exposure that is primarily secured by a first or subsequent lien on 
one-to-four family residential property (and not a securitization 
exposure, equity exposure, statutory multifamily mortgage, or presold 
construction loan). The definition of residential mortgage exposure 
also would include an exposure that is primarily secured by a first or 
subsequent lien on residential property that is not one-to-four family 
if the original and outstanding amount of the exposure is $1 million or 
less. A first-lien residential mortgage exposure would be a residential 
mortgage exposure secured by a first lien or by first and junior 
lien(s) where no other party holds an intervening lien. A junior-lien 
residential mortgage exposure would be a residential mortgage exposure 
that is not a first-lien residential mortgage exposure.
    The NPR would maintain the current risk-based capital treatment for 
residential mortgage exposures that are guaranteed by the U.S. 
government or its agency. Accordingly, residential mortgage exposures 
that are unconditionally guaranteed by the U.S. government or a U.S. 
agency would receive a zero percent risk weight, and residential 
mortgage exposures that are conditionally guaranteed by the U.S. 
government or a U.S. agency would receive a 20 percent risk weight.
    Under the NPR, a banking organization would divide residential 
mortgage exposures that are not guaranteed by the U.S. government or 
one of its agencies into two categories. The agencies propose to apply 
relatively low risk weights for residential mortgage exposures that do 
not have product features associated with higher credit risk, and 
higher risk weights for nontraditional loans that present greater risk. 
As described further below, the risk weight assigned to a residential 
mortgage exposure will also depend on the loan's loan-to-value ratio.
    The standards for category 1 residential mortgage exposures reflect 
those underwriting and product features that have demonstrated a lower 
risk of default both through supervisory experience and observations 
from the recent foreclosure crisis. Thus, the definition generally 
excludes mortgage products that include terms or other characteristics 
that the agencies have found to be indicative of higher risk. For 
example, the standards include consideration and documentation of a 
borrower's ability to repay, and would exclude certain higher risk 
product features, such as deferral of principal and balloon loans. 
Category 1 residential mortgages also would not include any junior lien 
mortgages. All residential mortgages that would not meet the definition 
of category 1 residential mortgage would be category 2 residential 
mortgages. See section 2 of the proposed rules for the definitions of 
``category 1 residential mortgage'' in the related notice titled 
``Regulatory Capital Rules: Regulatory Capital, Implementation of Basel 
III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition 
Provisions, and Prompt Corrective Action.''
    The agencies believe that the proposed divergence in risk weights 
for category 1 and category 2 residential mortgage exposures 
appropriately reflects differences in risk between mortgages in the two 
categories. Because category 2 residential mortgage exposures generally 
are of higher risk than category 1 residential mortgage exposures, the 
minimum proposed risk weight for a category 2 residential mortgage 
exposure is 100 percent.
    Under the general risk-based capital rules, a banking organization 
must assign a minimum 100 percent risk weight to an exposure secured by 
a junior lien on residential property, unless the banking organization 
also

[[Page 52899]]

holds the first lien and there are no intervening liens. The agencies 
also propose to require a banking organization that holds both a first 
and junior lien on the same property to combine the exposures into one 
first-lien residential mortgage exposure for purposes of determining 
the loan-to-value (LTV) and risk weight for the combined exposure. 
However, a banking organization could only categorize the combined 
exposure as a category 1 residential mortgage exposure if the terms and 
characteristics of both mortgages meet all of the criteria for category 
1 residential mortgage exposures. This requirement would ensure that no 
residential mortgage products associated with higher risk may be 
categorized as category 1 residential mortgage exposures.
    Except as described in the preceding paragraph, under this NPR, a 
banking organization would classify all junior-lien residential 
mortgage exposures as category 2 residential mortgage exposures in 
light of the increased risk associated with junior liens demonstrated 
in the recent foreclosure crisis.
    The proposed risk weighting would depend on not only the mortgage 
exposure's status as a category 1 or category 2 residential mortgage 
exposure, but also on the mortgage exposure's LTV ratio. The amount of 
equity a borrower has in a residential property is highly correlated 
with default risk, and the agencies believe that it is appropriate that 
LTV be an important component in assigning risk weights to residential 
mortgage exposures. However, the agencies stress that the use of LTV 
ratios to assign risk weights to residential mortgage exposures is not 
a substitute for, and does not otherwise release a banking organization 
from, its responsibility to have prudent loan underwriting and risk 
management practices consistent with the size, type, and risk of its 
mortgage business.\29\
---------------------------------------------------------------------------

    \29\ See, for example, ``Interagency Guidance on Nontraditional 
Mortgage Product Risks,'' 71 FR 58609 (Oct. 4, 2006) and ``Statement 
on Subprime Mortgage Lending,'' 72 FR 37569 (July 10, 2007). In 
addition, there is ongoing implementation of certain aspects of the 
mortgage reform initiatives under various sections of the Dodd-Frank 
Act. For example, section 1141 of the Dodd-Frank Act amended the 
Truth in Lending Act to prohibit creditors from making mortgage 
loans without regard to a consumer's repayment ability. See 15 
U.S.C. 1639c.
---------------------------------------------------------------------------

    The agencies are proposing in this NPR to require a banking 
organization to calculate the LTV ratios of a residential mortgage 
exposure as follows. The denominator of the LTV ratio, that is, the 
value of the property, would be equal to the lesser of the actual 
acquisition cost for the property (for a purchase transaction) or the 
estimate of a property's value at the origination of the loan or at the 
time of restructuring or modification. The estimate of value would be 
based on an appraisal or evaluation of the property in conformance with 
the agencies' appraisal regulations \30\ and should conform to the 
``Interagency Appraisal and Evaluation Guideline'' and the ``Real 
Estate Lending Guidelines.'' \31\ If a banking organization's first-
lien residential mortgage exposure consists of both first and junior 
liens on a property, a banking organization would update the estimate 
of value at the origination of the junior-lien mortgage.
---------------------------------------------------------------------------

    \30\ 12 CFR part 34, subpart C (OCC); 12 CFR part 208, subpart E 
and 12 CFR part 225, subpart G (Board); 12 CFR part 323 and 12 CFR 
part 390, subpart X (FDIC).
    \31\ 12 CFR part 34, subpart D and 12 CFR part 160 (OCC); 12 CFR 
part 208, subpart E (Board); 12 CFR part 323 and 12 CFR 390.442 
(FDIC).
---------------------------------------------------------------------------

    The loan amount for a first-lien residential mortgage exposure is 
the unpaid principal balance of the loan unless the first-lien 
residential mortgage exposure was a combination of a first and junior 
lien. In that case, the loan amount would be the sum of the unpaid 
principal balance of the first lien and the maximum contractual 
principal amount of the junior lien. The loan amount of a junior-lien 
residential mortgage exposure is the maximum contractual principal 
amount of the exposure, plus the maximum contractual principal amounts 
of all senior exposures secured by the same residential property on the 
date of origination of the junior-lien residential mortgage exposure.
    As proposed, a banking organization would not calculate a separate 
risk-weighted asset amount for the funded and unfunded portions of a 
residential mortgage exposure. Instead, the proposal would require only 
the calculation of a single LTV ratio representing a combined funded 
and unfunded amount when calculating the LTV ratio. Thus, the loan 
amount of a first-lien residential mortgage exposure would equal the 
funded principal amount (or combined exposures provided there is no 
intervening lien) plus the exposure amount of any unfunded commitment 
(that is, the unfunded amount of the maximum contractual amount of any 
commitment multiplied by the appropriate CCF). The loan amount of a 
junior-lien residential mortgage exposure would equal the sum of: (1) 
The funded principal amount of the exposure, (2) the exposure amount of 
any undrawn commitment associated with the junior-lien exposure, and 
(3) the exposure amount of any senior exposure held by a third party on 
the date of origination of the junior-lien exposure. If a senior 
exposure held by a third party includes an undrawn commitment, such as 
a HELOC or a negative amortization feature, the loan amount for a 
junior-lien residential mortgage exposure would include the maximum 
contractual amount of that commitment.
    The agencies believe that the LTV information should be readily 
available from the mortgage loan documents and thus should not present 
an issue for banking organizations in calculating the risk-based 
capital under the proposed requirements.
    A banking organization would not be able to recognize private 
mortgage insurance (PMI) when calculating the LTV ratio of a 
residential mortgage exposure. The agencies believe that, due to the 
varying degree of financial strength of mortgage providers, it would 
not be prudent to recognize PMI for purposes of the general risk-based 
capital rules.
    Question 5: The agencies solicit comments on all aspects of this 
NPR for determining the risk weights of residential mortgage loans, 
including the use of the LTV ratio to determine the risk-based capital 
treatment. What alternative criteria or approaches to categorizing 
mortgage loans would enable the agencies to appropriately and 
consistently differentiate among the levels of risk inherent in 
different mortgage exposures? For example, should all residential 
mortgages that meet the ``qualified mortgage'' criteria to be 
established for the purposes of the Truth in Lending Act pursuant to 
section 1412 of the Dodd-Frank Act be included in category 1? For 
category 1 residential mortgage exposures with interest rates that 
adjust or reset, would a proposed limit based directly on the amount 
the mortgage payment increases rather than on a change in interest rate 
be more appropriate? Why or why not? Does this proposal appropriately 
address loans with balloon payments and the risk of reverse mortgage 
loans? Why or why not? Provide detailed explanations and supporting 
data wherever possible.
    Question 6: The agencies solicit comment on whether to allow 
banking organizations to recognize mortgage insurance for purposes of 
calculating the LTV ratio of a residential mortgage exposure under the 
standardized approach. What criteria could the agencies use to ensure 
that only financially sound PMI providers are recognized?

[[Page 52900]]

b. Risk Weights for Residential Mortgage Exposures
    As proposed, a banking organization would determine the risk weight 
for a residential mortgage exposure using table 5 based on the loan's 
LTV ratio and whether it is a category 1 or category 2 residential 
mortgage exposure.

    Table 5--Proposed Risk Weights for Residential Mortgage Exposures
------------------------------------------------------------------------
                                     Category 1           Category 2
    Loan-to-value ratio (in         residential          residential
           percent)              mortgage exposure    mortgage exposure
                                    (in percent)         (in percent)
------------------------------------------------------------------------
Less than or equal to 60......                   35                  100
Greater than 60 and less than                    50                  100
 or equal to 80...............
Greater than 80 and less than                    75                  150
 or equal to 90...............
Greater than 90...............                  100                  200
------------------------------------------------------------------------

    As an example risk weight calculation, a category 1 residential 
mortgage loan that has a loan amount of $100,000 and a property value 
of $125,000 at origination would result in an LTV of 80 percent and 
would be assigned a risk weight of 50 percent. If, at the time of 
restructuring the loan at a later date, the loan amount is $92,000 and 
the value of the property is determined to be $110,000, the LTV would 
be 84 percent and the applicable risk weight would be 75 percent.
c. Modified or Restructured Residential Mortgage Exposures
    Under the current general risk-based capital rules, a residential 
mortgage may be assigned to the 50 percent risk weight category only if 
it is performing in accordance with its original terms or not 
restructured. The recent crises and ongoing problems in the housing 
market have demonstrated the profound negative effect foreclosures have 
on homeowners and their communities. Where practicable, modification or 
restructuring of a residential mortgage can be an effective means for a 
borrower to avoid default and foreclosure and for a banking 
organization to reduce risk of loss.
    The agencies have recognized the importance of the prudent use of 
mortgage restructuring and modification in a banking organization's 
risk management and believe that restructuring or modification can 
reduce the risk of a residential mortgage exposure. Therefore, in this 
NPR, the agencies are not proposing to automatically raise the risk 
weight for a residential mortgage exposure if it is restructured or 
modified. Instead, under this NPR, a banking organization would 
categorize a modified or restructured residential mortgage exposure as 
a category 1 or category 2 residential mortgage exposure in accordance 
with the terms and characteristics of the exposure after the 
modification or restructuring.
    Additionally, to ensure that the banking organization applies a 
risk weight to a restructured or modified mortgage that most accurately 
reflects its risk profile, a banking organization could only apply (1) 
a risk weight lower than 100 percent to a category 1 residential 
mortgage exposure or (2) a risk weight lower than 200 percent to a 
category 2 residential mortgage exposure if the banking organization 
updated the LTV ratio of the exposure at the time of the modification 
or restructuring.
    In further recognition of the importance of residential mortgage 
modifications and restructuring, a residential mortgage exposure 
modified or restructured on a permanent or trial basis solely pursuant 
to the U.S. Treasury's Home Affordable Mortgage Program (HAMP) would 
not be restructured or modified under the proposed requirements and 
would receive the risk weight provided in table 5.
    The agencies believe that treating mortgage loans modified pursuant 
to HAMP in this manner is appropriate in light of the special and 
unique incentive features of HAMP, and the fact that the program is 
offered by the U.S. government to achieve the public policy objective 
of promoting sustainable loan modifications for homeowners at risk of 
foreclosure in a way that balances the interests of borrowers, 
servicers, and lenders. The program includes specific debt-to-income 
ratio requirements, which should better ensure the borrower's ability 
to repay the modified loan, and it provides for the U.S. Treasury 
Department to match reductions in monthly payments dollar-for-dollar to 
reduce the borrower's front-end debt-to-income ratio.
    Additionally, the program provides financial incentives for 
servicers and lenders to take actions to reduce the likelihood of 
defaults, as well as for servicers and borrowers designed to help 
borrowers remain current on modified loans. The structure and amount of 
these cash payments align the financial incentives of servicers, 
lenders, and borrowers to encourage and increase the likelihood of 
participating borrowers remaining current on their mortgages. Each of 
these incentives is important to the agencies' determination with 
respect to the appropriate regulatory capital treatment of mortgage 
loans modified under HAMP.
    Question 7: The agencies request comment on whether loan 
modifications made pursuant to federal or state housing programs 
warrant specific provisions in the agencies' risk-based capital 
regulations at all, and if they do what criteria should be considered 
when determining the appropriate risk-based capital treatment for 
modified residential mortgages, given the risk characteristics of loans 
that require modification.
8. Pre-sold Construction Loans and Statutory Multifamily Mortgages
    The general risk-based capital rules assign either a 50 percent or 
a 100 percent risk weight to certain one-to-four family residential 
pre-sold construction loans and to multifamily residential loans, 
consistent with the Resolution Trust Corporation Refinancing, 
Restructuring, and Improvement Act of 1991 (RTCRRI Act).\32\ This NPR 
would maintain this general treatment while clarifying and

[[Page 52901]]

updating the way the general risk-based capital rules define these 
exposures.
---------------------------------------------------------------------------

    \32\ The RTCRRI Act mandates that each agency provide in its 
capital regulations (i) a 50 percent risk weight for certain one-to-
four-family residential pre-sold construction loans and multifamily 
residential loans that meet specific statutory criteria in the 
RTCRRI Act and any other underwriting criteria imposed by the 
agencies, and (ii) a 100 percent risk weight for one-to-four-family 
residential pre-sold construction loans for residences for which the 
purchase contract is cancelled. 12 U.S.C. 1831n, note.
---------------------------------------------------------------------------

    Under this NPR, a pre-sold construction loan would be subject to a 
50 percent risk weight unless the purchase contract is cancelled. This 
NPR would define a pre-sold construction loan as any one-to-four family 
residential construction loan to a builder that meets the requirements 
of section 618(a)(1) or (2) of the RTCRRI Act and the agencies' 
existing regulations. A multifamily mortgage that does not meet the 
proposed definition of a statutory multifamily mortgage would be 
treated as a corporate exposure. The proposed definitions are in 
section 2 of the proposed rules in the related notice titled 
``Regulatory Capital Rules: Regulatory Capital, Implementation of Basel 
III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition 
Provisions, and Prompt Corrective Action.''
9. High Volatility Commercial Real Estate Exposures
    In this NPR, the agencies are including a new risk-based capital 
treatment for certain commercial real estate exposures that currently 
receive a 100 percent risk weight under the general risk-based capital 
rules. Supervisory experience has demonstrated that certain 
acquisition, development, and construction (ADC) loans exposures 
present unique risks for which the agencies believe banking 
organizations should hold additional capital. Accordingly, the agencies 
propose to require banking organizations to assign a 150 percent risk 
weight to any High Volatility Commercial Real Estate Exposure (HVCRE). 
The proposal would define an HVCRE exposure to include any credit 
facility that finances or has financed the acquisition, development, or 
construction (ADC) of real property, unless the facility finances one- 
to four-family residential mortgage property, or commercial real estate 
projects that meet certain prudential criteria, including with respect 
to the LTV ratio and capital contributions or expense contributions of 
the borrower. See the definition of ``high volatility commercial real 
estate exposure'' in section 2 of the proposed rules in the related 
notice entitled ``Regulatory Capital Rules: Regulatory Capital, 
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital 
Adequacy, Transition Provisions, and Prompt Corrective Action''.
    A commercial real estate loan that is not an HVCRE exposure would 
be treated as a corporate exposure.
    Question 8: The agencies solicit comment on the proposed treatment 
for HVCRE exposures.
10. Past Due Exposures
    Under the general risk-based capital rules, the risk weight of a 
loan does not change if the loan becomes past due, with the exception 
of certain residential mortgage loans. The Basel II standardized 
approach provides risk weights ranging from 50 to 150 percent for loans 
that are more than 90 days past due to reflect the increased risk of 
loss. The agencies believe that a higher risk is appropriate for past 
due exposures to reflect the increased risk associated with such 
exposures
    Accordingly, consistent with the Basel capital framework and to 
reflect impaired credit quality of such exposures, the agencies propose 
that a banking organization assign a risk weight of 150 percent to an 
exposure that is not guaranteed or not secured (and that is not a 
sovereign exposure or a residential mortgage exposure) if it is 90 days 
or more past due or on nonaccrual. A banking organization may assign a 
risk weight to the collateralized or guaranteed portion of the past due 
exposure if the collateral, guarantee, or credit derivative meets the 
proposed requirements for recognition described in sections 36 and 37.
    Question 9: The agencies solicit comments on the proposed treatment 
of past due exposures.
11. Other Assets
    In this NPR, the agencies propose to apply the following risk 
weights for exposures not otherwise assigned to a specific risk weight 
category, which are generally consistent with the risk weights in the 
general risk-based capital rules:
    (1) A zero percent risk weight to cash owned and held in all of a 
banking organization's offices or in transit; gold bullion held in the 
banking organization's own vaults, or held in another depository 
institution's vaults on an allocated basis to the extent gold bullion 
assets are offset by gold bullion liabilities; and to exposures that 
arise from the settlement of cash transactions (such as equities, fixed 
income, spot foreign exchange and spot commodities) with a central 
counterparty where there is no assumption of ongoing counterparty 
credit risk by the central counterparty after settlement of the trade 
and associated default fund contributions;
    (2) A 20 percent risk weight to cash items in the process of 
collection; and
    (3) A 100 percent risk weight to all assets not specifically 
assigned a different risk weight under this NPR (other than exposures 
that would be deducted from tier 1 or tier 2 capital).
    In addition, subject to proposed transition arrangements, a banking 
organization would assign:
    (1) A 100 percent risk weight to DTAs arising from temporary 
differences that the banking organization could realize through net 
operating loss carrybacks; and
    (2) A 250 percent risk weight to MSAs and DTAs arising from 
temporary differences that the banking organization could not realize 
through net operating loss carrybacks that are not deducted from common 
equity tier 1 capital pursuant to section 22(d) of the proposal.
    The proposed requirements would provide limited flexibility to 
address situations where exposures of a depository institution holding 
company or nonbank financial company supervised by the Board, that are 
not exposures typically held by depository institutions, do not fit 
wholly within the terms of another risk-weight category. Under the 
proposal, such exposures could be assigned to the risk weight category 
applicable under the capital rules for bank holding companies, provided 
that (1) the depository institution holding company or nonbank 
financial company is not authorized to hold the asset under applicable 
law other than debt previously contracted or similar authority; and (2) 
the risks associated with the asset are substantially similar to the 
risks of assets that are otherwise assigned to a risk weight category 
of less than 100 percent under subpart D of the proposal.

C. Off-balance Sheet Items

    Under this NPR, as under the general risk-based capital rules, a 
banking organization would calculate the exposure amount of an off-
balance sheet item by multiplying the off-balance sheet component, 
which is usually the notional amount, by the applicable credit 
conversion factor (CCF). This treatment would be applied to off-balance 
sheet items, such as commitments, contingent items, guarantees, certain 
repo-style transactions, financial standby letters of credit, and 
forward agreements.
    Also similar to the general risk-based capital rules, a banking 
organization would apply a zero percent CCF to the unused portion of 
commitments that are unconditionally cancelable by the banking 
organization. For purposes of this NPR, a commitment would mean any 
legally binding arrangement that obligates a banking organization to 
extend credit or to purchase assets.

[[Page 52902]]

Unconditionally cancelable would mean a commitment that a banking 
organization may, at any time, with or without cause, refuse to extend 
credit under the commitment (to the extent permitted under applicable 
law). In the case of a residential mortgage exposure that is a line of 
credit, a banking organization would be deemed able to unconditionally 
cancel the commitment if it can, at its option, prohibit additional 
extensions of credit, reduce the credit line, and terminate the 
commitment to the full extent permitted by applicable law. If a banking 
organization provides a commitment that is structured as a syndication, 
it would only be required to calculate the exposure amount for its pro 
rata share of the commitment.
    The agencies propose to increase a CCF from zero percent to 20 
percent for commitments with an original maturity of one year or less 
that are not unconditionally cancelable by a banking organization, as 
consistent with the Basel II standardized approach. The proposed 
requirements would maintain the 20 percent CCF for self-liquidating, 
trade-related contingent items that arise from the movement of goods 
with an original maturity of one year or less.
    As under the general risk-based capital rules, a banking 
organization would apply a 50 percent CCF to commitments with an 
original maturity of more than one year that are not unconditionally 
cancelable by the banking organization; and to transaction-related 
contingent items, including performance bonds, bid bonds, warranties, 
and performance standby letters of credit.
    Under this NPR, a banking organization would be required to apply a 
100 percent CCF to off-balance sheet guarantees, repurchase agreements, 
securities lending or borrowing transactions, financial standby letters 
of credit; forward agreements, and other similar exposures. The off-
balance sheet component of a repurchase agreement would equal the sum 
of the current market values of all positions the banking organization 
has sold subject to repurchase. The off-balance sheet component of a 
securities lending transaction would be the sum of the current market 
values of all positions the banking organization has lent under the 
transaction. For securities borrowing transactions, the off-balance 
sheet component would be the sum of the current market values of all 
non-cash positions the banking organization has posted as collateral 
under the transaction. In certain circumstances, a banking organization 
may instead determine the exposure amount of the transaction as 
described in section II.F.2 of this preamble and section 37 of the 
proposal.
    The calculation of the off-balance sheet component for repurchase 
agreements, and securities lending and borrowing transactions described 
above represents a change to the general risk-based capital treatment 
for such transactions. Under the general risk-based capital rules, 
capital is required for any on-balance sheet exposure that arises from 
a repo-style transaction (that is, a repurchase agreement, reverse 
repurchase agreement, securities lending transaction, and securities 
borrowing transaction). For example, capital is required against the 
cash receivable that a banking organization generates when it borrows a 
security and posts cash collateral to obtain the security. However, a 
banking organization faces counterparty credit risk on a repo-style 
transaction, regardless of whether the transaction generates an on-
balance sheet exposure. Therefore, in contrast to the general risk-
based capital rules, this NPR would require a banking organization to 
hold risk-based capital against all repo-style transactions, regardless 
of whether they generate on-balance sheet exposures, as described in 
section 37 of the proposal.
    Under the general risk-based capital rules, a banking organization 
is subject to a risk-based capital requirement when it provides credit-
enhancing representations and warranties on assets sold or otherwise 
transferred to third parties as such positions are considered recourse 
arrangements.\33\ However, the general risk-based capital rules do not 
impose a risk-based capital requirement on assets sold or transferred 
with representations and warranties that contain (1) Certain early 
default clauses, (2) certain 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. GSE; or (3) warranties that permit the 
return of assets in instances of fraud, misrepresentation, or 
incomplete documentation.\34\
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    \33\ 12 CFR 3, appendix A, section 4(a)(11) and 12 CFR 167.6(b) 
(OCC); 12 CFR parts 208 and 225 appendix A, section III.B.3.a.xii 
(Board); 12 CFR part 325, appendix A, section II.B.5(a) and 12 CFR 
390.466(b) (FDIC).
    \34\ 12 CFR part 3, appendix A, section 4(a)(8) and 12 CFR 
167.6(b) (OCC); 12 CFR part 208, appendix A, section II.B.3.a.ii.1 
and 12 CFR part 225, appendix A, section III.B.3.a.ii.(1) (Board); 
and 12 CFR part 325, appendix A, section II.B.5(a) and 12 CFR part 
390.466(b) (FDIC).
---------------------------------------------------------------------------

    Under this NPR, if a banking organization provides a credit-
enhancing representation or warranty on assets it sold or otherwise 
transferred to third parties, including in cases of early default 
clauses or premium-refund clauses, the banking organization would treat 
such an arrangement as an off-balance sheet guarantee and apply a 100 
percent credit conversion factor (CCF) to the exposure amount. The 
agencies are proposing a different treatment than the one under the 
general risk-based capital rules because the agencies believe that a 
banking organization should hold capital for such exposures while 
credit-enhancing representations and warranties are in place.
    Question 10: The agencies solicit comment on the proposed treatment 
of credit-enhancing representations and warranties.
    The proposed risk-based capital treatment for off-balance sheet 
items is consistent with section 165(k) of the Dodd-Frank Act which 
provides that, in the case of a bank holding company with $50 billion 
or more in total consolidated assets the computation of capital for 
purposes of meeting capital requirements shall take into account any 
off-balance-sheet activities of the company.\35\ The proposal complies 
with the requirements of section 165(k) of the Dodd-Frank Act by 
requiring a bank holding company to hold risk-based capital for its 
off-balance sheet exposures, as described in sections 31, 33, 34 and 35 
of the proposal.
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    \35\ Section 165(k) of the Dodd-Frank Act (12 U.S.C. 5365(k)). 
This section defines an off-balance sheet activity as an existing 
liability of a company that is not currently a balance sheet 
liability, but may become one upon the happening of some future 
event. Such transactions may include direct credit substitutes in 
which a banking organization substitutes its own credit for a third 
party; irrevocable letters of credit; risk participations in 
bankers' acceptances; sale and repurchase agreements; asset sales 
with recourse against the seller; interest rate swaps; credit swaps; 
commodities contracts; forward contracts; securities contracts; and 
such other activities or transactions as the Board may define 
through a rulemaking.
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D. Over-the-counter Derivative Contracts

    In this NPR, the agencies propose generally to retain the treatment 
of over-the-counter (OTC) derivatives provided under the general risk-
based capital rules, which is similar to the current exposure method 
for determining the exposure amount for OTC derivative contracts 
contained in the Basel II standardized approach.\36\ The proposed

[[Page 52903]]

revisions to the treatment of the OTC derivative contracts include an 
updated definition of an OTC derivative contract, a revised conversion 
factor matrix for calculating the potential future exposure (PFE), a 
revision of the criteria for recognizing the netting benefits of 
qualifying master netting agreements and of financial collateral, and 
the removal of the 50 percent risk weight limit for OTC derivative 
contracts.
---------------------------------------------------------------------------

    \36\ The general risk-based capital rules for savings 
associations regarding the calculation of credit equivalent amounts 
for derivative contracts differ from the rules for other banking 
organizations. (See 12 CFR 167(a)(2) (federal savings associations) 
and 12 CFR 390.466(a)(2) (state savings associations)). The savings 
association rules address only interest rate and foreign exchange 
rate contracts and include certain other differences. Accordingly, 
the description of the general risk-based capital rules in this 
preamble primarily reflects the rules applicable to state and 
national banks and bank holding companies.
---------------------------------------------------------------------------

    Under the proposed requirements, as under the general risk-based 
capital rules, a banking organization would be required to hold risk-
based capital for counterparty credit risk for OTC derivative 
contracts. As defined in this NPR, a derivative contract is 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. A derivative contract would include an interest rate, 
exchange rate, equity, or a commodity derivative contract, a credit 
derivative, and any other instrument that poses similar counterparty 
credit risks. Under the proposal, derivative contracts also would 
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. This applies, for example, to 
mortgage-backed securities transactions that the GSEs conduct in the 
To-Be-Announced market.
    An OTC derivative contract would not include a derivative contract 
that is a cleared transaction, which would be subject to a specific 
treatment as described in section II.E of this preamble. OTC derivative 
contracts would, however, include an exposure of a banking organization 
that is a clearing member to its clearing member client where the 
banking organization is either acting as a financial intermediary and 
enters into an offsetting transaction with a central counterparty (CCP) 
or where the banking organization provides a guarantee to the CCP on 
the performance of the client. These transactions may not be treated as 
cleared transactions because the banking organization remains exposed 
directly to the risk of the individual counterparty.
    To determine the risk-weighted asset amount for an OTC derivative 
contract under the proposal, a banking organization would first 
determine its exposure amount for the contract and then apply to that 
amount a risk weight based on the counterparty, eligible guarantor, or 
recognized collateral.
    For a single OTC derivative contract that is not subject to a 
qualifying master netting agreement (as defined further below in this 
section), the exposure amount would be the sum of (1) the banking 
organization's current credit exposure, which would be the greater of 
the mark-to-market value or zero, and (2) PFE, which would be 
calculated by multiplying the notional principal amount of the OTC 
derivative contract by the appropriate conversion factor, in accordance 
with table 6 below.
    Under this NPR, the conversion factor matrix would be revised to 
include the additional categories of OTC derivative contracts as 
illustrated in table 6. For an OTC derivative contract that does not 
fall within one of the specified categories in table 6, the PFE would 
be calculated using the appropriate ``other'' conversion factor.
---------------------------------------------------------------------------

    \37\ For a derivative contract with multiple exchanges of 
principal, the conversion factor is multiplied by the number of 
remaining payments in the derivative contract.
    \38\ For a 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.
    \39\ A banking organization would use the column labeled 
``Credit (investment-grade reference asset)'' for a credit 
derivative whose reference asset is an outstanding unsecured long-
term debt security without credit enhancement that is investment 
grade. A banking organization would use the column labeled ``Credit 
(non-investment-grade reference asset)'' for all other credit 
derivatives.

                                           Table 6--Conversion Factor Matrix for OTC Derivative Contracts \37\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Credit
                                         Interest    Foreign exchange  (investment-grade     Credit (non-                  Precious metals
       Remaining maturity \38\             rate       rate and gold     reference asset)   investment-grade     Equity      (except gold)       Other
                                                                              \39\         reference asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less.....................         0.00               0.01               0.05               0.10         0.06               0.07         0.10
Greater than one year and less than          0.005               0.05               0.05               0.10         0.08               0.07         0.12
 or equal to five years..............
Greater than five years..............        0.015              0.075               0.05               0.10         0.10               0.08         0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For multiple OTC derivative contracts subject to a qualifying 
master netting agreement, the exposure amount would be calculated by 
adding the net current credit exposure and the adjusted sum of the PFE 
amounts for all OTC derivative contracts subject to the qualifying 
master netting agreement. The net current credit exposure would be the 
greater of zero and 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. The adjusted sum of the PFE 
amounts would be calculated as described in section 34(a)(2)(ii) of the 
proposal.
    Under the general risk-based capital rules, a banking organization 
must enter into a bilateral master netting agreement with its 
counterparty and obtain a written and well-reasoned legal opinion of 
the enforceability of the netting agreement for each of its netting 
agreements that cover OTC derivative contracts to recognize the netting 
benefit. Similarly, under this NPR, to recognize netting of multiple 
OTC derivative contracts, the contracts would be required to be subject 
to a qualifying master netting agreement; however, for most 
transactions, a banking organization may rely on sufficient legal 
review instead of an opinion on the enforceability of the netting 
agreement as described below. Under this NPR, a qualifying master 
netting agreement would be defined as any written, legally enforceable 
netting agreement, that creates a single legal obligation for all 
individual transactions covered by the agreement upon an event

[[Page 52904]]

of default (including receivership, insolvency, liquidation, or similar 
proceeding) provided that certain conditions are met. These conditions 
include requirements with respect to the banking organization's right 
to terminate the contract and lien date collateral and meeting certain 
standards with respect to legal review of the agreement to ensure it 
meets the criteria in the definition.
    The legal review must be sufficient so that the banking 
organization may conclude with a well-founded basis that, among other 
things the contract would be found legal, binding, and enforceable 
under the law of the relevant jurisdiction and that the contract meets 
the other requirements of the definition. In some cases, the legal 
review requirement could be met by reasoned reliance on a commissioned 
legal opinion or an in-house counsel analysis. In other cases, for 
example, those involving certain new derivative transactions or 
derivative counterparties in jurisdictions where a banking organization 
has little experience, the banking organization would be expected to 
obtain an explicit, written legal opinion from external or internal 
legal counsel addressing the particular situation. See the definition 
of ``qualifying master netting agreement'' in section 2 of the proposed 
rules in the related notice titled ``Regulatory Capital Rules: 
Regulatory Capital, Implementation of Basel III, Minimum Regulatory 
Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt 
Corrective Action.''
    If an OTC derivative contract is collateralized by financial 
collateral, a banking organization would first determine the exposure 
amount of the OTC derivative contract as described in this section. 
Next, to recognize the credit risk mitigation benefits of the financial 
collateral, a banking organization could use the simple approach for 
collateralized transactions as described in section 37(b) of the 
proposal. Alternatively, if the financial collateral is marked-to-
market on a daily basis and subject to a daily margin maintenance 
requirement, a banking organization could adjust the exposure amount of 
the contract using the collateral haircut approach described in section 
37(c) of the proposal.
    Under this NPR, a banking organization would be required to treat 
an equity derivative contract as an equity exposure and compute its 
risk-weighted asset amount according to the proposed calculation 
requirements described in section 52 (unless the contract is a covered 
position under subpart F of the proposal). If the banking organization 
risk weights a contract under the Simple Risk-Weight Approach described 
in section 52, it may choose not to hold risk-based capital against the 
counterparty risk of the equity contract, so long as it does so for all 
such contracts. Where the OTC equity contracts are subject to a 
qualified master netting agreement, a banking organization would either 
include or exclude all of the contracts from any measure used to 
determine counterparty credit risk exposures. If the banking 
organization is treating an OTC equity derivative contract as a covered 
position under subpart F, it would calculate a risk-based capital 
requirement for counterparty credit risk of the contract under section 
34.
    Similarly, if a banking organization purchases a credit derivative 
that is recognized under section 36 of the proposal as a credit risk 
mitigant for an exposure that is not a covered position under subpart F 
of the proposal, it would not be required to compute a separate 
counterparty credit risk capital requirement for the credit derivative, 
provided it does so consistently for all such credit derivative 
contracts. Further, where these credit derivative contracts are subject 
to a qualifying master netting agreement, the banking organization 
would either include them all or exclude them all from any measure used 
to determine the counterparty credit risk exposure to all relevant 
counterparties for risk-based capital purposes.
    In addition, if a banking organization provides protection through 
a credit derivative that is not a covered position under subpart F of 
the proposal, it would treat the credit derivative as an exposure to 
the underlying reference asset and compute a risk-weighted asset amount 
for the credit derivative under section 32 of the proposal. The banking 
organization would not be required to compute a counterparty credit 
risk capital requirement for the credit derivative, as long as it does 
so consistently and either includes all or excludes all such credit 
derivatives that are subject to a qualifying master netting contract 
from any measure used to determine counterparty credit risk exposure to 
all relevant counterparties for risk-based capital purposes.
    Where the banking organization provides protection through a credit 
derivative treated as a covered position under subpart F of the 
proposal, it would compute a supplemental counterparty credit risk 
capital requirement using an amount determined under section 34 for OTC 
credit derivatives or section 35 for credit derivatives that are 
cleared transactions. In either case, the PFE of the protection 
provider would be capped at the net present value of the amount of 
unpaid premiums.
    Under the general risk-based capital rules, the risk weight applied 
to an OTC derivative contract is limited to 50 percent even if the 
counterparty or guarantor would otherwise receive a higher risk weight. 
Under this NPR, the risk weight for OTC derivative transactions would 
not be subject to any specific ceiling, consistent with the Basel 
capital framework. The agencies believe that as the market for 
derivatives has developed, the types of counterparties acceptable to 
participants have expanded to include counterparties that merit a risk 
weight greater than 50 percent.
    Question 11: The agencies solicit comment on the proposed risk-
based capital treatment for OTC derivatives, including the definition 
of an OTC derivative and the removal of the 50 percent cap on risk 
weighting for OTC derivative contracts.

E. Cleared Transactions

1. Overview
    The BCBS and the agencies support clearing derivative and repo-
style transactions \40\ through a central counterparty (CCP) wherever 
possible in order to promote transparency, multilateral netting, and 
robust risk management practices.\41\
---------------------------------------------------------------------------

    \40\ See section II.F.2d of this preamble for a discussion of 
the proposed definition of a repo-style transaction.
    \41\ See, ``Capitalisation of Banking Organization Exposures to 
Central Counterparties'' (November 2011) (CCP consultative release), 
available at http://www.bis.org/publ/bcbs206.pdf. Once the CCP 
consultative release is finalized, the agencies expect to take into 
account the BCBS revisions and incorporate them into the agencies' 
capital rules through the regular rulemaking process, as 
appropriate.
---------------------------------------------------------------------------

    In general, CCPs help improve the safety and soundness of the 
derivatives market through the multilateral netting of exposures, 
establishment and enforcement of collateral requirements, and promoting 
market transparency. Under Basel II, exposures to a CCP arising from 
cleared transactions, posted collateral, clearing deposits or guaranty 
funds could be assigned an exposure amount of zero. However, when 
developing Basel III, the BCBS recognized that as more transactions 
move to central clearing, the potential for risk concentration and 
systemic risk increases. To address these concerns, the BCBS has sought 
comment on a more risk-sensitive approach for determining a capital 
requirement for a banking organization's exposures to a

[[Page 52905]]

CCP. In addition, to encourage CCPs to maintain strong risk management 
procedures, the BCBS sought comment on lower risk-based capital 
requirements for derivative and repo-style transaction exposures to 
CCPs that meet the standards established by the Committee on Payment 
and Settlement Systems (CPSS) and International Organization of 
Securities Commissions (IOSCO).\42\
---------------------------------------------------------------------------

    \42\ See CPSS, ``Recommendations for Central Counterparties'' 
(November 2004), available at http://www.bis.org/publ/cpss64.pdf?noframes=1.
---------------------------------------------------------------------------

    Consistent with the proposals the Basel Committee has made on these 
issues and the IOSCO standards, the agencies are seeking comment on 
specific risk-based capital requirements for derivative and repo-style 
transactions that are cleared on CCPs designed to incentivize the use 
of CCPs, help reduce counterparty credit risk, and promote strong risk 
management of CCPs to mitigate their potential for systemic risk. In 
contrast to the general risk-based capital rules, which permit a 
banking organization to exclude certain derivative contracts traded on 
an exchange from the risk-based capital calculation, the agencies would 
require a banking organization to hold risk-based capital for an 
outstanding derivative contract or a repo-style transaction that has 
been entered into with all CCPs, including exchanges. Specifically, the 
proposal would define a cleared transaction as an outstanding 
derivative contract or repo-style transaction that a banking 
organization or clearing member has entered into with a central 
counterparty (that is, a transaction that a central counterparty has 
accepted).\43\ Under the proposal, a banking organization would be 
required to hold risk-based capital for all of its cleared 
transactions, whether the banking organization acts as a clearing 
member (defined as a member of, or direct participant in, a CCP that is 
entitled to enter into transactions with the CCP) or a clearing member 
client (defined as a party to a cleared transaction associated with a 
CCP in which a clearing member acts either as a financial intermediary 
with respect to the party or guarantees the performance of the party to 
the CCP).
---------------------------------------------------------------------------

    \43\ For example, the agencies expect that a transaction with a 
derivatives clearing organization (DCO) would meet the proposed 
criteria for a cleared transaction. A DCO is a clearinghouse, 
clearing association, clearing corporation, or similar entity that 
enables each party to an agreement, contract, or transaction to 
substitute, through novation or otherwise, the credit of the DCO for 
the credit of the parties; arranges or provides, on a multilateral 
basis, for the settlement or netting of obligations; or otherwise 
provides clearing services or arrangements that mutualize or 
transfer credit risk among participants. To qualify as a DCO, an 
entity must be registered with the U.S. Commodity Futures Trading 
Commission and comply with all relevant laws and procedures.
---------------------------------------------------------------------------

    Derivative transactions that are not cleared transactions would be 
OTC derivative transactions. In addition, if a transaction submitted to 
a CCP is not accepted by a CCP because the terms of the transaction do 
not match or other operational issues were identified by the CCP, the 
transaction would not meet the definition of a cleared transaction and 
would be an OTC derivative transaction. If the counterparties to the 
transaction resolved the issues and resubmit the transaction, and if it 
is accepted, the transaction could then be a cleared transaction if it 
satisfies all the criteria described above.
    Under the proposal, a cleared transaction would include a 
transaction between a CCP and a clearing member banking organization 
for the banking organization's own account. In addition, it would 
include a transaction between a CCP and a clearing member banking 
organization acting on behalf of its client, and a transaction between 
a client banking organization and a clearing member where the clearing 
member acts on behalf of the banking organization and enters into an 
offsetting transaction with a CCP. A cleared transaction also includes 
one between a clearing member client and a CCP where a clearing member 
banking organization guarantees the performance of the clearing member 
client to the CCP. Transactions must also satisfy additional criteria 
provided in the definition of CCP in the proposed rule text.
    Under the proposal, a cleared transaction would not include an 
exposure of a banking organization that is a clearing member to its 
clearing member client where the banking organization is either acting 
as a financial intermediary and enters into an offsetting transaction 
with a CCP or where the banking organization provides a guarantee to 
the CCP on the performance of the client. Such a transaction would be 
treated as an OTC derivative transaction with the exposure amount 
calculated according to section 34 of the proposal. However, the 
agencies recognize that this treatment may create a disincentive for 
banking organizations to act as intermediaries and provide access to 
CCPs for clients. As a result, the agencies are considering approaches 
that could address this disincentive while at the same time 
appropriately reflect the risks of these transactions. For example, one 
approach would allow banking organizations that are clearing members to 
adjust the exposure amount calculated under section 34 downward by a 
certain percentage or, for advanced approaches banking organizations 
using the internal models method, to adjust the margin period of risk. 
The international discussions are ongoing on this issue and the 
agencies expect to revisit this issue once the Basel capital framework 
is revised. See also the definition of ``cleared transaction'' in 
section 2 of the proposed rules in the related notice titled 
``Regulatory Capital Rules: Regulatory Capital, Implementation of Basel 
III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition 
Provisions, and Prompt Corrective Action.''
    Question 12: The agencies request comment on whether the proposal 
provides an appropriately risk-sensitive treatment of (1) a transaction 
between a banking organization that is a clearing member and its client 
and (2) a clearing member's guarantee of its client's transaction with 
a CCP by treating these exposures as OTC derivative contracts. The 
agencies also request comment on whether the adjustment of the exposure 
amount would address possible disincentives for banking organizations 
that are clearing members to facilitate the clearing of their clients' 
transactions. What other approaches should the agencies consider?
2. Risk-weighted Asset Amount for Clearing Member Clients and Clearing 
Members
    As proposed in this NPR, to determine the risk-weighted asset 
amount for a cleared transaction, a clearing member client or a 
clearing member would multiply the trade exposure amount for the 
cleared transaction by the appropriate risk weight, determined as 
described below. The trade exposure amount would be calculated as 
follows:
    (1) For a derivative contract that is a cleared transaction, the 
trade exposure amount would equal the exposure amount for the 
derivative contract, calculated using the current exposure methodology 
for OTC derivative contracts under section 34 of the proposal, plus the 
fair value of the collateral posted by the clearing member banking 
organization that is held by the CCP in a manner that is not bankruptcy 
remote;\44\ and
---------------------------------------------------------------------------

    \44\ Under this proposal, bankruptcy remote, with respect to 
entity or asset, would mean that the entity or asset would be 
excluded from an insolvent entity's estate in a receivership, 
insolvency, liquidation, or similar proceeding.
---------------------------------------------------------------------------

    (2) For a repo-style transaction that is a cleared transaction, the 
trade exposure amount would equal the exposure amount calculated under 
the collateral

[[Page 52906]]

haircut approach (described in section 37(c) of the proposal) plus the 
fair value of the collateral posted by the clearing member client 
banking organization that is held by the CCP in a manner that is not 
bankruptcy remote.
    The trade exposure amount would not include any collateral posted 
by a clearing member banking organization that is held by a custodian 
in a manner that is bankruptcy remote from the CCP or any collateral 
posted by a clearing member client that is held by a custodian in a 
manner that is bankruptcy remote from the CCP, clearing members and 
other counterparties of the clearing member. In addition to the capital 
requirement for the cleared transaction, the banking organization would 
remain subject to a capital requirement for any collateral provided to 
a CCP, a clearing member, or a custodian in connection with a cleared 
transaction in accordance with section 32.
    Consistent with the Basel capital framework, the agencies propose 
that the risk weight for a cleared transaction depends on whether the 
CCP is a qualifying CCP (QCCP). As proposed, central counterparties 
that are designated financial market utilities (FMUs) and foreign 
entities regulated and supervised in a manner equivalent to designated 
FMUs would be QCCPs. In addition, a central counterparty could be a 
QCCP under the proposal if it was in sound financial condition and met 
certain standards that are consistent with BCBS expectations for QCCPs, 
as set forth in the proposed definition. See the definition of 
``qualified central counterparty'' in section 2 of the proposed rules 
in the related notice titled ``Regulatory Capital Rules: Regulatory 
Capital, Implementation of Basel III, Minimum Regulatory Capital 
Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective 
Action''.
    Under the proposal, a clearing member banking organization would 
apply a 2 percent risk weight to its trade exposure amount with a QCCP. 
A banking organization that is a clearing member client would apply a 2 
percent risk weight to the trade exposure amount only if:
    (1) The collateral posted by the banking organization to the QCCP 
or clearing member is subject to an arrangement that prevents any 
losses to the clearing member due to the joint default or a concurrent 
insolvency, liquidation, or receivership proceeding of the clearing 
member and any other clearing member clients of the clearing member, 
and
    (2) The clearing member client banking organization has conducted 
sufficient legal review to conclude with a well-founded basis (and 
maintains sufficient written documentation of that legal review) that 
in the event of a legal challenge (including one resulting from default 
or a liquidation, insolvency, or receivership proceeding) the relevant 
court and administrative authorities would find the arrangements to be 
legal, valid, binding, and enforceable under the law of the relevant 
jurisdiction.
    The agencies believe that omnibus accounts (that is, accounts that 
are generally set up by clearing entities for non-clearing members) in 
the United States would satisfy these requirements because of the 
protections afforded client accounts under certain regulations of the 
SEC \45\ and CFTC.\46\ If the criteria above are not met, a banking 
organization that is clearing member client would apply a risk weight 
of 4 percent to the trade exposure amount.
---------------------------------------------------------------------------

    \45\ See 15 U.S.C 78aaa-78lll and 17 CFR part 300.
    \46\ See 17 CFR part 190.
---------------------------------------------------------------------------

    For a cleared transaction with a CCP that is not a QCCP, a clearing 
member and a banking organization that is a clearing member client 
would risk weight the trade exposure amount to the CCP according to the 
treatment for the CCP under section 32 of the proposal. In addition, 
collateral posted by a clearing member banking organization that is 
held by a custodian in a manner that is bankruptcy remote from the CCP 
would not be subject to a capital requirement for counterparty credit 
risk. Collateral posted by a clearing member client that is held by a 
custodian in a manner that is bankruptcy remote from the CCP, clearing 
member, and other clearing member clients of the clearing member would 
not be subject to a capital requirement for counterparty credit risk.
3. Default Fund Contribution
    One of the benefits of clearing a transaction through a CCP is the 
protection provided to the CCP clearing members by the margin 
requirements imposed by the CCP, as well as by the CCP members' default 
fund contributions, and the CCP's own capital and contribution to the 
default fund. Default funds make CCPs safer and are an important source 
of collateral in case of counterparty default. However, CCPs 
independently determine default fund contributions from members. The 
BCBS therefore has proposed to establish a risk-sensitive approach for 
risk weighting a banking organization's exposure to a default fund.
    Consistent with the CCP consultative release, the agencies are 
proposing to require a banking organization that is a clearing member 
of a CCP to calculate the risk-weighted asset amount for its default 
fund contributions at least quarterly or more frequently if there is a 
material change, in the opinion of the banking organization or the 
primary federal supervisor, in the financial condition of the CCP. A 
default fund contribution would mean the funds contributed or 
commitments made by a clearing member to a CCP's mutualized loss-
sharing arrangement.\47\ Under this proposal, a banking organization 
would assign a 1,250 percent risk weight to its default fund 
contribution to a CCP that is not a QCCP.
---------------------------------------------------------------------------

    \47\ Default funds are also known as clearing deposits or 
guaranty funds.
---------------------------------------------------------------------------

    As under the CCP consultative release, a banking organization would 
calculate a risk-weighted asset amount for its default fund 
contribution to a QCCP by using a three-step process. The first step is 
to calculate the QCCP's hypothetical capital requirement 
(KCCP), unless the QCCP has already disclosed it. 
KCCP is the capital that a QCCP would be required to hold if 
it were a banking organization, and it is calculated using the current 
exposure methodology for OTC derivatives and recognizing the risk-
mitigating effects of collateral posted by and default fund 
contributions received from the QCCP clearing members.
    As a first step, for purposes of calculating KCCP, the 
agencies are proposing several modifications to the current exposure 
methodology to adjust for certain features that are unique to QCCPs. 
First, a clearing member would be permitted to offset its exposure to a 
QCCP with actual default fund contributions. Second, greater 
recognition of netting would be allowed when calculating 
KCCP. Specifically, the formula used to calculate the 
adjusted sum of the PFE amounts in section 34 (the Anet formula) would 
be changed from Anet = (0.4 x Agross) + (0.6 x NGR x Agross) to Anet = 
(0.3 x Agross) + (0.7 x NGR x Agross).\48\ Third, the risk weight of 
all clearing members would be set at 20 percent, except when a banking 
organization's primary federal supervisor has determined that a higher 
risk weight is appropriate based on the specific characteristics of the 
QCCP and

[[Page 52907]]

its clearing members. Finally, for derivative contracts that are 
options, the PFE amount calculation would be adjusted by multiplying 
the notional principal amount of the derivative contract by the 
appropriate conversion factor and the absolute value of the option's 
delta (that is, the ratio of the change in the value of the derivative 
contract to the corresponding change in the price of the underlying 
asset).
---------------------------------------------------------------------------

    \48\ NGR is defined as the net to gross ratio (that is, the 
ratio of the net current credit exposure to the gross current credit 
exposure). If a banking organization cannot calculate the NGR, the 
banking organization may use a value of 0.30 until March 31, 2013. 
If the CCP does not provide the NGR to the banking organization or 
data needed to calculate the NGR after that date, the CCP no longer 
meets the criteria for a QCCP.
---------------------------------------------------------------------------

    In the second step, KCCP is compared to the funded 
portion of the default fund of a QCCP and the total of all the clearing 
members' capital requirements (Kcm*) is calculated. If the 
total funded default fund of a QCCP is less than KCCP, 
additional capital would be assessed against the shortfall because of 
the small size of the funded portion of the default fund relative to 
KCCP. If the total funded default fund of a QCCP is greater 
than KCCP, but the QCCP's own funded contributions to the 
default fund are less than KCCP (so that the clearing 
members' default fund contributions are required to achieve 
KCCP), the clearing members' default fund contributions up 
to KCCP would be risk-weighted at 100 percent and a 
decreasing capital factor, between 0.16 percent and 1.6 percent, would 
be applied to the clearing members' funded default fund contributions 
above KCCP. If the QCCP's own contribution to the default 
fund is greater than KCCP, then only the decreasing capital 
factor would be applied to the clearing members' default fund 
contributions.
    In the third step, the total of all the clearing members' capital 
requirements (Kcm*) is allocated back to each individual 
clearing member. This allocation is proportional to each clearing 
member's contribution to the default fund but adjusted to reflect the 
impact of two average-size clearing members defaulting as well as to 
account for the concentration of exposure among clearing members.
    Question 13: The agencies are seeking comment on the proposed 
calculation of the risk-based capital for cleared transactions, 
including the proposed risk-based capital requirements for exposures to 
a QCCP. Are there specific types of exposures to certain QCCPs that 
would warrant an alternative risk-based capital approach? Please 
provide a detailed description of such transactions or exposures, the 
mechanics of the alternative risk-based approach, and the supporting 
rationale.

F. Credit Risk Mitigation

    Banking organizations use a number of techniques to mitigate credit 
risks. For example, a banking organization may collateralize exposures 
with first-priority claims, cash or securities; a third party may 
guarantee a loan exposure; a banking organization may buy a credit 
derivative to offset an exposure's credit risk; or a banking 
organization may net exposures with a counterparty under a netting 
agreement. The general risk-based capital rules recognize these 
techniques to some extent. This section describes how a banking 
organization would recognize the risk-mitigation effects of guarantees, 
credit derivatives, and collateral for risk-based capital purposes 
under the proposal. Similar to the general risk-based capital rules, a 
banking organization that is not engaged in complex financial 
activities generally would be able to use a substitution approach to 
recognize the credit risk-mitigation effect of an eligible guarantee 
from an eligible guarantor and the simple approach to recognize the 
effect of collateral.
    To recognize credit risk mitigants, all banking organizations 
should have operational procedures and risk management processes that 
ensure that all documentation used in collateralizing or guaranteeing a 
transaction is legal, valid, binding, and enforceable under applicable 
law in the relevant jurisdictions. A banking organization should 
conduct sufficient legal review to reach a well-founded conclusion that 
the documentation meets this standard as well as conduct additional 
reviews as necessary to ensure continuing enforceability.
    Although the use of credit risk mitigants may reduce or transfer 
credit risk, it simultaneously may increase other risks, including 
operational, liquidity, or market risk. Accordingly, a banking 
organization should employ robust procedures and processes to control 
risks, including roll-off and concentration risks, and monitor the 
implications of using credit risk mitigants for the banking 
organization's overall credit risk profile.
1. Guarantees and Credit Derivatives
a. Eligibility Requirements
    The general risk-based capital rules generally recognize third-
party guarantees provided by central governments, GSEs, PSEs in the 
OECD countries, multilateral lending institutions and regional 
development banking organizations, U.S. depository institutions, 
foreign banks, and qualifying securities firms in OECD countries.\49\ 
Consistent with the Basel capital framework, the agencies propose to 
recognize a wider range of eligible guarantors, including sovereigns, 
the Bank for International Settlements, the International Monetary 
Fund, the European Central Bank, the European Commission, Federal Home 
Loan Banks, Federal Agricultural Mortgage Corporation (Farmer Mac), 
MDBs, depository institutions, bank holding companies, savings and loan 
holding companies, credit unions, and foreign banks. Eligible 
guarantors would also include entities that are not special purpose 
entities that have issued and outstanding unsecured debt securities 
without credit enhancement that are investment grade and that meet 
certain other requirements.\50\ See the definition of ``eligible 
guarantor'' in section 2 of the proposed rules in the related notice 
titled ``Regulatory Capital Rules: Regulatory Capital, Implementation 
of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, 
Transition Provisions, and Prompt Corrective Action.''
---------------------------------------------------------------------------

    \49\ 12 CFR part 3, appendix A and 12 CFR 167.6 (OCC); 12 CFR 
parts 208 and 225, appendix A, section III.B.2 (Board); 12 CFR part 
325, appendix A, section II.B.3 and 12 CFR 390.466 (FDIC).
    \50\ Under the proposal, an exposure would be, ``investment 
grade'' if the entity to which the banking organization is exposed 
through a loan or security, or the reference entity with respect to 
a credit derivative, has adequate capacity to meet financial 
commitments for the projected life of the asset or exposure. Such an 
entity or reference entity has adequate capacity to meet financial 
commitments if the risk of its default is low and the full and 
timely repayment of principal and interest is expected.
---------------------------------------------------------------------------

    Under this NPR, guarantees and credit derivatives would be required 
to meet specific eligibility requirements to be recognized for credit 
risk mitigation purposes. Under the proposal an eligible guarantee 
would be defined as a guarantee from an eligible guarantor that is 
written and meets certain standards and conditions, including with 
respect to its enforceability. For example, an eligible guarantee must 
either be unconditional or a contingent obligation of the U.S. 
government or its agencies (the enforceability of which is dependent on 
some affirmative action on the part of the beneficiary of the guarantee 
or a third party, such as servicing requirements). See the definition 
of ``eligible guarantee'' in section 2 of the proposed rules in the 
related notice titled ``Regulatory Capital Rules: Regulatory Capital, 
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital 
Adequacy, Transition Provisions, and Prompt Corrective Action.''
    An eligible credit derivative would be defined as a credit 
derivative in the form of a credit default swap, nth-to-default swap, 
total return swap, or any other form of credit derivative approved by 
the primary federal supervisor,

[[Page 52908]]

provided that the instrument meets the standards and conditions set 
forth in the proposed definition. See the definition of ``eligible 
credit derivative'' in section 2 of the proposed rules in the related 
notice titled ``Regulatory Capital Rules: Regulatory Capital, 
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital 
Adequacy, Transition Provisions, and Prompt Corrective Action.''
    Under this NPR, a banking organization would be permitted to 
recognize the credit risk mitigation benefits of an eligible credit 
derivative that hedges 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 (1) the reference exposure ranks pari passu with or is 
subordinated to the hedged exposure; and (2) the reference exposure and 
the hedged exposure are 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 
issuer fails to pay under the terms of the hedged exposure.
    When a banking organization has a group of hedged exposures with 
different residual maturities that are covered by a single eligible 
guarantee or eligible credit derivative, a banking organization would 
treat each hedged exposure as if it were fully covered by a separate 
eligible guarantee or eligible credit derivative.
b. Substitution Approach
    Under the proposed substitution approach, if the protection amount 
(as defined below) of an eligible guarantee or eligible credit 
derivative is greater than or equal to the exposure amount of the 
hedged exposure, a banking organization would substitute the risk 
weight applicable to the guarantor or credit derivative protection 
provider for the risk weight assigned to the hedged exposure.
    If the protection amount of the eligible guarantee or eligible 
credit derivative is less than the exposure amount of the hedged 
exposure, a banking organization would treat the hedged exposure as two 
separate exposures (protected and unprotected) to recognize the credit 
risk mitigation benefit of the guarantee or credit derivative. In such 
cases, a banking organization would calculate the risk-weighted asset 
amount for the protected exposure under section 36 (using a risk weight 
applicable to the guarantor or credit derivative protection provider 
and an exposure amount equal to the protection amount of the guarantee 
or credit derivative). The banking organization would calculate its 
risk-weighted asset amount for the unprotected exposure under section 
36 of the proposal (using the risk weight assigned to the exposure and 
an exposure amount equal to the exposure amount of the original hedged 
exposure minus the protection amount of the guarantee or credit 
derivative).
    The protection amount of an eligible guarantee or eligible credit 
derivative would mean the effective notional amount of the guarantee or 
credit derivative (reduced to reflect any currency mismatch, maturity 
mismatch, or lack of restructuring coverage, as described in this 
section below). The effective notional amount for an eligible guarantee 
or eligible credit derivative would be the lesser of the contractual 
notional amount of the credit risk mitigant and the exposure amount of 
the hedged exposure, multiplied by the percentage coverage of the 
credit risk mitigant. For example, the effective notional amount of a 
guarantee that covers, on a pro rata basis, 40 percent of any losses on 
a $100 bond would be $40.
    The following sections addresses credit risk mitigants with 
maturity mismatches, lack of restructuring coverage, currency 
mismatches, and multiple credit risk mitigants. A banking organization 
that is not engaged in complex financial transactions is unlikely to 
have credit risk mitigant with a currency mismatch, maturity mismatch, 
or lack of restructuring coverage, or multiple credit risk mitigants. 
In such a case, a banking organization should refer to section II.F.2 
below which describes the treatment of collateralized transactions.
c. Maturity Mismatch Haircut
    Under the proposed requirements, a banking organization that 
recognizes an eligible guarantee or eligible credit derivative to 
adjust the effective notional amount of the credit risk mitigant to 
reflect any maturity mismatch between the hedged exposure and the 
credit risk mitigant. A maturity mismatch occurs when the residual 
maturity of a credit risk mitigant is less than that of the hedged 
exposure(s).\51\
---------------------------------------------------------------------------

    \51\ As noted above, when a banking organization has a group of 
hedged exposures with different residual maturities that are covered 
by a single eligible guarantee or eligible credit derivative, a 
banking organization would treat each hedged exposure as if it were 
fully covered by a separate eligible guarantee or eligible credit 
derivative. To determine whether any of the hedged exposures has a 
maturity mismatch with the eligible guarantee or credit derivative, 
the banking organization would assess whether the residual maturity 
of the eligible guarantee or eligible credit derivative is less than 
that of the hedged exposure.
---------------------------------------------------------------------------

    The residual maturity of a hedged exposure would be the longest 
possible remaining time before the obligated party of the hedged 
exposure is scheduled to fulfil its obligation on the hedged exposure. 
A banking organization would be required to take into account any 
embedded options that may reduce the term of the credit risk mitigant 
so that the shortest possible residual maturity for the credit risk 
mitigant would be used to determine the potential maturity mismatch. If 
a call is at the discretion of the protection provider, the residual 
maturity of the credit risk mitigant would be at the first call date. 
If the call is at the discretion of the banking organization purchasing 
the protection, but the terms of the arrangement at origination of the 
credit risk mitigant contain a positive incentive for the banking 
organization to call the transaction before contractual maturity, the 
remaining time to the first call date would be the residual maturity of 
the credit risk mitigant. For example, if there is a step-up in the 
cost of credit protection in conjunction with a call feature or if 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 would be the remaining time to the first call date. Under this 
NPR, a banking organization would be permitted to recognize a credit 
risk mitigant with a maturity mismatch only if its original maturity is 
greater than or equal to one year and the residual maturity is greater 
than three months.
    Assuming that the credit risk mitigant may be recognized, a banking 
organization would be required to apply the following adjustment to 
reduce the effective notional amount of the credit risk mitigant: Pm = 
E x [(t-0.25)/(T-0.25)], where:

(1) Pm = effective notional amount of the credit risk mitigant, 
adjusted for maturity mismatch;
(2) E = effective notional amount of the credit risk mitigant;
(3) t = the lesser of T or residual maturity of the credit risk 
mitigant, expressed in years; and
(4) T = the lesser of five or the residual maturity of the hedged 
exposure, expressed in years.
d. Adjustment for Credit Derivatives Without Restructuring as a Credit 
Event
    Under the proposal, a banking organization that seeks to recognize 
an eligible credit derivative that does not include a restructuring of 
the hedged exposure as a credit event under the

[[Page 52909]]

derivative would have to reduce the effective notional amount of the 
credit derivative recognized for credit risk mitigation purposes by 40 
percent. For purposes of the proposed credit risk mitigation framework, 
a restructuring would involve forgiveness or postponement of principal, 
interest, or fees that result in a credit loss event (that is, a 
charge-off, specific provision, or other similar debit to the profit 
and loss account). In these instances, the banking organization would 
be required to apply the following adjustment to reduce 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 a restructuring event (and maturity mismatch, 
if applicable); and
(2) Pm = effective notional amount of the credit risk mitigant 
(adjusted for maturity mismatch, if applicable).
e. Currency Mismatch Adjustment
    Under this proposal, if a banking organization 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 banking organization would apply the following formula 
to the effective notional amount of the guarantee or credit derivative: 
PC = Pr x (1-HFX), where:

(1) Pc = effective notional amount of the credit risk mitigant, 
adjusted for currency mismatch (and maturity mismatch and lack of 
restructuring event, if applicable);
(2) Pr = effective notional amount of the credit risk mitigant 
(adjusted for maturity mismatch and lack of restructuring event, if 
applicable); and
(3) HFX = haircut appropriate for the currency mismatch 
between the credit risk mitigant and the hedged exposure.

    A banking organization would be required to use a standard 
supervisory haircut of 8 percent for HFX (based on a ten-
business-day holding period and daily marking-to-market and 
remargining). Alternatively, a banking organization would be able to 
use internally estimated haircuts of HFX based on a ten-
business-day holding period and daily marking-to-market if the banking 
organization qualifies to use the own-estimates of haircuts in section 
37(c)(4) of the proposal. In either case, the banking organization is 
required to scale the haircuts up using the square root of time formula 
if the banking organization revalues the guarantee or credit derivative 
less frequently than once every 10 business days. The applicable 
haircut (HM) is calculated using the following square root 
of time formula:
[GRAPHIC] [TIFF OMITTED] TP30AU12.006


where TM = equals the greater of 10 or the number of days 
between revaluation.

f. Multiple Credit Risk Mitigants
    If multiple credit risk mitigants (for example, two eligible 
guarantees) cover a single exposure, the agencies propose to permit a 
banking organization disaggregate the exposure into portions covered by 
each credit risk mitigant (for example, the portion covered by each 
guarantee) and calculate separately a risk-based capital requirement 
for each portion, consistent with the Basel capital framework. In 
addition, when credit risk mitigants provided by a single protection 
provider have differing maturities, the mitigants should be subdivided 
into separate layers of protection.
2. Collateralized Transactions
a. Eligible Collateral
    The general risk-based capital rules recognize limited types of 
collateral, such as cash on deposit; securities issued or guaranteed by 
central governments of the OECD countries; securities issued or 
guaranteed by the U.S. government or its agencies; and securities 
issued by certain multilateral development banks.\52\ Given the fact 
that the general risk-based capital rules for collateral are 
restrictive and, in some cases, do not take into account market 
practices, the agencies propose to recognize the credit risk mitigating 
impact of an expanded range of financial collateral, consistent with 
the Basel capital framework.
---------------------------------------------------------------------------

    \52\ The agencies' rules for collateral transactions differ 
somewhat as described in the agencies' joint report to Congress. See 
``Joint Report: Differences in Accounting and Capital Standards 
among the Federal Banking Agencies; Report to Congressional 
Committees,'' 75 FR 47900 (August 9, 2010).
---------------------------------------------------------------------------

    As proposed, financial collateral would mean collateral in the form 
of: (1) Cash on deposit with the banking organization (including cash 
held for the banking organization by a third-party custodian or 
trustee); (2) gold bullion; (3) short- and long-term debt securities 
that are not resecuritization exposures and that are investment grade; 
(4) equity securities that are publicly-traded; (5) convertible bonds 
that are publicly-traded; or (6) money market fund shares and other 
mutual fund shares if a price for the shares is publicly quoted daily. 
With the exception of cash on deposit, the banking organization would 
also be required to have a perfected, first-priority security interest 
or, outside of the United States, the legal equivalent thereof, 
notwithstanding the prior security interest of any custodial agent. A 
banking organization would be permitted to recognize partial 
collateralization of an exposure.
    Under this NPR, a banking organization would be able to recognize 
the risk-mitigating effects of financial collateral using the simple 
approach, described in section II.F.2(c) below, for any exposure where 
the collateral is subject to a collateral agreement for at least the 
life of the exposure; the collateral must be revalued at least every 
six months; and the collateral (other than gold) and the exposure must 
be denominated in the same currency. For repo-style transactions, 
eligible margin loans, collateralized derivative contracts, and single-
product netting sets of such transactions, a banking organization could 
alternatively use the collateral haircut approach described in section 
II.F.2(d) below. A banking organization would be required to use the 
same approach for similar exposures or transactions.
b. Risk Management Guidance for Recognizing Collateral
    Before a banking organization recognizes collateral for credit risk 
mitigation purposes, it should: (1) CONDUCt sufficient legal review to 
ensure, at the inception of the collateralized transaction and on an 
ongoing basis, that all documentation used in the transaction is 
binding on all parties and legally enforceable in all relevant 
jurisdictions; (2) consider the correlation between risk of the 
underlying direct exposure and collateral risk in the transaction; and 
(3) fully take into account the time and cost needed to realize the 
liquidation proceeds and the potential for a decline in collateral 
value over this time period.
    A banking organization also should ensure that the legal mechanism 
under which the collateral is pledged or transferred ensures that the 
banking organization has the right to liquidate or take legal 
possession of the collateral in a timely manner in the event of the 
default, insolvency, or bankruptcy (or other defined credit event) of 
the counterparty and, where applicable, the custodian holding the 
collateral.
    In addition, a banking organization should ensure that it (1) Has 
taken all steps necessary to fulfill any legal requirements to secure 
its interest in the collateral so that it has and maintains an 
enforceable security interest; (2) has set up clear and robust 
procedures to ensure observation of any legal conditions required for 
declaring the default of the borrower and prompt

[[Page 52910]]

liquidation of the collateral in the event of default; (3) has 
established procedures and practices for conservatively estimating, on 
a regular ongoing basis, the fair value of the collateral, taking into 
account factors that could affect that value (for example, the 
liquidity of the market for the collateral and obsolescence or 
deterioration of the collateral); and (4) has in place systems for 
promptly requesting and receiving additional collateral for 
transactions whose terms require maintenance of collateral values at 
specified thresholds.
c. Simple Approach
    Under the proposed simple approach, which is similar to the general 
risk-based capital rules, the collateralized portion of the exposure 
would receive the risk weight applicable to the collateral. The 
collateral would be required to meet the definition of financial 
collateral, provided that a banking organization could recognize any 
collateral for a repo-style transaction that is included in the banking 
organization's Value-at-Risk (VaR)-based measure under the market risk 
capital rule. For repurchase agreements, reverse repurchase agreements, 
and securities lending and borrowing transactions, the collateral would 
be the instruments, gold, and cash that a banking organization has 
borrowed, purchased subject to resale, or taken as collateral from the 
counterparty under the transaction. As noted above, in all cases, (1) 
The terms of the collateral agreement would be required to be equal to 
or greater than the life of the exposure; (2) the banking organization 
would be required to revalue the collateral at least every six months; 
and (3) the collateral (other than gold) and the exposure would be 
required to be denominated in the same currency.
    Generally, the risk weight assigned to the collateralized portion 
of the exposure would be no less than 20 percent. However, the 
collateralized portion of an exposure could be assigned a risk weight 
of less than 20 percent for the following exposures. OTC derivative 
contracts that are marked-to-market on a daily basis and subject to a 
daily margin maintenance agreement, which would receive (1) a zero 
percent risk weight to the extent that they are collateralized by cash 
on deposit, or (2) a 10 percent risk weight to the extent that the 
contracts are collateralized by an exposure to a sovereign or a PSE 
that qualifies for a zero percent risk weight under section 32 of the 
proposal. In addition, a banking organization may assign a zero percent 
risk weight to the collateralized portion of an exposure where the 
financial collateral is cash on deposit; or the financial collateral is 
an exposure to a sovereign that qualifies for a zero percent risk 
weight under section 32 of the proposal, and the banking organization 
has discounted the market value of the collateral by 20 percent.
d. Collateral Haircut Approach
    The agencies would permit a banking organization to use a 
collateral haircut approach with supervisory haircuts or, with prior 
written approval of the primary federal supervisor, its own estimates 
of haircuts to recognize the risk-mitigating effect of financial 
collateral that secures an eligible margin loan, a repo-style 
transaction, collateralized derivative contract, or single-product 
netting set of such transactions, as well as any collateral that 
secures a repo-style transaction that is included in the banking 
organization's VaR-based measure under the market risk capital rule. A 
netting set would refer to a group of transactions with a single 
counterparty that are subject to a qualifying master netting agreement 
or a qualifying cross-product master netting agreement.
    The proposal would define a repo-style transaction as a repurchase 
or reverse repurchase transaction, or a securities borrowing or 
securities lending transaction (including a transaction in which a 
banking organization acts as agent for a customer and indemnifies the 
customer against loss), provided that the transaction meets certain 
standards and conditions, including with respect to its legal status 
and the assets backing the transaction. For example, the transaction 
must be a ``securities contract,'' ``repurchase agreement'' under the 
Bankruptcy Code or a qualified financial contract under certain 
provisions of U.S. banking laws, as specified in the definition. In 
addition, the contract must meet certain enforceability standards and a 
legal review of the contract must be conducted. See the definition of 
``repo-style transaction'' in section 2 of the proposed rules in the 
related notice titled ``Regulatory Capital Rules: Regulatory Capital, 
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital 
Adequacy, Transition Provisions, and Prompt Corrective Action.'':
    Under the proposal, an eligible margin loan would be defined as an 
extension of credit where certain standards and conditions are met, 
including with respect to collateral securing the loan and events of 
default in the agreements governing the loan. See the definition of 
``eligible margin loan'' in section 2 of the proposed rules in the 
related notice titled ``Regulatory Capital Rules: Regulatory Capital, 
Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital 
Adequacy, Transition Provisions, and Prompt Corrective Action.''
    Under the collateral haircut approach, a banking organization would 
determine the exposure amount using standard supervisory haircuts or 
its own estimates of haircuts and risk weight the exposure amount 
according to the counterparty or guarantor if applicable. A banking 
organization would set the exposure amount for an eligible margin loan, 
repo-style transaction, collateralized derivative contract, or a 
netting set of such transactions equal to the greater of zero and the 
sum of the following three quantities:
    (1) The value of the exposure less the value of the collateral. For 
eligible margin loans, repo-style transactions and netting sets 
thereof, the value of the exposure is the sum of the current market 
values of all instruments, gold, and cash the banking organization has 
lent, sold subject to repurchase, or posted as collateral to the 
counterparty under the transaction or netting set. For collateralized 
OTC derivative contracts and netting sets thereof, the value of the 
exposure is the exposure amount that is calculated under section 34 of 
the proposal. The value of the collateral would equal the sum of the 
current market values of all instruments, gold and cash the banking 
organization has borrowed, purchased subject to resale, or taken as 
collateral from the counterparty under the transaction or netting set;
    (2) 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 
banking organization 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 that the banking organization 
has borrowed, purchased subject to resale, or taken as collateral from 
the counterparty) multiplied by the market price volatility haircut 
appropriate to the instrument or gold; and
    (3) The absolute values 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 banking 
organization has lent, sold

[[Page 52911]]

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 banking organization has borrowed, purchased 
subject to resale, or taken as collateral from the counterparty) 
multiplied by the haircut appropriate to the currency mismatch.
    For purposes of the collateral haircut approach, a given instrument 
would include, for example, all securities with a single Committee on 
Uniform Securities Identification Procedures (CUSIP) number and would 
not include securities with different CUSIP numbers, even if issued by 
the same issuer with the same maturity date.
e. Standard Supervisory Haircuts
    Under this NPR, a banking organization would use an 8 percent 
haircut for each currency mismatch and would use the market price 
volatility haircut appropriate to each security as provided in table 7. 
The market price volatility haircuts are based on the ten-business-day 
holding period for eligible margin loans and derivative contracts and 
may be multiplied by the square root of \1/2\ (which equals 0.707107) 
to convert the standard supervisory haircuts to the five-business-day 
minimum holding period for repo-style transactions.

                                           Table 7--Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Haircut (in percents) assigned based on:
                                                           ------------------------------------------------------------------------------   Investment
                                                             Sovereign issuers risk weight under     Non-sovereign issuers risk weight         grade
                     Residual maturity                                Sec.   ----.32 \2\                    under Sec.   ----.32          securitization
                                                           ------------------------------------------------------------------------------  exposures (in
                                                               Zero %     20% or 50%      100%         20%          50%          100%        percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year..............................          0.5          1.0         15.0          1.0          2.0         25.0            4.0
Greater than 1 year and less than or equal to 5 years.....          2.0          3.0         15.0          4.0          6.0         25.0           12.0
Greater than 5 years......................................          4.0          6.0         15.0          8.0         12.0         25.0           24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold                         15.0
Other publicly-traded equities (including convertible bonds)                       25.0
Mutual funds                                                   Highest haircut applicable to any security in
                                                                        which the fund can invest.
Cash collateral held                                                               Zero.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 2 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.

    For example, if a banking organization has extended an eligible 
margin loan of $100 that is collateralized by five-year U.S. Treasury 
notes with a market value of $100, the value of the exposure less the 
value of the collateral would be zero, and the net position in the 
security ($100) times the supervisory haircut (.02) would be $2. There 
is no currency mismatch. Therefore, the exposure amount would be $0 + 
$2 = $2.
    During the financial crisis, many financial institutions 
experienced significant delays in settling or closing out 
collateralized transactions, such as repo-style transactions and 
collateralized OTC derivatives. The assumed holding period for 
collateral in the collateral haircut approach under Basel II proved to 
be inadequate for certain transactions and netting sets and did not 
reflect the difficulties and delays that institutions had when settling 
or liquidating collateral during a period of financial stress.
    Accordingly, consistent with the revised Basel capital framework, 
for netting sets where: (1) The number of trades exceeds 5,000 at any 
time during the quarter; (2) one or more trades involves illiquid 
collateral posted by the counterparty; or (3) the netting set includes 
any OTC derivatives that cannot be easily replaced, this NPR would 
require a banking organization to assume a holding period of 20 
business days for the collateral under the collateral haircut approach. 
When determining whether collateral is illiquid or an OTC derivative 
cannot be easily replaced for these purposes, a banking organization 
should assess whether, during a period of stressed market conditions, 
it could obtain multiple price quotes within two days or less for the 
collateral or OTC derivative that would not move the market or 
represent a market discount (in the case of collateral) or a premium 
(in the case of an OTC derivative).
    If over the two previous quarters more than two margin disputes on 
a netting set have occurred that lasted longer than the holding period, 
then the banking organization would use a holding period for that 
netting set that is at least two times the minimum holding period that 
would otherwise be used for that netting set. Margin disputes may occur 
when the banking organization and its counterparty do not agree on the 
value of collateral or on the eligibility of the collateral provided. 
Margin disputes also can occur when the banking organization and its 
counterparty disagree on the amount of margin that is required, which 
could result from differences in the valuation of a transaction, or 
from errors in the calculation of the net exposure of a portfolio, for 
instance, if a transaction is incorrectly included or excluded from the 
portfolio. In this NPR, the agencies propose to incorporate these 
adjustments to the holding period in the collateral haircut approach. 
However, consistent with the Basel capital framework, a banking 
organization would not be required to adjust the holding period upward 
for cleared transactions.
f. Own Estimates of Haircuts
    In this NPR, the agencies are proposing to allow banking 
organizations to calculate market price volatility and foreign exchange 
volatility using own internal estimates with prior written approval of 
the banking organization's primary federal supervisor. The banking 
organization's primary federal supervisor would base approval to use 
internally estimated haircuts on the satisfaction of certain minimum 
qualitative and quantitative standards, including the requirements that 
a banking organization would: (1) Use a 99th percentile one-tailed 
confidence interval and a minimum five-business-day holding period for 
repo-style transactions and a minimum ten-business-day holding period 
for all other transactions; (2) adjust holding periods upward where and 
as appropriate to take into account the

[[Page 52912]]

illiquidity of an instrument; (3) select a historical observation 
period that reflects a continuous 12-month period of significant 
financial stress appropriate to the banking organization's current 
portfolio; and (4) update its data sets and compute haircuts no less 
frequently than quarterly, as well as any time market prices change 
materially. A banking organization would estimate the volatilities of 
each exposure, the collateral, and foreign exchange rates and not take 
into account the correlations between them.
    Under the proposed requirements, a banking organization would be 
required to have policies and procedures that describe how it 
determines the period of significant financial stress used to calculate 
the bank's own internal estimates, and to be able to provide empirical 
support for the period used. These policies and procedures would 
address (1) how the banking organization links the period of 
significant financial stress used to calculate the own internal 
estimates to the composition and directional bias of the banking 
organization's current portfolio; and (2) the banking organization's 
process for selecting, reviewing, and updating the period of 
significant financial stress used to calculate the own internal 
estimates and for monitoring the appropriateness of the 12-month period 
in light of the bank's current portfolio. The banking organization 
would be required to obtain the prior approval of its primary federal 
supervisor for these policies and procedures and notify its primary 
federal supervisor if the banking organization makes any material 
changes to them. A banking organization's primary federal supervisor 
may require it to use a different period of significant financial 
stress in the calculation of the banking organization's own internal 
estimates.
    Under the proposal, a banking organization would be allowed to use 
internally estimated haircuts for categories of debt securities under 
certain conditions. The banking organization would be allowed to 
calculate internally estimated haircuts for categories of debt 
securities that are investment grade exposures. The haircut for a 
category of securities would have to be representative of the internal 
volatility estimates for securities in that category that the banking 
organization has lent, sold subject to repurchase, posted as 
collateral, borrowed, purchased subject to resale, or taken as 
collateral.
    In determining relevant categories, the banking organization would, 
at a minimum, take into account (1) The type of issuer of the security; 
(2) the investment grade of the security; (3) the maturity of the 
security; and (4) the interest rate sensitivity of the security. A 
banking organization would calculate a separate internally estimated 
haircut for each individual non-investment grade debt security and for 
each individual equity security. In addition, a banking organization 
would estimate a separate currency mismatch haircut for its net 
position in each mismatched currency based on estimated volatilities 
for foreign exchange rates between the mismatched currency and the 
settlement currency where an exposure or collateral (whether in the 
form of cash or securities) is denominated in a currency that differs 
from the settlement currency.
g. Simple Value-at-risk
    Under this NPR, a banking organization would not be permitted to 
use the simple value-at-risk (VaR) to calculate exposure amounts for 
eligible margin loans and repo-style transactions. However, the Basel 
standardized approach does incorporate the simple VaR approach for 
credit risk mitigants. Therefore, the agencies are considering whether 
to implement the simple VaR approach consistent with the requirements 
described below.
    Under the simple VaR approach (which is not included in the NPR), 
with the prior written approval of its primary federal supervisor, a 
banking organization could be allowed to estimate the exposure amount 
for repo-style transactions and eligible margin loans subject to a 
single-product qualifying master netting agreement using a VaR model 
(simple VaR approach). Under the simple VaR approach, a banking 
organization's exposure amount for transactions subject to such a 
netting agreement would be equal to the value of the exposures minus 
the value of the collateral plus a VaR-based estimate of the PFE. The 
value of the exposures would be the sum of the current market values of 
all instruments, gold, and cash the banking organization has lent, sold 
subject to repurchase, or posted as collateral to a counterparty under 
the netting set. The value of the collateral would be the sum of the 
current market values of all instruments, gold, and cash the banking 
organization has borrowed, purchased subject to resale, or taken as 
collateral from a counterparty under the netting set. The VaR-based 
estimate of the PFE would be an estimate of the banking organization's 
maximum exposure on the netting set over a fixed time horizon with a 
high level of confidence.
    To qualify for the simple VaR approach, a banking organization's 
VaR model would have to estimate the banking organization's 99th 
percentile, one-tailed confidence interval for an increase in the value 
of the exposures minus the value of the collateral ([sum]E-[sum]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 banking organization has lent, 
sold subject to repurchase, posted as collateral, borrowed, purchased 
subject to resale, or taken as collateral. The main ongoing 
qualification requirement for using a VaR model is that the banking 
organization would have to validate its VaR model by establishing and 
maintaining a rigorous and regular backtesting regime.
    Question 14: The agencies solicit comments on whether banking 
organizations should be permitted to use the simple VaR to calculate 
exposure amounts for margin lending, and repo-style transactions.
h. Internal Models Methodology
    The advanced approaches rule include an internal models methodology 
for the calculation of the exposure amount for the counterparty credit 
exposure for OTC derivatives, eligible margin loans, and repo-style 
transactions.\53\ This methodology requires a risk model that captures 
counterparty credit risk and estimates the exposure amount at the level 
of a netting set. A banking organization may use the internal models 
methodology for OTC derivatives, eligible margin loans, and repo-style 
transactions. In the companion NPR, the agencies are proposing to 
permit a banking organization subject to the advanced approaches risk-
based capital rules to use the internal models methodology to calculate 
the trade exposure amount for cleared transactions.\54\
---------------------------------------------------------------------------

    \53\ See 72 FR 69288, 69346 (December 7, 2007).
    \54\ The internal models methodology is fully discussed in the 
2007 Federal Register notice of the advanced approaches rule, with 
specific references at: (1) 72 FR 69346-69349 and 69302-69321); (2) 
section 22(c) and other paragraphs in section 22 of the common rule 
text (at 72 FR 69413-69416; sections 22 (a)(2) and (3), (i), (j), 
and (k) (these sections establish the qualification requirements for 
the advanced systems in general and therefore would apply to the 
expected positive exposure modeling approach as part of the internal 
models methodology); (3) sections 32(c) and (d) of the common rule 
text (at 72 FR 69413-69416); (4) applicable definitions in section 2 
of the common rule text (at 72 FR 69397-69405); and (5) applicable 
disclosure requirements in Tables 11.6 and 11.7 of the common rule 
text (at 72 FR 69443). In addition, the Advanced Approaches and 
Market Risk NPR proposes modifications to the internal models 
methodology.

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

[[Page 52913]]

    Although the internal models methodology is not part of this 
proposal, the Basel standardized approach does incorporate an internal 
models methodology for credit risk mitigants. Therefore, the agencies 
are considering whether to implement the internal models methodology in 
a final rule consistent with the requirements in the advanced 
approaches rule as modified by the companion NPR.
    Question 15: The agencies request comment on the appropriateness of 
including the internal models methodology for calculating exposure 
amounts for OTC derivatives, eligible margin loans, repo-style 
transactions and cleared transactions for all banking organizations. 
For purposes of reviewing the internal models methodology in the 
advanced approaches rule, commenters should substitute the term 
``exposure amount'' for the term ``exposure at default'' and ``EAD'' 
each time these terms appear in the advanced approaches rule.)

G. Unsettled Transactions

    In this NPR, the agencies propose to provide for a separate risk-
based capital requirement for transactions involving securities, 
foreign exchange instruments, and commodities that have a risk of 
delayed settlement or delivery. The proposed capital requirement would 
not, however, apply to certain types of transactions, including: (1) 
Cleared transactions that are marked-to-market daily and subject to 
daily receipt and payment of variation margin; (2) repo-style 
transactions, including unsettled repo-style transactions; (3) one-way 
cash payments on OTC derivative contracts; or (4) transactions with a 
contractual settlement period that is longer than the normal settlement 
period (which the proposal defines as the lesser of the market standard 
for the particular instrument or five business days).\55\ Under the 
proposal, in the case of a system-wide failure of a settlement, 
clearing system, or central counterparty, the banking organization's 
primary federal supervisor may waive risk-based capital requirements 
for unsettled and failed transactions until the situation is rectified.
---------------------------------------------------------------------------

    \55\ Such transactions would be treated as derivative contracts 
as provided in section 34 or section 35 of the proposal.
---------------------------------------------------------------------------

    This NPR proposes separate treatments for delivery-versus-payment 
(DvP) and payment-versus-payment (PvP) transactions with a normal 
settlement period, and non-DvP/non-PvP transactions with a normal 
settlement period. A DvP transaction would refer to 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. A PvP transaction would mean 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. A 
transaction would be considered to have 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.
    A banking organization would be required to hold risk-based capital 
against a DvP or PvP transaction with a normal settlement period if the 
banking organization's counterparty has not made delivery or payment 
within five business days after the settlement date. The banking 
organization would determine its risk-weighted asset amount for such a 
transaction by multiplying the positive current exposure of the 
transaction for the banking organization by the appropriate risk weight 
in table 8. The positive current exposure from an unsettled transaction 
of a banking organization would be 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 banking organization to the counterparty.

  Table 8--Proposed Risk Weights for Unsettled DvP and PvP Transactions
------------------------------------------------------------------------
                                                       Risk weight to be
                                                           applied to
 Number of business days after contractual settlement   positive current
                         date                             exposure (in
                                                            percent)
------------------------------------------------------------------------
From 5 to 15.........................................              100.0
From 16 to 30........................................              625.0
From 31 to 45........................................              937.5
46 or more...........................................            1,250.0
------------------------------------------------------------------------

    A banking organization would hold risk-based capital against any 
non-DvP/non-PvP transaction with a normal settlement period if the 
banking organization 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 banking 
organization would continue to hold risk-based capital against the 
transaction until it has received the corresponding deliverables. From 
the business day after the banking organization has made its delivery 
until five business days after the counterparty delivery is due, the 
banking organization would calculate the risk-weighted asset amount for 
the transaction by risk weighting the current market value of the 
deliverables owed to the banking organization, using the risk weight 
appropriate for an exposure to the counterparty in accordance with 
section 32. If a banking organization has not received its deliverables 
by the fifth business day after the counterparty delivery due date, the 
banking organization would assign a 1,250 percent risk weight to the 
current market value of the deliverables owed.
    Question 16: Are there other transactions with a CCP that the 
agencies should consider excluding from the treatment for unsettled 
transactions? If so, what are the specific transaction types that 
should be excluded and why would exclusion be appropriate?

H. Risk-weighted Assets for Securitization Exposures

    Under the general risk-based capital rules, a banking organization 
may use external ratings issued by NRSROs to assign risk weights to 
certain recourse obligations, residual interests, direct credit 
substitutes, and asset- and mortgage-backed securities. Such exposures 
to securitization transactions may also be subject to capital 
requirements that can result in effective risk weights of 1,250 
percent, or a dollar-for-dollar capital requirement. A banking 
organization must deduct certain credit-enhancing interest-only strips 
(CEIOs) from tier 1 capital.\56\ In this NPR, the agencies are updating 
the terminology of the securitization framework and proposing a broader 
definition of a securitization exposure to encompass a wider range of 
exposures with similar risk characteristics.
---------------------------------------------------------------------------

    \56\ See 12 CFR part 3, appendix A, section 4 and 12 CFR 167.12 
(OCC); 12 CFR parts 208 and 225 appendix A, section III.B.3 (Board); 
12 CFR part 325, appendix A section II.B.1 and 12 CFR 390.471 
(FDIC). The agencies also have published a significant amount of 
supervisory guidance to assist banking organizations with the 
capital treatment of securitization exposures. In general, the 
agencies expect banking organizations to continue to use this 
guidance, most of which would remain applicable to the 
securitization framework proposed in this NPR.
---------------------------------------------------------------------------

    As noted in the introduction section of this preamble, the Basel 
capital framework has maintained the use and reliance on credit ratings 
in the

[[Page 52914]]

securitization framework. In accordance with the Dodd-Frank Act 
requirement to remove references to and reliance on credit ratings, the 
agencies have developed alternative standards of creditworthiness for 
use in the securitization framework that, where possible and to the 
extent appropriate, have been designed to be similar to the 
requirements prescribed by the BCBS. These proposed alternative 
standards are also consistent with those incorporated into the market 
risk capital rules, under the agencies' final rule.\57\
---------------------------------------------------------------------------

    \57\ See ``Risk-Based Capital Guidelines: Market Risk,'' June 7, 
2012 (Federal Register publication forthcoming).
---------------------------------------------------------------------------

1. Overview of the Securitization Framework and Definitions
    The proposed securitization framework is designed to address the 
credit risk of exposures that involve the tranching of the credit risk 
of one or more underlying financial exposures. The agencies believe 
that requiring all or substantially all of the underlying exposures of 
a securitization be financial exposures creates an important boundary 
between the general credit risk framework and the securitization 
framework. Examples of financial exposures include loans, commitments, 
credit derivatives, guarantees, receivables, asset-backed securities, 
mortgage-backed securities, other debt securities, or equity 
securities. Based on their cash flow characteristics, for purposes of 
this proposal, the agencies also would consider asset classes such as 
lease residuals and entertainment royalties to be financial assets.
    The securitization framework is designed to address the tranching 
of the credit risk of financial exposures and is not designed, for 
example, to apply to tranched credit exposures to commercial or 
industrial companies or nonfinancial assets. Accordingly, under this 
NPR, a specialized loan to finance the construction or acquisition of 
large-scale projects (for example, airports or power plants), objects 
(for example, ships, aircraft, or satellites), or commodities (for 
example, reserves, inventories, precious metals, oil, or natural gas) 
generally would not be a securitization exposure because the assets 
backing the loan typically are nonfinancial assets (the facility, 
object, or commodity being financed).
    Proposed definition of securitization exposure would include on- or 
off-balance sheet credit exposure (including credit-enhancing 
representations and warranties) that arises from a traditional or 
synthetic securitization (including a resecuritization), or an exposure 
that directly or indirectly references a securitization exposure. A 
traditional securitization means a transaction in which credit risk has 
been transferred to one or more third parties, the credit risk 
associated with the underlying exposures has been separated into at 
least two tranches reflecting different levels of seniority, and 
certain other conditions are met, such as a measurement that all or 
substantially all of the underlying exposures are financial exposures. 
See the definition of ``traditional securitization'' in section 2 of 
the proposed rules in the related notice titled ``Regulatory Capital 
Rules: Regulatory Capital, Implementation of Basel III, Minimum 
Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and 
Prompt Corrective Action.''
    Paragraph (10) of the proposed definition would specifically 
exclude from the definition exposures to investment funds (as defined 
in the proposal) and collective investment and pension funds (as 
defined in relevant regulations and set forth in the proposed 
definition of ``traditional securitization''). These specific 
exemptions provided in paragraph (10) serve to narrow the potential 
scope of the securitization framework. Investment funds, collective 
investment funds, pension funds regulated under ERISA and their foreign 
equivalents, and transactions regulated under the Investment Company 
Act of 1940 and their foreign equivalents are exempted from the 
definition because these entities and transactions are tightly 
regulated and subject to strict leverage requirements. For purposes of 
this proposal, an investment fund is a company (1) where all or 
substantially all of the assets of the fund are financial assets; and 
(2) that has no material liabilities. In addition, the agencies believe 
that the capital requirements for an extension of credit to, or an 
equity holding in these transactions are more appropriately calculated 
under the rules for corporate and equity exposures, and that the 
securitization framework was not intended to apply to such 
transactions.
    Under the proposal, an operating company would not fall under the 
definition of a traditional securitization (even if substantially all 
of its assets are financial exposures). For purposes of the proposed 
definition of a traditional securitization, operating companies 
generally would refer to companies that are set up to conduct business 
with clients with the intention of earning a profit in their own right 
and generally produce goods or provide services beyond the business of 
investing, reinvesting, holding, or trading in financial assets. 
Accordingly, an equity investment in an operating company, such as a 
banking organization, generally would be an equity exposure under the 
proposal. In addition, investment firms that generally do not produce 
goods or provide services beyond the business of investing, 
reinvesting, holding, or trading in financial assets, would not be 
operating companies for purposes of this proposal and would not qualify 
for this general exclusion from the definition of traditional 
securitization.
    To address the treatment of investment firms, the primary federal 
supervisor of a banking organization, under paragraph (8) of the 
definition of traditional securitization, would have discretion to 
exclude from the definition of a traditional securitization those 
transactions in which the underlying exposures are owned by an 
investment firm that exercise substantially unfettered control over the 
size and composition of its assets, liabilities, and off-balance sheet 
exposures. The agencies would consider a number of factors in the 
exercise of this discretion, including the assessment of the 
transaction's leverage, risk profile, and economic substance. This 
supervisory exclusion would give the primary federal supervisor 
discretion to distinguish structured finance transactions, to which the 
securitization framework was designed to apply, from those of flexible 
investment firms such as certain hedge funds and private equity funds. 
Only investment firms that can easily change the size and composition 
of their capital structure, as well as the size and composition of 
their assets and off-balance sheet exposures, would be eligible for the 
exclusion from the definition of traditional securitization under this 
provision. The agencies do not consider managed collateralized debt 
obligation vehicles, structured investment vehicles, and similar 
structures, which allow considerable management discretion regarding 
asset composition but are subject to substantial restrictions regarding 
capital structure, to have substantially unfettered control. Thus, such 
transactions would meet the definition of traditional securitization.
    The agencies are concerned that the line between securitization 
exposures and non-securitization exposures may be difficult to draw in 
some circumstances. In addition to the supervisory exclusion from the 
definition of traditional securitization described above, the primary 
federal supervisor may scope certain transactions into the 
securitization

[[Page 52915]]

framework if justified by the economics of the transaction. Similar to 
the analysis for excluding an investment firm from treatment as a 
traditional securitization, the agencies would consider the economic 
substance, leverage, and risk profile of transactions to ensure that 
the appropriate risk-based capital treatment. The agencies would 
consider a number of factors when assessing the economic substance of a 
transaction including, for example, the amount of equity in the 
structure, overall leverage (whether on- or off-balance sheet), whether 
redemption rights attach to the equity investor, and the ability of the 
junior tranches to absorb losses without interrupting contractual 
payments to more senior tranches.
    Both the designation of exposures as securitization (or 
resecuritization) exposures and the calculation of risk-based capital 
requirements for securitization exposures would be guided by the 
economic substance of a transaction rather than its legal form. 
Provided there is a tranching of credit risk, securitization exposures 
could include, among other things, asset-backed and mortgage-backed 
securities, loans, lines of credit, liquidity facilities, financial 
standby letters of credit, credit derivatives and guarantees, loan 
servicing assets, servicer cash advance facilities, reserve accounts, 
credit-enhancing representations and warranties, and CEIOs. 
Securitization exposures also could include assets sold with retained 
tranches. Mortgage-backed pass-through securities (for example, those 
guaranteed by FHLMC or FNMA) do not meet the proposed definition of a 
securitization exposure because they do not involve a tranching of 
credit risk. Only those mortgage-backed securities that involve 
tranching of credit risk would be securitization exposures.
    Under the proposal, a synthetic securitization would mean 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).
    Consistent with 2009 Enhancements, this NPR would define a 
resecuritization exposure as an on- or off-balance sheet exposure to a 
resecuritization; or an exposure that directly or indirectly references 
a resecuritization exposure. An exposure to an asset-backed commercial 
paper program (ABCP) would not be a resecuritization exposure if 
either: (1) The program-wide credit enhancement does not meet the 
definition of a resecuritization exposure; or (2) the entity sponsoring 
the program fully supports the commercial paper through the provision 
of liquidity so that the commercial paper holders effectively are 
exposed to the default risk of the sponsor instead of the underlying 
exposures. A resecuritization would mean a securitization in which one 
or more of the underlying exposures is a securitization exposure. If a 
transaction involves a traditional multi-seller ABCP, also discussed in 
more detail below, a banking organization would need to determine 
whether the transaction should be considered a resecuritization 
exposure. For example, assume that an ABCP conduit acquires 
securitization exposures where the underlying assets consist of 
wholesale loans and no securitization exposures. As is typically the 
case in multi-seller ABCP conduits, each seller provides first-loss 
protection by over-collateralizing the conduit to which it sells its 
loans. To ensure that the commercial paper issued by each conduit is 
highly-rated, a banking organization sponsor provides either a pool-
specific liquidity facility or a program-wide credit enhancement such 
as a guarantee to cover a portion of the losses above the seller-
provided protection.
    The pool-specific liquidity facility generally would not be treated 
as a resecuritization exposure under this proposal because the pool-
specific liquidity facility represents a tranche of a single asset pool 
(that is, the applicable pool of wholesale exposures), which contains 
no securitization exposures. However, a sponsor's program-wide credit 
enhancement that does not cover all losses above the seller-provided 
credit enhancement across the various pools generally would constitute 
tranching of risk of a pool of multiple assets containing at least one 
securitization exposure, and therefore would be treated as a 
resecuritization exposure.
    In addition, if the conduit in this example funds itself entirely 
with a single class of commercial paper, then the commercial paper 
generally would not be considered a resecuritization exposure if either 
(1) the program-wide credit enhancement did not meet the proposed 
definition of a resecuritization exposure or (2) the commercial paper 
was fully supported by the sponsoring banking organization. When the 
sponsoring banking organization fully supports the commercial paper, 
the commercial paper holders effectively would be exposed to default 
risk of the sponsor instead of the underlying exposures, and the 
external rating of the commercial paper would be expected to be based 
primarily on the credit quality of the banking organization sponsor, 
thus ensuring that the commercial paper does not represent a tranched 
risk position.
2. Operational Requirements
a. Due Diligence Requirements
    During the recent financial crisis, it became apparent that many 
banking organizations relied exclusively on NRSRO ratings and did not 
perform their own credit analysis of the securitization exposures. 
Accordingly, and consistent with the Basel capital framework, banking 
organizations would be required under the proposal to satisfy specific 
due diligence requirements for securitization exposures. Specifically, 
a banking organization would be required to demonstrate, to the 
satisfaction of its primary federal supervisor, a comprehensive 
understanding of the features of a securitization exposure that would 
materially affect the performance of the exposure. The banking 
organization's analysis would be required to be commensurate with the 
complexity of the exposure and the materiality of the exposure in 
relation to capital. If the banking organization is not able to 
demonstrate a comprehensive understanding of a securitization exposure 
to the satisfaction of its primary federal supervisor, the banking 
organization would be required to assign a risk weight of 1,250 percent 
to the exposure.
    Under the proposal, to demonstrate a comprehensive understanding of 
a securitization exposure a banking organization would have to conduct 
and document an analysis of the risk characteristics of the exposure 
prior to acquisition and periodically thereafter. This analysis would 
consider:
    (1) Structural features of the securitization that would materially 
impact the performance of the exposure, for example, the contractual 
cash flow waterfall, waterfall-related triggers, credit enhancements, 
liquidity

[[Page 52916]]

enhancements, market value triggers, the performance of organizations 
that service the position, and deal-specific definitions of default;
    (2) Relevant information regarding the performance of the 
underlying credit exposure(s), for example, the percentage of loans 30, 
60, and 90 days past due; default rates; prepayment rates; loans in 
foreclosure; property types; occupancy; average credit score or other 
measures of creditworthiness; average LTV ratio; and industry and 
geographic diversification data on the underlying exposure(s);
    (3) Relevant market data of the securitization, for example, bid-
ask spread, most recent sales price and historical price volatility, 
trading volume, implied market rating, and size, depth and 
concentration level of the market for the securitization; and
    (4) For resecuritization exposures, performance information on the 
underlying securitization exposures, for example, the issuer name and 
credit quality, and the characteristics and performance of the 
exposures underlying the securitization exposures.
    On an ongoing basis (no less frequently than quarterly), a banking 
organization would be required to evaluate, review, and update as 
appropriate the analysis required under section 41(c)(1) for each 
securitization exposure.
    Question 17: What, if any, are specific challenges that are 
involved with meeting the proposed due diligence requirements and for 
what types of securitization exposures? How might the agencies address 
these challenges while ensuring that a banking organization conducts an 
appropriate level of due diligence commensurate with the risks of its 
exposures?
b. Operational Requirements for Traditional Securitizations
    In a traditional securitization, an originating banking 
organization typically transfers a portion of the credit risk of 
exposures to third parties by selling them to a securitization special 
purpose entity (SPE) (as defined in the proposal).\58\ Under this NPR, 
a banking organization would be an originating banking organization if 
it: (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.
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    \58\ The proposal would define a securitization SPE as 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.
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    Under the proposal, a banking organization 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 
underlying exposures from the calculation of risk-weighted assets only 
if each of the following conditions are met: (1) The exposures are not 
reported on the banking organization's consolidated balance sheet under 
GAAP; (2) the banking organization has transferred to one or more third 
parties credit risk associated with the underlying exposures; and (3) 
any clean-up calls relating to the securitization are eligible clean-up 
calls (as discussed below). An originating banking organization that 
meets these conditions would hold risk-based capital against any 
securitization exposures it retains in connection with the 
securitization. An originating banking organization that fails to meet 
these conditions would be required to hold risk-based capital against 
the transferred exposures as if they had not been securitized and would 
deduct from common equity tier 1 capital any after-tax gain-on-sale 
resulting from the transaction.
    In addition, if a securitization includes one or more underlying 
exposures in which (1) the borrower is permitted to vary the drawn 
amount within an agreed limit under a line of credit, and (2) contains 
an early amortization provision, the originating banking organization 
would be required to hold risk-based capital against the transferred 
exposures as if they had not been securitized and deduct from common 
equity tier 1 capital any after-tax gain-on-sale resulting from the 
transaction.\59\ The agencies believe that this treatment is 
appropriate given the lack of risk transference in securitizations that 
contain early amortization provisions.
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    \59\ Many securitizations of revolving credit facilities (for 
example, credit card receivables) contain provisions that require 
the securitization to be wound down and investors to be repaid if 
the excess spread falls below a certain threshold. This decrease in 
excess spread may, in some cases, be caused by deterioration in the 
credit quality of the underlying exposures. An early amortization 
event can increase a banking organization's capital needs if new 
draws on the revolving credit facilities need to be financed by the 
banking organization using on-balance sheet sources of funding. The 
payment allocations used to distribute principal and finance charge 
collections during the amortization phase of these transactions also 
can expose a banking organization to a greater risk of loss than in 
other securitization transactions. The proposed rule would define 
early amortization as a provision in a securitization's governing 
documentation that, when triggered, causes investors in the 
securitization exposures to be repaid before the original stated 
maturity of the securitization exposure, unless the provision is 
solely triggered by events not related to the performance of the 
underlying exposures or the originating banking organization (such 
as material changes in tax laws or regulations).
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c. Operational Requirements for Synthetic Securitizations
    In general, the proposal's treatment of synthetic securitizations 
is similar to that of traditional securitizations. The operational 
requirements for synthetic securitizations, however, are more rigorous 
to ensure that the originating banking organization has truly 
transferred credit risk of the underlying exposures to one or more 
third parties.
    For synthetic securitizations, an originating banking organization 
would recognize for risk-based capital purposes the use of a credit 
risk mitigant to hedge underlying exposures only if each of the 
conditions in the proposed definition of ``synthetic securitization'' 
is satisfied. These conditions include requirements with respect to the 
type and contractual governance of the credit risk mitigant used in the 
transaction. For example, the credit risk associated with the 
underlying exposures must be separated into at least two tranches 
reflecting different levels of seniority and all or substantially all 
of the underlying exposures are financial exposures. See the definition 
of ``synthetic securitization'' in section 2 of the proposed rules in 
the related notice titled ``Regulatory Capital Rules: Regulatory 
Capital, Implementation of Basel III, Minimum Regulatory Capital 
Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective 
Action.''
    Failure to meet these operational requirements for a synthetic 
securitization would prevent a banking organization from using the 
proposed securitization framework and would require the banking 
organization to hold risk-based capital against the underlying 
exposures as if they had not been synthetically securitized. A banking 
organization that provides credit protection to a synthetic 
securitization would use the securitization framework to compute risk-
based capital requirements for its exposures to the synthetic 
securitization even if the originating banking organization failed to 
meet one or more of the operational requirements for a synthetic 
securitization.

[[Page 52917]]

d. Clean-Up Calls
    To satisfy the operational requirements for securitizations and 
enable an originating banking organization to exclude the underlying 
exposures from the calculation of its risk-based capital requirements, 
any clean-up call associated with a securitization would need to be an 
eligible clean-up call. The proposal would define a clean-up call as a 
contractual provision that permits an originating banking organization 
or servicer to call securitization exposures before their stated 
maturity or call date. In the case of a traditional securitization, a 
clean-up call generally is accomplished by repurchasing the remaining 
securitization exposures once the amount of underlying exposures or 
outstanding securitization exposures falls below a specified level. In 
the case of a synthetic securitization, the clean-up call may take the 
form of a clause that extinguishes the credit protection once the 
amount of underlying exposures has fallen below a specified level.
    Under the proposal, an eligible clean-up call would be a clean-up 
call that (1) Is exercisable solely at the discretion of the 
originating banking organization 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 (for example, to purchase non-performing underlying 
exposures); and (3) 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, 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. 
Where a securitization SPE is structured as a master trust, a clean-up 
call with respect to a particular series or tranche issued by the 
master trust would meet criteria (3) of the definition of ``eligible 
clean-up call'' as long as the outstanding principal amount in that 
series was 10 percent or less of its original amount at the inception 
of the series.
3. Risk-weighted Asset Amounts for Securitization Exposures
    Under the proposed securitization framework, a banking organization 
generally would calculate a risk-weighted asset amount for a 
securitization exposure by applying either (1) the simplified 
supervisory formula approach (SSFA), described in section II.H.4 of 
this preamble, or (2) for banking organizations that are not subject to 
the market risk rule, a gross-up approach similar to an approach 
provided under the general risk-based capital rules. A banking 
organization would be required to apply either the gross-up approach or 
the SSFA consistently across all of its securitization exposures. 
Alternatively, a banking organization may choose to apply a 1,250 
percent risk weight to any of its securitization exposures. In 
addition, the proposal provides for alternative treatment of 
securitization exposures to ABCP liquidity facilities and certain 
gains-on-sales and CEIO exposures. The proposed requirements, similar 
to the general risk-based capital rules, would include exceptions for 
interest-only mortgage-backed securities, certain statutorily exempted 
assets, and certain derivatives as described below. In all cases, the 
minimum risk weight for securitization exposures would be 20 percent.
    For synthetic securitizations, which typically employ credit 
derivatives, a banking organization would apply the securitization 
framework when calculating risk-based capital requirements. Under this 
NPR, a banking organization may use the securitization CRM rules to 
adjust the capital requirement under the securitization framework for 
an exposure to reflect the CRM technique used in the transaction.
a. Exposure Amount of a Securitization Exposure
    Under this proposal, the exposure amount of an on-balance sheet 
securitization exposure that is not a repo-style transaction, eligible 
margin loan, OTC derivative contract or derivative that is a cleared 
transaction (other than a credit derivative) would be the banking 
organization's carrying value of the exposure. The exposure amount of 
an off-balance sheet securitization exposure that is not an eligible 
ABCP liquidity facility, a repo-style transaction, eligible margin 
loan, an OTC derivative contract, or a derivative that is a cleared 
transaction (other than a credit derivative) would be the notional 
amount of the exposure.
    For purposes of calculating the exposure amount of off-balance 
sheet exposure to an ABCP securitization exposure, such as a liquidity 
facility, the notional amount may be reduced to the maximum potential 
amount that the banking organization could be required to fund given 
the ABCP program's current underlying assets (calculated without regard 
to the current credit quality of those assets). Thus, if $100 is the 
maximum amount that could be drawn given the current volume and current 
credit quality of the program's assets, but the maximum potential draw 
against these same assets could increase to as much as $200 under some 
scenarios if their credit quality were to deteriorate, then the 
exposure amount is $200. This NPR would define an ABCP program as a 
program established primarily for the purpose of issuing commercial 
paper that is investment grade and backed by underlying exposures held 
in a securitization SPE. An eligible ABCP liquidity facility would be 
defined as a liquidity facility supporting ABCP, in form or in 
substance, that is subject to an asset quality test at the time of draw 
that precludes funding against assets that are 90 days or more past due 
or in default. Notwithstanding these eligibility requirements, a 
liquidity facility would be an eligible ABCP liquidity facility if the 
assets or exposures funded under the liquidity facility that do not 
meet the eligibility requirements are guaranteed by a sovereign entity 
that qualifies for a 20 percent risk weight or lower.
    The exposure amount of an eligible ABCP liquidity facility that is 
subject to the SSFA would be the notional amount of the exposure 
multiplied by a 100 percent CCF. The exposure amount of an eligible 
ABCP liquidity facility that is not subject to the SSFA would be the 
notional amount of the exposure multiplied by a 50 percent CCF. The 
proposed CCF for eligible ABCP liquidity facilities with an original 
maturity of less than one year is greater than the 10 percent CCF 
prescribed under the general risk-based capital rules.
    The exposure amount of a securitization exposure that is a repo-
style transaction, eligible margin loan, an OTC derivative or 
derivative that is a cleared transaction (other than a credit 
derivative) would be the exposure amount of the transaction as 
calculated in section 34 or section 37 as applicable.
b. Gains-On-Sale and Credit-Enhancing Interest-Only Strips
    Under this NPR and the Basel III NPR, a banking organization would 
deduct from common equity tier 1 capital any after-tax gain-on-sale 
resulting from a securitization and would apply a 1,250 percent risk 
weight to the portion of a credit-enhancing interest-only strip (CEIO) 
that does not constitute an after-tax gain-on-sale. The agencies 
believe this treatment is appropriate given historical supervisory 
concerns with the

[[Page 52918]]

subjectivity involved in valuations of gains-on-sale and CEIOs. 
Furthermore, although the treatments for gains-on-sale and CEIOs can 
increase an originating banking organization's risk-based capital 
requirement following a securitization, the agencies believe that such 
anomalies would be rare where a securitization transfers significant 
credit risk from the originating banking organization to third parties.
c. Exceptions Under the Securitization Framework
    There are several exceptions to the general provisions in the 
securitization framework that parallel the general risk-based capital 
rules. First, a banking organization would be required to assign a risk 
weight of at least 100 percent to an interest-only mortgage-backed 
security. The agencies believe that a minimum risk weight of 100 
percent is prudent in light of the uncertainty implied by the 
substantial price volatility of these securities. Second, as required 
by federal statute, a special set of rules would continue to apply to 
securitizations of small-business loans and leases on personal property 
transferred with retained contractual exposure by well-capitalized 
depository institutions.\60\ Finally, under this NPR, if a 
securitization exposure is an OTC derivative contract or derivative 
contract that is a cleared transaction (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), a banking 
organization may choose to set the risk-weighted asset amount of the 
exposure equal to the amount of the exposure. This treatment would be 
subject to supervisory approval.
---------------------------------------------------------------------------

    \60\ See 12 U.S.C. 1835. This provision places a cap on the 
risk-based capital requirement applicable to a well-capitalized 
depository institution that transfers small-business loans with 
recourse. This NPR does not expressly provide that the agencies may 
permit adequately capitalized banking organizations to use the small 
business recourse rule on a case-by-case basis because the agencies 
may make such a determination under the general reservation of 
authority in section 1 of the proposal.
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d. Overlapping Exposures
    This NPR includes provisions to limit the double counting of risks 
in situations involving overlapping securitization exposures. If a 
banking organization has multiple securitization exposures that provide 
duplicative coverage to the underlying exposures of a securitization 
(such as when a banking organization provides a program-wide credit 
enhancement and multiple pool-specific liquidity facilities to an ABCP 
program), the banking organization would not be required to hold 
duplicative risk-based capital against the overlapping position. 
Instead, the banking organization would apply to the overlapping 
position the applicable risk-based capital treatment under the 
securitization framework that results in the highest risk-based capital 
requirement.
e. Servicer Cash Advances
    A traditional securitization typically employs a servicing banking 
organization that, on a day-to-day basis, collects principal, interest, 
and other payments from the underlying exposures of the securitization 
and forwards such payments to the securitization SPE or to investors in 
the securitization. Servicing banking organizations often provide a 
facility to the securitization under which the servicing banking 
organization 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. These servicer cash advance 
facilities are securitization exposures.
    A banking organization would either apply the SSFA or the gross-up 
approach, as described below, or a 1,250 percent risk weight to its 
exposure under the facility. The treatment of the undrawn portion of 
the facility would depend on whether the facility is an eligible 
servicer cash advance facility. An eligible servicer cash advance 
facility would be defined as 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.
    Consistent with the general risk-based capital rules with respect 
to the treatment of residential mortgage servicer cash advances, a 
servicing banking organization would not be required to hold risk-based 
capital against the undrawn portion of an eligible servicer cash 
advance facility. A banking organization that provides a non-eligible 
servicer cash advance facility would determine its risk-based capital 
requirement for the notional amount of the undrawn portion of the 
facility in the same manner as the banking organization would determine 
its risk-based capital requirement for any other off-balance sheet 
securitization exposure.
f. Implicit Support
    This NPR specifies consequence for a banking organization's risk-
based capital requirements if the banking organization provides support 
to a securitization in excess of the banking organization's 
predetermined contractual obligation (implicit support). First, similar 
to the general risk-based capital rules, a banking organization that 
provides such implicit support would include in risk-weighted assets 
all of the underlying exposures associated with the securitization as 
if the exposures had not been securitized, and deduct from common 
equity tier 1 capital any after-tax gain-on-sale resulting from the 
securitization.\61\ Second, the banking organization would disclose 
publicly (i) that it has provided implicit support to the 
securitization, and (ii) the risk-based capital impact to the banking 
organization of providing such implicit support. Under the proposed 
reservations of authority, the banking organization's primary federal 
supervisor also could require the banking organization to hold risk-
based capital against all the underlying exposures associated with some 
or all the banking organization's other securitizations as if the 
exposures had not been securitized, and to deduct from common equity 
tier 1 capital any after-tax gain-on-sale resulting from such 
securitizations.
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    \61\ ``Interagency Guidance on Implicit Recourse in Asset 
Securitizations,'' (May 23, 2002). OCC Bulletin 2002-20; CEO Memo 
No. 162 (OCC); SR letter 02-15 (Board); and FIL-52-2002 (FDIC).
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4. Simplified Supervisory Formula Approach
    For purposes of this proposal, and consistent with the approach 
provided for assigning specific risk-weighting factors to 
securitization exposures under subpart F, the agencies have developed a 
simplified version of the advanced approaches supervisory formula 
approach (SFA to assign risk weights to securitization exposures.\62\ 
This

[[Page 52919]]

approach is referred to as the simplified supervisory formula approach 
(SSFA. Banking organizations may choose to use the alternative gross-up 
approach described in section II.5 below, provided that it applies the 
gross-up approach to all of its securitization exposures.
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    \62\ When using the SFA, a banking organization must meet 
minimum requirements under the Basel internal ratings-based approach 
to estimate probability of default and loss given default for the 
underlying exposures. Under the agencies' current risk-based capital 
rules, the SFA is available only to banking organizations that have 
been approved to use the advanced approaches.
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    Similar to the SFA under the advanced approaches rule, the proposed 
SSFA is a formula that starts with a baseline derived from the capital 
requirements that apply to all exposures underlying a securitization 
and then assigns risk weights based on the subordination level of an 
exposure. The proposed SSFA was designed to apply relatively higher 
capital requirements to the more risky junior tranches of a 
securitization that are the first to absorb losses, and relatively 
lower requirements to the most senior exposures.
    The SSFA methodology begins with ``KG'' the weighted-
average risk weight of the underlying exposures, calculated using the 
risk-weighted asset amounts in the standardized approach of subpart D, 
as proposed in this NPR. In addition, the SSFA also uses the attachment 
and detachment points of the particular securitization positions, and 
the current amount of delinquencies within the underlying exposures of 
the securitization. In terms of enhancements, the agencies note that 
the relative seniority of the exposure, as well as all cash funded 
enhancements, are recognized as part of the SSFA calculation.
    The SSFA as proposed would apply a 1,250 percent risk weight to 
securitization exposures that absorb losses up to the amount of capital 
that would be required for the underlying exposures under subpart D had 
those exposures been held directly by a banking organization. In 
addition, agencies are proposing a supervisory risk-weight floor or 
minimum risk-weight for a given securitization of 20 percent. The 
agencies believe that a 20 percent floor is reasonably prudent given 
recent performance of securitization structures during times of stress, 
and will maintain this floor in the final rule.
    At the inception of a securitization, the SSFA as proposed would 
require more capital on a transaction-wide basis than would be required 
if the pool of assets had not been securitized. That is, if the banking 
organization held every tranche of a securitization, its overall 
capital charge would be greater than if the banking organization held 
the underlying assets in portfolio. The agencies believe this overall 
outcome is important in reducing the likelihood of regulatory capital 
arbitrage through securitizations.
    To make the SSFA risk-sensitive and forward-looking, the agencies 
are proposing to adjust KG based on delinquencies among the 
underlying assets of the securitization structure. Specifically, the 
parameter KG is modified and the resulting adjusted 
parameter is labeled KA. KA is set equal to the 
weighted average of the KG value and a fixed parameter equal 
to 0.5.
[GRAPHIC] [TIFF OMITTED] TP30AU12.007

    KG would be the weighted-average total capital 
requirement of the underlying exposures, calculated using the 
standardized risk weighting methodologies in subpart D, as proposed in 
this NPR. The agencies believe it is important to calibrate risk 
weights for securitization exposures around the risk associated with 
the underlying assets of the securitization in this proposal, in order 
to reduce complexity and promote consistency between the different 
frameworks for calculating risk-weighted asset amounts in the 
standardized approach.
[GRAPHIC] [TIFF OMITTED] TP30AU12.008

    The agencies believe that, with the delinquent exposure calibration 
parameter set equal to 0.5, the overall capital requirement would be 
sufficiently responsive and prudent to ensure sufficient capital for 
pools that demonstrate credit weakness. The entire specification of the 
SSFA in the final rule is as follows:
[GRAPHIC] [TIFF OMITTED] TP30AU12.009


[[Page 52920]]


[GRAPHIC] [TIFF OMITTED] TP30AU12.010


[[Page 52921]]


[GRAPHIC] [TIFF OMITTED] TP30AU12.011


[[Page 52922]]


[GRAPHIC] [TIFF OMITTED] TP30AU12.036

    Substituting this value into the equation yields:
    [GRAPHIC] [TIFF OMITTED] TP30AU12.037
    
5. Gross-up Approach
    As an alternative to the SSFA, banking organizations that are not 
subject to subpart F may assign risk-based capital requirements to 
securitization exposures by implementing a gross-up approach described 
in section 43 of the proposal, which is similar to an approach provided 
under the general risk-based capital rules. If the banking organization 
chooses to apply the gross-up approach, it would be required to apply 
this approach to all of its securitization exposures, except as 
otherwise provided for certain securitization exposures under sections 
44 and 45 of the proposal.
    The gross-up approach assigns risk-based capital requirements based 
on the full amount of the credit-enhanced assets for which the banking 
organization directly or indirectly assumes credit risk. To calculate 
risk-weighted assets under the gross-up approach, a banking 
organization would determine four inputs: the pro rata share, the 
exposure amount, the enhanced amount, and the applicable risk weight. 
The pro rata share is the par value of the banking organization's 
exposure as a percentage of the par value of the tranche in which the 
securitization exposure resides. The enhanced amount is the value of 
all the tranches that are more senior to the tranche in which the 
exposure resides. The applicable risk weight is the weighted-average 
risk weight of the underlying exposures in the securitization pool as 
calculated under subpart D.
    Under the gross-up approach, a banking organization would be 
required to calculate the credit equivalent amount, which equals the 
sum of the exposure of the banking organization's securitization 
exposure and the pro rata share multiplied by the enhanced amount. To 
calculate risk-weighted assets for a securitization exposure under the 
gross-up approach, a banking organization would be required to assign 
the applicable risk weight to the gross-up credit equivalent amount. As 
noted above, in all cases, the minimum risk weight for securitization 
exposures would be 20 percent.
    Question 18: The agencies solicit commenters' views on the proposed 
gross-up approach.
6. Alternative Treatments for Certain Types of Securitization Exposures
    Under the NPR, a banking organization generally would assign a 
1,250 percent risk weight to all securitization exposures to which the 
banking organization does not apply the SSFA or the gross-up approach. 
However, the NPR provides alternative treatments for certain types of 
securitization exposures described below, provided that the banking

[[Page 52923]]

organization knows the composition of the underlying exposures at all 
times:
a. Eligible ABCP Liquidity Facilities
    In this NPR, consistent with the Basel capital framework, a banking 
organization would be permitted to determine the exposure amount of an 
eligible asset-backed commercial paper (ABCP) liquidity facility by 
multiplying the exposure amount by the highest risk weight applicable 
to any of the individual underlying exposures covered by the facility. 
The proposal would define an eligible ABCP liquidity facility to mean a 
liquidity facility supporting ABCP, in form or in substance, that is 
subject to an asset quality test at the time of draw that precludes 
funding against assets that are 90 days or more past due or in default. 
Notwithstanding the preceding sentence, a liquidity facility is an 
eligible ABCP liquidity facility if the assets or exposures funded 
under the liquidity facility that do not meet the eligibility 
requirements are guaranteed by a sovereign that qualifies for a 20 
percent risk weight or lower.
b. A Securitization Exposures in a Second Loss Position or Better to an 
ABCP Program
    Under the proposal, a banking organization may determine the risk-
weighted asset amount of a securitization exposure that is in a second 
loss position or better to an ABCP program by multiplying the exposure 
amount by the higher of 100 percent and the highest risk weight 
applicable to any of the individual underlying exposures of the ABCP 
program,\63\ provided the exposure meets the following criteria:
---------------------------------------------------------------------------

    \63\ The proposal would define an ABCP program as a program that 
primarily issues commercial paper that is investment grade and 
backed by underlying exposures held in a bankruptcy-remote manner.
---------------------------------------------------------------------------

    (1) The exposure is not a first priority securitization exposure or 
an eligible ABCP liquidity facility;
    (2) The exposure is economically in a second loss position or 
better, and the first loss position provides significant credit 
protection to the second loss position;
    (3) The exposure qualifies as investment grade; and
    (4) The banking organization holding the exposure does not retain 
or provide protection for the first-loss position.
    The agencies believe that this approach, which is consistent with 
the Basel capital framework, appropriately and conservatively assesses 
the credit risk of non-first-loss exposures to ABCP programs.
7. Credit Risk Mitigation for Securitization Exposures
    As proposed, the treatment of credit risk mitigation for 
securitization exposures would differ slightly from the treatment for 
other exposures. In general, to recognize the risk mitigating effects 
of financial collateral or an eligible guarantee or an eligible credit 
derivative from an eligible guarantor, a banking organization would use 
the approaches for collateralized transactions under section 37 of the 
proposal, the substitution treatment for guarantees and credit 
derivatives described in section 36 of the proposal.
    Under section 45 of the proposal, a banking organization would be 
permitted to recognize an eligible guarantee or eligible credit 
derivative only from an eligible guarantor. In addition, when an 
eligible guarantee or eligible credit derivative covers multiple hedged 
exposures that have different residual maturities, the banking 
organization would be required to use the longest residual maturity of 
any of the hedged exposures as the residual maturity of all the hedged 
exposures.
8. Nth-to-default Credit Derivatives
    The agencies propose that the capital requirement for protection 
provided through an nth-to-default derivative be determined either by 
using the SSFA, or applying a 1,250 percent risk weight. A banking 
organization would determine its exposure in the nth-to-default credit 
derivative as the largest notional amount of all the underlying 
exposures.
    When applying the SSFA, the attachment point (parameter A) is the 
ratio of the sum of the notional amounts of all underlying exposures 
that are subordinated to the banking organization's exposure to the 
total notional amount of all underlying exposures. In the case of a 
first-to-default credit derivative, there are no underlying exposures 
that are subordinated to the banking organization's exposure. In the 
case of a second-or-subsequent-to default credit derivative, the 
smallest (n-1) underlying exposure(s) are subordinated to the banking 
organization`s exposure.
    Under the SSFA, the detachment point (parameter D) is the sum of 
the attachment point and the ratio of the notional amount of the 
banking organization's exposure to the total notional amount of the 
underlying exposures. A banking organization that does not use the SSFA 
to calculate a risk weight for an nth-to-default credit derivative 
would assign a risk weight of 1,250 percent to the exposure.
    For protection purchased through a first-to-default derivative, a 
banking organization that obtains credit protection on a group of 
underlying exposures through a first-to-default credit derivative that 
meets the rules of recognition for guarantees and credit derivatives 
under section 36(b) would determine its risk-based capital requirement 
for the underlying exposures as if the banking organization 
synthetically securitized the underlying exposure with the smallest 
risk-weighted asset amount and had obtained no credit risk mitigant on 
the other underlying exposures. A banking organization must calculate a 
risk-based capital requirement for counterparty credit risk according 
to section 34 for a first-to-default credit derivative that does not 
meet the rules of recognition of section 36(b).
    For second-or-subsequent-to default credit derivatives, a banking 
organization that obtains credit protection on a group of underlying 
exposures through a nth-to-default credit derivative that meets the 
rules of recognition of section 36(b) (other than a first-to-default 
credit derivative) may recognize the credit risk mitigation benefits of 
the derivative only if the banking organization also has obtained 
credit protection on the same underlying exposures in the form of 
first-through-(n-1)-to-default credit derivatives; or if n-1 of the 
underlying exposures have already defaulted. If a banking organization 
satisfies these requirements, the banking organization would determine 
its risk-based capital requirement for the underlying exposures as if 
the banking organization had only synthetically securitized the 
underlying exposure with the smallest risk-weighted asset amount. For a 
nth-to-default credit derivative that does not meet the rules of 
recognition of section 36(b), a banking organization would calculate a 
risk-based capital requirement for counterparty credit risk according 
to the treatment of OTC derivatives under section 34.

I. Equity Exposures

1. Introduction
    Under the general risk-based capital rules, a banking organization 
must deduct a portion of non-financial equity investments from tier 1 
capital, based on the aggregate adjusted carrying value of all non-
financial equity investments held directly or indirectly by the banking 
organization as a percentage of its tier 1 capital.\64\ For those 
equity

[[Page 52924]]

exposures that are not deducted, a banking organization generally must 
assign a 100 percent risk weight.
---------------------------------------------------------------------------

    \64\ In contrast, the current rules for state and federal 
savings associations require the deduction of most equity securities 
from total capital. See 12 CFR part 167.5(c)(2)(ii) (federal savings 
associations) and 12 CFR 390.465(c)(2)(ii) (state savings 
associations).
---------------------------------------------------------------------------

    Consistent with the Basel capital framework, in this NPR, the 
agencies are proposing to require a banking organization to apply the 
simple risk-weight approach (SRWA) for equity exposures that are not 
exposures to an investment fund and apply certain look-through 
approaches to assign risk-weighted asset amounts to equity exposures to 
an investment fund. In some cases, such as equity exposures to the 
Federal Home Loan Bank, the treatment under the proposal would remain 
unchanged from the general risk-based capital rules. However, this NPR 
introduces changes to the treatment of equity exposures, which are 
consistent with the treatment for equity exposures under the advanced 
approaches rule, to improve risk sensitivity of the general risk-based 
capital requirements. For example, the proposal would differentiate 
between publicly-traded and non-publicly-traded equity exposures, while 
the general risk-based capital rules do not make such a distinction.
    Under this NPR, the definition of equity exposure would include 
ownership interests that are residual claims on the assets and income 
of a company, unless the company is consolidated by the banking 
organization under GAAP, and options and warrants for securities or 
instruments that would be equity exposures. The definition would 
exclude securitization exposures. Additionally. certain other criteria 
would need to be met for an exposure to be an ``equity exposure,'' as 
set forth in the proposed definition. See the definition of ``equity 
exposure'' in section 2 of the proposed rules in the related notice 
titled ``Regulatory Capital Rules: Regulatory Capital, Implementation 
of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, 
Transition Provisions, and Prompt Corrective Action.''
2. Exposure Measurement
    Under the proposal, a banking organization would be required to 
determine the adjusted carrying value for each equity exposure based on 
the approaches described below. For the on-balance sheet component of 
an equity exposure, the adjusted carrying value would be a banking 
organization's carrying value of the exposure. For a commitment to 
acquire an equity exposure that is unconditional, the adjusted carrying 
value would be the effective notional principal amount of the exposure 
multiplied by a 100 percent conversion factor. For a commitment to 
acquire an equity exposure that is conditional, the adjusted carrying 
value would be the effective notional principal amount of the 
commitment multiplied by (1) a 20 percent conversion factor, for a 
commitment with an original maturity of one year or less or (2) a 50 
percent conversion factor, for a commitment with an original maturity 
of over one year. For the off-balance sheet component of an equity 
exposure that is not an equity commitment, the adjusted carrying value 
would be 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 described in the hedged transactions section below, exposure 
amounts may have different treatments in the case of hedged equity 
exposures. The agencies created the concept of the effective notional 
principal amount of the off-balance sheet portion of an equity exposure 
to provide a uniform method for banking organizations to measure the 
on-balance sheet equivalent of an off-balance sheet exposure. For 
example, if the value of a derivative contract referencing the common 
stock of company X changes the same amount as the value of 150 shares 
of common stock of company X, for a small change (for example, 1.0 
percent) in the value of the common stock of company X, the effective 
notional principal amount of the derivative contract is the current 
value of 150 shares of common stock of company X, regardless of the 
number of shares the derivative contract references. The adjusted 
carrying value of the off-balance sheet component of the derivative is 
the current value of 150 shares of common stock of company X minus the 
adjusted carrying value of any on-balance sheet amount associated with 
the derivative.
3. Equity Exposure Risk Weights
    Under the proposed SRWA, set forth in section 52 of the proposal, a 
banking organization would determine the risk-weighted asset amount for 
each 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 portion of a hedge 
pair as described below, by the lowest applicable risk weight in table 
9. A banking organization would determine the risk-weighted asset 
amount for an equity exposure to an investment fund under section 53 of 
the proposal. A banking organization would sum risk-weighted asset 
amounts for all of its equity exposures to calculate its aggregate 
risk-weighted asset amount for its equity exposures. The proposed SRWA 
is summarized in table 9 and described in more detail below:

               Table 9--Simple Risk-Weight Approach (SRWA)
------------------------------------------------------------------------
       Risk weight (in percent)                 Equity exposure
------------------------------------------------------------------------
0....................................  An equity exposure to a
                                        sovereign, the Bank for
                                        International Settlements, the
                                        European Central Bank, the
                                        European Commission, the
                                        International Monetary Fund, an
                                        MDB, and any other entity whose
                                        credit exposures receive a zero
                                        percent risk weight under
                                        section 32 of the proposal.
20...................................  An equity exposure to a PSE,
                                        Federal Home Loan Bank or the
                                        Federal Agricultural Mortgage
                                        Corporation (Farmer Mac).
100..................................   Community development
                                        equity exposures \65\
                                        The effective portion of
                                        a hedge pair
                                        Non-significant equity
                                        exposures to the extent that the
                                        aggregate adjusted carrying
                                        value of the exposures does not
                                        exceed 10 percent of tier 1
                                        capital plus tier 2 capital
250..................................  A significant investment in the
                                        capital of an unconsolidated
                                        financial institution that is
                                        not deducted under section 22 of
                                        the proposal.

[[Page 52925]]

 
300..................................  A publicly-traded equity exposure
                                        (other than an equity exposure
                                        that receives a 600 percent risk
                                        weight and including the
                                        ineffective portion of a hedge
                                        pair).
400..................................  An equity exposure that is not
                                        publicly-traded (other than an
                                        equity exposure that receives a
                                        600 percent risk weight).
600..................................  An equity exposure to an
                                        investment firm that (i) would
                                        meet the definition of a
                                        traditional securitization were
                                        it not for the primary federal
                                        supervisor's application of
                                        paragraph (8) of that definition
                                        and (ii) has greater than
                                        immaterial leverage.
------------------------------------------------------------------------

    Under the proposal, equity exposures to sovereign, supranational 
entities, MDBs, and PSEs would receive a risk weight of zero percent, 
20 percent, or 100 percent, as described in section 52 of the proposal. 
Certain community development equity exposures, the effective portion 
of hedged pairs, and, up to certain limits, non-significant equity 
exposures would receive a 100 percent risk weight. In addition, a 
banking organization generally would assign a 250 percent risk weight 
to an equity exposure related to a significant investment in the 
capital of unconsolidated financial institutions that is not deducted 
under section 22; a 300 percent risk weight to a publicly-traded equity 
exposure; and a 400 percent risk weight to a non-publicly-traded equity 
exposure.
---------------------------------------------------------------------------

    \65\ The proposed rule generally defines these exposures as 
exposures that would qualify as community development investments 
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). For savings associations, community 
development investments would be defined to mean equity investments 
that are designed primarily to promote community welfare, including 
the welfare of low- and moderate-income communities or families, 
such as by providing services or jobs, and 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).
---------------------------------------------------------------------------

    This proposal defines publicly-traded as 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 is registered with, 
or approved by, a national securities regulatory authority and that 
provides a liquid, two-way market for the instrument in question. A 
two-way market would refer to a market where there are independent bona 
fide offers to buy and sell so that a price reasonably related to the 
last sales price or current bona fide competitive bid and offer 
quotations can be determined within one day and settled at that price 
within a relatively short time frame conforming to trade custom.
    The proposal would require banking organizations to assign a 600 
percent risk weight to an equity exposure to an investment firm, 
provided that the investment firm (1) would meet the definition of a 
traditional securitization were it not for the primary federal 
supervisor's application of paragraph (8) of that definition and (2) 
has greater than immaterial leverage. As discussed in the 
securitizations section, the agencies would have discretion under this 
proposal to exclude from the definition of a traditional securitization 
those investment firms that exercise substantially unfettered control 
over the size and composition of their assets, liabilities, and off-
balance sheet exposures. Equity exposures to investment firms that 
would otherwise be traditional securitizations were it not for the 
specific primary federal supervisor's exclusion are leveraged exposures 
to the underlying financial assets of the investment firm. The agencies 
believe that equity exposure to such firms with greater than immaterial 
leverage warrant a 600 percent risk weight under the SRWA, due to their 
particularly high risk. Moreover, the agencies believe that the 100 
percent risk weight assigned to non-significant equity exposures is 
inappropriate for equity exposures to investment firms with greater 
than immaterial leverage.
4. Non-significant Equity Exposures
    Under this NPR, a banking organization would be permitted to apply 
a 100 percent risk weight to certain equity exposures deemed non-
significant. Non-significant equity exposures would mean an equity 
exposure to the extent that the aggregate adjusted carrying value of 
the exposures does not exceed 10 percent of the banking organization's 
total capital.\66\
---------------------------------------------------------------------------

    \66\ The definition would exclude exposures to an investment 
firm that (1) would meet the definition of traditional 
securitization were it not for the primary federal supervisor's 
application of paragraph (8) of the definition of a traditional 
securitization and (2) has greater than immaterial leverage.
---------------------------------------------------------------------------

    To compute the aggregate adjusted carrying value of a banking 
organization's equity exposures for determining their non-significance, 
this proposal provides that the banking organization may exclude (1) 
Equity exposures that receive less than a 300 percent risk weight under 
the SRWA (other than equity exposures determined to be non-
significant); (2) the equity exposure in a hedge pair with the smaller 
adjusted carrying value; and (3) 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 (4) exposures that 
qualify as community development equity exposures. If a banking 
organization does not know the actual holdings of the investment fund, 
the banking organization 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 banking 
organization would assume that the investment fund invests to the 
maximum extent possible in equity exposures.
    To determine which of a banking organization's equity exposures 
qualify for a 100 percent risk weight based on non-significance, the 
banking organization first would include equity exposures to 
unconsolidated small business investment companies, or those held 
through consolidated small business investment companies described in 
section 302 of the Small Business Investment Act of 1958. Next, it 
would include publicly-traded equity exposures (including those held 
indirectly through investment funds), and then it would include non-
publicly-traded equity exposures (including

[[Page 52926]]

those held indirectly through investment funds).\67\
---------------------------------------------------------------------------

    \67\ See 15 U.S.C. 682.
---------------------------------------------------------------------------

    The treatment of non-significant equity exposures in this proposal 
is consistent with the advanced approaches rule. However, in light of 
significant volatility in equity values since publication of the 
advanced approaches rule in 2007, and the BCBS revisions to the Basel 
capital framework, the agencies are considering whether a more simple 
treatment of banking organizations' non-significant equity exposures is 
appropriate.
    One alternative would assign a 100 percent risk weight to a banking 
organization's equity exposures to small business investment companies 
and to stock that a banking organization acquires in satisfaction of 
debts previously contracted (DPC), consistent with the proposed 
treatment of community development investments and the effective 
portion of hedge pairs. The full amount of a banking organization's 
equity exposure to a small business investment company and the full 
amount of its DPC equity exposures (together with community development 
investments and the effective portion of hedge pairs) would receive a 
100 percent risk weight, not just the ``non-significant'' portion of 
such equity exposures.
    If the agencies assign a 100 percent risk weight to equity 
exposures to a small business investment company and to DPC equity 
exposures, the agencies would consider what other types of equity 
exposures, if any, would continue to be exempt from the calculation of 
the ``non-significant'' amount of equity exposures for risk-based 
capital purposes and what capital treatment would be appropriate for 
such exposures. For example, the agencies could reduce the threshold 
for non-significant equity exposure calculation from 10 percent of tier 
1 capital and tier 2 capital to 5 percent of tier 1 and tier 2 capital.
    Question 19: The agencies solicit comment on an alternative 
proposal to simplify the risk-based capital treatment of banking 
organizations' non-significant equity exposures by assigning a 100 
percent risk weight to equity exposures to small business investment 
companies and to DPC equity exposures, consistent with the treatment of 
community development investments and the effective portion of hedged 
pairs. What other types of equity exposures (excluding exposures to 
small business investment companies and equities taken for DPC) should 
be excluded from the non-significant equity exposure calculation under 
the alternative approach and what is the approximate amount of these 
exposures in relation to banking organizations' total capital? What 
would be an appropriate measure or level for determining whether equity 
exposures in the aggregate are ``non-significant'' for a banking 
organization?
5. Hedged Transactions
    In this NPR, the agencies are proposing the following treatment for 
recognizing hedged equity exposures. For purposes of determining risk-
weighted assets under the SRWA, a banking organization could identify 
hedge pairs. Hedge pairs would be defined as two equity exposures that 
form an effective hedge, as long as each equity exposure is publicly-
traded or has a return that is primarily based on a publicly-traded 
equity exposure. Under the NPR, a banking organization may risk weight 
only the effective and ineffective portions of a hedge pair rather than 
the entire adjusted carrying value of each exposure that makes up the 
pair.
    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 banking 
organization acquires at least one of the equity exposures); the 
documentation specifies the measure of effectiveness (E) the banking 
organization would 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 banking organization would measure E at least quarterly 
and would use one of three measures of E described in the next section: 
the dollar-offset method, the variability-reduction method, or the 
regression method.
    It is possible that only part of a banking organization's exposure 
to a particular equity instrument is part of a hedge pair. For example, 
assume a banking organization has equity exposure A with a $300 
adjusted carrying value and chooses to hedge a portion of that exposure 
with equity exposure B with an adjusted carrying value of $100. Also 
assume that the combination of equity exposure B and $100 of the 
adjusted carrying value of equity exposure A form an effective hedge 
with an E of 0.8. In this situation, the banking organization would 
treat $100 of equity exposure A and $100 of equity exposure B as a 
hedge pair, and the remaining $200 of its equity exposure A as a 
separate, stand-alone equity position. The effective portion of a hedge 
pair would be calculated as E multiplied by the greater of the adjusted 
carrying values of the equity exposures forming the hedge pair. The 
ineffective portion of a hedge pair would be calculated as (1-E) 
multiplied by the greater of the adjusted carrying values of the equity 
exposures forming the hedge pair. In the above example, the effective 
portion of the hedge pair would be 0.8 x $100 = $80, and the 
ineffective portion of the hedge pair would be (1-0.8) x $100 = $20.
6. Measures of Hedge Effectiveness
    As stated above, a banking organization could determine 
effectiveness using any one of three methods: the dollar-offset method, 
the variability-reduction method, or the regression method. Under the 
dollar-offset method, a banking organization would determine the ratio 
of the cumulative sum of the changes in value of one equity exposure to 
the cumulative sum of the changes in value of the other equity 
exposure, termed the ratio of value change (RVC). If the changes in the 
values of the two exposures perfectly offset each other, the RVC would 
be -1. If RVC is positive, implying that the values of the two equity 
exposures move in the same direction, 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 would equal the absolute value of RVC. If 
RVC is negative and less than -1, then E would equal 2 plus RVC.
    The variability-reduction method of measuring effectiveness 
compares changes in the value of the combined position of the two 
equity exposures in the hedge pair (labeled X in the equation below) to 
changes in the value of one exposure as though that one exposure were 
not hedged (labeled A). This measure of E expresses the time-series 
variability in X as a proportion of the variability of A. As the 
variability described by the numerator becomes small relative to the 
variability described by the denominator, the measure of effectiveness 
improves, but is bounded from above by a value of one. E would be 
computed as:

[[Page 52927]]

[GRAPHIC] [TIFF OMITTED] TP30AU12.012

    The value of t would range from zero to T, where T is the length of 
the observation period for the values of A and B, and is comprised of 
shorter values each labeled t.
    The regression method of measuring effectiveness is based on 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 the hedge pair is the independent variable. E would equal the 
coefficient of determination of this regression, which is the 
proportion of the variation in the dependent variable explained by 
variation in the independent variable. However, if the estimated 
regression coefficient is positive, then the value of E is zero. The 
closer the relationship between the values of the two exposures, the 
higher E would be.
7. Equity Exposures to Investment Funds
    Under the general risk-based capital rules, exposures to 
investments funds are captured through one of two methods. These 
methods are similar to the alternative modified look-through approach 
and the simple modified look-through approach described below. The 
agencies propose an additional option in this NPR, the full look-
through approach.
    The agencies propose a separate treatment for equity exposures to 
an investment fund to ensure that banking organizations do not receive 
a punitive risk-based capital requirement for equity exposures to 
investment funds that hold only low-risk assets, and to prevent banking 
organizations from arbitraging the proposed risk-based capital 
requirements for certain high-risk exposures.
    As proposed, a banking organization would determine the risk-
weighted asset amount for equity exposures to investment funds using 
one of three approaches: the full look-through approach, the simple 
modified look-through approach, or the alternative modified look-
through approach, unless the equity exposure to an investment fund is a 
community development equity exposure. Such community development 
equity exposures would be subject to a 100 percent risk weight. If an 
equity exposure to an investment fund is part of a hedge pair, a 
banking organization would use the ineffective portion of the hedge 
pair 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 would be equal to its adjusted carrying 
value. A banking organization could choose which approach to apply for 
each equity exposure to an investment fund.
a. Full Look-through Approach
    A banking organization may use the full look-through approach only 
if the banking organization is able to calculate a risk-weighted asset 
amount for each of the exposures held by the investment fund. Under the 
proposal, a banking organization would be required to calculate the 
risk-weighted asset amount for each of the exposures held by the 
investment fund (as calculated under subpart D of the proposal) as if 
the exposures were held directly by the banking organization. The 
banking organization's risk-weighted asset amount for the fund would be 
equal to the aggregate risk-weighted asset amount of the exposures held 
by the fund as if they were held directly by the banking organization 
multiplied by the banking organization's proportional ownership share 
of the fund.
b. Simple Modified Look-through Approach
    Under the proposed simple modified look-through approach, a banking 
organization would set the risk-weighted asset amount for its equity 
exposure to an investment fund equal to the adjusted carrying value of 
the equity exposure multiplied by the highest risk weight assigned 
according to subpart D of the proposal that applies to any exposure the 
fund is permitted to hold under the prospectus, partnership agreement, 
or similar agreement that defines the fund's permissible investments. 
The banking organization 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.
c. Alternative Modified Look-through Approach
    Under the proposed alternative modified look-through approach, a 
banking organization may assign the adjusted carrying value of an 
equity exposure to an investment fund on a pro rata basis to different 
risk weight categories under subpart D of the proposal 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 banking organization's 
equity exposure to the investment fund would be equal to the sum of 
each portion of the adjusted carrying value assigned to an exposure 
type multiplied by the applicable risk weight. If the sum of the 
investment limits for all exposures within the fund exceeds 100 
percent, the banking organization would assume that the fund invests to 
the maximum extent permitted under its investment limits in the 
exposure type with the highest applicable risk weight under the 
proposed requirements and continues to make investments in the order of 
the exposure category with the next highest risk weight until the 
maximum total investment level is reached. If more than one exposure 
category applies to an exposure, the banking organization would use the 
highest applicable risk

[[Page 52928]]

weight. A banking organization 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.

III. Insurance-related Activities

    The agencies propose to apply consolidated capital requirements to 
savings and loan holding companies, consistent with the transfer of 
supervisory responsibilities to the Board under Title III of the Dodd-
Frank Act, as well as the requirements in section 171 of the Dodd-Frank 
Act. Savings and loan holding companies have not been subject to 
consolidated quantitative capital requirements prior to this proposal.
    In the Notice of Intent published in April 2011 (2011 notice of 
intent), the Board discussed the possibility of applying to savings and 
loan holding companies the same consolidated risk-based and leverage 
capital requirements as those proposed for bank holding companies.\68\ 
The Board requested comment on unique characteristics, risks, or 
specific activities of savings and loan holding companies that should 
be taken into consideration when developing consolidated capital 
requirements for these entities. The Board also sought specific comment 
on instruments that are currently included in savings and loan holding 
companies' regulatory capital that would be excluded or strictly 
limited under Basel III, as well as the appropriate transition 
provisions.
---------------------------------------------------------------------------

    \68\ See 76 FR 22662 (April 22, 2011).
---------------------------------------------------------------------------

    The Board received comment letters on the 2011 notice of intent as 
well as on other notices issued in 2011 pertaining to savings and loan 
companies.\69\ In addition, Board staff met with a number of industry 
participants, regulators, and trade groups to further the discussion of 
relevant considerations. The main themes raised by commenters relevant 
to this proposal were the appropriateness of requiring savings and loan 
holding companies to apply ``bank-centric'' consolidated capital 
standards; the need to appropriately address certain instruments and 
assets unique to savings and loan holding companies; the need for 
appropriate transition periods; and the degree of regulatory burden 
(particularly for those savings and loan holding companies that are 
insurance companies that only prepare financial statements according to 
Statutory Accounting Principles).
---------------------------------------------------------------------------

    \69\ See, for example, ``Agency Information Collection 
Activities Regarding Savings and Loan Holding Companies,'' available 
at http://www.gpo.gov/fdsys/pkg/FR-2011-12-29/pdf/2011-33432.pdf; 
``Proposed Agency Information Collection Activities; Comment 
Request,'' available at http://www.gpo.gov/fdsys/pkg/FR-2011-08-25/pdf/2011-21736.pdf.
---------------------------------------------------------------------------

    A number of commenters suggested that the Board defer its oversight 
of savings and loan holding companies, in part or in whole, to 
functional regulators or impose the same capital standards required by 
insurance regulators. Other commenters suggested that certain savings 
and loan holding companies should be exempt from the Board's regulatory 
capital requirements in cases where depository institution activity 
constitutes only a small part of the consolidated organization's assets 
and revenues. The Board believes both of these approaches would be 
inconsistent with the requirements set out in section 171 of the Dodd-
Frank Act. Further, the Board believes it is important to apply 
consolidated risk-based and leverage capital requirements to insurance-
based holding companies because the insurance risk-based capital 
requirements are not imposed on a consolidated basis and are based on 
different considerations, such as solvency concerns, rather than broad 
categories of credit risk.
    The Board considered all the comments received and believes that 
the proposed requirements for savings and loan holding companies 
appropriately take into consideration their unique characteristics, 
risks, and activities while ensuring compliance with the requirements 
of the Dodd-Frank Act. Further, a uniform approach for all holding 
companies would mitigate potential competitive equity issues, limit 
opportunities for regulatory arbitrage, and facilitate comparable 
treatment of similar risks.
    In 2011, the agencies amended the general risk-based capital rules 
to provide that low-risk assets not held by depository institutions may 
receive the capital treatment applicable under the capital guidelines 
for bank holding companies under limited circumstances.\70\ This 
provision provides appropriate capital requirements for certain low-
risk exposures that generally are not held by depository institutions 
and brings the regulations applicable to bank holding companies into 
compliance with section 171 of the Dodd-Frank Act, which requires that 
bank holding companies be subject to capital requirements that are no 
less stringent than those applied to insured depository institutions. 
The agencies propose to continue this approach for purposes of this 
NPR.
---------------------------------------------------------------------------

    \70\ See 76 FR 37620 (June 28, 2011).
---------------------------------------------------------------------------

    The proposed requirements that are unique to savings and loan 
holding companies or bank holding companies are discussed below, 
including provisions pertaining to the determination of risk-weighted 
assets for nonbanking exposures unique to insurance underwriting 
activities (whether conducted by a bank holding company or savings and 
loan holding company).
Policy Loans
    A policy loan would be defined as a loan to policyholders under the 
provisions of an insurance contract that are secured by the cash 
surrender value or collateral assignment of the related policy or 
contract. A policy loan would include: (1) A cash loan, including a 
loan resulting from early payment or accelerated payment benefits, on 
an insurance contract when the terms of contract specify that the 
payment is a policy loan secured by the policy; and (2) an automatic 
premium loan, which is a loan made in accordance with policy provisions 
which provide that delinquent premium payments are automatically paid 
from the cash value at the end of the established grace period for 
premium payments.
    Under the proposal, a policy loan would be assigned a 20 percent 
risk. Such treatment is similar to the treatment of a cash-secured 
loan. The Board believes this treatment is appropriate in light of the 
fact that should a borrower default, the resulting loss to the 
insurance company is mitigated by the right to access the cash 
surrender value or collateral assignment of the related policy.
Separate Accounts
    A separate account is a legally segregated pool of assets owned and 
held by an insurance company and maintained separately from its general 
account assets for the benefit of an individual contract holder, 
subject to certain conditions. To qualify as a separate account, the 
following conditions generally must be met: (1) The account must be 
legally recognized under applicable law; (2) the assets in the account 
must be insulated from general liabilities of the insurance company 
under applicable law and protected from the insurance company's general 
creditors in the event of the insurer's insolvency; (3) the insurance 
company must invest the funds within the account as directed by the 
contract holder in designated investment alternatives or in accordance 
with specific investment objectives or

[[Page 52929]]

policies; and (4) all investment performance, net of contract fees and 
assessments, must be passed through to the contract holder, provided 
that contracts may specify conditions under which there may be a 
minimum guarantee, but not a ceiling.
    Under the general risk-based capital rules, assets held in separate 
accounts are assigned to risk-weight categories based on the risk 
weight of the underlying assets. However, the agencies propose to 
assign a zero percent risk weight to assets held in non-guaranteed 
separate accounts where all the losses are passed on to the contract 
holders. To qualify as a non-guaranteed separate account, the insurance 
company could not contractually guarantee a minimum return or account 
value to the contract holder, and the insurance company would not be 
required to hold reserves for these separate account assets pursuant to 
its contractual obligations on an associated policy. The proposal would 
maintain the current risk-weighting treatment for assets held in a 
separate account that does not qualify as a non-guaranteed separate 
account.
    The agencies believe the proposed treatment for non-guaranteed 
separate account assets is appropriate, even though the proposed 
definition of non-guaranteed separate accounts is more restrictive than 
the one used by insurance regulators. The proposed criteria for non-
guaranteed separate accounts are designed to ensure that a zero percent 
risk weight is applied only to the assets for which contract holders, 
and not an insurance company, would bear all the losses.
    Question 20: The agencies request comment on how the proposed 
definition of a separate account interacts with state law. What are the 
significant differences and what is the nature of the implications of 
these differences?
Deferred Acquisition Costs and Value of Business Acquired
    Deferred acquisition costs (DAC) represent certain costs incurred 
in the acquisition of a new contract or renewal insurance contract that 
are capitalized pursuant to GAAP. Value of business acquired (VOBA) 
refers to assets that reflect revenue streams from insurance policies 
purchased by an insurance company. The Board proposes to risk weight 
these assets at 100 percent, similar to other assets not specifically 
assigned a different risk weight under this NPR.
Surplus Notes
    A surplus note is a financial instrument issued by an insurance 
company that is included in surplus for statutory accounting purposes 
as prescribed or permitted by state laws and regulations. A surplus 
note generally has the following features: (1) The applicable state 
insurance regulator approves in advance the form and content of the 
note; (2) the instrument is subordinated to policyholders, to claimant 
and beneficiary claims, and to all other classes of creditors other 
than surplus note holders; and (3) the applicable state insurance 
regulator is required to approve in advance any interest payments and 
principal repayments on the instrument.
    The Board believes that surplus notes do not meet the proposal's 
eligibility criteria for tier 1 capital. In particular, surplus notes 
are not perpetual instruments but represent debt instruments that are 
treated as equity for insurance regulatory capital purposes. Surplus 
notes are long-term, unsecured obligations, subordinated to all senior 
debt holders and policy claims. The main equity characteristics of 
surplus notes are the loss absorbency feature and the need to obtain 
prior approval from insurance regulators before issuance.
    Some commenters on the Board's savings and loan holding company-
related proposals issued in 2011 recommended that all outstanding 
surplus note issuances should be grandfathered and considered eligible 
as additional tier 1 capital instruments. Other commenters believed the 
Basel III framework provided sufficient flexibility to include surplus 
notes in tier 1 capital given the BCBS's recognition that Basel III 
should accommodate the specific needs of non-joint stock companies, 
such as mutual and cooperatives, which are unable to issue common 
stock. The Board believes generally that including surplus notes in 
tier 1 capital would be inconsistent with the proposed eligibility 
criteria for regulatory capital instruments and with overall safety and 
soundness concerns because surplus notes generally do not reflect the 
required loss absorbency characteristics of tier 1 instruments under 
the proposal. A surplus note could be eligible for inclusion in tier 2 
capital provided the note meets the proposed tier 2 capital eligibility 
criteria. The Board has sought to incorporate reasonable transition 
provisions in the first NPR for instruments that would no longer meet 
the eligibility criteria for tier 2 capital.
Additional Deductions--Insurance Underwriting Subsidiaries
    Consistent with the current treatment under the advanced approaches 
rule, the Basel III NPR would require bank holding companies and 
savings and loan holding companies to consolidate and deduct the 
minimum regulatory capital requirement of insurance underwriting 
subsidiaries (generally 200 percent of the subsidiary's authorized 
control level as established by the appropriate state insurance 
regulator) from total capital to reflect the capital needed to cover 
insurance risks. The proposed deduction treatment recognizes that 
capital requirements imposed by the functional regulator to cover the 
various risks that insurance risk-based capital captures reflect 
capital needs at the particular subsidiary and that this capital is 
therefore not generally available to absorb losses in other parts of 
the organization. The deduction would be 50 percent from tier 1 capital 
and 50 percent from tier 2 capital.
    Question 21: The agencies solicit comment on all aspects of the 
proposed treatment of insurance underwriting activities.
    Question 22: What are the specific terms and features of capital 
instruments (including surplus notes) unique to insurance companies 
that diverge from current eligibility requirements under the proposal? 
Are there ways in which such terms and features might be modified in 
order to bring the instruments into compliance with the proposal?
    Question 23: The agencies seek data on the amount and issuers of 
surplus notes currently outstanding. What proportion of insurance 
company capital is comprised of surplus notes?

IV. Market Discipline and Disclosure Requirements

A. Proposed Disclosure Requirements

    The agencies have long supported meaningful public disclosure by 
banking organizations with the objective of improving market discipline 
and encouraging sound risk-management practices. As noted above, the 
BCBS introduced public disclosure requirements under Pillar 3 of Basel 
II, which is designed to complement the minimum capital requirements 
and the supervisory review process by encouraging market discipline 
through enhanced and meaningful public disclosure.\71\ The BCBS 
introduced additional disclosure requirements in Basel III, which the 
agencies are

[[Page 52930]]

proposing to apply to banking organizations as discussed herein.\72\
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    \71\ The agencies incorporated the BCBS disclosure requirements 
into the advanced approaches rule in 2007. See 72 FR 69288, 69432 
(December 7, 2007).
    \72\ In December 2011, the BCBS proposed additional Pillar 3 
disclosure requirements in a consultative paper titled ``Definition 
of Capital Disclosure Requirements,'' available at http://www.bis.org/publ/bcbs212.pdf. The agencies anticipate incorporating 
these disclosure requirements for banking organizations with more 
than $50 billion in total assets through a separate rulemaking once 
the BCBS finalizes these disclosure requirements.
---------------------------------------------------------------------------

    The public disclosure requirements under this NPR would apply only 
to banking organizations representing the top consolidated level of the 
banking group with $50 billion or more in total consolidated assets 
that are not advanced approaches banking organizations making public 
disclosures pursuant to section 172 of the proposal.\73\ The agencies 
note that the asset threshold of $50 billion is consistent with the 
threshold established by section 165 of the Dodd-Frank Act relating to 
enhanced supervision and prudential standards for certain banking 
organizations.\74\ In addition, the agencies are trying to strike an 
appropriate balance between the market benefits of disclosure and the 
additional burden to a banking organization that provides disclosures. 
A banking organization may be able to fulfill some of the proposed 
disclosure requirements by relying on similar disclosures made in 
accordance with accounting standards or SEC mandates. In addition, a 
banking organization could use information provided in regulatory 
reports to fulfill the disclosure requirements. In these situations, a 
banking organization would be required to explain any material 
differences between the accounting or other disclosures and the 
disclosures required under this proposal.
---------------------------------------------------------------------------

    \73\ Advanced approaches banking organizations would be subject 
to the disclosure requirements described in the Advanced Approaches 
and Market Risk NPR.
    \74\ See section 165(a) of the Dodd-Frank Act (12 U.S.C. 
5365(a)). The Dodd-Frank Act provides that the Board may, upon the 
recommendation of the Financial Stability Oversight Council, 
increase the $50 billion asset threshold for the application of the 
resolution plan, concentration limit, and credit exposure report 
requirements. See 12 U.S.C. 5365(a)(2)(B).
---------------------------------------------------------------------------

    A banking organization's exposure to risks and the techniques that 
it uses to identify, measure, monitor, and control those risks are 
important factors that market participants consider in their assessment 
of the banking organization. Accordingly, as proposed, a banking 
organization would have a formal disclosure policy approved by its 
board of directors that addresses the banking organization's approach 
for determining the disclosures it should make. The policy should 
address the associated internal controls, disclosure controls, and 
procedures. The board of directors and senior management would ensure 
the appropriate review of the disclosures and that effective internal 
controls, disclosure controls, and procedures are maintained. One or 
more senior officers of the banking organization must attest that the 
disclosures meet the requirements of this proposal.
    A banking organization would decide the relevant disclosures based 
on a materiality concept. Information would be regarded as material if 
its omission or misstatement could change or influence the assessment 
or decision of a user relying on that information for the purpose of 
making investment decisions.

B. Frequency of Disclosures

    Consistent with the agencies' longstanding requirements for robust 
quarterly disclosures in regulatory reports, and considering the 
potential for rapid changes in risk profiles, this NPR would require 
that quantitative disclosures are made quarterly. However, qualitative 
disclosures that provide a general summary of a banking organization's 
risk-management objectives and policies, reporting system, and 
definitions may be disclosed annually, provided any significant changes 
are disclosed in the interim.
    The proposal would require that the disclosures are timely. The 
agencies acknowledge that the timing of disclosures under the federal 
banking laws may not always coincide with the timing of disclosures 
required under other federal laws, including disclosures required under 
the federal securities laws and their implementing regulations by the 
SEC. For calendar quarters that do not correspond to fiscal year-end, 
the agencies would consider those disclosures that are made within 45 
days as timely. In general, where a banking organization's fiscal year 
end coincides with the end of a calendar quarter, the agencies would 
consider disclosures to be timely if they are made no later than the 
applicable SEC disclosure deadline for the corresponding Form 10-K 
annual report. In cases where an institution's fiscal year-end does not 
coincide with the end of a calendar quarter, the primary federal 
supervisor would consider the timeliness of disclosures on a case-by-
case basis. In some cases, management may determine that a significant 
change has occurred, such that the most recent reported amounts do not 
reflect the banking organization's capital adequacy and risk profile. 
In those cases, a banking organization would need to disclose the 
general nature of these changes and briefly describe how they are 
likely to affect public disclosures going forward. A banking 
organization would make these interim disclosures as soon as 
practicable after the determination that a significant change has 
occurred.

C. Location of Disclosures and Audit Requirements

    The disclosures required by the proposal would have to be publicly 
available (for example, included on a public Web site) for each of the 
last three years or such shorter time period beginning when the 
proposal comes into effect. Except as discussed below, management would 
have some discretion to determine the appropriate medium and location 
of the disclosure. Furthermore, a banking organization would have 
flexibility in formatting its public disclosures.
    The agencies encourage management to provide all of the required 
disclosures in one place on the entity's public Web site and the 
agencies anticipate that the public Web site address would be reported 
in a banking organization's regulatory report. Alternatively, banking 
organizations would be permitted to provide the disclosures in more 
than one place, as some of them may be included in public financial 
reports (for example, in Management's Discussion and Analysis included 
in SEC filings) or other regulatory reports. The agencies would 
encourage such banking organizations to provide a summary table on 
their public Web site that specifically indicates where all the 
disclosures may be found (for example, regulatory report schedules, 
page numbers in annual reports).
    Disclosures of common equity tier 1, tier 1, and total capital 
ratios would be tested by external auditors as part of the financial 
statement audit. Disclosures that are not included in the footnotes to 
the audited financial statements are not subject to external audit 
reports for financial statements or internal control reports from 
management and the external auditor.

D. Proprietary and Confidential Information

    The agencies believe that the proposed requirements strike an 
appropriate balance between the need for meaningful disclosure and the 
protection of proprietary and confidential information.\75\ 
Accordingly,

[[Page 52931]]

the agencies believe that banking organizations would be able to 
provide all of these disclosures without revealing proprietary and 
confidential information. Only in rare circumstances might disclosure 
of certain items of information required by the proposal compel a 
banking organization to reveal confidential and proprietary 
information. In these unusual situations, the agencies propose that if 
a banking organization believes that disclosure of specific commercial 
or financial information would compromise its position by making public 
information that is either proprietary or confidential in nature, the 
banking organization need not disclose those specific items. Instead, 
the banking organization must disclose more general information about 
the subject matter of the requirement, together with the fact that, and 
the reason why, the specific items of information have not been 
disclosed. This provision would apply only to those disclosures 
included in this NPR and does not apply to disclosure requirements 
imposed by accounting standards or other regulatory agencies.
---------------------------------------------------------------------------

    \75\ Proprietary information encompasses information that, if 
shared with competitors, would render a banking organization's 
investment in these products/systems less valuable, and, hence, 
could undermine its competitive position. Information about 
customers is often confidential, in that it is provided under the 
terms of a legal agreement or counterparty relationship.
---------------------------------------------------------------------------

    Question 24: The agencies seek commenters' views on all of the 
elements of the proposed public disclosure requirements. In particular, 
the agencies seek views on specific disclosure requirements that are 
problematic, and why.

E. Specific Public Disclosure Requirements

    The public disclosure requirements are designed to provide 
important information to market participants on the scope of 
application, capital, risk exposures, risk assessment processes, and, 
thus, the capital adequacy of the institution. The agencies note that 
the substantive content of the tables is the focus of the disclosure 
requirements, not the tables themselves. The table numbers below refer 
to the table numbers in the proposal.
    A banking organization would make the disclosures described in 
tables 14.1 through 14.10. The banking organization would make these 
disclosures publicly available for each of the last three years or such 
shorter time period beginning when the proposed requirements come into 
effect.\76\
---------------------------------------------------------------------------

    \76\ Other public disclosure requirements would continue to 
apply, such as federal securities law, and regulatory reporting 
requirements for banking organizations.
---------------------------------------------------------------------------

    Table 14.1 disclosures, ``Scope of Application,'' would name the 
top corporate entity in the group to which subpart D of the proposal 
would apply; include a brief description of the differences in the 
basis for consolidating entities for accounting and regulatory 
purposes, as well as a description of any restrictions, or other major 
impediments, on transfer of funds or total capital within the group. 
These disclosures provide the basic context underlying regulatory 
capital calculations.
    Table 14.2 disclosures, ``Capital Structure,'' would provide 
summary information on the terms and conditions of the main features of 
regulatory capital instruments, which would allow for an evaluation of 
the quality of the capital available to absorb losses within a banking 
organization. A banking organization also would disclose the total 
amount of common equity tier 1, tier 1 and total capital, with separate 
disclosures for deductions and adjustments to capital. The agencies 
expect that many of these disclosure requirements would be captured in 
revised regulatory reports.
    Table 14.3 disclosures, ``Capital Adequacy,'' would provide 
information on a banking organization's approach for categorizing and 
risk-weighting its exposures, as well as the amount of total risk-
weighted assets. The table would also include common equity tier 1, and 
tier 1 and total risk-based capital ratios for the top consolidated 
group; and for each depository institution subsidiary.
    Table 14.4 disclosures, ``Capital Conservation Buffer,'' would 
require a banking organization to disclose the capital conservation 
buffer, the eligible retained income and any limitations on capital 
distributions and certain discretionary bonus payments, as applicable.
    Tables 14.5, 14.6 and 14.7 disclosures, related to credit risk, 
counterparty credit risk and credit risk mitigation, respectively, 
would provide market participants with insight into different types and 
concentrations of credit risk to which a banking organization is 
exposed and the techniques it uses to measure, monitor, and mitigate 
those risks. These disclosures are intended to enable market 
participants to assess the credit risk exposures of the banking 
organization without revealing proprietary information.
    Table 14.8 disclosures, ``Securitization,'' would provide 
information to market participants on the amount of credit risk 
transferred and retained by a banking organization through 
securitization transactions, the types of products securitized by the 
organization, the risks inherent in the organization's securitized 
assets, the organization's policies regarding credit risk mitigation, 
and the names of any entities that provide external credit assessments 
of a securitization. These disclosures would provide a better 
understanding of how securitization transactions impact the credit risk 
of a bank. For purposes of these disclosures, ``exposures securitized'' 
include underlying exposures originated by a banking organization, 
whether generated by the banking organization or purchased from third 
parties, and third-party exposures included in sponsored programs. 
Securitization transactions in which the originating banking 
organization does not retain any securitization exposure would be shown 
separately and would only be reported for the year of inception.
    Table 14.9 disclosures, ``Equities Not Subject to Subpart F of the 
[proposal],'' would provide market participants with an understanding 
of the types of equity securities held by the banking organization and 
how they are valued. The table would also provide information on the 
capital allocated to different equity products and the amount of 
unrealized gains and losses.
    Table 14.10 disclosures, ``Interest Rate Risk for Non-trading 
Activities,'' would require banking organization to provide certain 
quantitative and qualitative disclosures regarding the banking 
organization's management of interest rate risks.

V. List of Acronyms That Appear in the Proposal

ABCP Asset-Backed Commercial Paper
ABS Asset Backed Security
ADC Acquisition, Development, or Construction
AFS Available For Sale
ALLL Allowance for Loan and Lease Losses
AOCI Accumulated Other Comprehensive Income
BCBS Basel Committee on Banking Supervision
BHC Bank Holding Company
BIS Bank for International Settlements
CAMELS Capital adequacy, Asset quality, Management, Earnings, 
Liquidity, and Sensitivity to market risk
CCF Credit Conversion Factor
CCP Central Counterparty
CDC Community Development Corporation
CDFI Community Development Financial Institution
CDO Collateralized Debt Obligation
CDS Credit Default Swap
CDSind Index Credit Default Swap
CEIO Credit-Enhancing Interest-Only Strip
CF Conversion Factor
CFR Code of Federal Regulations
CFTC Commodity Futures Trading Commission
CMBS Commercial Mortgage Backed Security

[[Page 52932]]

CPSS Committee on Payment and Settlement Systems
CRC Country Risk Classifications
CRAM Country Risk Assessment Model
CRM Credit Risk Mitigation
CUSIP Committee on Uniform Securities Identification Procedures
DAC Deferred Acquisition Costs
DCO Derivatives Clearing Organizations
DFA Dodd-Frank Act
DI Depository Institution
DPC Debts Previously Contracted
DTA Deferred Tax Asset
DTL Deferred Tax Liability
DVA Debit Valuation Adjustment
DvP Delivery-versus-Payment
E Measure of Effectiveness
EAD Exposure at Default
ECL Expected Credit Loss
EE Expected Exposure
E.O. Executive Order
EPE Expected Positive Exposure
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FFIEC Federal Financial Institutions Examination Council
FHLMC Federal Home Loan Mortgage Corporation
FMU Financial Market Utility
FNMA Federal National Mortgage Association
FR Federal Register
GAAP Generally Accepted Accounting Principles
GDP Gross Domestic Product
GLBA Gramm-Leach-Bliley Act
GSE Government-Sponsored Entity
HAMP Home Affordable Mortgage Program
HELOC Home Equity Line of Credit
HOLA Home Owners' Loan Act
HVCRE High-Volatility Commercial Real Estate
IAA Internal Assessment Approach
IFRS International Reporting Standards
IMM Internal Models Methodology
I/O Interest-Only
IOSCO International Organization of Securities Commissions
LTV Loan-to-Value Ratio
M Effective Maturity
MDB Multilateral Development Banks
MSA Mortgage Servicing Assets
NGR Net-to-Gross Ratio
NPR Notice of Proposed Rulemaking
NRSRO Nationally Recognized Statistical Rating Organization
OCC Office of the Comptroller of the Currency
OECD Organization for Economic Co-operation and Development
OIRA Office of Information and Regulatory Affairs
OMB Office of Management and Budget
OTC Over-the-Counter
OTTI Other Than Temporary Impairment
PCA Prompt Corrective Action
PCCR Purchased Credit Card Relationships
PFE Potential Future Exposure
PMI Private Mortgage Insurance
PSE Public Sector Entities
PvP Payment-versus-payment
QCCP Qualifying Central Counterparty
REIT Real Estate Investment Trust
RFA Regulatory Flexibility Act
RMBS Residential Mortgage Backed Security
RTCRRI Act Resolution Trust Corporation Refinancing, Restructuring, 
and Improvement Act of 1991
RVC Ratio of Value Change
RWA Risk-Weighted Asset
SEC Securities and Exchange Commission
SFA Supervisory Formula Approach
SFT Securities Financing Transactions
SLHC Savings and Loan Holding Company
SPE Special Purpose Entity
SPV Special Purpose Vehicle
SR Supervision and Regulation Letter
SRWA Simple Risk-Weight Approach
SSFA Simplified Supervisory Formula Approach
UMRA Unfunded Mandates Reform Act of 1995
U.S. United States
U.S.C. United States Code
VaR Value-at-Risk
VOBA Value of Business Acquired

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA) requires 
an agency to provide an initial regulatory flexibility analysis with a 
proposed rule or to certify 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 banking entities with assets less than 
or equal to $175 million) and publish its certification and a short, 
explanatory statement in the Federal Register along with the proposed 
rule.
    The agencies are separately publishing initial regulatory 
flexibility analyses for the proposals as set forth in this NPR.

Board

A. Statement of the Objectives of the Proposal; Legal Basis
    As discussed in the Supplementary Information above, the Board is 
proposing to revise its capital requirements to promote safe and sound 
banking practices, implement Basel III and other aspects of the Basel 
capital framework, and codify its capital requirements.
    The proposals in this NPR and the Basel III NPR would implement 
provisions consistent with certain requirements of the Dodd-Frank Act 
because they would (1) revise regulatory capital requirements to remove 
all references to, and requirements of reliance on, credit ratings,\77\ 
and (2) impose new or revised minimum capital requirements on certain 
depository institution holding companies.\78\
---------------------------------------------------------------------------

    \77\ See 15 U.S.C. 78o-7, note.
    \78\ See 12 U.S.C. 5371.
---------------------------------------------------------------------------

    Additionally, under section 38(c)(1) of the Federal Deposit 
Insurance Act, the agencies may prescribe capital standards for 
depository institutions that they regulate.\79\ In addition, among 
other authorities, the Board may establish capital requirements for 
state member banks under the Federal Reserve Act,\80\ for state member 
banks and bank holding companies under the International Lending 
Supervision Act and Bank Holding Company Act,\81\ and for savings and 
loan holding companies under the Home Owners Loan Act.\82\
---------------------------------------------------------------------------

    \79\ See 12 U.S.C. 1831o(c).
    \80\ See 12 U.S.C. 321-338.
    \81\ See 12 U.S.C. 3907; 12 U.S.C. 1844.
    \82\ See 12 U.S.C. 1467a(g)(1).
---------------------------------------------------------------------------

B. Small Entities Potentially Affected by the Proposal
    Under regulations issued by the Small Business Administration,\83\ 
a small entity includes a depository institution, bank holding company, 
or savings and loan holding company with total assets of $175 million 
or less (a small banking organization). As of March 31, 2012 there were 
373 small state member banks. As of December 31, 2011, there were 
approximately 128 small savings and loan holding companies and 2,385 
small bank holding companies.\84\
---------------------------------------------------------------------------

    \83\ See 13 CFR 121.201.
    \84\ The December 31, 2011 data are the most recent available 
data on small savings and loan holding companies and small bank 
holding companies.
---------------------------------------------------------------------------

    The proposed requirements would not apply to small bank holding 
companies that are not engaged in significant nonbanking activities, do 
not conduct significant off-balance sheet activities, and do not have a 
material amount of debt or equity securities outstanding that are 
registered with the SEC. These small bank holding companies remain 
subject to the Board's Small Bank Holding Company Policy Statement 
(Policy Statement).\85\
---------------------------------------------------------------------------

    \85\ See 12 CFR part 225, appendix C. Section 171 of the Dodd-
Frank provides an exemption from its requirements for bank holding 
companies subject to the Policy Statement (as in effect on May 19, 
2010). Section 171 does not provide a similar exemption for small 
savings and loan holding companies and they are therefore subject to 
the proposed rules. 12 U.S.C. 5371(b)(5)(C).
---------------------------------------------------------------------------

    Small state member banks and small savings and loan holding 
companies (covered small banking organizations) would be subject to the 
proposals in this NPR.
C. Impact on Covered Small Banking Organizations
    The proposed requirements in the Basel III NPR and this NPR may 
impact covered small banking organizations in several ways, including 
both recordkeeping and compliance requirements. As explained in the 
Basel III NPR, the proposals therein would change the minimum capital 
ratios and

[[Page 52933]]

qualifying criteria for regulatory capital, including required 
deductions and adjustments. The proposals in this NPR would modify the 
risk weight treatment for some exposures.
    Most small state member banks already hold capital in excess of the 
proposed minimum risk-based regulatory ratios. Therefore, the proposed 
requirements are not expected to significantly impact the capital 
structure of most covered small state member banks. Comparing the 
capital requirements proposed in this NPR and the Basel III NPR on a 
fully phased-in basis to minimum requirements of the current rules, the 
capital ratios of approximately 1-2 percent of small state member banks 
would fall below at least one of the proposed minimum risk-based 
capital requirements. Thus, the Board believes that the proposals in 
this NPR and the Basel III NPR would affect an insubstantial number of 
small state member banks.
    Because the Board has not fully implemented reporting requirements 
for savings and loan holding companies, it is unable to determine the 
impact of the proposed requirements on small savings and loan holding 
companies. The Board seeks comment on the potential impact of the 
proposed requirements on small savings and loan holding companies.
    Covered small banking organizations that would have to raise 
additional capital to comply with the requirements of the proposal may 
incur certain costs, including costs associated with issuance of 
regulatory capital instruments. The Board has sought to minimize the 
burden of raising additional capital by providing for transitional 
arrangements that phase-in the new capital requirements over several 
years, allowing banking organizations time to accumulate additional 
capital through retained earnings as well as raising capital in the 
market.
    As discussed above, the proposed requirements would modify risk 
weights for exposures, as well as calculation of the leverage ratio. 
Accordingly, covered small banking organizations would be required to 
change their internal reporting processes to comply with these changes. 
These changes may require some additional personnel training and 
expenses related to new systems (or modification of existing systems) 
for calculating regulatory capital ratios.
    Additionally, covered small banking organizations that hold certain 
exposures would be required to obtain additional information under the 
proposed rules in order to determine the applicable risk weights. 
Covered small banking organizations that hold exposures to sovereign 
entities other than the United States, foreign depository institutions, 
or foreign public sector entities would have to acquire Country Risk 
Classification ratings produced by the OECD to determine the applicable 
risk weights. Covered small banking organizations that hold residential 
mortgage exposures would need to have and maintain information about 
certain underwriting features of the mortgage as well as the LTV ratio 
in order to determine the applicable risk weight. Generally, covered 
small banking organizations that hold securitization exposures would 
need to obtain sufficient information about the underlying exposures to 
satisfy due diligence requirements and apply the simplified supervisory 
formula described above to calculate the appropriate risk weight, or be 
required to assign a 1,250 percent risk weight to the exposure.
    Covered small banking organizations typically do not hold 
significant exposures to foreign entities or securitization exposures, 
and the Board expects any additional burden related to calculating risk 
weights for these exposures, or holding capital against these 
exposures, would be modest. Some covered small banking organizations 
may hold significant residential mortgage exposures. However, if the 
small banking organization originated the exposure, it should have 
sufficient information to determine the applicable risk weight under 
the proposal. If the small banking organization acquired the exposure 
from another institution, the information it would need to determine 
the applicable risk weight is consistent with information that it 
should normally collect for portfolio monitoring purposes and internal 
risk management.
    Covered small banking organizations would not be subject to the 
disclosure requirements in subpart D of the proposal. However, the 
Board expects to modify regulatory reporting requirements that apply to 
covered small banking organizations to reflect the changes made to the 
Board's capital requirements in the proposal. The Board expects to 
propose these changes to the relevant reporting forms in a separate 
notice.
    For small savings and loan holding companies, the compliance 
burdens described above may be greater than for those of other covered 
small banking organizations. Small savings and loan holding companies 
previously were not subject to regulatory capital requirements and 
reporting requirements tied regulatory capital requirements. Small 
savings and loan holding companies may therefore need to invest 
additional resources in establishing internal systems (including 
purchasing software or hiring personnel) or raising capital to come 
into compliance with the proposed rules.
D. Transitional Arrangements To Ease Compliance Burden
    For those covered small banking organizations that would not 
immediately meet the proposed minimum requirements, the NPR provides 
transitional arrangements for banking organizations to make adjustments 
and to come into compliance. Small covered banking organizations would 
be required to meet the proposed minimum capital ratio requirements 
beginning on January 1, 2013 thorough to December 31, 2014. On January 
1, 2015, small covered banking organizations would be required to 
comply with the new Prompt Corrective Action capital ratio requirements 
proposed in the Basel III NPR. January 1, 2015 is also the proposed 
effective date for small covered companies to begin calculating risk-
weighted assets according to the methodologies in this NPR.
E. Identification of Duplicative, Overlapping, or Conflicting Federal 
Rules
    The Board is unaware of any duplicative, overlapping, or 
conflicting federal rules. As noted above, the Board anticipates 
issuing a separate proposal to implement reporting requirements that 
are tied to (but do not overlap or duplicate) the requirements of the 
proposed rules. The Board seeks comments and information regarding any 
such rules that are duplicative, overlapping, or otherwise in conflict 
with the proposed rules.
F. Discussion of Significant Alternatives
    The Board has sought to incorporate flexibility into the proposals 
in this NPR and provide alternative treatments to lessen burden and 
complexity for smaller banking organizations wherever possible, 
consistent with safety and soundness and applicable law, including the 
Dodd-Frank Act. These alternatives and flexibility features include the 
following:
     Covered small banking organizations would not be subject 
to the enhanced disclosure requirements of the proposed rules.
     Covered small banking organizations could choose to apply 
the gross-up approach for securitization exposures rather than the 
SSFA.

[[Page 52934]]

    The proposal also offers covered small banking organizations a 
choice between a simpler and more complex methods of risk weighting 
equity exposures to investment funds.
    The Board welcomes comment on any significant alternatives to the 
proposed rules applicable to covered small banking organizations that 
would minimize their impact on those entities, as well as on all other 
aspects of its analysis. A final regulatory flexibility analysis will 
be conducted after consideration of comments received during the public 
comment period.

OCC

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.) (RFA), the OCC is publishing this summary of its 
Initial Regulatory Flexibility Analysis (IRFA) for this NPR. The RFA 
requires an agency to publish in the Federal Register its IRFA or a 
summary of its IRFA at the time of the publication of its general 
notice of proposed rulemaking \86\ or to certify that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities.\87\ For its IRFA, the OCC analyzed the potential 
economic impact of this NPR on the small entities that it regulates.
---------------------------------------------------------------------------

    \86\ 5 U.S.C. 603(a).
    \87\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The OCC welcomes comment on all aspects of the summary of its IRFA. 
A final regulatory flexibility analysis will be conducted after 
consideration of comments received during the public comment period.
A. Reasons Why the Proposed Rule is Being Considered by the Agencies; 
Statement of the Objectives of the Proposed Rule; and Legal Basis
    As discussed in the Supplementary Information section above, the 
agencies are proposing to revise their capital requirements to promote 
safe and sound banking practices, implement Basel III, and harmonize 
capital requirements across charter type. This NPR also satisfies 
certain requirements under the Dodd-Frank Act by revising regulatory 
capital requirements to remove all references to, and requirements of 
reliance on, credit ratings. Federal law authorizes each of the 
agencies to prescribe capital standards for the banking organizations 
it regulates.\88\
---------------------------------------------------------------------------

    \88\ See, e.g., 12 U.S.C. 1467a(g)(1); 12 U.S.C. 1831o(c)(1); 12 
U.S.C. 1844; 12 U.S.C. 3907; and 12 U.S.C. 5371.
---------------------------------------------------------------------------

B. Small Entities Affected by the Proposal
    Under regulations issued by the Small Business Administration,\89\ 
a small entity includes a depository institution or bank holding 
company with total assets of $175 million or less (a small banking 
organization). As of March 31, 2012, there were approximately 599 small 
national banks and 284 small federally chartered savings associations.
---------------------------------------------------------------------------

    \89\ See 13 CFR 121.201.
---------------------------------------------------------------------------

C. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    This NPR includes changes to the general risk-based capital 
requirements that address the calculation of risk-weighted assets and 
affect small banking organizations. The proposed rules in this NPR that 
would affect small banking organizations include:
    1. Changing the denominator of the risk-based capital ratios by 
revising the asset risk weights;
    2. Revising the treatment of counterparty credit risk;
    3. Replacing references to credit ratings with alternative measures 
of creditworthiness;
    4. Providing more comprehensive recognition of collateral and 
guarantees; and
    5. Providing a more favorable capital treatment for transactions 
cleared through qualifying central counterparties.
    These changes are designed to enhance the risk-sensitivity of the 
calculation of risk-weighted assets. Therefore, capital requirements 
may go down for some assets and up for others. For those assets with a 
higher risk weight under this NPR, however, that increase may be large 
in some instances, e.g., requiring the equivalent of a dollar-for-
dollar capital charge for some securitization exposures.
    The Basel Committee on Banking Supervision has been conducting 
periodic reviews of the potential quantitative impact of the Basel III 
framework.\90\ Although these reviews monitor the impact of 
implementing the Basel III framework rather than the proposed rule, the 
OCC is using estimates consistent with the Basel Committee's analysis, 
including a conservative estimate of a 20 percent increase in risk-
weighted assets, to gauge the impact of this NPR on risk-weighted 
assets. Using this assumption, the OCC estimates that a total of 56 
small national banks and federally chartered savings associations will 
need to raise additional capital to meet their regulatory minimums. The 
OCC estimates that this total projected shortfall will be $143 million 
and that the cost of lost tax benefits associated with increasing total 
capital by $143 million will be approximately $0.8 million per year. 
Averaged across the 56 affected institutions, the cost is approximately 
$14,000 per institution per year.
---------------------------------------------------------------------------

    \90\ See, ``Update on Basel III Implementation Monitoring,'' 
Quantitative Impact Study Working Group, January 28, 2012.
---------------------------------------------------------------------------

    To comply with the proposed rules in this NPR, covered small 
banking organizations would be required to change their internal 
reporting processes. These changes would require some additional 
personnel training and expenses related to new systems (or modification 
of existing systems) for calculating regulatory capital ratios.
    Additionally, covered small banking organizations that hold certain 
exposures would be required to obtain additional information under the 
proposed rules in order to determine the applicable risk weights. 
Covered small banking organizations that hold exposures to sovereign 
entities other than the United States, foreign depository institutions, 
or foreign public sector entities would have to acquire Country Risk 
Classification ratings produced by the OECD to determine the applicable 
risk weights. Covered small banking organizations that hold residential 
mortgage exposures would need to have and maintain information about 
certain underwriting features of the mortgage as well as the LTV ratio 
in order to determine the applicable risk weight. Generally, covered 
small banking organizations that hold securitization exposures would 
need to obtain sufficient information about the underlying exposures to 
satisfy due diligence requirements and apply either the simplified 
supervisory formula or the gross-up approach described in section ----
--.43 of this NPR to calculate the appropriate risk weight, or be 
required to assign a 1,250 percent risk weight to the exposure.
    Covered small banking organizations typically do not hold 
significant exposures to foreign entities or securitization exposures, 
and the agencies expect any additional burden related to calculating 
risk weights for these exposures, or holding capital against these 
exposures, would be relatively modest. The OCC estimates that, for 
small national banks and federal savings associations, the cost of 
implementing the alternative measures of creditworthiness will be 
approximately $36,125 per institution.
    Some covered small banking organizations may hold significant 
residential mortgage exposures.

[[Page 52935]]

However, if the small banking organization originated the exposure, it 
should have sufficient information to determine the applicable risk 
weight under the proposed rule. If the small banking organization 
acquired the exposure from another institution, the information it 
would need to determine the applicable risk weight is consistent with 
information that it should normally collect for portfolio monitoring 
purposes and internal risk management.
    Covered small banking organizations would not be subject to the 
disclosure requirements in subpart D of the proposed rule. However, the 
agencies expect to modify regulatory reporting requirements that apply 
to covered small banking organizations to reflect the changes made to 
the agencies' capital requirements in the proposed rules. The agencies 
expect to propose these changes to the relevant reporting forms in a 
separate notice.
    To determine if a proposed rule has a significant economic impact 
on small entities we compared the estimated annual cost with annual 
noninterest expense and annual salaries and employee benefits for each 
small entity. If the estimated annual cost was greater than or equal to 
2.5 percent of total noninterest expense or 5 percent of annual 
salaries and employee benefits we classified the impact as significant. 
The OCC has concluded that the proposals included in this NPR would 
exceed this threshold for 500 small national banks and 253 small 
federally chartered private savings institutions. Accordingly, for the 
purposes of this IRFA, the OCC has concluded that the changes proposed 
in this NPR, when considered without regard to other changes to the 
capital requirements that the agencies simultaneously are proposing, 
would have a significant economic impact on a substantial number of 
small entities.
    Additionally, as discussed in the Supplementary Information section 
above, the changes proposed in this NPR should be considered together 
with changes proposed in the separate Basel III NPR also published in 
today's Federal Register. The changes described in the Basel III NPR 
include changes to minimum capital requirements that would impact small 
national banks and federal savings associations. These include a more 
conservative definition of regulatory capital, a new common equity tier 
1 capital ratio, a higher minimum tier 1 capital ratio, new thresholds 
for prompt corrective action purposes, and a new capital conservation 
buffer. To estimate the impact of the Basel III NPR on national banks' 
and federal savings' association capital needs, the OCC estimated the 
amount of capital the banks will need to raise to meet the new minimum 
standards relative to the amount of capital they currently hold. To 
estimate new capital ratios and requirements, the OCC used currently 
available data from banks' quarterly Consolidated Report of Condition 
and Income (Call Reports) to approximate capital under the proposed 
rule, which shows that most banks have raised their capital levels well 
above the existing minimum requirements. After comparing existing 
levels with the proposed new requirements, the OCC determined that 28 
small institutions that it regulates would fall short of the proposed 
increased capital requirements. Together, those institutions would need 
to raise approximately $82 million in regulatory capital to meet the 
proposed minimum requirements set forth in the Basel III NPR. The OCC 
estimates that the cost of lost tax benefits associated with increasing 
total capital by $82 million will be approximately $0.5 million per 
year. Averaged across the 28 affected institutions, the cost attributed 
to the Basel III NPR is approximately $18,000 per institution per year. 
The OCC concluded for purposes of its IRFA for the Basel III NPR that 
the changes described in the Basel III NPR, when considered without 
regard to changes in this NPR, would not result in a significant 
economic impact on a substantial number of small entities. However, the 
OCC has concluded that the proposed changes in this NPR would result in 
a significant economic impact on a substantial number of small 
entities. Therefore, considered together, this NPR and the Basel III 
NPR would have a significant economic impact on a substantial number of 
small entities.
D. Identification of Duplicative, Overlapping, or Conflicting Federal 
Rules
    The OCC is unaware of any duplicative, overlapping, or conflicting 
federal rules. As noted previously, the OCC anticipates issuing a 
separate proposal to implement reporting requirements that are tied to 
(but do not overlap or duplicate) the requirements of the proposed 
rules. The OCC seeks comments and information regarding any such 
federal rules that are duplicative, overlapping, or otherwise in 
conflict with the proposed rule.
E. Discussion of Significant Alternatives to the Proposed Rule
    The agencies have sought to incorporate flexibility into the 
proposed rule and lessen burden and complexity for smaller banking 
organizations wherever possible, consistent with safety and soundness 
and applicable law, including the Dodd-Frank Act. The agencies are 
requesting comment on potential options for simplifying the rule and 
reducing burden, including whether to permit certain small banking 
organizations to continue using portions of the current general risk-
based capital rules to calculate risk-weighted assets. Additionally, 
the agencies proposed the following alternatives and flexibility 
features:
     Covered small banking organizations are not subject to the 
enhanced disclosure requirements of the proposed rules.
     Covered small banking organizations would continue to 
apply a 100 percent risk weight to corporate exposures (as described in 
section ----.32 of this NPR).
     Covered small banking organizations may choose to apply 
the simpler gross-up method for securitization exposures rather than 
the Simplified Supervisory Formula Approach (SSFA) (as described in 
section ----.43 of this NPR).
     The proposed rule offers covered small banking 
organizations a choice between a simpler and more complex methods of 
risk weighting equity exposures to investment funds (as described in 
section ----.53 of this NPR).
    The agencies welcome comment on any significant alternatives to the 
proposed rules applicable to covered small banking organizations that 
would minimize their impact on those entities.

VII. Paperwork Reduction Act

A. Request for Comment on Proposed Information Collection

    In accordance with the requirements of the Paperwork Reduction Act 
(PRA) of 1995, the Agencies may not conduct or sponsor, and the 
respondent is not required to respond to, an information collection 
unless it displays a currently valid Office of Management and Budget 
(OMB) control number. The Agencies are requesting comment on a proposed 
information collection.
    The information collection requirements contained in this joint 
notice of proposed rulemaking (NPRs) have been submitted by the OCC and 
FDIC to OMB for review under the PRA, under OMB Control Nos. 1557-0234 
and 3064-0153. In accordance with the PRA (44 U.S.C. 3506; 5 CFR part 
1320, Appendix A.1), the Board has reviewed the NPR under the authority 
delegated by OMB. The Board's OMB Control No. is 7100-0313. The 
requirements are

[[Page 52936]]

found in Sec. Sec.  ----.35, ----.37, ----.41, ----.42, ----.62, and --
--.63.
    The Agencies have published two other NPRs in this issue of the 
Federal Register. Please see the NPRs entitled ``Regulatory Capital 
Rules: Regulatory Capital, Minimum Regulatory Capital Ratios, Capital 
Adequacy, Transition Provisions'' and ``Regulatory Capital Rules: 
Advanced Approaches Risk-based Capital Rules; Market Risk Capital 
Rule.'' While the three NPRs together comprise an integrated capital 
framework, the PRA burden has been divided among the three NPRs and a 
PRA statement has been provided in each.
    Comments are invited on:
    (a) Whether the collection of information is necessary for the 
proper performance of the Agencies' functions, including whether the 
information has practical utility;
    (b) The accuracy of the estimates of the burden of the information 
collection, including the validity of the methodology and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record.
    Comments should be addressed to:
    OCC: Communications Division, Office of the Comptroller of the 
Currency, Public Information Room, Mail stop 1-5, Attention: 1557-0234, 
250 E Street SW., Washington, DC 20219. In addition, comments may be 
sent by fax to 202-874-4448, or by electronic mail to 
regs.comments@occ.treas.gov. You can inspect and photocopy the comments 
at the OCC's Public Information Room, 250 E Street SW., Washington, DC 
20219. You can make an appointment to inspect the comments by calling 
202-874-5043.
    Board: You may submit comments, identified by R-14441255, by any of 
the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments on the http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: regs.comments@federalreserve.gov. Include docket 
number in the subject line of the message.
     Fax: 202-452-3819 or 202-452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C Streets 
NW.) between 9 a.m. and 5 p.m. on weekdays.
    FDIC: You may submit written comments, which should refer to RIN 
3064-AD96 Standardized Approach for Risk-weighted Assets; Market 
Discipline and Disclosure Requirements 0153, by any of the following 
methods:
     Agency Web Site: http://www.fdic.gov/regulations/laws/
federal/propose.html. Follow the instructions for submitting comments 
on the FDIC Web site.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: Comments@FDIC.gov.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, FDIC, 550 17th Street NW., Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m.
    Public Inspection: All comments received will be posted without 
change to http://www.fdic.gov/regulations/laws/federal/propose/html 
including any personal information provided. Comments may be inspected 
at the FDIC Public Information Center, Room 100, 801 17th Street NW., 
Washington, DC, between 9 a.m. and 4:30 p.m. on business days.

B. Proposed Information Collection

    Title of Information Collection: Basel III, Part II.
    Frequency of Response: On occasion and quarterly.
    Affected Public:
    OCC: National banks and federally chartered savings associations.
    Board: State member banks, bank holding companies, and savings and 
loan holding companies.
    FDIC: Insured state nonmember banks, state savings associations, 
and certain subsidiaries of these entities.
    Estimated Burden: The burden estimates below exclude any regulatory 
reporting burden associated with changes to the Consolidated Reports of 
Income and Condition for banks (FFIEC 031 and FFIEC 0431; OMB Nos. 
7100- 0036, 3064-0052, 1557-0081), and the Financial Statements for 
Bank Holding Companies (FR Y-9; OMB No. 7100-0128), and the Capital 
Assessments and Stress Testing information collection (FR Y-14A/Q/M; 
OMB No. 7100-0341).
    The agencies are still considering whether to revise these 
information collections or to implement a new information collection 
for the regulatory reporting requirements. In either case, a separate 
notice would be published for comment on the regulatory reporting 
requirements.
OCC
    Estimated Number of Respondents: Independent national banks, 172; 
federally chartered savings banks, 603.
    Estimated Burden per Respondent: One-time recordkeeping, 122 hours; 
ongoing recordkeeping, 20 hours; one-time disclosures, 226.25 hours; 
ongoing disclosures, 131.25 hours.
    Total Estimated Annual Burden: 112,303.75 hours.
Board
    Estimated Number of Respondents: SMBs, 831; BHCs, 933; SLHCs, 438.
    Estimated Burden per Respondent: One-time recordkeeping, 122 hours; 
ongoing recordkeeping, 20 hours; one-time disclosures, 226.25 hours; 
ongoing disclosures, 131.25 hours.
    Total Estimated Annual Burden: One-time recordkeeping and 
disclosures, 279,277.75 hours; ongoing recordkeeping and disclosures 
68,715.
FDIC
    Estimated Number of Respondents: 4,571.
    Estimated Burden per Respondent: One-time recordkeeping, 122 hours; 
ongoing recordkeeping, 20 hours; one-time disclosures, 226.25 hours; 
ongoing disclosures, 131.25 hours.
    Total Estimated Annual Burden: 652,087 hours (558,567 one-time 
recordkeeping and disclosures; 93,520 ongoing recordkeeping and 
disclosures).
    Abstract:
    The recordkeeping requirements are found in sections --.35, --.37, 
-- and .41. The disclosure requirements are found in sections --.42, 
--.62, and --.63. These recordkeeping and disclosure requirements are 
necessary for the agencies' assessment and monitoring of

[[Page 52937]]

the risk-sensitivity of the calculation of a banking organization's 
total risk-weighted assets and for general safety and soundness 
purposes.
Section-by-section Analysis
Recordkeeping
    Section --.35 sets forth requirements for cleared transactions. 
Section --.35(b)(3)(i)(A) would require for a cleared transaction with 
a qualified central counterparty (QCCP) that a client bank apply a risk 
weight of 2 percent, provided that the collateral posted by the bank to 
the QCCP is subject to certain arrangements and the client bank has 
conducted a sufficient legal review (and maintains sufficient written 
documentation of the legal review) to conclude with a well-founded 
basis that the arrangements, in the event of a legal challenge, would 
be found to be legal, valid, binding and enforceable under the law of 
the relevant jurisdictions. The agencies estimate that respondents 
would take on average 2 hours to reprogram and update systems with the 
requirements outlined in this section. In addition, the agencies 
estimate that, on a continuing basis, respondents would take on average 
2 hours annually to maintain their internal systems.
    Section --.37 addresses requirements for collateralized 
transactions. Section --.37(c)(4)(i)(E) would require that a bank have 
policies and procedures describing how it determines the period of 
significant financial stress used to calculate its own internal 
estimates for haircuts and be able to provide empirical support for the 
period used. The agencies estimate that respondents would take on 
average 80 hours (two business weeks) to reprogram and update systems 
with the requirements outlined in this section. In addition, the 
agencies estimate that, on a continuing basis, respondents would take 
on average 16 hours annually to maintain their internal systems.
    Section --.41 addresses operational requirements for securitization 
exposures. Section --.41(b)(3) would allow for synthetic 
securitizations a bank's recognition, for risk-based capital purposes, 
of a credit risk mitigant to hedge underlying exposures if certain 
conditions are met, including the bank's having obtained a well-
reasoned opinion from legal counsel that confirms the enforceability of 
the credit risk mitigant in all relevant jurisdictions. Section 
--.41(c)(2)(i) would require that a bank support a demonstration of its 
comprehensive understanding of a securitization exposure by conducting 
and documenting an analysis of the risk characteristics of each 
securitization exposure prior to its acquisition, taking into account a 
number of specified considerations. The agencies estimate that 
respondents would take on average 40 hours (one business week) to 
reprogram and update systems with the requirements outlined in this 
section. In addition, the agencies estimate that, on a continuing 
basis, respondents would take on average 2 hours annually to maintain 
their internal systems.
Disclosures
    Section --.42 addresses risk-weighted assets for securitization 
exposures. Section --.42(e)(2) would require that a bank publicly 
disclose that is has provided implicit support to the securitization 
and the risk-based capital impact to the bank of providing such 
implicit support.
    Section --.62 sets forth disclosure requirements related to a 
bank's capital requirements. Section --.62(a) specifies a quarterly 
frequency for the disclosure of information in the applicable tables 
set out in section 63 and, if a significant change occurs, such that 
the most recent reported amounts are no longer reflective of the bank's 
capital adequacy and risk profile, section --.62(a) also would require 
the bank to disclose as soon as practicable thereafter, a brief 
discussion of the change and its likely impact. Section 62(a) would 
allow for annual disclosure of qualitative information that typically 
does not change each quarter, provided that any significant changes are 
disclosed in the interim. Section --.62(b) would require that a bank 
have a formal disclosure policy approved by the board of directors that 
addresses its approach for determining the disclosures it makes. The 
policy would be required to address the associated internal controls 
and disclosure controls and procedures. Section 62(c) would require a 
bank with total consolidated assets of $50 billion or more that is not 
an advanced approaches bank, if it concludes that specific commercial 
or financial information required to be disclosed under section --.62 
would be exempt from disclosure by the agency under the Freedom of 
Information Act (5 U.S.C. 552), to disclose more general information 
about the subject matter of the requirement and the reason the specific 
items of information have not been disclosed.
    Section --.63 sets forth disclosure requirements for banks with 
total consolidated assets of $50 billion or more that are not advanced 
approaches banks. Section --.63(a) would require a bank to make the 
disclosures in Tables 14.1 through 14.10 and in section --.63(b) for 
each of the last three years beginning on the effective date of the 
rule. Section --.63(b) would require quarterly disclosure of a bank's 
common equity tier 1 capital, additional tier 1 capital, tier 2 
capital, tier 1 and total capital ratios, including the regulatory 
capital elements and all the regulatory adjustments and deductions 
needed to calculate the numerator of such ratios; total risk-weighted 
assets, including the different regulatory adjustments and deductions 
needed to calculate total risk-weighted assets; regulatory capital 
ratios during any transition periods, including a description of all 
the regulatory capital elements and all regulatory adjustments and 
deductions needed to calculate the numerator and denominator of each 
capital ratio during any transition period; and a reconciliation of 
regulatory capital elements as they relate to its balance sheet in any 
audited consolidated financial statements. Table 14.1 sets forth scope 
of application qualitative and quantitative disclosure requirements; 
Table 14.2 sets forth capital structure qualitative and quantitative 
disclosure requirements; Table 14.3 sets forth capital adequacy 
qualitative and quantitative disclosure requirements; Table 14.4 sets 
forth capital conservation buffer qualitative and quantitative 
disclosure requirements; Table 14.5 sets forth general qualitative and 
quantitative disclosure requirements for credit risk; Table 14.6 sets 
forth general qualitative and quantitative disclosure requirements for 
counterparty credit risk-related exposures; Table 14.7 sets forth 
qualitative and quantitative disclosure requirements for credit risk 
mitigation; Table 14.8 sets forth qualitative and quantitative 
disclosure requirements for securitizations; Table 14.9 sets forth 
qualitative and quantitative disclosure requirements for equities not 
subject to Subpart F of the rule; and Table 14.10 sets forth 
qualitative and quantitative disclosure requirements for interest rate 
risk for non-trading activities.
    The agencies estimate that respondents would take on average 226.25 
hours to reprogram and update systems with the requirements outlined in 
these sections. In addition, the agencies estimate that, on a 
continuing basis, respondents would take on average 131.25 hours 
annually to maintain their internal systems.

VIII. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the Federal 
banking agencies to use plain language in all

[[Page 52938]]

proposed and final rules published after January 1, 2000. The agencies 
invited comment on whether the proposed rule was written plainly and 
clearly or whether there were ways the agencies could make the rule 
easier to understand. The agencies received no comments on these 
matters and believe that the final rule is written plainly and clearly 
in conjunction with the agencies' risk-based capital rules.

IX. OCC Unfunded Mandates Reform Act of 1995 Determination

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 
U.S.C. 1532 et seq.) requires that an agency prepare a written 
statement before promulgating a rule that includes a Federal mandate 
that may result in the expenditure by State, local, and Tribal 
governments, in the aggregate, or by the private sector of $100 million 
or more (adjusted annually for inflation) in any one year. If a written 
statement is required, the UMRA (2 U.S.C. 1535) also requires an agency 
to identify and consider a reasonable number of regulatory alternatives 
before promulgating a rule and from those alternatives, either select 
the least costly, most cost-effective or least burdensome alternative 
that achieves the objectives of the rule, or provide a statement with 
the rule explaining why such an option was not chosen.
    Under this NPR, the OCC is proposing changes to their minimum 
capital requirements that address the calculation of risk-weighted 
assets. The proposed rule would:
    1. Change denominator of the risk-based capital ratios by revising 
the methodologies for calculating risk weights;
    2. Revise the treatment of counterparty credit risk;
    3. Replace references to credit ratings with alternative measures 
of creditworthiness;
    4. Provide more comprehensive recognition of collateral and 
guarantees;
    5. Provide a more favorable capital treatment for transactions 
cleared through qualifying central counterparties; and
    6. Introduce disclosure requirements for banking organizations with 
assets of $50 billion or more.
    To estimate the impact of this NPR on national banks and federal 
savings associations, the OCC estimated the amount of capital banks 
will need to raise to meet the new minimum standards relative to the 
amount of capital they currently hold, as well as the compliance costs 
associated with establishing the infrastructure to determine correct 
risk weights using the new alternative measures of creditworthiness and 
the compliance costs associated with new disclosure requirements. The 
OCC has determined that its NPR will not result in expenditures by 
State, local, and Tribal governments, or by the private sector, of $100 
million or more (adjusted annually for inflation). Accordingly, the 
UMRA does not require that a written statement accompany this NPR.

Addendum 1: Summary of this NPR for Community Banking Organizations 
Overview

    The agencies are issuing a notice of proposed rulemaking (NPR, 
proposal, or proposed rule) to harmonize and address shortcomings in 
the measurement of risk-weighted assets that became apparent during 
the recent financial crisis, in part by implementing in the United 
States changes made by the Basel Committee on Banking Supervision 
(BCBS) to international regulatory capital standards and by 
implementing aspects of the Dodd-Frank Act. Among other things, the 
proposed rule would:
     Revise risk weights for residential mortgages based on 
loan-to-value ratios and certain product and underwriting features;
     Increase capital requirements for past-due loans, high 
volatility commercial real estate exposures, and certain short-term 
loan commitments;
     Expand the recognition of collateral and guarantors in 
determining risk-weighted assets;
     Remove references to credit ratings; and
     Establish due diligence requirements for securitization 
exposures.
    This addendum presents a summary of the proposal in this NPR 
that is most relevant for smaller, less complex banking 
organizations that are not subject to the market risk capital rule 
or the advanced approaches capital rule, and that have under $50 
billion in total assets. The agencies intend for this addendum to 
act as a guide for these banking organizations, helping them to 
navigate the proposed rule and identify the changes most relevant to 
them. The addendum does not, however, by itself provide a complete 
understanding of the proposed rules and the agencies expect and 
encourage all institutions to review the proposed rule in its 
entirety.

A. Zero Percent Risk-weighted Items

    The following exposures would receive a zero percent risk weight 
under the proposal:
     Cash;
     Certain gold bullion;
     Direct and unconditional claims on the U.S. government, 
its central bank, or a U.S. government agency;
     Exposures unconditionally guaranteed by the U.S. 
government, its central bank, or a U.S. government agency;
     Claims on certain supranational entities (such as the 
International Monetary Fund) and certain multilateral development 
banking organizations; and
     Claims on and exposures unconditionally guaranteed by 
sovereign entities that meet certain criteria (as discussed below).
    For more information, please refer to sections 32(a) and 
37(b)(3)(iii) of the proposal. For exposures to foreign governments 
and their central banks, see section L below.

B. 20 Percent Risk Weighted Items

    The following exposures would receive a twenty percent risk 
weight under the proposal:
     Cash items in the process of collection;
     Exposures conditionally guaranteed by the U.S. 
government, its central bank, or a U.S. government agency;
     Claims on government-sponsored entities (GSEs);
     Claims on U.S. depository institutions and National 
Credit Union Administration (NCUA)-insured credit unions;
     General obligation claims on, and claims guaranteed by 
the full faith and credit of state and local governments (and any 
other public sector entity, as defined in the proposal) in the 
United States; and
     Claims on and exposures guaranteed by foreign banks and 
public sector entities if the sovereign of incorporation of the 
foreign bank or public sector entity meets certain criteria (as 
described below).
    A conditional guarantee is one that requires the satisfaction of 
certain conditions, for example servicing requirements.
    For more information, please refer to sections 32(a) through 
32(e), and section 32(l) of the proposal. For exposures to foreign 
banks and public sector entities, see section L below.

C. 50 Percent Risk-weighted Exposures

    The following exposures would receive a 50 percent risk weight 
under the proposal:
     ``Statutory'' multifamily mortgage loans meeting 
certain criteria;
     Presold residential construction loans meeting certain 
criteria;
     Revenue bonds issued by state and local governments in 
the United States; and
     Claims on and exposures guaranteed by sovereign 
entities, foreign banks, and foreign public sector entities that 
meet certain criteria (as described below).
    The criteria for multifamily loans and presold residential 
construction loans are generally the same as in the existing general 
risk-based capital rules. These criteria are required under federal 
law.\91\ Consistent with the general risk-based capital rules and 
requirements of the statute, the proposal would assign a 100 percent 
risk weight to pre-sold construction loans where the contract is 
cancelled.
---------------------------------------------------------------------------

    \91\ See sections 618(a)(1) or (2) and 618(b)(1) of the 
Resolution Trust Corporation Refinancing, Restructuring, and 
Improvement Act of 1991.
---------------------------------------------------------------------------

    For more information, please refer to sections 32(e), 32(h), and 
32(i) of the proposal. Also refer to section 2 of the proposal for 
relevant definitions:

--Pre-sold construction loan.
--Revenue obligation.
--Statutory multifamily mortgage.

[[Page 52939]]

D. 1-4 Family Residential Mortgage Loans

    Under the proposed rule, 1-4 family residential mortgages would 
be separated into two risk categories (``category 1 residential 
mortgage exposures'' and ``category 2 residential mortgage 
exposures'') based on certain product and underwriting 
characteristics. The proposed definition of category 1 residential 
mortgage exposures would generally include traditional, first-lien, 
prudently underwritten mortgage loans. The proposed definition of 
category 2 residential mortgage exposures would generally include 
junior-liens and non-traditional mortgage products.
    The proposal would not recognize private mortgage insurance 
(PMI) for purposes of calculating the loan to value (LTV) ratio. 
Therefore, the LTV levels in the table below represent only the 
borrower's equity in the mortgaged property.
    The table below shows the proposed risk weights for 1-4 family 
residential mortgage loans, based on the LTV ratio and risk category 
of the exposure:

 
----------------------------------------------------------------------------------------------------------------
                                                                    Risk weight for          Risk weight for
                                                                 category 1 residential   category 2 residential
                    LTV ratio (in percent)                         mortgage exposures       mortgage exposures
                                                                       (percent)                (percent)
----------------------------------------------------------------------------------------------------------------
Less than or equal to 60......................................                       35                      100
Greater than 60 and less than or equal to 80..................                       50                      100
Greater than 80 and less than or equal to 90..................                       75                      150
Greater than 90...............................................                      100                      200
----------------------------------------------------------------------------------------------------------------

    Definitions:
    Category 1 residential mortgage exposure would mean a 
residential mortgage exposure with the following characteristics:

--The term of the mortgage loan does not exceed 30 years;
--The terms of the mortgage loan provide for regular periodic 
payments that do not:
[cir] Result in an increase of the principal balance;
[cir] Allow the borrower to defer repayment of principal of the 
residential mortgage exposure; or,
[cir] Result in a balloon payment;
--The standards used to underwrite the residential mortgage loan:
[cir] Took into account all of the borrower's obligations, including 
for mortgage obligations, principal, interest, taxes, insurance, and 
assessments; and
[cir] Resulted in a conclusion that the borrower is able to repay 
the loan using:
[squf] The maximum interest rate that may apply during the first 
five years after the date of the closing of the residential mortgage 
loan; and
[squf] The amount of the residential mortgage loan as of the date of 
the closing of the transaction;
--The terms of the residential mortgage loan allow the annual rate 
of interest to increase no more than two percentage points in any 
twelve-month period and no more than six percentage points over the 
life of the loan;
--For a first-lien home equity line of credit (HELOC), the borrower 
must be qualified using the principal and interest payments based on 
the maximum contractual exposure under the terms of the HELOC;
--The determination of the borrower's ability to repay is based on 
documented, verified income;
--The residential mortgage loan is not 90 days or more past due or 
on non-accrual status; and
--The residential mortgage loan is not a junior-lien residential 
mortgage exposure.

    Category 2 residential mortgage exposure would mean a 
residential mortgage exposure that is not a Category 1 residential 
mortgage exposure and is not guaranteed by the U.S. government.
    LTV ratio would equal the loan amount divided by the value of 
the property.
    Loan Amount:

--For a first-lien residential mortgage, the loan amount would be 
the maximum contractual principal amount of the loan. For a 
traditional mortgage loan where the loan balance will not increase 
under the terms of the mortgage, the loan amount is the current loan 
balance. However, for a loan whose balance may increase under the 
terms of the mortgage, such as pay-option adjustable loan that can 
negatively amortize or for a HELOC, the loan amount is the maximum 
contractual principal amount of the loan.
--For a junior-lien mortgage, the loan amount would be the maximum 
contractual principal amount of the loan plus the maximum 
contractual principal amounts of all more senior loans secured by 
the same residential property on the date of origination of the 
junior-lien residential mortgage.

    The value of the property is the lesser of the acquisition cost 
(for a purchase transaction) or the estimate of the property's value 
at the origination of the loan or the time of restructuring. The 
banking organization must base all estimates of a property's value 
on an appraisal or evaluation of the property that meets the 
requirements of the primary federal supervisor's appraisal 
regulations.\92\
---------------------------------------------------------------------------

    \92\ The appraisal or evaluation must satisfy the requirements 
of 12 CFR part 34, subpart C, 12 CFR part 164 (OCC); 12 CFR part 
208, subpart E (Board); 12 CFR part 323, 12 CFR 390.442 (FDIC).
---------------------------------------------------------------------------

    If a banking organization holds a first mortgage and junior-lien 
mortgage on the same residential property and there is no 
intervening lien, the proposal treats the combined exposure as a 
single first-lien mortgage exposure.
    If a banking organization holds two or more mortgage loans on 
the same residential property, and one of the loans is category 2, 
then the banking organization would be required to treat all of the 
loans on the property as category 2.
    Additional Notes:

--1-4 family mortgage loans sold with recourse are converted to an 
on-balance sheet credit equivalent amount using a 100 percent 
conversion factor. There is no grace period, such as the 120-day 
exception under the current general risk-based capital rules.
--Restructured and modified mortgages would be assigned risk weights 
based on their LTVs and classification as category 1 or category 2 
residential mortgage exposures based on the modified contractual 
terms. If the LTV is not updated at the time of modification or 
restructuring, a category 1 residential mortgage would receive a 
risk weight of 100 percent and a category 2 residential mortgage 
would receive a risk weight of 200 percent.
--Similar to the current capital rules, loans modified or 
restructured under the Treasury's Home Affordable Mortgage Program 
(HAMP) would not be considered modified or restructured for the 
purposes of the proposal.

    For more information, please refer to section 32(g) of the 
proposal. Also refer to section 2 for relevant definitions:

--Category 1 residential mortgage exposure
--Category 2 residential mortgage exposure
--First lien residential mortgage exposure
--Junior-lien residential mortgage
--Residential mortgage exposure

E. Past Due Exposures

    The proposal would assign a 150 percent risk weight to loans and 
other exposures that are 90 days or more past due. This applies to 
all exposure categories except for the following:

--1-4 family residential exposures (1-4 family loans over 90 days 
past due and are in Category 2 and would be risk weighted as 
described in section D).
--A sovereign exposure where the sovereign has experienced a 
sovereign default.

    For more information, please refer to section 32(k) of the 
proposal.

F. High-Volatility Commercial Real Estate Loans (HVCRE)

    The proposal would assign a 150 percent risk weight to HVCRE 
exposures. The

[[Page 52940]]

proposal defines an HVCRE exposure as a credit facility that 
finances or has financed the acquisition, development, or 
construction (ADC) of real property, unless the facility finances:

--One- to four-family residential properties; or
--Commercial real estate projects in which:
[cir] The LTV ratio is less than or equal to the applicable maximum 
supervisory LTV ratio;
[cir] 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
[cir] The borrower contributed the amount of capital required by 
this definition before the banking organization 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 banking organization that provided the ADC 
facility as long as the permanent financing conforms with the 
banking organization's underwriting criteria for long-term mortgage 
loans.

    For more information please refer to section 32 of the proposal. 
Also refer to section 2 for relevant definitions:

--High-volatility commercial real estate exposure (HVCRE)

G. Commercial Loans/Corporate Exposures

    The proposal would assign a 100 percent risk weight to all 
corporate exposures. The definition of a corporate exposure would 
exclude exposures that are specifically covered elsewhere in the 
proposal, such as HVCRE, pre-sold residential construction loans, 
and statutory multifamily mortgages.
    For more information please refer to section 32(f) of the 
proposal, and section 33 for off-balance sheet exposures.

H. Consumer Loans and Credit Cards

    Under the proposed rule, consumer loans and credit cards would 
continue to receive a 100 percent risk weight. The proposal does not 
specifically list these assets, but they fall into the ``other 
assets'' category that would receive a 100 percent risk weight.
    For more information, please refer to section 32(l) of the 
proposal.

I. Basel III Risk Weight Items

    As described in the Basel III NPR, the amounts of the threshold 
deduction items (mortgage servicing assets, certain deferred tax 
assets, and investments in the common equity of financial 
institutions) that are not deducted would be assigned a risk weight 
of 250 percent. In addition, certain high-risk exposures such as 
credit-enhancing interest-only (CEIO) strips would receive 1,250 
percent risk weight.

J. Other Assets and Exposures

    Where the proposal does not assign a specific risk weight to an 
asset or exposure type, the applicable risk weight would be 100 
percent. For example, premises, fixed assets, and other real estate 
owned receive a risk weight of 100 percent. Section 32(m) of the 
proposal for bank holding companies and savings and loan holding 
companies provides specific risk weights for certain insurance-
related assets.
    For more information, please refer to section 32(l) of the 
proposal.

K. Conversion Factors for Off-balance Sheet Items

    Similar to the current rules, under the proposal, a banking 
organization would be required to calculate the exposure amount of 
an off-balance sheet exposure using the credit conversion factors 
(CCFs) below. The proposal increases the CCR for commitments with an 
original maturity of one year or less from zero percent to 20 
percent.

--Zero percent CCF. A banking organization would apply a zero 
percent CCF to the unused portion of commitments that are 
unconditionally cancelable by the banking organization.
--20 percent CCF. A banking organization would apply a 20 percent 
CCF to:
[cir] Commitments with an original maturity of one year or less that 
are not unconditionally cancelable by the banking organization.
[cir] Self-liquidating, trade-related contingent items that arise 
from the movement of goods, with an original maturity of one year or 
less.
--50 percent CCF. A banking organization would apply a 50 percent 
CCF to:
[cir] Commitments with an original maturity of more than one year 
that are not unconditionally cancelable by the banking organization.
[cir] Transaction-related contingent items, including performance 
bonds, bid bonds, warranties, and performance standby letters of 
credit.
--100 percent CCF. A banking organization would apply a 100 percent 
CCF to the following off-balance-sheet items and other similar 
transactions:
[cir] Guarantees;
[cir] Repurchase agreements (the off-balance sheet component of 
which equals the sum of the current market values of all positions 
the banking organization has sold subject to repurchase);
[cir] Off-balance sheet securities lending transactions (the off-
balance sheet component of which equals the sum of the current 
market values of all positions the banking organization has lent 
under the transaction);
[cir] Off-balance sheet securities borrowing transactions (the off-
balance sheet component of which equals the sum of the current 
market values of all non-cash positions the banking organization has 
posted as collateral under the transaction);
[cir] Financial standby letters of credit; and
[cir] Forward agreements.

    For more information please refer to section 33 of the proposal. 
Also refer to section 2 for the definition of unconditionally 
cancelable.

L. Over-the-Counter (OTC) Derivative Contracts

    The proposal provides a method for determining the risk-based 
capital requirement for a derivative contract that is similar to the 
general risk-based capital rules. Under the proposed rule, the 
banking organization would determine the exposure amount and then 
assign a risk weight based on the counterparty or collateral. The 
exposure amount is the sum of current exposures plus potential 
future credit exposures (PFEs). In contrast to the general risk-
based capital rules, which place a 50 percent risk weight cap on 
derivatives, the proposal does not include a risk weight cap and 
introduces specific credit conversion factors for credit 
derivatives.
    The current credit exposure is the greater of zero or the mark-
to-market value of the derivative contract.
    The PFE is generally the notional amount of the derivative 
contract multiplied by a credit conversion factor for the type of 
derivative contract. The table below shows the credit conversion 
factors for derivative contracts:

                                                  Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Credit
                                         Interest    Foreign exchange  (investment-grade     Credit (non-                  Precious metals
        Remaining maturity \2\             rate       rate and gold      \3\ reference     investment-grade     Equity      (except gold)       Other
                                        (percent)       (percent)          asset) \4\      reference asset)   (percent)       (percent)       (percent)
                                                                           (percent)          (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less.....................          0.0                1.0                5.0               10.0          6.0                7.0         10.0
Greater than one year and less than            0.5                5.0                5.0               10.0          8.0                7.0         12.0
 or equal to five years..............

[[Page 52941]]

 
Greater than five years..............          1.5                7.5                5.0               10.0         10.0                8.0        15.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a 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\ As proposed, ``investment grade'' would mean that the entity to which the banking organization is exposed through a loan or security, or the
  reference entity with respect to a credit derivative, has adequate capacity to meet financial commitments for the projected life of the asset or
  exposure. Such an entity or reference entity has adequate capacity to meet financial commitments if the risk of its default is low and the full and
  timely repayment of principal and interest is expected.
\4\ A [BANK] must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative whose reference asset is an outstanding
  unsecured long-term debt security without credit enhancement that is investment grade. A [BANK] must use the column labeled ``Credit (non-investment-
  grade reference asset)'' for all other credit derivatives.

    For more information please refer to section 34 of the proposal. 
Also refer to section 2 for relevant definitions:

--Effective notional amount
--Eligible credit derivative
--Eligible derivative contract
--Exposure amount
--Interest rate derivative contract

M. Securitization Exposures

    Section 42 of the proposal introduces due diligence requirements 
for banking organizations that own, originate or purchase 
securitization exposures and introduces a new definition of 
securitization exposure. If a banking organization is unable to 
demonstrate to the satisfaction of its primary federal supervisor a 
comprehensive understanding of the features of a securitization 
exposure that would materially affect the performance of the 
exposure, the banking organization would be required to assign the 
securitization exposure a risk weight of 1,250 percent. The banking 
organization's analysis would be required to be commensurate with 
the complexity of the securitization exposure and the materiality of 
the exposure in relation to capital.
    Note that mortgage-backed pass-through securities (for example, 
those guaranteed by Federal Home Loan Mortgage Corporation (FHLMC) 
or Federal National Mortgage Association (FNMA) do not meet the 
proposed definition of a securitization exposure because they do not 
involve a tranching of credit risk. Rather, only those mortgage-
backed securities that involve tranching of credit risk would be 
securitization exposures. For securitization exposures guaranteed by 
the U.S. Government or GSEs, there are no changes relative to the 
existing treatment:

--The Government National Mortgage Association (Ginnie Mae) 
securities receive a zero percent risk weight to the extent they are 
unconditionally guaranteed.
--The Federal National Mortgage Association (Fannie Mae) and the 
Federal Home Loan Mortgage Corporation (Freddie Mac) guaranteed 
securities receive a 20 percent risk weight.
--Fannie Mae and Freddie Mac non-credit enhancing interest-only (IO) 
securities receive a 100 percent risk weight.

    The risk-based capital requirements for securitizations under 
the proposed rule would be as follows:

--A banking organization would deduct any after-tax gain-on-sale of 
a securitization. (This requirement would usually pertain to banking 
organizations that are securitizers rather than purchasers of 
securitization exposures);
--A banking organization would assign a 1,250 percent risk weight to 
a CEIO.
--A banking organization would assign a 100 percent risk weight to 
non-credit enhancing IO mortgage-backed securities.

    For privately-issued mortgage securities and all other 
securitization exposures, a banking organization would be able 
choose among the following approaches, provided that the banking 
organization consistently applies such approach to all 
securitization exposures: \93\
---------------------------------------------------------------------------

    \93\ The ratings-based approach for externally-rated positions 
would no longer be available.

--A banking organization may use the existing gross-up approach to 
risk weight all of its securitizations. Under the existing gross-up 
approach, senior securitization tranches are assigned the risk 
weight associated with the underlying exposures. A banking 
organization must hold capital for the senior tranche based on the 
risk weight of the underlying exposures. For subordinate 
securitization tranches, a banking organization must hold capital 
for the subordinate tranche, as well as all more senior tranches for 
which the subordinate tranche provides credit support.
--A banking organization may determine the risk weight for the 
securitization exposure using the simplified supervisory formula 
approach (SSFA) described in section 43 of the proposal. The SSFA 
formula would require a banking organization to apply a supervisory 
formula that requires various data inputs including the risk weight 
applicable to the underlying exposures; the attachment and 
detachment points of the securitization tranche, which is the 
relative position of the securitization position in the structure 
(subordination); and the current percentage of the underlying 
exposures that are 90 days or more past due, in default, or in 
foreclosure. Banking organizations considering the SSFA approach 
should carefully read and consider section 43 of the proposal.

    Alternatively, a banking organization may apply a 1,250 percent 
risk weight to any of its securitization exposures.
    For more information, please refer to sections 42-45 of the 
proposal. Also refer to section 2 for the following definitions:

--Credit-enhancing interest-only strip
--Gain-on-sale
--Resecuritization
--Resecuritization exposure
--Securitization exposure
--Securitization special purpose entity (securitization SPE)
--Synthetic securitization
--Traditional securitization
--Underlying exposure

N. Equity Exposures

    Under section 52 of the proposal, a banking organization would 
apply a simple risk-weight approach (SRWA) to determine the risk 
weight for equity exposures that are not exposures to an investment 
fund. The following table indicates the risk weights that would 
apply to equity exposures under the SRWA:

[[Page 52942]]



------------------------------------------------------------------------
     Risk weight  (in percent)                 Equity exposure
------------------------------------------------------------------------
0.................................  An equity exposure to a sovereign
                                     entity, the Bank for International
                                     Settlements, the European Central
                                     Bank, the European Commission, the
                                     International Monetary Fund, a MDB,
                                     and any other entity whose credit
                                     exposures receive a zero percent
                                     risk weight under section 32 of
                                     this proposed rule.
20................................  An equity exposure to a public
                                     sector entity, Federal Home Loan
                                     Bank or the Federal Agricultural
                                     Mortgage Corporation (Farmer Mac).
100...............................   Community development
                                     equity exposures.\94\
                                     The effective portion of a
                                     hedge pair.
                                     Non-significant equity
                                     exposures to the extent that the
                                     aggregate adjusted carrying value
                                     of the exposures does not exceed 10
                                     percent of tier 1 capital plus tier
                                     2 capital.
250...............................  A significant investment in the
                                     capital of an unconsolidated
                                     financial institution that is not
                                     deducted under section 22.
300...............................  A publicly-traded equity exposure
                                     (other than an equity exposure that
                                     receives a 600 percent risk weight
                                     and including the ineffective
                                     portion of a hedge pair).
400...............................  An equity exposure that is not
                                     publicly-traded (other than an
                                     equity exposure that receives a 600
                                     percent risk weight).
600...............................  An equity exposure to a hedge fund
                                     or other investment firm that has
                                     greater than immaterial leverage.
------------------------------------------------------------------------

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

    \94\ The proposed rule generally defines Community Development 
Exposures as exposures that would qualify as community development 
investments 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). For savings associations, community 
development investments would be defined to mean equity investments 
that are designed primarily to promote community welfare, including 
the welfare of low- and moderate-income communities or families, 
such as by providing services or jobs, and 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).
---------------------------------------------------------------------------

    For more information, please refer to sections 51 and 52 of the 
proposal, and any related definitions in section 2:

--Equity exposure
--Equity derivative contract

O. Equity Exposures to Investment Funds

    The proposals described in this section would apply to equity 
exposures to investment funds such as mutual funds, but not to hedge 
funds or other leveraged investment funds (refer to section above). 
For exposures to investment funds other than community development 
exposures, a banking organization must use one of three risk-
weighting approaches described below:
    1. Full look-through approach:
    For this two-step approach, a banking organization would be 
required to obtain information regarding the asset pool underlying 
the investment fund as of the date of the calculation, as well as 
the banking organization's proportional share of ownership in the 
fund. For the first step the banking organization would assign risk 
weights to the assets of the entire investment fund and calculates 
the sum of those risk-weighted assets. For the second step, the 
banking organization would multiply the sum of the fund's risk-
weighted assets by the banking organization's proportional ownership 
in the fund.
    2. Simple modified look-through approach:
    Similar to the current capital rules, under this approach a 
banking organization would multiply the adjusted carrying value of 
its investment in the fund by the highest risk weight that applies 
to any exposure the fund is permitted to hold as described in the 
prospectus or fund documents.
    3. Alternative modified look-through approach:
    Similar to the current capital rules, under this approach a 
banking organization would assign the adjusted carrying value of an 
equity exposure to an investment fund on a pro rata basis to 
different risk-weight categories based on the investment limits 
described in the fund's prospectus. The banking organization's risk-
weighted asset amount is the sum of each portion of the adjusted 
carrying value assigned to an exposure type multiplied by the 
applicable risk weight under section 32 of the proposal. For 
purposes of the calculation the banking organization must assume the 
fund is invested in assets with the highest risk weight permitted by 
its prospectus and to the maximum amounts permitted.
    For community development exposures, a banking organization's 
risk-weighted asset amount is equal to its adjusted carrying value 
for the fund.
    For more information please refer to section 53 of the proposal. 
Also refer to section 2 for relevant definitions:

--Adjusted carrying value
--Investment fund

P. Treatment of Guarantees

    The proposal would allow a banking organization to substitute 
the risk weight of an eligible guarantor for the risk weight 
otherwise applicable to the guaranteed exposure. This treatment 
would apply only to eligible guarantees and eligible credit 
derivatives, and would provide certain adjustments for maturity 
mismatches, currency mismatches, and situations where restructuring 
is not treated as a credit event.
    Under the proposal, eligible guarantors would include sovereign 
entities, certain supranational entities such as the International 
Monetary Fund, Federal Home Loan Banks, Farmer Mac, a multilateral 
development bank, a depository institution, a bank holding company, 
a savings and loan holding company, a foreign bank, or an entity 
that has investment-grade debt, whose creditworthiness is not 
positively correlated with the credit risk of the exposures for 
which it provides guarantees. Eligible guarantors would not include 
monoline insurers, re-insurers, or special purpose entities.
    To be an eligible guarantee, the guarantee would be required to 
be from an eligible guarantor and must meet the requirements of the 
proposal, including that the guarantee must:

--Be written;
--Be either:
[cir] Unconditional, or
[cir] A contingent obligation of the U.S. government or its 
agencies, the enforceability of which to the beneficiary is 
dependent upon some affirmative action on the part of the 
beneficiary of the guarantee or a third party (for example, 
servicing requirements);
--Cover all or a pro rata portion of all contractual payments of the 
obligor on the reference exposure;
--Give the beneficiary a direct claim against the protection 
provider; and
--And meet other requirements of the rule.

    For more information please refer to section 36 of the proposal. 
Also refer to section 2 for relevant definitions:

--Eligible guarantee
--Eligible guarantor

Q. Treatment of Collateralized Transactions

    The proposal allows banking organizations to recognize the risk 
mitigating benefits of financial collateral in risk-weighted assets, 
and defines financial collateral to include:

--Cash on deposit at the bank or third-party custodian;
--Gold;
--Investment grade long-term securities (excluding 
resecuritizations);
--Investment grade short-term instruments (excluding 
resecuritizations);
--Publicly-traded equity securities;
--Publicly-traded convertible bonds; and,
--Money market mutual fund shares; and other mutual fund shares if a 
price is quoted daily.


[[Page 52943]]


    In all cases the banking organization would be required to have 
a perfected, first priority interest in the financial collateral.
    1. Simple approach: A banking organization may apply a risk 
weight to the portion of an exposure that is secured by the market 
value of financial collateral by using the risk weight of the 
collateral--subject to a risk weight floor of 20 percent. To apply 
the simple approach, the collateral must be subject to a collateral 
agreement for at least the life of the exposure; the collateral must 
be revalued at least every 6 months; and the collateral (other than 
gold) must be in the same currency. There would be a few limited 
exceptions to the 20 percent risk weight floor:

--A banking organization may assign a zero percent risk weight to 
the collateralized portion of an exposure where:
[cir] The financial collateral is cash on deposit; or
[cir] The financial collateral is an exposure to a sovereign that 
qualifies for a zero percent risk weight (including the United 
States) and the banking organization has discounted the market value 
of the collateral by 20 percent.
--A banking organization would be permitted to assign a zero percent 
risk weight to an exposure to an OTC derivative contract that is 
marked-to-market on a daily basis and subject to a daily margin 
maintenance requirement, to the extent the contract is 
collateralized by cash on deposit.
--A banking organization would be permitted to assign a 10 percent 
risk weight to an exposure to an OTC derivative contract that is 
marked-to-market on a daily basis and subject to a daily margin 
maintenance requirement, to the extent the contract is 
collateralized by U.S. government securities or an exposure to a 
sovereign that qualifies for a zero percent risk weight under the 
proposal.

    2. Collateral Haircut Approach: For an eligible margin loan, a 
repo-style transaction, a collateralized derivative contract, or a 
single-product netting set of such transactions, a banking 
organization may instead decide to use the collateral haircut 
approach to recognize the credit risk mitigation benefits of 
eligible collateral by reducing the amount of the exposure to be 
risk weighted rather than by substituting the risk weight of the 
collateral. Banking organizations considering the collateral haircut 
approach should carefully read section 37 of the proposal. The 
collateral haircut approach takes into account the value of the 
banking organization's exposure, the value of the collateral, and 
haircuts to account for potential volatility in position values and 
foreign exchange rates. The haircuts may be determined using one of 
two methodologies.
    A banking organization may use standard haircuts based on the 
table below and a standard foreign exchange rate haircut of 8 
percent.

                                                Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Haircut (in percents) assigned based on:
                                                           ------------------------------------------------------------------------------   Investment
                                                             Sovereign issuers risk weight under     Non-sovereign issuers risk weight         grade
                     Residual maturity                                Sec.   ----.32 \2\                    under Sec.   ----.32          securitization
                                                           ------------------------------------------------------------------------------  exposures (in
                                                               Zero %     20% or 50%      100%         20%          50%          100%        percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year..............................          0.5          1.0         15.0          1.0          2.0         25.0            4.0
Greater than 1 year and less than or equal to 5 years.....          2.0          3.0         15.0          4.0          6.0         25.0           12.0
Greater than 5 years......................................          4.0          6.0         15.0          8.0         12.0         25.0           24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold                         15.0
Other publicly-traded equities (including convertible bonds)                       25.0
Mutual funds                                                   Highest haircut applicable to any security in
                                                                        which the fund can invest.
Cash collateral held                                                               Zero.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 2 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.

    Alternatively, a banking organization may, with supervisory 
approval, use own estimates of collateral haircuts when calculating 
the appropriate capital charge for an eligible margin loan, a repo-
style transaction, or a collateralized derivative contract. Section 
37 of the proposal provides the requirements for calculating own 
estimates, including the requirement that such estimates be 
determined based on a period of market stress appropriate for the 
collateral under this approach.
    For more information, please refer to section 37 of the 
proposal. Also refer to section 2 for relevant definitions:

--Financial collateral
--Repo-style transaction

R. Treatment of Cleared Transactions

    The proposal introduces a specific capital treatment for 
exposures to central counterparties (CCPs), including certain 
transactions conducted through clearing members by banking 
organizations that are not themselves clearing members of a CCP. 
Section 35 of the proposal describes the capital treatment of 
cleared transactions and of default fund exposures to CCPs, 
including more favorable capital treatment for cleared transactions 
through CCPs that meet certain criteria.

S. Unsettled Transactions

    The proposal provides for a separate risk-based capital 
requirement for transactions involving securities, foreign exchange 
instruments, and commodities that have a risk of delayed settlement 
or delivery. The proposed capital requirement would not, however, 
apply to certain types of transactions, including cleared 
transactions that are marked-to-market daily and subject to daily 
receipt and payment of variation margin. The proposal contains 
separate treatments for delivery-versus-payment (DvP) and payment-
versus-payment (PvP) transactions with a normal settlement period, 
and non-DvP/non-PvP transactions with a normal settlement period.

T. Foreign Exposures

    Under the proposal a banking organization would risk weight an 
exposure to a foreign government, foreign public sector entity 
(PSE), and a foreign bank based on the Country Risk Classification 
(CRC) that is applicable to the foreign government, or the home 
country of the foreign PSE or foreign bank.
    Country risk classification (CRC) for a sovereign means the CRC 
published by the Organization for Economic Co-operation and 
Development.
    The risk weights for foreign sovereigns, foreign banks, and 
foreign PSEs are shown in the tables below:

              Risk Weights for Foreign Sovereign Exposures
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
    0-1.................................................               0
    2...................................................              20
    3...................................................              50
    4-6.................................................             100
    7...................................................             150
No CRC..................................................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

--A sovereign exposure would be assigned a 150 percent risk weight 
immediately upon

[[Page 52944]]

determining that an event of sovereign default has occurred, or if 
an event of sovereign default has occurred during the previous five 
years.

               Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
    0-1.................................................              20
    2...................................................              50
    3...................................................             100
    4-7.................................................             150
No CRC..................................................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------


            Risk Weights for Foreign PSE General Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
    0-1.................................................              20
    2...................................................              50
    3...................................................             100
    4-7.................................................             150
No CRC..................................................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------


            Risk Weights for Foreign PSE Revenue Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
    0-1.................................................              50
    2-3.................................................             100
    4-7.................................................             150
No CRC..................................................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    For more information, please refer to section 32(a), 32(d), and 
32(e) of the proposal. Also refer to section 2 for relevant 
definitions:

--Home country
--Public sector entity (PSE)
--Sovereign
--Sovereign exposure

    The following is a table summarizing the proposed changes to the 
general risk-based capital rules for risk weighting assets.

                                    Comparison of Current Rules vs. Proposal
----------------------------------------------------------------------------------------------------------------
                                       Current risk weight (in
               Category                        general)                 Proposal                 Comments
----------------------------------------------------------------------------------------------------------------
                  Risk Weights for On-Balance Sheet Exposures Under Current and Proposed Rules
----------------------------------------------------------------------------------------------------------------
Cash.................................  0%.....................  0%.....................  .......................
Direct and unconditional claims on     0%.....................  0%.....................  .......................
 the U.S. Government, its agencies,
 and the Federal Reserve.
Claims on certain supranational        20%....................  0%.....................  Claims on supranational
 entities and multilateral                                                                entities include, for
 development banks.                                                                       example, claims on the
                                                                                          International Monetary
                                                                                          Fund.
Cash items in the process of           20%....................  20%....................  .......................
 collection.
Conditional claims on the U.S.         20%....................  20%....................  A conditional claim is
 government.                                                                              one that requires the
                                                                                          satisfaction of
                                                                                          certain conditions,
                                                                                          for example, servicing
                                                                                          requirements.
Claims on government-sponsored         20%....................  20% on exposures other
 entities (GSEs).                                                than equity exposures.
                                       100% on GSE preferred    .......................  .......................
                                        stock (20% for
                                        national banks).
Claims on U.S. depository              20%....................  20%....................  Instruments included in
 institutions and National Credit      100% risk weight for an  100% risk weight for an   the capital of the
 Union Administration (NCUA)-insured    instrument included in   instrument included in   depository institution
 credit unions.                         the depository           the depository           may be deducted (refer
                                        institution's            institution's            to Addendum 1 on the
                                        regulatory capital.      regulatory capital       definition of capital)
                                                                 (unless that             or treated under the
                                                                 instrument is an         equities section
                                                                 equity exposure or is    below.
                                                                 deducted--see Addendum
                                                                 1).
Claims on U.S. public sector entities  20% for general          20% for general
 (PSEs).                                obligations.             obligations.
                                       50% for revenue          50% for revenue
                                        obligations.             obligations.
Industrial development bonds.........  100%...................  100%.
Claims on qualifying securities firms  20% in general.........  100%...................  Instruments included in
                                                                See commercial loans      the capital of the
                                                                 and corporate            securities firm may be
                                                                 exposures to financial   deducted (refer to
                                                                 companies section        Addendum 1 on the
                                                                 below..                  definition of capital)
                                                                                          or treated under the
                                                                                          equities section
                                                                                          below.
1-4 family loans.....................  50% if first lien,       Category 1: 35%, 50%,    Category 1 is defined
                                        prudently                75%,100% depending on    to include first-lien
                                        underwritten, owner      LTV.                     mortgage products that
                                        occupied or rented,                               meet certain
                                        current or <90 days                               underwriting
                                        past due; 100%                                    characteristics.
                                        otherwise.
                                                                Category 2: 100%, 150%,  Category 2 is defined
                                                                 200% depending on LTV.   to include junior-
                                                                                          liens and mortgages
                                                                                          that do not meet the
                                                                                          category 1 criteria.

[[Page 52945]]

 
1-4 family loans modified under Home   50% and 100% The         35% to 200% The banking  Under the proposal (as
 Affordable Mortgage Program (HAMP).    banking organization     organization must        under current rules)
                                        must use the same risk   determine whether the    HAMP loans are not
                                        weight assigned to the   modified terms make      treated as
                                        loan prior to the        the loan a Category 1    restructured loans.
                                        modification so long     or a Category 2
                                        as the loan continues    mortgage.
                                        to meet other
                                        applicable prudential
                                        criteria.
Loans to builders secured by 1-4       50% if the loan meets    50% if the loan meets
 family properties presold under firm   all criteria in the      all criteria in the
 contracts.                             regulation; 100% if      regulation; 100% if
                                        the contract is          the contract is
                                        cancelled; 100% for      cancelled; 100% for
                                        loans not meeting the    loans not meeting the
                                        criteria.                criteria.
Loans on multifamily properties......  50% if the loan meets    50% if the loan meets    .......................
                                        all the criteria in      all the criteria in
                                        the regulation; 100%     the regulation; 100%
                                        otherwise.               otherwise.
Corporate exposures..................  100%                     100%...................  .......................
                                                                However, if the
                                                                 exposure is an
                                                                 instrument included in
                                                                 the capital of the
                                                                 financial company,
                                                                 deduction treatment
                                                                 may apply (see
                                                                 Appendix 1)..
High-volatility commercial real        100%...................  150%...................  The proposed treatment
 estate (HVCRE) loans.                                                                    would apply to certain
                                                                                          facilities that
                                                                                          finance the
                                                                                          acquisition,
                                                                                          development or
                                                                                          construction of real
                                                                                          property other than 1-
                                                                                          4 family residential
                                                                                          property.
Consumer loans.......................  100%...................  100%...................  This is not a specific
                                                                                          category under the
                                                                                          proposal. Therefore
                                                                                          the default risk
                                                                                          weight of 100%
                                                                                          applies.
Past due exposures...................  Generally the risk       150% for the portion     .......................
                                        weight does not change   that is not guaranteed
                                        when the loan is past    or secured (does not
                                        due;                     apply to sovereign
                                       However, 1-4 family       exposures or 1-4
                                        loans that are past      family residential
                                        due 90 days or more      mortgage exposures).
                                        are 100% risk weight..
Assets not assigned to a risk weight   100%...................  100%                     .......................
 category, including fixed assets,
 premises, and other real estate
 owned.
Claims on foreign governments and      0% for direct and        Risk weight depends on   Under the current and
 their central banks.                   unconditional claims     Country Risk             proposed rules, a
                                        on Organization for      Classification (CRC)     banking organization
                                        Economic Co-operation    applicable to the        may apply a lower risk
                                        and Development (OECD)   sovereign and ranges     weight to an exposure
                                        governments; 20% for     between 0% and 150%;     denominated in the
                                        conditional claims on   100% for sovereigns       sovereign's own
                                        OECD governments; 100%   that do not have a       currency if the
                                        for claims on non-OECD   CRC;.                    banking organization
                                        governments that        150% for a sovereign      has at least an
                                        entail some degree of    that has defaulted       equivalent amount of
                                        transfer risk.           within the previous 5    liabilities in that
                                                                 years..                  currency.
Claims on foreign banks..............  20% for claims on banks  Risk weight depends on   Under the proposed
                                        in OECD countries;       home country's CRC       rule, instruments
                                       20% for short-term        rating and ranges        included in the
                                        claims on banks in non-  between 20% and 50%;     capital of a foreign
                                        OECD countries;.        100% for foreign bank     bank would be deducted
                                       100% for long-term        whose home country       (refer to Addendum 1
                                        claims on banks in non-  does not have a CRC;.    on the definition of
                                        OECD countries..        150% in the case of a     capital) or treated
                                                                 sovereign default in     under the equities
                                                                 the bank's home          section below.
                                                                 country;.
                                                                100% for an instrument
                                                                 included in a bank's
                                                                 regulatory capital
                                                                 (unless that
                                                                 instrument is an
                                                                 equity exposure or is
                                                                 deducted (see Addendum
                                                                 1))..
Claims on foreign PSEs...............  20% for general          Risk weight depends on   .......................
                                        obligations of states    the home country's CRC
                                        and political            and ranges between 20%
                                        subdivisions of OECD     and 150% for general
                                        countries;               obligations; and
                                       50% for revenue           between 50% and 150%
                                        obligations of states    for revenue
                                        and political            obligations;
                                        subdivisions of OECD    100% for exposures to a
                                        countries;.              PSE in a home country
                                       100% for all              that does not have a
                                        obligations of states    CRC;.
                                        and political           150% for a PSE in a
                                        subdivisions of non-     home country with a
                                        OECD countries..         sovereign default..

[[Page 52946]]

 
Mortgage backed security (MBS), asset  Ratings Based Approach:  Deduction for the after-
 backed security (ABS), and            --20%: AAA&AA;.........   tax gain-on-sale of a
 structured securities.                --50%: A-rated.........   securitization;
                                       --100%: BBB............  1,250% risk weight for
                                       --200%: BB-rated.......   a Credit-Enhancing
                                       [Securitizations with     Interest-Only Strip
                                        short-term ratings--     (CEIO);.
                                        20, 50, 100, and for    100% for interest-only
                                        unrated positions,       MBS that are not
                                        where the banking        credit-enhancing;.
                                        organization            Banking organizations
                                        determines the credit    may elect to follow a
                                        rating--100 or 200];.    gross up approach,
                                                                 similar to existing
                                                                 rules..
                                       Gross-up approach the    Simplified Supervisory   .......................
                                        risk-weighted asset      Formula Approach
                                        amount is calculated     (SSFA)--the risk
                                        using the risk weight    weight for a position
                                        of the underlying        is determined by a
                                        assets amount of the     formula and is based
                                        position and the full    on the risk weight
                                        amount of the assets     applicable to the
                                        supported by the         underlying exposures,
                                        position (that is, all   the relative position
                                        of the more senior       of the securitization
                                        positions);              position in the
                                       Dollar for dollar         structure
                                        capital for residual     (subordination), and
                                        interests;.              measures of
                                       Deduction for CEIO        delinquency and loss
                                        strips over              on the securitized
                                        concentration limit;.    assets;
                                       100% for stripped MBS    1250% otherwise........
                                        (interest only (IOs)
                                        and [FULL TERM] (Pos))
                                        that are not credit
                                        enhancing..
Unsettled transactions...............  Not addressed.           100%, 625%, 937.5%, and  DvP (delivery vs.
                                                                 1,250% for DvP or PvP    payment) and PvP
                                                                 transactions depending   (payment vs. payment)
                                                                 on the number of         are defined below.
                                                                 business days past the
                                                                 settlement date;
                                                                1,250% for non-DvP, non-
                                                                 PvP transactions more
                                                                 than 5 days past the
                                                                 settlement date.
                                                                The proposed capital
                                                                 requirement for
                                                                 unsettled transactions
                                                                 would not apply to
                                                                 cleared transactions
                                                                 that are marked-to-
                                                                 market daily and
                                                                 subject to daily
                                                                 receipt and payment of
                                                                 variation margin.
Equity exposures.....................  100% or incremental      0% risk weight: equity   MDB = multilateral
                                        deduction approach for   exposures to a           development bank.
                                        nonfinancial equity      sovereign, certain
                                        investments.             supranational
                                                                 entities, or an MDB
                                                                 whose debt exposures
                                                                 are eligible for 0%
                                                                 risk weight;
                                                                20%: Equity exposures
                                                                 to a PSE, a FHLB, or
                                                                 Farmer Mac;
                                                                100%: Equity exposures
                                                                 to community
                                                                 development
                                                                 investments and small
                                                                 business investment
                                                                 companies and non-
                                                                 significant equity
                                                                 investments;
                                                                250%: Significant
                                                                 investments in the
                                                                 capital of
                                                                 unconsolidated
                                                                 financial institutions
                                                                 that are not deducted
                                                                 from capital pursuant
                                                                 to section 22;
                                                                300%: Most publicly-
                                                                 traded equity
                                                                 exposures;
                                                                400%: Equity exposures
                                                                 that are not publicly-
                                                                 traded;
                                                                600%: Equity exposures
                                                                 to certain investment
                                                                 funds.

[[Page 52947]]

 
Equity exposures to investment funds.  There is a 20% risk      Full look-through: Risk
                                        weight floor on mutual   weight the assets of
                                        fund holdings.           the fund (as if owned
                                       General rule: Risk        directly) multiplied
                                        weight is the same as    by the banking
                                        the highest risk         organization's
                                        weight investment the    proportional ownership
                                        fund is permitted to     in the fund.
                                        hold..                  Simple modified look-
                                       Option: A banking         through: Multiply the
                                        organization may         banking organization's
                                        assign risk weights      exposure by the risk
                                        pro rata according to    weight of the highest
                                        the investment limits    risk weight asset in
                                        in the fund's            the fund..
                                        prospectus..            Alternative modified
                                                                 look-through: Assign
                                                                 risk weight on a pro
                                                                 rata basis based on
                                                                 the investment limits
                                                                 in the fund's
                                                                 prospectus..
                                                                For community
                                                                 development exposures,
                                                                 risk-weighted asset
                                                                 amount = adjusted
                                                                 carrying value..
----------------------------------------------------------------------------------------------------------------
                         Credit Conversion Factors Under the Current and Proposed Rules
----------------------------------------------------------------------------------------------------------------
Conversion factors for off-balance     0% for the unused        0% for the unused
 sheet items.                           portion of a             portion of a
                                        commitment with an       commitment that is
                                        original maturity of     unconditionally
                                        one year or less, or     cancellable by the
                                        which unconditionally    banking organization;
                                        cancellable at any
                                        time;
                                       10% for unused portions  20% for the unused
                                        of eligible Asset-       portion of a
                                        Backed Commercial        commitment with an
                                        Paper (ABCP) liquidity   original maturity of
                                        facilities with an       one year or less that
                                        original maturity of     is not unconditionally
                                        one year or less;        cancellable;
                                       20% for self-            20% for self-
                                        liquidating trade-       liquidating, trade-
                                        related contingent       related contingent
                                        items;                   items;
                                       50% for the unused       50% for the unused
                                        portion of a             portion of a
                                        commitment with an       commitment over one
                                        original maturity of     year that are not
                                        more than one year       unconditionally
                                        that are not             cancellable;
                                        unconditionally
                                        cancellable;
                                       50% for transaction-     50% for transaction-
                                        related contingent       related contingent
                                        items (performance       items (performance
                                        bonds, bid bonds,        bonds, bid bonds,
                                        warranties, and          warranties, and
                                        standby letters of       standby letters of
                                        credit);                 credit);
                                       100% for guarantees,     100% for guarantees,     .......................
                                        repurchase agreements,   repurchase agreements,
                                        securities lending and   securities lending and
                                        borrowing                borrowing
                                        transactions,            transactions,
                                        financial standby        financial standby
                                        letters of credit, and   letters of credit, and
                                        forward agreements.      forward agreements.
Derivative contracts.................  Conversion to an on-     Conversion to an on-     .......................
                                        balance sheet amount     balance sheet amount
                                        based on current         based on current
                                        exposure plus            exposure plus
                                        potential future         potential future
                                        exposure and a set of    exposure and a set of
                                        conversion factors.      conversion factors. No
                                        50% risk weight cap.     risk weight cap.
----------------------------------------------------------------------------------------------------------------

[[Page 52948]]

 
                           Credit Risk Mitigation Under the Current and Proposed Rules
----------------------------------------------------------------------------------------------------------------
Guarantees...........................  Generally recognizes     Recognizes guarantees    Claims conditionally
                                        guarantees provided by   from eligible            guaranteed by the U.S.
                                        central governments,     guarantors: sovereign    government receive a
                                        GSEs, public sector      entities, Bank for       risk weight of 20
                                        entities (PSEs) in       International            percent under the
                                        OECD countries,          Settlements (BIS),       standardized approach.
                                        multilateral lending     International Monetary
                                        institutions, regional   Fund (IMF), European
                                        development banking      Central Bank (ECB),
                                        organizations, U.S.      European Commission,
                                        depository               Federal Home Loan
                                        institutions, foreign    Banks (FHLBs), Farmer
                                        banks, and qualifying    Mac, a multilateral
                                        securities firms in      development bank, a
                                        OECD countries.          depository
                                       Substitution approach     institution, a bank
                                        that allows the          holding company, a
                                        banking organization     savings and loan
                                        to substitute the risk   holding company, a
                                        weight of the            foreign bank, or an
                                        protection provider      entity other than a
                                        for the risk weight      special purpose entity
                                        ordinarily assigned to   (SPE) that has
                                        the exposure..           investment grade debt,
                                                                 whose creditworthiness
                                                                 is not positively
                                                                 correlated with the
                                                                 credit risk of the
                                                                 exposures for which it
                                                                 provides guarantees
                                                                 and is not a monoline
                                                                 insurer or re-insurer.
                                                                Substitution treatment
                                                                 allows the banking
                                                                 organization to
                                                                 substitute the risk
                                                                 weight of the
                                                                 protection provider
                                                                 for the risk weight
                                                                 ordinarily assigned to
                                                                 the exposure. Applies
                                                                 only to eligible
                                                                 guarantees and
                                                                 eligible credit
                                                                 derivatives, and
                                                                 adjusts for maturity
                                                                 mismatches, currency
                                                                 mismatches, and where
                                                                 restructuring is not
                                                                 treated as a credit
                                                                 event.
Collateralized transactions..........  Recognize only cash on   For financial            Financial collateral:
                                        deposit, securities      collateral only, the     cash on deposit at the
                                        issued or guaranteed     proposal provides two    banking organization
                                        by OECD countries,       approaches:.             (or 3rd party
                                        securities issued or    1. Simple approach: A     custodian); gold;
                                        guaranteed by the U.S.   banking organization     investment grade
                                        government or a U.S.     may apply a risk         securities (excluding
                                        government agency, and   weight to the portion    resecuritizations);
                                        securities issued by     of an exposure that is   publicly-traded equity
                                        certain multilateral     secured by the market    securities; publicly-
                                        development banks.       value of collateral by   traded convertible
                                       Substitute risk weight    using the risk weight    bonds; money market
                                        of collateral for risk   of the collateral--      mutual fund shares;
                                        weight of exposure,      with a general risk      and other mutual fund
                                        sometimes with a 20%     weight floor of 20%..    shares if a price is
                                        risk weight floor..     2. Collateral haircut     quoted daily. In all
                                                                 approach using           cases the banking
                                                                 standard supervisory     organization must have
                                                                 haircuts or own          a perfected, 1st
                                                                 estimates of haircuts    priority interest.
                                                                 for eligible margin     For the simple approach
                                                                 loans, repo-style        there must be a
                                                                 transactions,            collateral agreement
                                                                 collateralized           for at least the life
                                                                 derivative contracts..   of the exposure;
                                                                                          collateral must be
                                                                                          revalued at least
                                                                                          every 6 months;
                                                                                          collateral other than
                                                                                          gold must be in the
                                                                                          same currency.
----------------------------------------------------------------------------------------------------------------

Addendum 2: Definitions used in the Proposal

    Definitions of the terms used in this proposal can be found in 
Part [----] CAPITAL ADEQUACY OF [BANK]s, Subpart A-General, Text 
Sec.  ----.2 Definitions, of the related document entitled 
``Regulatory Capital Rules: Regulatory Capital, Implementation of 
Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, 
Transition Provisions, and Prompt Corrective Action'' immediately 
preceding this proposal and published elsewhere in today's Federal 
Register.

Text of Proposed Common Rule

PART CAPITAL ADEQUACY OF [BANK]s

Subpart D--Risk-Weighted Assets--Standardized Approach

Sec.
----.30 Applicability.

RISK-WEIGHTED ASSETS FOR GENERAL CREDIT RISK

----.31 Mechanics for calculating risk-weighted assets for general 
credit risk.
----.32 General risk weights.
----.33 Off-balance sheet exposures.
----.34 OTC derivative contracts.
----.35 Cleared transactions.
----.36 Guarantees and credit derivatives: substitution treatment.
----.37 Collateralized transactions.

RISK-WEIGHTED ASSETS FOR UNSETTLED TRANSACTIONS

----.38 Unsettled transactions.

[[Page 52949]]

RISK-WEIGHTED ASSETS FOR SECURITIZATION EXPOSURES

----.41 Operational requirements for securitization exposures.
----.42 Risk-weighted assets for securitization exposures.
----.43 Simplified supervisory formula approach (SSFA) and the 
gross-up approach.
----.44 Securitization exposures to which the SSFA and gross-Up 
approach do not apply.
----.45 Recognition of credit risk mitigants for securitization 
exposures.

RISK-WEIGHTED ASSETS FOR EQUITY EXPOSURES

----.51 Introduction and exposure measurement.
----.52 Simple risk-weight approach (SRWA).
----.53 Equity exposures to investment funds.

DISCLOSURES

----.61 Purpose and scope.
----.62 Disclosure requirements.
----.63 Disclosures by [BANK]s described in Sec.  ----.61.

Subpart D--Risk Weighted Assets--Standardized Approach

Sec.  ----.30 Applicability.
    (a) A market risk [BANK] must exclude from its calculation of risk-
weighted assets under this subpart the risk-weighted asset amounts of 
all covered positions, as defined in subpart F of this part (except 
foreign exchange positions that are not trading positions, over-the-
counter (OTC) derivative positions, cleared transactions, and unsettled 
transactions).
    (b) On January 1, 2015, and thereafter, a [BANK] must calculate 
risk-weighted assets under subpart D of this part. On or before 
December 31, 2014, the [BANK] must calculate risk-weighted assets under 
either:
    (i) The methodology described in the general risk-based capital 
rules under 12 CFR part 3, appendix A, 12 CFR part 167 (OCC); 12 CFR 
part 208, appendix A, 12 CFR part 225, appendix A (Board); 12 CFR part 
325, appendix A, and 12 CFR part 390 (FDIC); or
    (ii) Subpart D of this part.
    (c) Notwithstanding paragraph (b) of this section, a [BANK] is 
subject to the transition provisions under Sec.  ----.300.

RISK-WEIGHTED ASSETS FOR GENERAL CREDIT RISK


Sec.  ----.31  Mechanics for calculating risk-weighted assets for 
general credit risk.

    (a) General risk-weighting requirements. A [BANK] must apply risk 
weights to its exposures as follows:
    (1) A [BANK] must determine the exposure amount of each on-balance 
sheet exposure, each OTC derivative contract, and each off-balance 
sheet commitment, trade and transaction-related contingency, guarantee, 
repo-style transaction, financial standby letter of credit, forward 
agreement, or other similar transaction that is not:
    (i) An unsettled transaction subject to Sec.  ----.38;
    (ii) A cleared transaction subject to Sec.  ----.35;
    (iii) A default fund contribution subject to Sec.  ----.35;
    (iv) A securitization exposure subject to Sec. Sec.  ----.41 
through ----.45; or
    (v) An equity exposure (other than an equity OTC derivative 
contract) subject to Sec. Sec.  ----.51 through ----.53.
    (2) The [BANK] must multiply each exposure amount by the risk 
weight appropriate to the exposure based on the exposure type or 
counterparty, eligible guarantor, or financial collateral to determine 
the risk-weighted asset amount for each exposure.
    (b) Total risk-weighted assets for general credit risk equals the 
sum of the risk-weighted asset amounts calculated under this section.


Sec.  ----.32  General risk weights.

    (a) Sovereign exposures. (1) Exposures to the U.S. government. (i) 
Notwithstanding any other requirement in this subpart, a [BANK] must 
assign a zero percent risk weight to:
    (A) An exposure to the U.S. government, its central bank, or a U.S. 
government agency; and
    (B) The portion of an exposure that is directly and unconditionally 
guaranteed by the U.S. government, its central bank, or a U.S. 
government agency.\95\
---------------------------------------------------------------------------

    \95\ Under this section, a [BANK] must assign a zero percent 
risk weight to a deposit, or the portion of a deposit, that is 
insured by the FDIC or National Credit Union Administration.
---------------------------------------------------------------------------

    (ii) A [BANK] must assign a 20 percent risk weight to the portion 
of an exposure that is conditionally guaranteed by the U.S. government, 
its central bank, or a U.S. government agency.
    (2) Other sovereign exposures. A [BANK] must assign a risk weight 
to a sovereign exposure based on the Country Risk Classification (CRC) 
applicable to the sovereign in accordance with Table 1.

              Table 1--Risk Weights for Sovereign Exposures
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                                                           Risk weight
                                                             (in person)
------------------------------------------------------------------------
Sovereign CRC.......................               0-1                 0
                                                     2                20
                                                     3                50
                                                   4-6               100
                                                     7               150
------------------------------------------------------------------------
                        No CRC                                       100
------------------------------------------------------------------------
                   Sovereign Default                                 150
------------------------------------------------------------------------

    (3) Certain sovereign exposures. Notwithstanding paragraph (a)(2) 
of this section, a [BANK] may assign to a sovereign exposure a risk 
weight that is lower than the applicable risk weight in Table 1 if:
    (i) The exposure is denominated in the sovereign's currency;
    (ii) The [BANK] has at least an equivalent amount of liabilities in 
that currency; and
    (iii) The risk weight is not lower than the risk weight that the 
sovereign allows [BANK]s under its jurisdiction to assign to the same 
exposures to the sovereign.
    (4) Sovereign exposures with no CRC. Except as provided in 
paragraph (a)(5) of this section, a [BANK] must assign a 100 percent 
risk weight to a sovereign exposure if the sovereign does not have a 
CRC assigned to it.
    (5) Sovereign default. A [BANK] must assign a 150 percent risk 
weight to a

[[Page 52950]]

sovereign exposure immediately upon determining that an event of 
sovereign default has occurred, or if an event of sovereign default has 
occurred during the previous five years.
    (b) Certain supranational entities and Multilateral Development 
Banks (MDBs). A [BANK] must assign a zero percent risk weight to an 
exposure to the Bank for International Settlements, the European 
Central Bank, the European Commission, the International Monetary Fund, 
or an MDB.
    (c) Exposures to government-sponsored entities (GSEs). (1) A [BANK] 
must assign a 20 percent risk weight to an exposure to a GSE that is 
not an equity exposure.
    (2) A [BANK] must assign a 100 percent risk weight to preferred 
stock issued by a GSE.
    (d) Exposures to depository institutions, foreign banks, and credit 
unions. (1) Exposures to U.S. depository institutions and credit 
unions. A [BANK] must assign a 20 percent risk weight to an exposure to 
a depository institution or credit union that is organized under the 
laws of the United States or any state thereof, except as otherwise 
provided under paragraph (d)(3) of this section.
    (2) Exposures to foreign banks. (i) Except as otherwise provided 
under paragraphs (d)(2)(ii) and (d)(3) of this section, a [BANK] must 
assign a risk weight to an exposure to a foreign bank using the CRC 
rating that corresponds to the foreign bank's home country in 
accordance with Table 2.

          Table 2--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
    0-1.................................................              20
    2...................................................              50
    3...................................................             100
    4-7.................................................             150
No CRC..................................................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    (ii) A [BANK] must assign a 100 percent risk weight to an exposure 
to a foreign bank whose home country does not have a CRC, with the 
exception of self-liquidating, trade-related contingent items that 
arise from the movement of goods, and that have a maturity of three 
months or less, which may be assigned a 20 percent risk weight.
    (iii) A [BANK] must assign a 150 percent risk weight to an exposure 
to a foreign bank immediately upon determining that an event of 
sovereign default has occurred in the bank's home country, or if an 
event of sovereign default has occurred in the foreign bank's home 
country during the previous five years.
    (3) A [BANK] must assign a 100 percent risk weight to an exposure 
to a financial institution that is includable in that financial 
institution's capital unless the exposure is:
    (i) An equity exposure;
    (ii) A significant investment in the capital of an unconsolidated 
financial institution in the form of common stock pursuant to Sec.  --
--.22(d)(iii);
    (iii) Is deducted from regulatory capital under Sec.  ----.22 of 
the proposal; and
    (iv) Subject to a 150 percent risk weight under Table 2 of 
paragraph (d)(2) of this section.
    (e) Exposures to public sector entities (PSEs). (1) Exposures to 
U.S. PSEs. (i) A [BANK] must assign a 20 percent risk weight to a 
general obligation exposure to a PSE that is organized under the laws 
of the United States or any state or political subdivision thereof.
    (ii) A [BANK] must assign a 50 percent risk weight to a revenue 
obligation exposure to a PSE that is organized under the laws of the 
United States or any state or political subdivision thereof.
    (2) Exposures to foreign PSEs. (i) Except as provided in paragraphs 
(e)(1) and (e)(3) of this section, a [BANK] must assign a risk weight 
to a general obligation exposure to a PSE based on the CRC that 
corresponds to the PSE's home country, as set forth in Table 3.
    (ii) Except as provided in paragraphs (e)(1) and (e)(3) of this 
section, a [BANK] must assign a risk weight to a revenue obligation 
exposure to a PSE based on the CRC that corresponds to the PSE's home 
country, as set forth in Table 4.
    (3) A [BANK] may assign a lower risk weight than would otherwise 
apply under Table 3 and 4 to an exposure to a foreign PSE if:
    (i) The PSE's home country allows banks under its jurisdiction to 
assign a lower risk weight to such exposures; and
    (ii) The risk weight is not lower than the risk weight that 
corresponds to the PSE's home country in accordance with Table 1.

       Table 3--Risk Weights for Non-U.S. PSE General Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
    0-1.................................................              20
    2...................................................              50
    3...................................................             100
    4-7.................................................             150
No CRC..................................................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------


       Table 4--Risk Weights for Non-U.S. PSE Revenue Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
    0-1.................................................              20
    2-3.................................................             100
    4-7.................................................             150
No CRC..................................................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    (4) A [BANK] must assign a 100 percent risk weight to an exposure 
to a PSE whose home country does not have a CRC.
    (5) A [BANK] must assign a 150 percent risk weight to a PSE 
exposure immediately upon determining that an event of sovereign 
default has occurred in a PSE's home country or if an event of 
sovereign default has occurred in the PSE's home country during the 
previous five years.
    (f) Corporate exposures. A [BANK] must assign a 100 percent risk 
weight to all its corporate exposures.
    (g) Residential mortgage exposures. (1) General Requirement. A 
[BANK] must assign to a residential mortgage exposure the applicable 
risk weight in Table 6, using the loan-to-value (LTV) ratio described 
in paragraph (g)(3) of this section.
    (2) Restructured or modified mortgages. (i) If a residential 
mortgage exposure is restructured or modified, the [BANK] must classify 
the residential mortgage exposure as a category 1 residential mortgage 
exposure or category 2 residential mortgage exposure in accordance with 
the terms and characteristics of the exposure after the modification or 
restructuring.
    (ii) A [BANK] may assign a risk weight lower than 100 percent to a 
category 1 residential mortgage exposure after the exposure has been 
modified or restructured only if:
    (A) The residential mortgage exposure continues to meet category 1 
criteria; and
    (B) The [BANK] updates the LTV ratio at the time of restructuring, 
as provided under paragraph (g)(3) of this section.
    (iii) A [BANK] may assign a risk weight lower than 200 percent to a 
category 2 residential mortgage

[[Page 52951]]

exposure after the exposure has been modified or restructured only if 
the [BANK] updates the LTV ratio at the time of restructuring as 
provided under paragraphs (g)(3) of this section.

                            Table 6--Risk Weights for Residential Mortgage Exposures
----------------------------------------------------------------------------------------------------------------
                                                                 Category 1 residential   Category 2 residential
               Loan-to-value ratio (in percent)                  mortgage exposure (in    mortgage exposure (in
                                                                        percent)                 percent)
----------------------------------------------------------------------------------------------------------------
Less than or equal to 60......................................                       35                      100
Greater than 60 and less than or equal to 80..................                       50                      100
Greater than 80 and less than or equal to 90..................                       75                      150
Greater than 90...............................................                      100                      200
----------------------------------------------------------------------------------------------------------------

    (3) LTV ratio calculation. To determine the LTV ratio of a 
residential mortgage loan for the purpose of this section, a [BANK] 
must divide the loan amount by the value of the property, as described 
in this section. A [BANK] must assign a risk weight to the exposure 
according to its respective LTV ratio.
    (i) Loan amount for calculating the LTV ratio of a residential 
mortgage exposure. (A) First-lien residential mortgage exposure. The 
loan amount of a first-lien residential mortgage exposure is the unpaid 
principal balance of the loan. If the first-lien residential mortgage 
exposure is a combination of a first and junior lien, the loan amount 
is the maximum contractual principal amount of the exposure.
    (B) Junior-lien residential mortgage exposure. The loan amount of a 
junior-lien residential mortgage exposure is the maximum contractual 
principal amount of the exposure, plus the maximum contractual 
principal amounts of all senior exposures secured by the same 
residential property on the date of origination of the junior-lien 
residential mortgage exposure.
    (ii) Value. (A) The value of the property is the lesser of the 
actual acquisition cost (for a purchase transaction) or the estimate of 
the property's value at the origination of the loan or at the time of 
restructuring or modification.
    (B) A [BANK] must base all estimates of a property's value on an 
appraisal or evaluation of the property that satisfies 12 CFR part 34, 
subpart C, 12 CFR part 164 (OCC); 12 CFR part 208, subpart E (Board); 
12 CFR part 323, 12 CFR 390.442 (FDIC).
    (4) Loans modified pursuant to the Home Affordable Mortgage 
Program. A loan modified or restructured on a permanent or trial basis 
solely pursuant to the U.S. Treasury's Home Affordable Mortgage Program 
is not modified or restructured for purposes of this section.
    (h) Pre-sold residential construction loans. A [BANK] must assign a 
50 percent risk weight to a pre-sold construction loan unless the 
purchase contract is cancelled. A [BANK] must assign a 100 percent risk 
weight to such loan if the purchase contract is cancelled.
    (i) Statutory multifamily mortgages. A [BANK] must assign a 50 
percent risk weight to a statutory multifamily mortgage.
    (j) High-volatility commercial real estate (HVCRE) exposures. A 
[BANK] must assign a 150 percent risk weight to an HVCRE exposure.
    (k) Past due exposures. Except for a sovereign exposure or a 
residential mortgage exposure, if an exposure is 90 days or more past 
due or on nonaccrual:
    (1) A [BANK] must assign a 150 percent risk weight to the portion 
of the exposure that is not guaranteed or that is unsecured.
    (2) A [BANK] may assign a risk weight to the collateralized portion 
of a past due exposure based on the risk weight that applies under 
Sec.  ----.37 if the collateral meets the requirements of that section.
    (3) A [BANK] may assign a risk weight to the guaranteed portion of 
a past due exposure based on the risk weight that applies under Sec.  
----.36 if the guarantee or credit derivative meets the requirements of 
that section.
    (l) Other assets. (1) A [BANK] must assign a zero percent risk 
weight to cash owned and held in all offices of the [BANK] or in 
transit; to gold bullion held in the [BANK]'s own vaults or held in 
another depository institution's vaults on an allocated basis, to the 
extent the gold bullion assets are offset by gold bullion liabilities; 
and to exposures that arise from the settlement of cash transactions 
(such as equities, fixed income, spot FX and spot commodities) with a 
central counterparty where there is no assumption of ongoing 
counterparty credit risk by the central counterparty after settlement 
of the trade and associated default fund contributions.
    (2) A [BANK] must assign a 20 percent risk weight to cash items in 
the process of collection.
    (3) A [BANK] must assign a 100 percent risk weight to DTAs arising 
from temporary differences that the [BANK] could realize through net 
operating loss carrybacks.
    (4) A [BANK] must assign a 250 percent risk weight to MSAs and DTAs 
arising from temporary differences that the [BANK] could not realize 
through net operating loss carrybacks that are not deducted from common 
equity tier 1 capital pursuant to Sec.  ----.22(d).
    (5) A [BANK] must assign a 100 percent risk weight to all assets 
not specifically assigned a different risk weight under this subpart 
(other than exposures that are deducted from tier 1 or tier 2 capital).
    (6) Notwithstanding the requirements of this section, a [BANK] may 
assign an asset that is not included in one of the categories provided 
in this section to the risk weight category applicable under the 
capital rules applicable to bank holding companies and savings and loan 
holding companies at 12 CFR part 217, provided that all of the 
following conditions apply:
    (i) The [BANK] is not authorized to hold the asset under applicable 
law other than debt previously contracted or similar authority; and
    (ii) The risks associated with the asset are substantially similar 
to the risks of assets that are otherwise assigned to a risk weight 
category of less than 100 percent under this subpart.


Sec.  ----.33  Off-balance sheet exposures.

    (a) General. (1) A [BANK] must calculate the exposure amount of an 
off-balance sheet exposure using the credit conversion factors (CCFs) 
in paragraph (b) of this section.
    (2) Where a [BANK] commits to provide a commitment, the [BANK] may 
apply the lower of the two applicable CCFs.
    (3) Where a [BANK] provides a commitment structured as a 
syndication or participation, the [BANK] is only

[[Page 52952]]

required to calculate the exposure amount for its pro rata share of the 
commitment.
    (b) Credit conversion factors. (1) Zero percent CCF. A [BANK] must 
apply a zero percent CCF to the unused portion of commitments that are 
unconditionally cancelable by the [BANK].
    (2) 20 percent CCF. A [BANK] must apply a 20 percent CCF to:
    (i) Commitments with an original maturity of one year or less that 
are not unconditionally cancelable by the [BANK].
    (ii) Self-liquidating, trade-related contingent items that arise 
from the movement of goods, with an original maturity of one year or 
less.
    (3) 50 percent CCF. A [BANK] must apply a 50 percent CCF to:
    (i) Commitments with an original maturity of more than one year 
that are not unconditionally cancelable by the [BANK].
    (ii) Transaction-related contingent items, including performance 
bonds, bid bonds, warranties, and performance standby letters of 
credit.
    (4) 100 percent CCF. A [BANK] must apply a 100 percent CCF to the 
following off-balance-sheet items and other similar transactions:
    (i) Guarantees;
    (ii) Repurchase agreements (the off-balance sheet component of 
which equals the sum of the current market values of all positions the 
[BANK] has sold subject to repurchase);
    (iii) Off-balance sheet securities lending transactions (the off-
balance sheet component of which equals the sum of the current market 
values of all positions the [BANK] has lent under the transaction);
    (iv) Off-balance sheet securities borrowing transactions (the off-
balance sheet component of which equals the sum of the current market 
values of all non-cash positions the [BANK] has posted as collateral 
under the transaction);
    (v) Financial standby letters of credit; and
    (vi) Forward agreements.


Sec.  ----.34  OTC derivative contracts.

    (a) Exposure amount. (1) Single OTC derivative contract. Except as 
modified by paragraph (b) of this section, the exposure amount 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 OTC 
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 OTC derivative contract or zero.
    (ii) PFE. (A) 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 OTC derivative contract by the appropriate conversion factor in 
Table 7.
    (B) For purposes of calculating either the PFE under this paragraph 
or the gross PFE under paragraph (a)(2) 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.
    (C) For an OTC derivative contract that does not fall within one of 
the specified categories in Table 7, the PFE must be calculated using 
the appropriate ``other'' conversion factor.
    (D) A [BANK] must use an OTC derivative contract's effective 
notional principal amount (that is, the apparent or stated notional 
principal amount multiplied by any multiplier in the OTC derivative 
contract) rather than the apparent or stated notional principal amount 
in calculating PFE.
    (E) The PFE of the protection provider of a credit derivative is 
capped at the net present value of the amount of unpaid premiums.

                                             Table 7--Conversion Factor Matrix for 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)
                                                                            asset) \3\        asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................            0.00            0.01            0.05            0.10            0.06            0.07            0.10
Greater than one year and less than or             0.005            0.05            0.05            0.10            0.08            0.07            0.12
 equal to five years....................
Greater than five years.................           0.015           0.075            0.05            0.10            0.10            0.08           0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a 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 asset)'' for a credit derivative whose reference asset is an outstanding
  unsecured long-term debt security without credit enhancement that is investment grade. A [BANK] must use the column labeled ``Credit (non-investment-
  grade reference asset)'' for all other credit derivatives.

    (2) Multiple OTC derivative contracts subject to a qualifying 
master netting agreement. Except as modified by paragraph (b) of this 
section, the exposure amount 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 amounts 
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 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 zero.
    (ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE 
amounts, 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 (a)(1)(ii) of this section for each 
individual derivative contract subject to the qualifying master netting 
agreement); and
    (B) Net-to-gross Ratio (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

[[Page 52953]]

current credit exposures (as determined under paragraph (a)(1)(i) of 
this section) of all individual derivative contracts subject to the 
qualifying master netting agreement).
    (b) Recognition of credit risk mitigation of collateralized OTC 
derivative contracts: (1) A [BANK] may recognize the credit risk 
mitigation benefits of financial collateral that secures an OTC 
derivative contract or multiple OTC derivative contracts subject to a 
qualifying master netting agreement (netting set) by using the simple 
approach in Sec.  ----.37(b).
    (2) As an alternative to the simple approach, a [BANK] may 
recognize the credit risk mitigation benefits of financial collateral 
that secures such a contract or netting set if the financial collateral 
is marked-to-market on a daily basis and subject to a daily margin 
maintenance requirement by applying a risk weight to the exposure as if 
it is uncollateralized and adjusting the exposure amount calculated 
under paragraph (a)(1)(i) or (ii) of this section using the collateral 
haircut approach in Sec.  ----.37(c). The [BANK] must substitute the 
exposure amount calculated under paragraph (a)(1)(i) or (ii) of this 
section for [sum]E in the equation in Sec.  ----.37(c)(2).
    (c) Counterparty credit risk for OTC credit derivatives. (1) 
Protection purchasers. A [BANK] that purchases an OTC credit derivative 
that is recognized under Sec.  ----.36 as a credit risk mitigant for an 
exposure that is not a covered position under subpart F is not required 
to compute a separate counterparty credit risk capital requirement 
under Sec.  ----.32 provided that the [BANK] does so consistently for 
all such credit derivatives. The [BANK] must either include all or 
exclude all such credit derivatives that are subject to a qualifying 
master netting agreement from any measure used to determine 
counterparty credit risk exposure to all relevant counterparties for 
risk-based capital purposes.
    (2) Protection providers. (i) A [BANK] that is the protection 
provider under an OTC credit derivative must treat the OTC credit 
derivative as an exposure to the underlying reference asset. The [BANK] 
is not required to compute a counterparty credit risk capital 
requirement for the OTC credit derivative under Sec.  ----.32, provided 
that this treatment is applied consistently for all such OTC credit 
derivatives. The [BANK] must either include all or exclude all such OTC 
credit derivatives that are subject to a qualifying master netting 
agreement from any measure used to determine counterparty credit risk 
exposure.
    (ii) The provisions of paragraph (c)(2) of this section apply to 
all relevant counterparties for risk-based capital purposes unless the 
[BANK] is treating the OTC credit derivative as a covered position 
under subpart F, in which case the [BANK] must compute a supplemental 
counterparty credit risk capital requirement under this section.
    (d) Counterparty credit risk for OTC equity derivatives. (1) A 
[BANK] must treat an OTC equity derivative contract as an equity 
exposure and compute a risk-weighted asset amount for the OTC equity 
derivative contract under Sec. Sec.  ----.51 through ----.53 (unless 
the [BANK] is treating the contract as a covered position under subpart 
F).
    (2) In addition, the [BANK] must also calculate a risk-based 
capital requirement for the counterparty credit risk of an OTC equity 
derivative contract under this section if the [BANK] is treating the 
contract as a covered position under subpart F.
    (3) If the [BANK] risk weights the contract under the Simple Risk-
Weight Approach (SRWA) in Sec.  ----.52, the [BANK] may choose not to 
hold risk-based capital against the counterparty credit risk of the OTC 
equity derivative contract, as long as it does so for all such 
contracts. Where the OTC 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.


Sec.  ----.  35 Cleared transactions.

    (a) Requirements. (1) A [BANK] that is a clearing member client 
must use the methodologies described in paragraph (b) of this section 
to calculate risk-weighted assets for a cleared transaction.
    (2) A [BANK] that is a clearing member must use the methodologies 
described in paragraph (c) of this section to calculate its risk-
weighted assets for cleared transactions and paragraph (d) of this 
section to calculate its risk-weighted assets for its default fund 
contribution to a CCP.
    (b) Clearing member client [BANK]s. (1) Risk-weighted assets for 
cleared transactions. (i) To determine the risk-weighted asset amount 
for a cleared transaction, a [BANK] that is a clearing member client 
must multiply the trade exposure amount for the cleared transaction, 
calculated in accordance with paragraph (b)(2) of this section, by the 
risk weight appropriate for the cleared transaction, determined in 
accordance with paragraph (b)(3) of this section.
    (ii) A clearing member client [BANK]'s total risk-weighted assets 
for cleared transactions is the sum of the risk-weighted asset amounts 
for all its cleared transactions.
    (2) Trade exposure amount. (i) For a cleared transaction that is a 
derivative contract or netting set of derivative contracts, the trade 
exposure amount equals:
    (A) The exposure amount for the derivative contract or netting set 
of derivative contracts, calculated using the methodology used to 
calculate exposure amount for OTC derivative contracts under Sec.  --
--.34, plus
    (B) The fair value of the collateral posted by the clearing member 
client [BANK] and held by the CCP or a clearing member in a manner that 
is not bankruptcy remote.
    (ii) For a cleared transaction that is a repo-style transaction, 
the trade exposure amount equals:
    (A) The exposure amount for the repo-style transaction calculated 
using the methodologies under Sec.  ----.37(c), plus
    (B) The fair value of the collateral posted by the clearing member 
client and held by the CCP or a clearing member in a manner that is not 
bankruptcy remote.
    (3) Cleared transaction risk weights. (i) For a cleared transaction 
with a QCCP, a clearing member client [BANK] must apply a risk weight 
of:
    (A) 2 percent if the collateral posted by the [BANK] to the QCCP or 
clearing member is subject to an arrangement that prevents any losses 
to the clearing member client due to the joint default or a concurrent 
insolvency, liquidation, or receivership proceeding of the clearing 
member and any other clearing member clients of the clearing member; 
and the clearing member client [BANK] has conducted sufficient legal 
review to conclude with a well-founded basis (and maintains sufficient 
written documentation of that legal review) that in the event of a 
legal challenge (including one resulting from default or from 
liquidation, insolvency, or receivership proceeding) the relevant court 
and administrative authorities would find the arrangements to be legal, 
valid, binding and enforceable under the law of the relevant 
jurisdictions; or
    (B) 4 percent in all other circumstances.
    (ii) For a cleared transaction with a CCP that is not a QCCP, a 
clearing member client [BANK] must apply the risk weight appropriate 
for the CCP according to Sec.  ----.32.
    (4) Collateral. (i) Notwithstanding any other requirements in this 
section, collateral posted by a clearing member client [BANK] that is 
held by a

[[Page 52954]]

custodian in a manner that is bankruptcy remote from the CCP, clearing 
member and other clearing member clients of the clearing member, is not 
subject to a capital requirement under this section.
    (ii) A [BANK] must calculate a risk-weighted asset amount for any 
collateral provided to a CCP, clearing member or a custodian in 
connection with a cleared transaction in accordance with the 
requirements under Sec.  ----.32.
    (c) Clearing member [BANK]s. (1) Risk-weighted assets for cleared 
transactions. (i) To determine the risk-weighted asset amount for a 
cleared transaction, a clearing member [BANK] must multiply the trade 
exposure amount for the cleared transaction, calculated in accordance 
with paragraph (c)(2) of this section, by the risk weight appropriate 
for the cleared transaction, determined in accordance with paragraph 
(c)(3) of this section.
    (ii) A clearing member [BANK]'s total risk-weighted assets for 
cleared transactions is the sum of the risk-weighted asset amounts for 
all of its cleared transactions.
    (2) Trade exposure amount. A clearing member [BANK] must calculate 
its trade exposure amount for a cleared transaction as follows:
    (i) For a derivative contract that is a cleared transaction, the 
trade exposure amount equals:
    (A) The exposure amount for the derivative contract, calculated 
using the methodology to calculate exposure amount for OTC derivative 
contracts under Sec.  ----.34, plus
    (B) The fair value of the collateral posted by the clearing member 
[BANK] and held by the CCP in a manner that is not bankruptcy remote.
    (ii) For a repo-style transaction that is a cleared transaction, 
trade exposure amount equals:
    (A) The exposure amount for repo-style transactions calculated 
using methodologies under Sec.  ----.37(c), plus
    (B) The fair value of the collateral posted by the clearing member 
[BANK] and held by the CCP in a manner that is not bankruptcy remote.
    (3) Cleared transaction risk weight. (i) For a cleared transaction 
with a QCCP, a clearing member [BANK] must apply a risk weight of 2 
percent.
    (ii) For a cleared transaction with a CCP that is not a QCCP, a 
clearing member [BANK] must apply the risk weight appropriate for the 
CCP according to Sec.  ----.32.
    (4) Collateral. (i) Notwithstanding any other requirement in this 
section, collateral posted by a clearing member [BANK] that is held by 
a custodian in a manner that is bankruptcy remote from the CCP is not 
subject to a capital requirement under this section.
    (ii) A [BANK] must calculate a risk-weighted asset amount for any 
collateral provided to a CCP, clearing member or a custodian in 
connection with a cleared transaction in accordance with requirements 
under Sec.  ----.32.
    (d) Default fund contributions. (1) General requirement. A clearing 
member [BANK] must determine the risk-weighted asset amount for a 
default fund contribution to a CCP at least quarterly, or more 
frequently if, in the opinion of the [BANK] or the [AGENCY], there is a 
material change in the financial condition of the CCP.
    (2) Risk-weighted asset amount for default fund contributions to 
non-qualifying CCPs. A clearing member [BANK]'s risk-weighted asset 
amount for default fund contributions to CCPs that are not QCCPs equals 
the sum of such default fund contributions multiplied by 1,250 percent.
    (3) Risk-weighted asset amount for default fund contributions to 
QCCPs. A clearing member [BANK]'s risk-weighted asset amount for 
default fund contributions to QCCPs equals the sum of its capital 
requirement, KCM for each QCCP, as calculated under Sec.  --
--.35(d)(3)(i), multiplied by 1,250 percent.
    (i) The hypothetical capital requirement of a QCCP 
(KCCP) equals:
[GRAPHIC] [TIFF OMITTED] TP30AU12.013

Where
(A) EBRMi = the exposure amount for each transaction 
cleared through the QCCP by clearing member i, calculated in 
accordance with Sec.  ----.34 for derivative transactions and Sec.  
----.37(c)(2) for repo-style transactions, provided that:
(1) For purposes of this section, in calculating the exposure amount 
the [BANK] may replace the formula provided in Sec.  ----.34 with 
the following: Anet = (0.3 x Agross) + (0.7 x NGR x Agross) or, if 
the [BANK] cannot calculate NGR, it may use a value of 0.30 until 
March 31, 2013; and
(2) For derivative contracts that are options, the PFE described in 
Sec.  ------.34(b)(2) must be adjusted by multiplying the notional 
principal amount of the derivative contract by the appropriate 
conversion factor in Table 7 and the absolute value of the option's 
delta, that is, the ratio of the change in the value of the 
derivative contract to the corresponding change in the price of the 
underlying asset.
(B) VMi = any collateral posted by clearing member i to 
the QCCP that it is entitled to receive from the QCCP, but has not 
yet received, and any collateral that the QCCP is entitled to 
receive from clearing member i, but has not yet received;
(C) IMi = the collateral posted as initial margin by 
clearing member i to the QCCP;
(D) DFi = the funded portion of clearing member i's 
default fund contribution that will be applied to reduce the QCCP's 
loss upon a default by clearing member i; and
(E) RW = 20 percent, except when the [AGENCY] has determined that a 
higher risk weight is more appropriate based on the specific 
characteristics of the QCCP and its clearing members.

    (ii) For a [BANK] that is a clearing member of a QCCP with a 
default fund supported by funded commitments, KCM equals:

[[Page 52955]]

[GRAPHIC] [TIFF OMITTED] TP30AU12.014

Subscripts 1 and 2 denote the clearing members with the two largest 
ANet values. For purposes of this paragraph, for derivatives 
ANet is defined in Sec.  ----.34(a)(2)(ii) and for repo-
style transactions, ANet means the exposure amount as 
defined in Sec.  ----.37(c)(2);
(B) N =the number of clearing members in the QCCP;
(C) DFCCP = the QCCP's own funds and other financial 
resources that would be used to cover its losses before clearing 
members' default fund contributions are used to cover losses;
(D) DFCM = funded default fund contributions from all 
clearing members and any other clearing member contributed financial 
resources that are available to absorb mutualized QCCP losses;
(E) DF = DFCCP + DFCM (that is, the total funded 
default fund contribution);
[GRAPHIC] [TIFF OMITTED] TP30AU12.015


from surviving clearing members assuming that two average clearing 
members have defaulted and their default fund contributions and initial 
margins have been used to absorb the resulting losses);

[[Page 52956]]

[GRAPHIC] [TIFF OMITTED] TP30AU12.016

    (B) For a [BANK] that is a clearing member of a QCCP with a default 
fund supported by unfunded commitments and is unable to calculate 
KCM using the methodology described in paragraph (d)(3)(iii) 
of this section, KCM equals:

[[Page 52957]]

[GRAPHIC] [TIFF OMITTED] TP30AU12.017

    (4) Total risk-weighted assets for default fund contributions. 
Total risk-weighted assets for default fund contributions is the sum of 
a clearing member [BANK]'s risk-weighted assets for all of its default 
fund contributions to all CCPs of which the [BANK] is a clearing 
member.


Sec.  ----.36  Guarantees and credit derivatives: substitution 
treatment.

    (a) Scope. (1) General. A [BANK] may recognize the credit risk 
mitigation benefits of an eligible guarantee or eligible credit 
derivative by substituting the risk weight associated with the 
protection provider for the risk weight assigned to an exposure, as 
provided under this section.
    (2) This section applies to 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.
    (3) Exposures on which there is a tranching of credit risk 
(reflecting at least two different levels of seniority) generally are 
securitization exposures subject to Sec. Sec.  ----.41 through ----.45.
    (4) If multiple eligible guarantees or eligible credit derivatives 
cover a single exposure described in 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-weighted asset amount for each separate 
exposure as described in paragraph (c) of this section.
    (5) If a single eligible guarantee or eligible credit derivative 
covers multiple hedged exposures described in paragraph (a)(2) 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-weighted asset amount for each exposure as 
described in paragraph (c) of this section.
    (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 with, or is 
subordinated to, the hedged exposure; and
    (ii) The reference exposure and the hedged exposure are to the same 
legal entity, and legally enforceable cross-default or cross-
acceleration clauses are in place to ensure payments under the credit 
derivative are triggered when the obligated party of the hedged 
exposure fails to pay under the terms of the hedged exposure.
    (c) Substitution approach. (1) 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 
exposure amount of the hedged exposure, a [BANK] may recognize the 
guarantee or credit derivative in determining the risk-weighted asset 
amount for the hedged exposure by substituting the risk weight 
applicable to the guarantor or credit derivative protection provider 
under Sec.  ----.32 for the risk weight assigned to the exposure.
    (2) Partial coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in Sec. Sec.  ----.36(a) and ----
--.37(b) and the protection amount (P) of the guarantee or credit 
derivative is less than the exposure amount 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.
    (i) The [BANK] may calculate the risk-weighted asset amount for the 
protected exposure under Sec.  ----.32, where the applicable risk 
weight is the risk weight applicable to the guarantor or credit 
derivative protection provider. (ii) The [BANK] must calculate the 
risk-weighted asset amount for the unprotected exposure under Sec.  --
--.32, where the applicable risk weight is that of the unprotected 
portion of the hedged exposure.
    (ii) The treatment provided in this section is applicable when the 
credit risk of an exposure is covered on a partial pro rata basis and 
may be applicable when an adjustment is made to the effective notional 
amount of the guarantee or credit derivative under paragraphs (d), (e), 
or (f) of this section.
    (d) Maturity mismatch adjustment. (1) A [BANK] that recognizes an 
eligible guarantee or eligible credit derivative in determining the 
risk-weighted asset amount 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 obligated party of the hedged 
exposure is scheduled to fulfil its obligation on the hedged 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]

[[Page 52958]]

(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.
    (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 reduce 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;
    (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) Adjustment for 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 reduce 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 adjustment. (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 eight 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. 
A [BANK] qualifies for the use of its own internal estimates of foreign 
exchange volatility if it qualifies for the use of its own-estimates 
haircuts in Sec.  ----.37(c)(4).
    (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 10 business days 
using the following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TP30AU12.018

Sec.  ----.37  Collateralized transactions.

    (a) General. (1) To recognize the risk-mitigating effects of 
financial collateral, a [BANK] may use:
    (i) The simple approach in paragraph (b) of this section for any 
exposure.
    (ii) The collateral haircut approach in paragraph (c) of this 
section for repo-style transactions, eligible margin loans, 
collateralized derivative contracts, and single-product netting sets of 
such transactions.
    (2) A [BANK] may use any approach described in this section that is 
valid for a particular type of exposure or transaction; however, it 
must use the same approach for similar exposures or transactions.
    (b) The simple approach. (1) General requirements. (i) A [BANK] may 
recognize the credit risk mitigation benefits of financial collateral 
that secures any exposure.
    (ii) To qualify for the simple approach, the collateral must meet 
the following requirements:
    (A) The collateral must be subject to a collateral agreement for at 
least the life of the exposure;
    (B) The collateral must be revalued at least every six months; and
    (C) The collateral (other than gold) and the exposure must be 
denominated in the same currency.
    (2) Risk weight substitution. (i) A [BANK] may apply a risk weight 
to the portion of an exposure that is secured by the market value of 
collateral (that meets the requirements of paragraph (b)(1) of this 
section) based on the risk weight assigned to the collateral under 
Sec.  ----.32. For repurchase agreements, reverse repurchase 
agreements, and securities lending and borrowing transactions, the 
collateral is the instruments, gold, and cash the [BANK] has borrowed, 
purchased subject to resale, or taken as collateral from the 
counterparty under the transaction. Except as provided in paragraph 
(b)(3) of this section, the risk weight assigned to the collateralized 
portion of the exposure may not be less than 20 percent.
    (ii) A [BANK] must apply a risk weight to the unsecured portion of 
the exposure based on the risk weight assigned to the exposure under 
this subpart.
    (3) Exceptions to the 20 percent risk-weight floor and other 
requirements. Notwithstanding paragraph (b)(2)(i) of this section:
    (i) A [BANK] may assign a zero percent risk weight to an exposure 
to an OTC derivative contract that is marked-to-market on a daily basis 
and subject to a daily margin maintenance requirement, to the extent 
the contract is collateralized by cash on deposit.
    (ii) A [BANK] may assign a 10 percent risk weight to an exposure to 
an OTC derivative contract that is marked-to-market daily and subject 
to a daily margin maintenance requirement, to the extent that the 
contract is collateralized by an exposure to a sovereign that qualifies 
for a zero percent risk weight under Sec.  ----.32.
    (iii) A [BANK] may assign a zero percent risk weight to the 
collateralized portion of an exposure where:

[[Page 52959]]

    (A) The financial collateral is cash on deposit; or
    (B) The financial collateral is an exposure to a sovereign that 
qualifies for a zero percent risk weight under Sec.  ----.32, and the 
[BANK] has discounted the market value of the collateral by 20 percent.
    (c) Collateral haircut approach. (1) General. A [BANK] may 
recognize the credit risk mitigation benefits of financial collateral 
that secures an eligible margin loan, repo-style transaction, 
collateralized derivative contract, or single-product netting set of 
such transactions, and of any collateral that secures a repo-style 
transaction that is included in the [BANK]'s VaR-based measure under 
subpart F by using the collateral haircut approach in this section. A 
[BANK] may use the standard supervisory haircuts in paragraph (c)(3) of 
this section or, with prior written approval of the [AGENCY], its own 
estimates of haircuts according to paragraph (c)(4) of this section.
    (2) Exposure amount equation. A [BANK] must determine the exposure 
amount for an eligible margin loan, repo-style transaction, 
collateralized derivative contract, or a single-product netting set of 
such transactions by setting the exposure amount equal to max {0, 
[([sum]E--[sum]C) + [sum](Es x Hs) + [sum](Efx x Hfx)]{time} , where:
    (i)(A) For eligible margin loans and repo-style transactions and 
netting sets thereof, [sum]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)); and
    (B) For collateralized derivative contracts and netting sets 
thereof, [sum]E equals the exposure amount of the OTC derivative 
contract (or netting set) calculated under Sec. Sec.  ----.34 (c) or 
(d).
    (ii) [sum]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));
    (iii) Es equals the absolute value of the net position in a given 
instrument or in gold (where the net position in the instrument or 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);
    (iv) Hs equals the market price volatility haircut appropriate to 
the instrument or gold referenced in Es;
    (v) 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
    (vi) Hfx equals the haircut appropriate to the mismatch between the 
currency referenced in Efx and the settlement currency.
    (3) Standard supervisory haircuts. (i) A [BANK] must use the 
haircuts for market price volatility (Hs) provided in Table 8, as 
adjusted in certain circumstances in accordance with the requirements 
of paragraphs (c)(3)(iii) and (iv) of this section:

                                           Table 8--Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Haircut (in percents) assigned based on:
                                                                    ------------------------------------------------------------------
                                                                      Sovereign issuers risk weight      Non-sovereign issuers risk     Investment grade
                         Residual maturity                               under Sec.   ----.32 \2\       weight under Sec.   ----.32      securitization
                                                                    ------------------------------------------------------------------   exposures (in
                                                                                  20% or                                                    percent)
                                                                       Zero %      50%        100%       20%        50%        100%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year.......................................        0.5        1.0       15.0        1.0        2.0       25.0                4.0
Greater than 1 year and less than or equal to 5 years..............        2.0        3.0       15.0        4.0        6.0       25.0               12.0
Greater than 5 years...............................................        4.0        6.0       15.0        8.0       12.0       25.0               24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold..............................15.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other publicly-traded equities (including convertible bonds)............................25.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mutual funds.........................................................Highest haircut applicable to any security
                                                                            in which the fund can invest.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash collateral held....................................................................Zero........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 2 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.

    (ii) For currency mismatches, a [BANK] must use a haircut for 
foreign exchange rate volatility (Hfx) of 8.0 percent, as adjusted in 
certain circumstances under paragraphs (c)(3)(iii) and (iv) of this 
section.
    (iii) For repo-style transactions, a [BANK] may multiply the 
standard supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) 
of this section by the square root of [frac12] (which equals 0.707107).
    (iv) If the number of trades in a netting set exceeds 5,000 at any 
time during a quarter, a [BANK] must adjust the supervisory haircuts 
provided in paragraphs (c)(3)(i) and (ii) of this section upward on the 
basis of a holding period of twenty business days for the following 
quarter except in the calculation of the exposure amount for purposes 
of Sec.  ------.35. If a netting set contains one or more trades 
involving illiquid collateral or an OTC derivative that cannot be 
easily replaced, a [BANK] must adjust the supervisory haircuts upward 
on the basis of a holding period of twenty business days. If over the 
two previous quarters more than two margin disputes on a netting set 
have occurred

[[Page 52960]]

that lasted more than the holding period, then the [BANK] must adjust 
the supervisory haircuts upward for that netting set on the basis of a 
holding period that is at least two times the minimum holding period 
for that netting set. A [BANK] must adjust the standard supervisory 
haircuts upward using the following formula:
[GRAPHIC] [TIFF OMITTED] TP30AU12.019


(A) TM equals a holding period of longer than 10 business 
days for eligible margin loans and derivative contracts or longer 
than 5 business days for repo-style transactions;
(B) HS equals the standard supervisory haircut; and
(C) TS equals 10 business days for eligible margin loans 
and derivative contracts or 5 business days for repo-style 
transactions.

    (v) If the instrument a [BANK] has lent, sold subject to 
repurchase, or posted as collateral does not meet the definition of 
financial collateral, the [BANK] must use a 25.0 percent haircut for 
market price volatility (Hs).
    (4) 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.
    (i) To receive [AGENCY] approval to use its own internal estimates, 
a [BANK] must satisfy the following minimum standards:
    (A) A [BANK] must use a 99th percentile one-tailed confidence 
interval.
    (B) The minimum holding period for a repo-style transaction is five 
business days and for an eligible margin loan is ten business days 
except for transactions or netting sets for which paragraph 
(c)(4)(i)(C) of this section applies. 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] TP30AU12.020


(1) TM equals 5 for repo-style transactions and 10 for 
eligible margin loans;
(2) TN equals the holding period used by the [BANK] to 
derive HN; and
(3) HN equals the haircut based on the holding period 
TN.

    (C) If the number of trades in a netting set exceeds 5,000 at any 
time during a quarter, a [BANK] must calculate the haircut using a 
minimum holding period of twenty business days for the following 
quarter except in the calculation of the exposure amount for purposes 
of Sec.  ----.35. If a netting set contains one or more trades 
involving illiquid collateral or an OTC derivative that cannot be 
easily replaced, a [BANK] must calculate the haircut using a minimum 
holding period of twenty business days. If over the two previous 
quarters more than two margin disputes on a netting set have occurred 
that lasted more than the holding period, then the [BANK] must 
calculate the haircut for transactions in that netting set on the basis 
of a holding period that is at least two times the minimum holding 
period for that netting set.
    (D) A [BANK] is required to calculate its own internal estimates 
with inputs calibrated to historical data from a continuous 12-month 
period that reflects a period of significant financial stress 
appropriate to the security or category of securities.
    (E) A [BANK] must have policies and procedures that describe how it 
determines the period of significant financial stress used to calculate 
the [BANK]'s own internal estimates for haircuts under this section and 
must be able to provide empirical support for the period used. The 
[BANK] must obtain the prior approval of the [AGENCY] for, and notify 
the [AGENCY] if the [BANK] makes any material changes to, these 
policies and procedures.
    (F) Nothing in this section prevents the [AGENCY] from requiring a 
[BANK] to use a different period of significant financial stress in the 
calculation of own internal estimates for haircuts.
    (G) A [BANK] must update its data sets and calculate haircuts no 
less frequently than quarterly and must also reassess data sets and 
haircuts whenever market prices change materially.
    (ii) With respect to debt securities that are 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:
    (A) The type of issuer of the security;
    (B) The credit quality of the security;
    (C) The maturity of the security; and
    (D) The interest rate sensitivity of the security.
    (iii) With respect to debt securities that are not investment grade 
and equity securities, a [BANK] must calculate a separate haircut for 
each individual security.
    (iv) 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.
    (v) 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).

RISK-WEIGHTED ASSETS FOR UNSETTLED TRANSACTIONS


Sec.  ----.38  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 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

[[Page 52961]]

that have a risk of delayed settlement or delivery. This section does 
not apply to:
    (1) Cleared transactions that are marked-to-market daily and 
subject to daily receipt and payment of variation margin;
    (2) Repo-style transactions, including unsettled repo-style 
transactions;
    (3) One-way cash payments on OTC derivative contracts; or
    (4) Transactions with a contractual settlement period that is 
longer than the normal settlement period (which are treated as OTC 
derivative contracts as provided in Sec.  ----.34).
    (c) System-wide failures. In the case of a system-wide failure of a 
settlement, clearing system or central counterparty, 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 9.

      Table 9--Risk Weights for Unsettled DvP and PvP Transactions
------------------------------------------------------------------------
                                                          Risk weight to
                                                           be applied to
  Number of business days after contractual settlement       positive
                          date                                current
                                                           exposure (in
                                                             percent)
------------------------------------------------------------------------
From 5 to 15............................................           100.0
From 16 to 30...........................................           625.0
From 31 to 45...........................................           937.5
46 or more..............................................         1,250.0
------------------------------------------------------------------------

    (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 the risk-weighted asset amount for the 
transaction by treating the current market value of the deliverables 
owed to the [BANK] as an exposure to the counterparty and using the 
applicable counterparty risk weight under Sec.  ----.32.
    (3) If the [BANK] has not received its deliverables by the fifth 
business day after counterparty delivery was due, the [BANK] must 
assign a 1,250 percent risk weight to the current market value of the 
deliverables owed to the [BANK].
    (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.

RISK-WEIGHTED ASSETS FOR SECURITIZATION EXPOSURES


Sec.  ----.41  Operational requirements for securitization exposures.

    (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 condition in this 
section is satisfied. A [BANK] that meets these conditions must hold 
risk-based capital against any credit risk 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 common equity tier 1 
capital any after-tax gain-on-sale resulting from the transaction. The 
conditions are:
    (1) The exposures are not reported on the [BANK]'s consolidated 
balance sheet under GAAP;
    (2) The [BANK] has transferred to one or more third parties credit 
risk associated with the underlying exposures; and
    (3) Any clean-up calls relating to the securitization are eligible 
clean-up calls.
    (4) The securitization does not:
    (i) Include 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) Contain an early amortization provision.
    (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 condition in this paragraph is satisfied. A 
[BANK] that meets these conditions must hold risk-based capital against 
any credit risk of the exposures it retains in connection with the 
synthetic securitization. A [BANK] that fails to meet these conditions 
or chooses not to recognize the credit risk mitigant for purposes of 
this section must instead 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, or an eligible guarantee;
    (2) The [BANK] transfers credit risk associated with the underlying 
exposures to one or more third parties, and the terms and conditions in 
the credit risk mitigants employed do not include provisions that:
    (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.
    (c) Due diligence requirements. (1) Except for exposures that are 
deducted from common equity tier 1 capital, if a [BANK] is unable to 
demonstrate to the satisfaction of the [AGENCY] a comprehensive 
understanding of the features of a securitization exposure that would 
materially affect the performance of the exposure, the [BANK] must 
assign the securitization exposure a risk weight of 1,250 percent. The 
[BANK]'s analysis must be commensurate with the complexity of the 
securitization exposure and the materiality of the exposure in relation 
to its capital.
    (2) A [BANK] must demonstrate its comprehensive understanding of a 
securitization exposure under paragraph (c)(1) of this section, for 
each securitization exposure by:

[[Page 52962]]

    (i) Conduct an analysis of the risk characteristics of a 
securitization exposure prior to acquiring the exposure, and document 
such analysis within three business days after acquiring the exposure, 
considering:
    (A) Structural features of the securitization that would materially 
impact the performance of the exposure, for example, the contractual 
cash flow waterfall, waterfall-related triggers, credit enhancements, 
liquidity enhancements, market value triggers, the performance of 
organizations that service the exposure, and deal-specific definitions 
of default;
    (B) Relevant information regarding the performance of the 
underlying credit exposure(s), for example, the percentage of loans 30, 
60, and 90 days past due; default rates; prepayment rates; loans in 
foreclosure; property types; occupancy; average credit score or other 
measures of creditworthiness; average LTV ratio; and industry and 
geographic diversification data on the underlying exposure(s);
    (C) Relevant market data of the securitization, for example, bid-
ask spread, most recent sales price and historic price volatility, 
trading volume, implied market rating, and size, depth and 
concentration level of the market for the securitization; and
    (D) In addition, for resecuritization exposures, performance 
information on the underlying securitization exposures, for example, 
the issuer name and credit quality, and the characteristics and 
performance of the exposures underlying the securitization exposures.
    (ii) On an on-going basis (no less frequently than quarterly), 
evaluating, reviewing, and updating as appropriate the analysis 
required under paragraph (c)(1) of this section for each securitization 
exposure.


Sec.  ----.42  Risk-weighted assets for securitization exposures.

    (a) Securitization risk weight approaches. Except as provided 
elsewhere in this section or in Sec.  ----.41:
    (1) A [BANK] must deduct from common equity tier 1capital any 
after-tax gain-on-sale resulting from a securitization and apply a 
1,250 percent risk weight to the portion of a CEIO that does not 
constitute after-tax gain-on-sale.
    (2) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section, a [BANK] may assign a risk weight to 
the securitization exposure using the simplified supervisory formula 
approach (SSFA) in accordance with Sec. Sec.  ----.43(a) through --
--.43(d). Alternatively, a [BANK] that is not subject to subpart F may 
assign a risk weight to the securitization exposure using the gross-up 
approach in accordance with Sec.  ----.43(e). The [BANK] must apply 
either the SSFA or the gross-up approach consistently across all of its 
securitization exposures.
    (3) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section and the [BANK] cannot, or chooses not 
to apply the SSFA or the gross-up approach to the exposure, the [BANK] 
must assign a risk weight to the exposure as described in Sec.  --
--.44.
    (4) If a securitization exposure is a 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 (c) of this section.
    (b) Total risk-weighted assets for securitization exposures. A 
[BANK]'s total risk-weighted assets for securitization exposures equals 
the sum of the risk-weighted asset amount for securitization exposures 
that the [BANK] risk weights under Sec. Sec.  ----.41(c), --
--.42(a)(1), and ----.43, ----.44, or ----.45, except as provided in 
Sec. Sec.  ----.42(e) through (j).
    (c) Exposure amount of a securitization exposure. (1) On-balance 
sheet securitization exposures. The exposure 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 equal to the carrying value of the exposure.
    (2) Off-balance sheet securitization exposures. (i) The exposure 
amount of an off-balance sheet securitization exposure that is not a 
repo-style transaction, eligible margin loan, or an OTC derivative 
contract (other than a credit derivative) is the notional amount of the 
exposure, except for an eligible asset-backed commercial paper (ABCP) 
liquidity facility. For an off-balance sheet securitization exposure to 
an ABCP program, such as an eligible ABCP 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).
    (ii) A [BANK] must determine the exposure amount of an eligible 
ABCP liquidity facility for which the SSFA does not apply by 
multiplying the notional amount of the exposure by a CCF of 50 percent.
    (iii) A [BANK] must determine the exposure amount of an eligible 
ABCP liquidity facility for which the SSFA applies by multiplying the 
notional amount of the exposure by a CCF of 100 percent.
    (3) Repo-style transactions, eligible margin loans, and derivative 
contracts. The exposure amount of a securitization exposure that is a 
repo-style transaction, eligible margin loan, or derivative contract 
(other than a credit derivative) is the exposure amount of the 
transaction as calculated under Sec.  ----.34 or Sec.  ----.37 as 
applicable.
    (d) Overlapping exposures. If a [BANK] has multiple securitization 
exposures that provide duplicative coverage to 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.
    (e) 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 include in risk-weighted assets all of the 
underlying exposures associated with the securitization as if the 
exposures had not been securitized and must deduct from common equity 
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 risk-based capital impact to the [BANK] of providing such 
implicit support.
    (f) Undrawn portion of an eligible servicer cash advance facility. 
Regardless of any other provision of this subpart, a [BANK] is not 
required to hold risk-based capital against the undrawn portion of an 
eligible servicer cash advance facility.
    (g) Interest-only mortgage-backed securities. Regardless of any 
other provisions of this subpart, the risk weight for a non-credit-
enhancing interest-only mortgage-backed security may not be less than 
100 percent.
    (h) Small-business loans and leases on personal property 
transferred with retained contractual exposure. (1) Regardless of any 
other provisions of

[[Page 52963]]

this subpart, a [BANK] that has transferred small-business loans and 
leases on personal property (small-business obligations) must include 
in risk-weighted assets only its contractual exposure to the small-
business obligations if all the following conditions are met:
    (i) The transaction must be treated as 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 contractual obligation.
    (iii) The small business obligations 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.
    (iv) The [BANK] is well capitalized, as defined in the [AGENCY]'s 
prompt corrective action regulation. 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 under 
this paragraph.
    (2) The total outstanding amount of contractual exposure retained 
by a [BANK] on transfers of small-business obligations receiving the 
capital treatment specified in paragraph (h)(1) of this section cannot 
exceed 15 percent of the [BANK]'s total capital.
    (3) If a [BANK] ceases to be well capitalized or exceeds the 15 
percent capital limitation provided in paragraph (h)(2) of this 
section, the capital treatment under paragraph (h)(1) of this section 
will continue to apply to any transfers of small-business obligations 
with retained contractual exposure 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 specified in paragraph (h)(1) of this section for purposes 
of:
    (i) Determining whether a [BANK] is adequately capitalized, 
undercapitalized, significantly undercapitalized, or critically 
undercapitalized under the [AGENCY]'s prompt corrective action 
regulations; and
    (ii) Reclassifying a well-capitalized [BANK] to adequately 
capitalized and requiring an adequately capitalized [BANK] to comply 
with certain mandatory or discretionary supervisory actions as if the 
[BANK] were in the next lower prompt-corrective-action category.
    (i) Nth-to-default credit derivatives. (1) Protection provider. A 
[BANK] may assign a risk weight using the SSFA in Sec.  ----.43 to an 
nth-to-default credit derivative in accordance with this paragraph. A 
[BANK] must determine its exposure in the nth-to-default credit 
derivative as the largest notional dollar amount of all the underlying 
exposures.
    (2) For purposes of determining the risk weight for an nth-to-
default credit derivative using the SSFA, the [BANK] must calculate the 
attachment point and detachment point of its exposure as follows:
    (i) The attachment point (parameter A) is the ratio of the sum of 
the notional amounts of all underlying exposures that are subordinated 
to the [BANK]'s exposure to the total notional amount of all underlying 
exposures. In the case of a first-to-default credit derivative, there 
are no underlying exposures that are subordinated to the [BANK]'s 
exposure. In the case of a second-or-subsequent-to-default credit 
derivative, the smallest (n-1) notional amounts of the underlying 
exposure(s) are subordinated to the [BANK]'s exposure.
    (ii) The detachment point (parameter D) equals the sum of parameter 
A plus the ratio of the notional amount of the [BANK]'s exposure in the 
nth-to-default credit derivative to the total notional amount of all 
underlying exposures.
    (3) A [BANK] that does not use the SSFA to determine a risk weight 
for its nth-to-default credit derivative must assign a risk weight of 
1,250 percent to the exposure.
    (4) Protection purchaser. (i) First-to-default credit derivatives. 
A [BANK] that obtains credit protection on a group of underlying 
exposures through a first-to-default credit derivative that meets the 
rules of recognition of Sec.  --.36(b) must determine its risk-based 
capital requirement for the underlying exposures as if the [BANK] 
synthetically securitized the underlying exposure with the smallest 
risk-weighted asset amount and had obtained no credit risk mitigant on 
the other underlying exposures. A [BANK] must calculate a risk-based 
capital requirement for counterparty credit risk according to Sec.  
--.34 for a first-to-default credit derivative that does not meet the 
rules of recognition of Sec.  --.36(b).
    (ii) Second-or-subsequent-to-default credit derivatives. (A) A 
[BANK] that obtains credit protection on a group of underlying 
exposures through a nth -to-default credit derivative that meets the 
rules of recognition of Sec.  --.36(b) (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 
(i)(4)(ii)(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 
smallest risk-weighted asset amount.
    (C) A [BANK] must calculate a risk-based capital requirement for 
counterparty credit risk according to Sec.  --.34 for a nth-to-default 
credit derivative that does not meet the rules of recognition of Sec.  
--.36(b).
    (j) Guarantees and credit derivatives other than N-th to default 
credit derivatives. (1) Protection provider. For a guarantee or credit 
derivative (other than an nth-to-default credit derivative) provided by 
a [BANK] that covers the full amount or a pro rata share of a 
securitization exposure's principal and interest, the [BANK] must risk 
weight the guarantee or credit derivative as if it holds the portion of 
the reference exposure covered by the guarantee or credit derivative.
    (2) Protection purchaser. (i) If a [BANK] chooses (and is able) to 
recognize a guarantee or credit derivative (other than an nth-to-
default credit derivative) that references a securitization exposure as 
a credit risk mitigant, where applicable, the [BANK] must apply Sec.  
--.45.
    (ii) If a [BANK] cannot, or chooses not to, recognize a credit 
derivative that references a securitization exposure as a credit risk 
mitigant under Sec.  --.45, the [BANK] must determine its capital 
requirement only for counterparty credit risk in accordance with Sec.  
----.31.


Sec.  ----.43.  Simplified supervisory formula approach (SSFA) and the 
gross-up approach.

    (a) General requirements. To use the SSFA to determine the risk 
weight for a securitization exposure, a [BANK] must have data that 
enables it to assign accurately the parameters described in paragraph 
(b) of this section. Data used to assign the parameters described in 
paragraph (b) of this section must be the most currently available data 
and no more than 91 calendar days old. A [BANK] that does not have the 
appropriate data to assign the parameters described in paragraph (b) of

[[Page 52964]]

this section must assign a risk weight of 1,250 percent to the 
exposure.
    (b) SSFA parameters. To calculate the risk weight for a 
securitization exposure using the SSFA, a [BANK] must have accurate 
information on the following five inputs to the SSFA calculation:
    (1) KG is the weighted-average (with unpaid principal 
used as the weight for each exposure) total capital requirement of the 
underlying exposures calculated using this subpart. KG is 
expressed as a decimal value between zero and 1 (that is, an average 
risk weight of 100 percent represents a value of KG equal to 
.08).
    (2) Parameter W is expressed as a decimal value between zero and 
one. Parameter W is the ratio of the sum of the dollar amounts of any 
underlying exposures within the securitized pool that meet any of the 
criteria as set forth in paragraphs (b)(2)(i) through (vi) of this 
section to the ending balance, measured in dollars, of underlying 
exposures:
    (i) Ninety days or more past due,
    (ii) Subject to a bankruptcy or insolvency proceeding,
    (iii) In the process of foreclosure,
    (iv) Held as real estate owned;
    (v) Has contractually deferred interest payments for 90 days or 
more; or
    (vi) Is in default.
    (3) Parameter A is the attachment point for the exposure, which 
represents the threshold at which credit losses will first be allocated 
to the exposure. Parameter A equals the ratio of the current dollar 
amount of underlying exposures that are subordinated to the exposure of 
the [BANK] to the current dollar amount of underlying exposures. Any 
reserve account funded by the accumulated cash flows from the 
underlying exposures that is subordinated to the [BANK]'s 
securitization exposure may be included in the calculation of parameter 
A to the extent that cash is present in the account. Parameter A is 
expressed as a decimal value between zero and one.
    (4) Parameter D is the detachment point for the exposure, which 
represents the threshold at which credit losses of principal allocated 
to the exposure would result in a total loss of principal. Parameter D 
equals parameter A plus the ratio of the current dollar amount of the 
securitization exposures that are pari passu with the exposure (that 
is, have equal seniority with respect to credit risk) to the current 
dollar amount of the underlying exposures. Parameter D is expressed as 
a decimal value between zero and one.
    (5) A supervisory calibration parameter, p, is equal to 0.5 for 
securitization exposures that are not resecuritization exposures and 
equal to 1.5 for resecuritization exposures.
    (c) Mechanics of the SSFA. KG and W are used to 
calculate KA, the augmented value of KG, which 
reflects the observed credit quality of the underlying pool of 
exposures. KA is defined in paragraph (d) of this section. 
The values of parameters A and D, relative to KA determine 
the risk weight assigned to a securitization exposure as described in 
paragraph (d) of this section. The risk weight assigned to a 
securitization exposure, or portion of a exposure, as appropriate, is 
the larger of the risk weight determined in accordance with this 
paragraphs (c) and (d) of this section and a risk weight of 20 percent.
    (1) When the detachment point, parameter D, for a securitization 
exposure is less than or equal to KA, the exposure must be 
assigned a risk weight of 1,250 percent.
    (2) When the attachment point, parameter A, for a securitization 
exposure is greater than or equal to KA, the [BANK] must 
calculate the risk weight in accordance with paragraph (d) of this 
section.
    (3) When A is less than KA and D is greater than 
KA, the risk weight is a weighted-average of 1,250 percent 
and 1,250 percent times KSSFA calculated in accordance with 
paragraph (d) of this section, but with the parameter A revised to be 
set equal to KA. For the purpose of this weighted-average 
calculation:

[[Page 52965]]

[GRAPHIC] [TIFF OMITTED] TP30AU12.021

    (e) Gross-up approach. (1) Applicability. A [BANK] that is not 
subject to subpart F may apply the gross-up approach set forth in this 
section instead of the SSFA to determine the risk weight of its 
securitization exposures, provided that it applies the gross-up 
approach or a 1,250 percent risk weight to all of its securitization 
exposures, except as otherwise provided for certain securitization 
exposures in Sec.  --.44 and --.45.
    (2) To use the gross-up approach, a [BANK] must calculate the 
following four inputs:
    (i) Pro rata share, which is the par value of the [BANK]'s 
securitization exposure as a percent of the par value of the tranche in 
which the securitization exposure resides;
    (ii) Enhanced amount, which is the value of tranches that are more 
senior to the tranche in which the [BANK]'s securitization resides;
    (iii) Exposure amount of the [BANK]'s securitization exposure 
calculated under Sec.  ----.42(c); and
    (iv) Risk weight, which is the weighted-average risk weight of 
underlying exposures in the securitization pool as calculated under 
this subpart.
    (3) Credit equivalent amount. The credit equivalent amount of a 
securitization exposure under this section equals the sum of the 
exposure amount of the [BANK]'s securitization exposure and the pro 
rata share multiplied by the enhanced amount, each calculated in 
accordance with paragraph (e)(2) of this section.
    (4) Risk-weighted assets. To calculate risk-weighted assets for a 
securitization exposure under the gross-up approach, a [BANK] must 
apply the risk weight calculated under paragraph (e)(2) of this section 
to the credit equivalent amount calculated in paragraph (e)(3) of this 
section.
    (f) Limitations. Notwithstanding any other provision of this 
section, a [BANK] must assign a risk weight of not less than 20 percent 
to a securitization exposure.

[[Page 52966]]

Sec.  ----.44.  Securitization exposures to which the SSFA and gross-up 
approach do not apply.

    (a) General Requirement. A [BANK] must assign a 1,250 percent risk 
weight to all securitization exposures to which the [BANK] does not 
apply the SSFA or the gross up approach under Sec.  ----.43, except as 
set forth in this section;
    (b) Eligible ABCP liquidity facilities. A [BANK] may determine the 
risk-weighted asset amount of an eligible ABCP liquidity facility by 
multiplying the exposure amount by the highest risk weight applicable 
to any of the individual underlying exposures covered by the facility.
    (c) A securitization exposure in a second loss position or better 
to an ABCP program. (1) Risk weighting. A [BANK] may determine the 
risk-weighted asset amount of a securitization exposure that is in a 
second loss position or better to an ABCP program that meets the 
requirements of paragraph (c)(2) of this section by multiplying the 
exposure amount by the higher of the following risk weights:
    (i) 100 percent; and
    (ii) The highest risk weight applicable to any of the individual 
underlying exposures of the ABCP program.
    (2) Requirements. (i) The exposure is not an eligible ABCP 
liquidity facility;
    (ii) The exposure must be economically in a second loss position or 
better, and the first loss position must provide significant credit 
protection to the second loss position;
    (iii) The exposure qualifies as investment grade; and
    (iv) The [BANK] holding the exposure must not retain or provide 
protection to the first loss position.


Sec.  ----.45  Recognition of credit risk mitigants for securitization 
exposures.

    (a) General. (1) An originating [BANK] that has obtained a credit 
risk mitigant to hedge its exposure to a synthetic or traditional 
securitization that satisfies the operational criteria provided in 
Sec.  ----.41 may recognize the credit risk mitigant under Sec. Sec.  
----.36 or ----.37, but only as provided in this section.
    (2) An investing [BANK] that has obtained a credit risk mitigant to 
hedge a securitization exposure may recognize the credit risk mitigant 
under Sec. Sec.  ----.36 or ----.37, but only as provided in this 
section.
    (b) Eligible guarantors for securitization exposures. A [BANK] may 
only recognize an eligible guarantee or eligible credit derivative from 
an eligible guarantor.
    (c) Mismatches. A [BANK] must make any applicable adjustment to the 
protection amount of an eligible guarantee or credit derivative as 
required in Sec. Sec.  ----.36(d), (e), and (f) for any hedged 
securitization exposure. 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 hedged exposures.

Risk-weighted Assets For Equity Exposures


Sec.  ----.51  Introduction and exposure measurement.

    (a) General. To calculate its risk-weighted asset amounts for 
equity exposures that are not equity exposures to an investment fund, a 
[BANK] must use the Simple Risk-Weight Approach (SRWA) provided in 
Sec.  ----.52. A [BANK] must use the look-through approaches provided 
in Sec.  ----.53 to calculate its risk-weighted asset amounts for 
equity exposures to investment funds.
    (b) Adjusted carrying value. For purposes of Sec. Sec.  ----.51 
through ----.53, 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 and
    (2) For the off-balance sheet component of an equity exposure that 
is not an equity commitment, 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) given a 
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.
    (3) For a commitment to acquire an equity exposure (an equity 
commitment), the effective notional principal amount of the exposure is 
multiplied by the following conversion factors (CFs):
    (i) Conditional equity commitments with an original maturity of one 
year or less receive a CF of 20 percent.
    (ii) Conditional equity commitments with an original maturity of 
over one year receive a CF of 50 percent.
    (iii) Unconditional equity commitments receive a CF of 100 percent.


Sec.  ----.52  Simple risk-weight approach (SRWA).

    (a) General. Under the SRWA, a [BANK]'s total risk-weighted assets 
for equity exposures equals 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 under this section and 
the risk-weighted asset amounts for each of the [BANK]'s individual 
equity exposures to an investment fund as determined under Sec.  --
--.53.
    (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 portion of a hedge pair (as defined 
in paragraph (c) of this section) by the lowest applicable risk weight 
in this paragraph.
    (1) Zero percent risk weight equity exposures. An equity exposure 
to a sovereign, the Bank for International Settlements, the European 
Central Bank, the European Commission, the International Monetary Fund, 
an MDB, and any other entity whose credit exposures receive a zero 
percent risk weight under Sec.  ----.32 may be assigned a zero percent 
risk weight.
    (2) 20 percent risk weight equity exposures. An equity exposure to 
a PSE, Federal Home Loan Bank or the Federal Agricultural Mortgage 
Corporation (Farmer Mac) must be assigned a 20 percent risk weight.
    (3) 100 percent risk weight equity exposures. The following equity 
exposures must be assigned a 100 percent risk weight:
    (i) Community development equity exposures.
    (A) For [BANK]s, savings and loan holding companies, and bank 
holding companies, an equity exposure that qualifies as a community 
development investment under Sec.  ----.24 (Eleventh) of the National 
Bank Act, 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.
    (B) For savings associations, an equity exposure that is designed 
primarily to promote community welfare, including the welfare of low- 
and moderate-income communities or families, such as by providing 
services or employment, and excluding equity exposures to an 
unconsolidated small business investment company and equity

[[Page 52967]]

exposures held through a small business investment company described in 
section 302 of the Small Business Investment Act.
    (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 application of paragraph 
(8) of that definition in Sec.  ------.2 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 total 
capital.
    (A) To compute the aggregate adjusted carrying value of a [BANK]'s 
equity exposures for purposes of this section, 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 
section 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, then must include publicly-traded equity exposures (including 
those held indirectly through investment funds), and then must include 
nonpublicly-traded equity exposures (including those held indirectly 
through investment funds).
    (4) 250 percent risk weight equity exposures. Significant 
investments in the capital of unconsolidated financial institutions 
that are not deducted from capital pursuant to Sec.  ----.22(d) are 
assigned a 250 percent risk weight.
    (5) 300 percent risk weight equity exposures. A publicly-traded 
equity exposure (other than an equity exposure described in paragraph 
(b)(7) of this section and including the ineffective portion of a hedge 
pair) must be assigned a 300 percent risk weight.
    (6) 400 percent risk weight equity exposures. An equity exposure 
(other than an equity exposure described in paragraph (b)(7)) of this 
section that is not publicly-traded must be assigned a 400 percent risk 
weight.
    (7) 600 percent risk weight equity exposures. An equity exposure to 
an investment firm must be assigned a 600 percent risk weight, provided 
that the investment firm:
    (i) Would meet the definition of a traditional securitization were 
it not for the application of paragraph (8) of that definition; and
    (ii) Has greater than immaterial leverage.
    (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 changes in value of one equity 
exposure to the cumulative sum of the 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:
[GRAPHIC] [TIFF OMITTED] TP30AU12.022

    (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 E equals 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.


Sec.  ----.53  Equity exposures to investment funds.

    (a) Available approaches. (1) Unless the exposure meets the 
requirements for a community development equity exposure under Sec.  --
----.52(b)(3)(i), a [BANK] must determine the risk-weighted asset 
amount of an equity exposure to an investment fund under the Full Look-
Through Approach described in paragraph (b) of this section, the Simple 
Modified Look-Through Approach described in

[[Page 52968]]

paragraph (c) of this section, or the Alterative Modified Look-Through 
Approach described paragraph (d) 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 Sec.  ----.52(b)(3)(i) 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 Sec.  ----.52(c) 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 
subpart as if the proportional ownership share of each exposure were 
held directly by the [BANK]) may set the risk-weighted asset amount of 
the [BANK]'s exposure to the fund equal to the product of:
    (1) The aggregate risk-weighted asset amounts of the exposures held 
by the fund as if they were held directly by the [BANK]; and
    (2) The [BANK]'s proportional ownership share of the fund.
    (c) Simple Modified Look-Through Approach. Under the Simple 
Modified Look-Through 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 that applies to any exposure the fund is permitted to hold under 
the prospectus, partnership agreement, or similar agreement that 
defines the fund's permissible investments (excluding derivative 
contracts that are used for hedging rather than speculative purposes 
and that do not constitute a material portion of the fund's exposures).
    (d) Alternative Modified Look-Through Approach. Under the 
Alternative Modified Look-Through 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 under this subpart 
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 type multiplied by the 
applicable risk weight under this subpart. If the sum of the investment 
limits for all exposure types 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 type with the 
highest applicable risk weight under this subpart and continues to make 
investments in order of the exposure type with the next highest 
applicable risk weight under this subpart until the maximum total 
investment level is reached. If more than one exposure type 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.
    DISCLOSURES


Sec.  ----.61  Purpose and scope.

    Sections ----.61-----.63 of this subpart establish public 
disclosure requirements related to the capital requirements described 
in Subpart B for a [BANK] with total consolidated assets of $50 billion 
or more that is not an advanced approaches [BANK] making public 
disclosures pursuant to Sec.  ----.172. Such a [BANK] must comply with 
Sec.  ----.62 of this part unless it is a consolidated subsidiary of a 
bank holding company, savings and loan holding company, or depository 
institution that is subject to these disclosure requirements or a 
subsidiary of a non-U.S. banking organization that is subject to 
comparable public disclosure requirements in its home jurisdiction. For 
purposes of this section, total consolidated assets are determined 
based on the average of the [BANK]'s total consolidated assets in the 
four most recent quarters as reported on the [REGULATORY REPORT]; or 
the average of the [BANK]'s total consolidated assets in the most 
recent consecutive quarters as reported quarterly on the [BANK]'s 
[REGULATORY REPORT] if the [BANK] has not filed such a report for each 
of the most recent four quarters.


Sec.  ----.62  Disclosure requirements.

    (a) A [BANK] described in Sec.  ----.61 must provide timely public 
disclosures each calendar quarter of the information in the applicable 
tables in Sec.  ----.63. If a significant change occurs, such that the 
most recent reported amounts are no longer reflective of the [BANK]'s 
capital adequacy and risk profile, then a brief discussion of this 
change and its likely impact must be disclosed as soon as practicable 
thereafter. Qualitative disclosures that typically do not change each 
quarter (for example, a general summary of the [BANK]'s risk management 
objectives and policies, reporting system, and definitions) may be 
disclosed annually, provided that any significant changes are disclosed 
in the interim. The [BANK]'s management is encouraged to provide all of 
the disclosures required by Sec. Sec.  ----.61 through ----.63 of this 
part in one place on the [BANK]'s public Web site.\96\
---------------------------------------------------------------------------

    \96\ Alternatively, a [BANK] may provide the disclosures in more 
than one place, as some of them may be included in public financial 
reports (for example, in Management's Discussion and Analysis 
included in SEC filings) or other regulatory reports. The [BANK] 
must publicly provide a summary table that specifically indicates 
where all the disclosures may be found (for example, regulatory 
report schedules, page numbers in annual reports).
---------------------------------------------------------------------------

    (b) A [BANK] described in Sec.  ----.61 must have a formal 
disclosure policy approved by the board of directors that addresses its 
approach for determining the disclosures it makes. The policy must 
address the associated internal controls and disclosure controls and 
procedures. The board of directors and senior management are 
responsible for establishing and maintaining an effective internal 
control structure over financial reporting, including the disclosures 
required by this subpart, and must ensure that appropriate review of 
the disclosures takes place. One or more senior officers of the [BANK] 
must attest that the disclosures meet the requirements of this subpart.
    (c) If a [BANK] described in Sec.  ----.61 concludes that specific 
commercial or financial information that it would otherwise be required 
to disclose under this section would be exempt from disclosure by the 
[AGENCY] under the Freedom of Information Act (5 U.S.C. 552), then the 
[BANK] is not required to disclose that specific information pursuant 
to this section, but must disclose more general information about the 
subject matter of the requirement, together with the fact that, and the 
reason why, the specific items of information have not been disclosed.


Sec.  ----.63   Disclosures by [BANK]s described in Sec.  ----.61.

    (a) Except as provided in Sec.  ----.62, a [BANK] described in 
Sec.  ----.61 must make the disclosures described in Tables 14.1 
through 14.10 of this section. The [BANK] must make these disclosures 
publicly available for each of the last three years (that is, twelve 
quarters) or such shorter period beginning on the effective date of 
this subpart D.

[[Page 52969]]

    (b) A [BANK] must publicly disclose each quarter the following:
    (1) Common equity tier 1 capital, additional tier 1 capital, tier 2 
capital, tier 1 and total capital ratios, including the regulatory 
capital elements and all the regulatory adjustments and deductions 
needed to calculate the numerator of such ratios;
    (2) Total risk-weighted assets, including the different regulatory 
adjustments and deductions needed to calculate total risk-weighted 
assets;
    (3) Regulatory capital ratios during any transition periods, 
including a description of all the regulatory capital elements and all 
regulatory adjustments and deductions needed to calculate the numerator 
and denominator of each capital ratio during any transition period; and
    (4) A reconciliation of regulatory capital elements as they relate 
to its balance sheet in any audited consolidated financial statements.

                    Table 14.1--Scope of Application
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures.....  (a).......  The name of the top corporate
                                           entity in the group to which
                                           subpart D of this [PART]
                                           applies.
                             -------------------------------------------
                              (b).......  A brief description of the
                                           differences in the basis for
                                           consolidating entities \97\
                                           for accounting and regulatory
                                           purposes, with a description
                                           of those entities:
                                          (1) That are fully
                                           consolidated;
                                          (2) That are deconsolidated
                                           and deducted from total
                                           capital;
                                          (3) For which the total
                                           capital requirement is
                                           deducted; and
                                          (4) That are neither
                                           consolidated nor deducted
                                           (for example, where the
                                           investment in the entity is
                                           assigned a risk weight in
                                           accordance with this
                                           subpart).
                              (c).......  Any restrictions, or other
                                           major impediments, on
                                           transfer of funds or total
                                           capital within the group.
Quantitative Disclosures....  (d).......  The aggregate amount of
                                           surplus capital of insurance
                                           subsidiaries included in the
                                           total capital of the
                                           consolidated group.
                              (e).......  The aggregate amount by which
                                           actual total capital is less
                                           than the minimum total
                                           capital requirement in all
                                           subsidiaries, with total
                                           capital requirements and the
                                           name(s) of the subsidiaries
                                           with such deficiencies.
------------------------------------------------------------------------
\97\ Entities include securities, insurance and other financial
  subsidiaries, commercial subsidiaries (where permitted), and
  significant minority equity investments in insurance, financial, and
  commercial entities.


                      Table 14.2--Capital Structure
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures.....  (a).......  Summary information on the
                                           terms and conditions of the
                                           main features of all
                                           regulatory capital
                                           instruments.
------------------------------------------------------------------------
Quantitative Disclosures....  (b).......  The amount of common equity
                                           tier 1 capital, with separate
                                           disclosure of:
                                          (1) Common stock and related
                                           surplus;
                                          (2) Retained earnings;
                                          (3) Common equity minority
                                           interest;
                                          (4) AOCI; and
                                          (5) Regulatory deductions and
                                           adjustments made to common
                                           equity tier 1 capital.
                              (c).......  The amount of tier 1 capital,
                                           with separate disclosure of:
                                          (1) Additional tier 1 capital
                                           elements, including
                                           additional tier 1 capital
                                           instruments and tier 1
                                           minority interest not
                                           included in common equity
                                           tier 1 capital; and
                                          (2) Regulatory deductions and
                                           adjustments made to tier 1
                                           capital.
                              (d).......  The amount of total capital,
                                           with separate disclosure of:
                                          (1) Tier 2 capital elements,
                                           including tier 2 capital
                                           instruments and total capital
                                           minority interest not
                                           included in tier 1 capital;
                                           and
                                          (2) Regulatory deductions and
                                           adjustments made to total
                                           capital.
------------------------------------------------------------------------


                      Table 14.3--Capital Adequacy
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative disclosures.....  (a).......  A summary discussion of the
                                           [BANK]'s approach to
                                           assessing the adequacy of its
                                           capital to support current
                                           and future activities.
Quantitative disclosures....  (b).......  Risk-weighted assets for:
                                          (1) Exposures to sovereign
                                           entities;
                                          (2) Exposures to certain
                                           supranational entities and
                                           MDBs;
                                          (3) Exposures to depository
                                           institutions, foreign banks,
                                           and credit unions;
                                          (4) Exposures to PSEs;
                                          (5) Corporate exposures;
                                          (6) Residential mortgage
                                           exposures;
                                          (7) Statutory multifamily
                                           mortgages and pre-sold
                                           construction loans;
                                          (8) HVCRE loans;
                                          (9) Past due loans;
                                          (10) Other assets;
                                          (11) Cleared transactions;
                                          (12) Default fund
                                           contributions;
                                          (13) Unsettled transactions;
                                          (14) Securitization exposures;
                                           and
                                          (15) Equity exposures.
                              (c).......  Standardized market risk-
                                           weighted assets as calculated
                                           under subpart F of this
                                           [PART].\98\

[[Page 52970]]

 
                              (d).......  Common equity tier 1, tier 1
                                           and total risk-based capital
                                           ratios:
                                          (1) For the top consolidated
                                           group; and
                                          (2) For each depository
                                           institution subsidiary.
                              (e).......  Total risk-weighted assets.
------------------------------------------------------------------------
\98\ Standardized market risk-weighted assets determined under subpart F
  are to be disclosed only for the approaches used.


                 Table 14.4--Capital Conservation Buffer
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Quantitative Disclosures....  (a).......  At least quarterly, the [BANK]
                                           must calculate and publicly
                                           disclose the capital
                                           conservation buffer as
                                           described under Sec.   ------
                                           .11.
                              (b).......  At least quarterly, the [BANK]
                                           must calculate and publicly
                                           disclose the eligible
                                           retained income of the
                                           [BANK], as described under
                                           Sec.   ----.11.
                              (c).......  At least quarterly, the [BANK]
                                           must calculate and publicly
                                           disclose any limitations it
                                           has on capital distributions
                                           and discretionary bonus
                                           payments resulting from the
                                           capital conservation buffer
                                           framework described under
                                           Sec.   ----.11, including the
                                           maximum payout amount for the
                                           quarter.
------------------------------------------------------------------------

General Qualitative Disclosure Requirement

    For each separate risk area described in tables 14.5 through 14.10, 
the [BANK] must describe its risk management objectives and policies, 
including: strategies and processes; the structure and organization of 
the relevant risk management function; the scope and nature of risk 
reporting and/or measurement systems; policies for hedging and/or 
mitigating risk and strategies and processes for monitoring the 
continuing effectiveness of hedges/mitigants.

             Table 14.5 99--Credit Risk: General Disclosures
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures.....  (a).......  The general qualitative
                                           disclosure requirement with
                                           respect to credit risk
                                           (excluding counterparty
                                           credit risk disclosed in
                                           accordance with Table 14.6),
                                           including the:
                                          (1) Policy for determining
                                           past due or delinquency
                                           status;
                                          (2) Policy for placing loans
                                           on nonaccrual;
                                          (3) Policy for returning loans
                                           to accrual status;
                                          (4) Definition of and policy
                                           for identifying impaired
                                           loans (for financial
                                           accounting purposes);
                                          (5) Description of the
                                           methodology that the [BANK]
                                           uses to estimate its
                                           allowance for loan losses,
                                           including statistical methods
                                           used where applicable;
                                          (6) Policy for charging-off
                                           uncollectible amounts; and
                                          (7) Discussion of the [BANK]'s
                                           credit risk management
                                           policy.
Quantitative Disclosures....  (b).......  Total credit risk exposures
                                           and average credit risk
                                           exposures, after accounting
                                           offsets in accordance with
                                           GAAP, without taking into
                                           account the effects of credit
                                           risk mitigation techniques
                                           (for example, collateral and
                                           netting not permitted under
                                           GAAP), over the period
                                           categorized by major types of
                                           credit exposure. For example,
                                           [BANK]s could use categories
                                           similar to that used for
                                           financial statement purposes.
                                           Such categories might
                                           include, for instance
                                          (1) Loans, off-balance sheet
                                           commitments, and other non-
                                           derivative off-balance sheet
                                           exposures,
                                          (2) Debt securities, and
                                          (3) OTC derivatives.\100\
                              (c).......  Geographic distribution of
                                           exposures, categorized in
                                           significant areas by major
                                           types of credit
                                           exposure.\101\
                              (d).......  Industry or counterparty type
                                           distribution of exposures,
                                           categorized by major types of
                                           credit exposure.
                              (e).......  By major industry or
                                           counterparty type:
                                          (1) Amount of impaired loans
                                           for which there was a related
                                           allowance under GAAP;
                                          (2) Amount of impaired loans
                                           for which there was no
                                           related allowance under GAAP;
                                          (3) Amount of loans past due
                                           90 days and on nonaccrual;
                                          (4) Amount of loans past due
                                           90 days and still
                                           accruing;\102\
                                          (5) The balance in the
                                           allowance for credit losses
                                           at the end of each period,
                                           disaggregated on the basis of
                                           the [BANK]'s impairment
                                           method. To disaggregate the
                                           information required on the
                                           basis of impairment
                                           methodology, an entity shall
                                           separately disclose the
                                           amounts based on the
                                           requirements in GAAP; and
                                          (6) Charge-offs during the
                                           period.
                              (f).......  Amount of impaired loans and,
                                           if available, the amount of
                                           past due loans categorized by
                                           significant geographic areas
                                           including, if practical, the
                                           amounts of allowances related
                                           to each geographical area
                                           \103\, further categorized as
                                           required by GAAP.
                              (g).......  Reconciliation of changes in
                                           ALLL.\104\
                              (h).......  Remaining contractual maturity
                                           delineation (for example, one
                                           year or less) of the whole
                                           portfolio, categorized by
                                           credit exposure.
------------------------------------------------------------------------
\99\ Table 14.5 does not cover equity exposures.
\100\ See, for example, ASC Topic 815-10 and 210-20 (formerly FASB
  Interpretation Numbers 37 and 41).
\101\ Geographical areas may consist of individual countries, groups of
  countries, or regions within countries. A [BANK] might choose to
  define the geographical areas based on the way the [BANK]'s portfolio
  is geographically managed. The criteria used to allocate the loans to
  geographical areas must be specified.
\102\ A [BANK] is encouraged also to provide an analysis of the aging of
  past-due loans.
\103\ The portion of the general allowance that is not allocated to a
  geographical area should be disclosed separately.

[[Page 52971]]

 
\104\ The reconciliation should include the following: a description of
  the allowance; the opening balance of the allowance; charge-offs taken
  against the allowance during the period; amounts provided (or
  reversed) for estimated probable loan losses during the period; any
  other adjustments (for example, exchange rate differences, business
  combinations, acquisitions and disposals of subsidiaries), including
  transfers between allowances; and the closing balance of the
  allowance. Charge-offs and recoveries that have been recorded directly
  to the income statement should be disclosed separately.


   Table 14.6--General Disclosure for Counterparty Credit Risk-Related
                                Exposures
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures.....  (a).......  The general qualitative
                                           disclosure requirement with
                                           respect to OTC derivatives,
                                           eligible margin loans, and
                                           repo-style transactions,
                                           including a discussion of:
                                          (1) The methodology used to
                                           assign credit limits for
                                           counterparty credit
                                           exposures;
                                          (2) Policies for securing
                                           collateral, valuing and
                                           managing collateral, and
                                           establishing credit reserves;
                                          (3) The primary types of
                                           collateral taken; and
                                          (4) The impact of the amount
                                           of collateral the [BANK]
                                           would have to provide given a
                                           deterioration in the [BANK]'s
                                           own creditworthiness.
Quantitative Disclosures....  (b).......  Gross positive fair value of
                                           contracts, collateral held
                                           (including type, for example,
                                           cash, government securities),
                                           and net unsecured credit
                                           exposure.\105\ A [BANK] also
                                           must disclose the notional
                                           value of credit derivative
                                           hedges purchased for
                                           counterparty credit risk
                                           protection and the
                                           distribution of current
                                           credit exposure by exposure
                                           type.\106\
                              (c).......  Notional amount of purchased
                                           and sold credit derivatives,
                                           segregated between use for
                                           the [BANK]'s own credit
                                           portfolio and in its
                                           intermediation activities,
                                           including the distribution of
                                           the credit derivative
                                           products used, categorized
                                           further by protection bought
                                           and sold within each product
                                           group.
------------------------------------------------------------------------
\105\ Net unsecured credit exposure is the credit exposure after
  considering both the benefits from legally enforceable netting
  agreements and collateral arrangements without taking into account
  haircuts for price volatility, liquidity, etc.
\106\ This may include interest rate derivative contracts, foreign
  exchange derivative contracts, equity derivative contracts, credit
  derivatives, commodity or other derivative contracts, repo-style
  transactions, and eligible margin loans.


               Table 14.7--Credit Risk Mitigation 107 108
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures.....  (a).......  The general qualitative
                                           disclosure requirement with
                                           respect to credit risk
                                           mitigation, including:
                                          (1) Policies and processes for
                                           collateral valuation and
                                           management;
                                          (2) A description of the main
                                           types of collateral taken by
                                           the [BANK];
                                          (3) The main types of
                                           guarantors/credit derivative
                                           counterparties and their
                                           creditworthiness; and
                                          (4) Information about (market
                                           or credit) risk
                                           concentrations with respect
                                           to credit risk mitigation.
Quantitative Disclosures....  (b).......  For each separately disclosed
                                           credit risk portfolio, the
                                           total exposure that is
                                           covered by eligible financial
                                           collateral, and after the
                                           application of haircuts.
                              (c).......  For each separately disclosed
                                           portfolio, the total exposure
                                           that is covered by guarantees/
                                           credit derivatives and the
                                           risk-weighted asset amount
                                           associated with that
                                           exposure.
------------------------------------------------------------------------
\107\ At a minimum, a [BANK] must provide the disclosures in Table 14.7
  in relation to credit risk mitigation that has been recognized for the
  purposes of reducing capital requirements under this subpart. Where
  relevant, [BANK]s are encouraged to give further information about
  mitigants that have not been recognized for that purpose.
\108\ Credit derivatives that are treated, for the purposes of this
  subpart, as synthetic securitization exposures should be excluded from
  the credit risk mitigation disclosures and included within those
  relating to securitization (Table 14.8).


                       Table 14.8--Securitization
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures.....  (a).......  The general qualitative
                                           disclosure requirement with
                                           respect to a securitization
                                           (including synthetic
                                           securitizations), including a
                                           discussion of:
                                          (1) The [BANK]'s objectives
                                           for securitizing assets,
                                           including the extent to which
                                           these activities transfer
                                           credit risk of the underlying
                                           exposures away from the
                                           [BANK] to other entities and
                                           including the type of risks
                                           assumed and retained with
                                           resecuritization activity;
                                           \109\
                                          (2) The nature of the risks
                                           (e.g. liquidity risk)
                                           inherent in the securitized
                                           assets;
                                          (3) The roles played by the
                                           [BANK] in the securitization
                                           process \110\ and an
                                           indication of the extent of
                                           the [BANK]'s involvement in
                                           each of them;
                                          (4) The processes in place to
                                           monitor changes in the credit
                                           and market risk of
                                           securitization exposures
                                           including how those processes
                                           differ for resecuritization
                                           exposures;
                                          (5) The [BANK]'s policy for
                                           mitigating the credit risk
                                           retained through
                                           securitization and
                                           resecuritization exposures;
                                           and
                                          (6) The risk-based capital
                                           approaches that the [BANK]
                                           follows for its
                                           securitization exposures
                                           including the type of
                                           securitization exposure to
                                           which each approach applies.
                              (b).......  A list of:
                                          (1) The type of securitization
                                           SPEs that the [BANK], as
                                           sponsor, uses to securitize
                                           third-party exposures. The
                                           [BANK] must indicate whether
                                           it has exposure to these SPEs
                                           , either on- or off-balance
                                           sheet; and
                                          (2) Affiliated entities--
                                          (i) That the [BANK] manages or
                                           advises; and
                                          (ii) That invest either in the
                                           securitization exposures that
                                           the [BANK] has securitized or
                                           in securitization SPEs that
                                           the [BANK] sponsors.\111\
                              (c).......  Summary of the [BANK]'s
                                           accounting policies for
                                           securitization activities,
                                           including:
                                          (1) Whether the transactions
                                           are treated as sales or
                                           financings;
                                          (2) Recognition of gain-on-
                                           sale;
                                          (3) Methods and key
                                           assumptions applied in
                                           valuing retained or purchased
                                           interests;

[[Page 52972]]

 
                                          (4) Changes in methods and key
                                           assumptions from the previous
                                           period for valuing retained
                                           interests and impact of the
                                           changes;
                                          (5) Treatment of synthetic
                                           securitizations;
                                          (6) How exposures intended to
                                           be securitized are valued and
                                           whether they are recorded
                                           under subpart D; and
                                          (7) Policies for recognizing
                                           liabilities on the balance
                                           sheet for arrangements that
                                           could require the [BANK] to
                                           provide financial support for
                                           securitized assets.
                              (d).......  An explanation of significant
                                           changes to any quantitative
                                           information since the last
                                           reporting period.
Quantitative Disclosures....  (e).......  The total outstanding
                                           exposures securitized by the
                                           [BANK] in securitizations
                                           that meet the operational
                                           criteria provided in Sec.   --
                                           --.41 (categorized into
                                           traditional and synthetic
                                           securitizations), by exposure
                                           type, separately for
                                           securitizations of third-
                                           party exposures for which the
                                           bank acts only as
                                           sponsor.\112\
                              (f).......  For exposures securitized by
                                           the [BANK] in securitizations
                                           that meet the operational
                                           criteria in Sec.   ----.41:
                                          (1) Amount of securitized
                                           assets that are impaired/past
                                           due categorized by exposure
                                           type; \113\ and
                                          (2) Losses recognized by the
                                           [BANK] during the current
                                           period categorized by
                                           exposure type.\114\
                              (g).......  The total amount of
                                           outstanding exposures
                                           intended to be securitized
                                           categorized by exposure type.
                              (h).......  Aggregate amount of:
                                          (1) On-balance sheet
                                           securitization exposures
                                           retained or purchased
                                           categorized by exposure type;
                                           and
                                          (2) Off-balance sheet
                                           securitization exposures
                                           categorized by exposure type.
                              (i).......  (1) Aggregate amount of
                                           securitization exposures
                                           retained or purchased and the
                                           associated capital
                                           requirements for these
                                           exposures, categorized
                                           between securitization and
                                           resecuritization exposures,
                                           further categorized into a
                                           meaningful number of risk
                                           weight bands and by risk-
                                           based capital approach (e.g.,
                                           SSFA); and
                                          (2) Exposures that have been
                                           deducted entirely from tier 1
                                           capital, credit enhancing I/
                                           Os deducted from total
                                           capital (as described in Sec.
                                             ----.42(a)(1), and other
                                           exposures deducted from total
                                           capital should be disclosed
                                           separately by exposure type.
                              (j).......  Summary of current year's
                                           securitization activity,
                                           including the amount of
                                           exposures securitized (by
                                           exposure type), and
                                           recognized gain or loss on
                                           sale by exposure type.
                              (k).......  Aggregate amount of
                                           resecuritization exposures
                                           retained or purchased
                                           categorized according to:
                                          (1) Exposures to which credit
                                           risk mitigation is applied
                                           and those not applied; and
                                          (2) Exposures to guarantors
                                           categorized according to
                                           guarantor credit worthiness
                                           categories or guarantor name.
 
------------------------------------------------------------------------
\109\ The [BANK] should describe the structure of resecuritizations in
  which it participates; this description should be provided for the
  main categories of resecuritization products in which the [BANK] is
  active.
\110\ For example, these roles may include originator, investor,
  servicer, provider of credit enhancement, sponsor, liquidity provider,
  or swap provider.
\111\ Such affiliated entities may include, for example, money market
  funds, to be listed individually, and personal and private trusts, to
  be noted collectively.
\112\ ``Exposures securitized'' include underlying exposures originated
  by the bank, whether generated by them or purchased, and recognized in
  the balance sheet, from third parties, and third-party exposures
  included in sponsored transactions. Securitization transactions
  (including underlying exposures originally on the bank's balance sheet
  and underlying exposures acquired by the bank from third-party
  entities) in which the originating bank does not retain any
  securitization exposure should be shown separately but need only be
  reported for the year of inception. Banks are required to disclose
  exposures regardless of whether there is a capital charge under Pillar
  1.
\113\ Include credit-related other than temporary impairment (OTTI).
\114\ For example, charge-offs/allowances (if the assets remain on the
  bank's balance sheet) or credit-related OTTI of I/O strips and other
  retained residual interests, as well as recognition of liabilities for
  probable future financial support required of the bank with respect to
  securitized assets.



      Table 14.9--Equities Not Subject to Subpart F of this [PART]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures.....  (a).......  The general qualitative
                                           disclosure requirement with
                                           respect to equity risk for
                                           equities not subject to
                                           subpart F of this [PART],
                                           including:
                                          (1) Differentiation between
                                           holdings on which capital
                                           gains are expected and those
                                           taken under other objectives
                                           including for relationship
                                           and strategic reasons; and
                                          (2) Discussion of important
                                           policies covering the
                                           valuation of and accounting
                                           for equity holdings not
                                           subject to subpart F of this
                                           [PART]. This includes the
                                           accounting techniques and
                                           valuation methodologies used,
                                           including key assumptions and
                                           practices affecting valuation
                                           as well as significant
                                           changes in these practices.
Quantitative Disclosures....  (b).......  Value disclosed on the balance
                                           sheet of investments, as well
                                           as the fair value of those
                                           investments; for securities
                                           that are publicly-traded, a
                                           comparison to publicly-quoted
                                           share values where the share
                                           price is materially different
                                           from fair value.
                              (c).......  The types and nature of
                                           investments, including the
                                           amount that is:
                                          (1) Publicly-traded; and
                                          (2) Non publicly-traded.
                              (d).......  The cumulative realized gains
                                           (losses) arising from sales
                                           and liquidations in the
                                           reporting period.
                              (e).......  (1) Total unrealized gains
                                           (losses).\115\
                                          (2) Total latent revaluation
                                           gains (losses).\116\
                                          (3) Any amounts of the above
                                           included in tier 1 or tier 2
                                           capital.

[[Page 52973]]

 
                              (f).......  Capital requirements
                                           categorized by appropriate
                                           equity groupings, consistent
                                           with the [BANK]'s
                                           methodology, as well as the
                                           aggregate amounts and the
                                           type of equity investments
                                           subject to any supervisory
                                           transition regarding
                                           regulatory capital
                                           requirements.
 
------------------------------------------------------------------------
\115\ Unrealized gains (losses) recognized on the balance sheet but not
  through earnings.
\116\ Unrealized gains (losses) not recognized either on the balance
  sheet or through earnings.



       Table 14.10--Interest Rate Risk for Non-trading Activities
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative disclosures.....  (a).......  The general qualitative
                                           disclosure requirement,
                                           including the nature of
                                           interest rate risk for non-
                                           trading activities and key
                                           assumptions, including
                                           assumptions regarding loan
                                           prepayments and behavior of
                                           non-maturity deposits, and
                                           frequency of measurement of
                                           interest rate risk for non-
                                           trading activities.
Quantitative disclosures....  (b).......  The increase (decline) in
                                           earnings or economic value
                                           (or relevant measure used by
                                           management) for upward and
                                           downward rate shocks
                                           according to management's
                                           method for measuring interest
                                           rate risk for non-trading
                                           activities, categorized by
                                           currency (as appropriate).
------------------------------------------------------------------------


[End of Proposed Common Rule Text]

List of Subjects

12 CFR Part 3

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

12 CFR Part 217

    Banks, banking, Federal Reserve System, Holding companies, 
Reporting and recordkeeping requirements, Securities.

12 CFR Part 325

    Administrative practice and procedure, Banks, banking, Capital 
Adequacy, Reporting and recordkeeping requirements, Savings 
associations, State non-member banks.

Adoption of Proposed Common Rule

    The adoption of the proposed common rules by the agencies, as 
modified by agency-specific text, is set forth below:

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons set forth in the common preamble and under the 
authority of 12 U.S.C. 93a and 5412(b)(2)(B), the Office of the 
Comptroller of the Currency proposes to further amend part 3 of chapter 
I of title 12, Code of Federal Regulations as proposed to be amended 
elsewhere in this issue of the Federal Register under Docket IDs OCC-
2012-0008 and OCC-2012-0010, as follows:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

    1. The authority citation for part 3 is revised to read as follows:

    Authority:  12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).

    2. Designate the text set forth at the end of the common preamble 
as subpart D of part 3.
    3. Newly designated subpart D is amended as set forth below:
    i. Remove ``[AGENCY]'' and add ``OCC'' in its place, wherever it 
appears;
    ii. Remove ``[BANK]'' and add ``national bank or Federal savings 
association'' in its place, wherever it appears;
    iii. Remove ``[BANK]s'' and add ``national banks and Federal 
savings associations'' in its place, wherever it appears;
    iv. Remove ``[BANK]'s'' and add ``national bank's and Federal 
savings association's'' in its place, wherever it appears;
    v. Remove ``[PART]'' and add ``Part 3'' in its place, wherever it 
appears; and
    vi. Remove ``[REGULATORY REPORT]'' and add ``Call Report'' in its 
place, wherever it appears.

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the common preamble, part 217 of 
chapter II of title 12 of the Code of Federal Regulations is proposed 
to be amended as follows:

PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND 
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)

    1. The authority citation for part 217 continues to read as 
follows:

    Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 3904, 3906-
3909, 4808, 5365, 5371.

    2. Subpart D is added as set forth at the end of the common 
preamble.
    3. Subpart D is amended as set forth below:
    a. Remove ``[AGENCY]'' and add ``Board'' in its place wherever it 
appears.
    b. Remove ``[BANK]'' and add ``Board-regulated institution'' in its 
place wherever it appears.
    c. Remove ``[BANK]s'' and add ``Board-regulated institutions'' in 
its place, wherever it appears;
    d. Remove ``[BANK]'s'' and add ``Board-regulated institution's'' in 
its place, wherever it appears;
    e. Remove ``[REGULATORY REPORT]'' wherever it appears and add in 
its place ``Consolidated Reports of Condition and Income (Call Report), 
for a state member bank, or the Consolidated Financial Statements for 
Bank Holding Companies (FR Y-9C), for a bank holding company or savings 
and loan holding company, as applicable'' the first time it appears and 
``Call Report, for a state member bank, or FR Y-9C, for a bank holding 
company or savings and loan holding company, as applicable'' every time 
thereafter;
    f. Remove ``[PART]'' and add ``part'' in its place wherever it 
appears.
    4. In Sec.  217.30, revise paragraph (b)(1)(i) to read as follows:

[[Page 52974]]

Sec.  217.30  Applicability.

* * * * *
    (b) * * *
    (1) * * *
    (i) The methodology described in the general risk-based capital 
rules under 12 CFR part 208, appendix A, 12 CFR part 225, appendix A 
(Board); or
* * * * *
    5. In Sec.  217.32, revise paragraphs (g)(3)(ii)(B), (k) 
introductory text, (l)(1) and (l)(6) introductory text, and add new 
paragraph (m) to read as follows:


Sec.  217.32  General risk weights.

* * * * *
    (g) * * *
    (3) * * *
    (ii) * * *
    (B) A Board-regulated institution must base all estimates of a 
property's value on an appraisal or evaluation of the property that 
satisfies subpart E of 12 CFR part 208.
* * * * *
    (k) Past due exposures. Except for an exposure to a sovereign 
entity or a residential mortgage exposure or a policy loan, if an 
exposure is 90 days or more past due or on nonaccrual:
* * * * *
    (l) Other assets. (1)(i) A bank holding company or savings and loan 
holding company must assign a zero percent risk weight to cash owned 
and held in all offices of subsidiary depository institutions or in 
transit, and to gold bullion held in a subsidiary depository 
institution's own vaults, or held in another depository institution's 
vaults on an allocated basis, to the extent the gold bullion assets are 
offset by gold bullion liabilities.
    (ii) A state member bank must assign a zero percent risk weight to 
cash owned and held in all offices of the state member bank or in 
transit; to gold bullion held in the state member bank's own vaults or 
held in another depository institution's vaults on an allocated basis, 
to the extent the gold bullion assets are offset by gold bullion 
liabilities; and to exposures that arise from the settlement of cash 
transactions (such as equities, fixed income, spot foreign exchange and 
spot commodities) with a central counterparty where there is no 
assumption of ongoing counterparty credit risk by the central 
counterparty after settlement of the trade and associated default fund 
contributions.
* * * * *
    (6) Notwithstanding the requirements of this section, a state 
member bank may assign an asset that is not included in one of the 
categories provided in this section to the risk weight category 
applicable under the capital rules applicable to bank holding companies 
and savings and loan holding companies under this part, provided that 
all of the following conditions apply:
* * * * *
    (m) Other--insurance assets--(1) Assets held in a separate account. 
(i) A bank holding company or savings and loan holding company must 
risk-weight the individual assets held in a separate account that does 
not qualify as a non-guaranteed separate account as if the individual 
assets were held directly by the bank holding company or savings and 
loan holding company.
    (ii) A bank holding company or savings and loan holding company 
must assign a zero percent risk weight to an asset that is held in a 
non-guaranteed separate account.
    (2) Policy loans. A bank holding company or savings and loan 
holding company must assign a 20 percent risk weight to a policy loan.
    6. In Sec.  217. 42, revise paragraph (h)(1)(iv) to read as 
follows:


Sec.  217.42  Risk-weighted assets for securitization exposures.

* * * * *
    (h) * * *
    (1) * * *
    (iv) In the case of a state member bank, the bank is well 
capitalized, as defined in 12 CFR 208.43. For purposes of determining 
whether a state member bank is well capitalized for purposes of this 
paragraph, the state member bank's capital ratios must be calculated 
without regard to the capital treatment for transfers of small-business 
obligations under this paragraph.
    (B) In the case of a bank holding company or savings and loan 
holding company, the bank holding company or savings and loan holding 
company is well capitalized, as defined in 12 CFR 225.2. For purposes 
of determining whether a bank holding company or savings and loan 
holding company is well capitalized for purposes of this paragraph, the 
bank holding company or savings and loan holding company'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.
* * * * *
    7. In Sec.  217.52, revise paragraph (b)(3)(i) to read as follows:


Sec.  217.52  Simple risk-weight approach (SRWA).

* * * * *
    (b) * * *
    (3) * * *
    (i) Community development equity exposures.
    (A) For state member banks and bank holding companies, 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).
    (B) For savings and loan holding companies, an equity exposure that 
is designed primarily to promote community welfare, including the 
welfare of low- and moderate-income communities or families, such as by 
providing services or employment, and excluding equity exposures to an 
unconsolidated small business investment company and equity exposures 
held through a small business investment company described in section 
302 of the Small Business Investment Act of 1958 (15 U.S.C. 682).
* * * * *

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

    For the reasons set forth in the common preamble, the Federal 
Deposit Insurance Corporation proposes to amend part 324 of chapter III 
of title 12 of the Code of Federal Regulations as follows:

PART 324--CAPITAL ADEQUACY

    1. The authority citation for part 324 continues to read as 
follows:

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233, 
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, 
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).

    2. Subpart D is added as set forth at the end of the common 
preamble.
    3. Subpart D is amended as set forth below:
    a. Remove ``[AGENCY]'' and add ``FDIC'' in its place, wherever it 
appears;
    b. Remove ``[BANK]'' and add ``bank and state savings association'' 
in its place, wherever it appears in the phrase ``Each [BANK]'' or 
``each [BANK]'';
    c. Remove ``[BANK]'' and add ``bank or state savings association'' 
in its place,

[[Page 52975]]

wherever it appears in the phrase ``A [BANK]'', ``a [BANK]'', ``The 
[BANK]'', or ``the [BANK]'';
    d. Remove ``[BANK]S'' and add ``banks and state savings 
associations'' in its place, wherever it appears;
    e. Remove ``[BANK]'S'' and add ``banks and state savings 
associations''' in its place, wherever it appears;
    f. Remove ``[PART]'' and add ``Part 324'' in its place, wherever it 
appears;
    g. Remove ``[REGULATORY REPORT]'' and add ``Consolidated Reports of 
Condition and Income (Call Report)'' in its place the first time it 
appears, and add ``Call Report'' in its place, wherever it appears 
every time thereafter.

    Dated: June 11, 2012.
Thomas J. Curry,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, July 3, 2012.
Jennifer J. Johnson,
Secretary of the Board.
    Dated at Washington, DC, this 12th day of June, 2012.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2012-17010 Filed 8-10-12; 8:45 am]
BILLING CODE 6210-01-P